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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED: OCTOBER 31, 1997,
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
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COMMISSION FILE NUMBER: 0-13063
AUTOTOTE CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 81-0422894
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
750 LEXINGTON AVENUE, 25TH FLOOR
NEW YORK, NEW YORK 10022
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER:
(212) 754-2233
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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Class A Common Stock, $.01 par value American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such report), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
- -
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. X
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As of January 23, 1998, the aggregate market value of voting stock held by
nonaffiliates of the registrant was approximately $62,618,691.
Common shares outstanding as of January 23, 1998 were 35,416,534.
DOCUMENTS INCORPORATED BY REFERENCE
The following document is incorporated herein by reference:
DOCUMENT PARTS INTO WHICH INCORPORATED
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Proxy Statement for the Company's Part III
1998 Annual Meeting of Stockholders
EXHIBIT INDEX APPEARS ON PAGE 68
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[LOGO OF AUTOTOTE APPEARS HERE]
1997 ANNUAL REPORT AND FORM 10-K
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AUTOTOTE CORPORATION provides computerized wagering equipment,
computer software, facilities management and satellite
broadcast services for on-track, off-track, and inter-track
pari-mutuel wagering at thoroughbred, harness and greyhound
racetracks, jai alai frontons, government-sponsored lotteries
and legalized sports betting facilities. The Company's systems
are in use in the United States, Europe, Canada, Mexico, Latin
America, New Zealand, and the Far East.
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PART I
When used herein, the words "believe," "anticipate," "think," "intend,"
"will be" and similar expressions identify forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995. Such
statements are not guarantees of future performance and involve certain risks
and uncertainities discussed herein, which could cause actual results to
differ materially from those in the forward-looking statements. Readers are
cautioned not to place undue reliance on the forward-looking statements which
speak only as of the date hereof. Readers are also urged to carefully review
and consider the various disclosures made by the Company which attempt to
advise interested parties of the factors which affect the Company's business,
including the disclosures made under the caption "Management's Discussion and
Analysis of Financial Condition and Results of Operations." All references to
a fiscal year are to the Company's fiscal year which ends October 31. The term
"pari-mutuel" is a form of wagering in which all wagers are placed in a pool
and the payoff is computed based on the total amount of the pool, as compared
to fixed odds wagering where the "house" sets the payoff. The pool of gross
wagers is referred to as "Handle." Information with respect to Racing Industry
Handle is only provided through 1995, the last year such information was
available. References to "Autotote" or the "Company" include Autotote
Corporation and its subsidiaries.
ITEM 1. BUSINESS
INDUSTRY OVERVIEW
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 has 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. 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 in 1992 to $11.6 billion of Handle in
1996, a compound annual growth rate of approximately 5%.
Autotote Corporation ("Autotote" or the "Company") has benefited from the
growth trends in the industry. 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 off-track
betting establishments ("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 1997. 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.
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
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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.
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, three simulcasting branches and six
other OTB locations, which accept wagers on racing events at more than 30
racetracks throughout North America and which processed approximately $203
million in Handle in fiscal 1997. 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. On December 15, 1997, the Company signed an agreement with the
Connecticut Lottery Corporation to service the Connecticut State Lottery
through May 2003, with five one-year options to extend the contract through
May 2008. Under the terms of the agreement, the Company will provide and
operate a triplex on-line system and manufacture and install approximately
3,200 new PROBE-L lottery terminals. The Company expects to finance its
obligations under this agreement by entering into a long-term financing
arrangement in fiscal 1998. There can be no assurance that the Company will be
able to secure such financing with terms favorable to the Company. In the
event the Company is unable to secure such financing, it will need to use
either some of the Company's existing cash or cash available under the
Facility (see Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources).
For information on the Company's business and geographic segments, see Note
18 to Consolidated Financial Statements.
PARI-MUTUEL OPERATIONS
Pari-mutuel Operations have accounted for 85%, 73% and 83% of the Company's
total service revenues and product sales for the fiscal years 1997, 1996 and
1995, respectively.
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 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.
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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 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 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 1997.
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 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.
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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 $203 million in fiscal 1997.
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, three similcasting branches and a telephone account betting operation
in New Haven. The Company's approximately 39,000 square feet 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 $53.5
million annually.
The exclusive right to operate the Connecticut OTB is subject to state
regulations with respect to such matters as the location of OTBs, hours of
operation and certain financial and operational standards. The Company must
pay liquidated damages to the state if these standards are not met. The
Company is also subject to a pari-mutuel tax of 3.5% of all monies wagered.
The percentage of the total Handle which the Company may receive as the
operating revenues from the Connecticut OTB is determined by the track where
the event is held and ranges from 15% to 25%, depending on the racetrack and
type of wagers.
The Company believes operation of the Connecticut OTB further strengthens
its competitive position in attracting certain new racetrack customers to the
extent that the Connecticut OTB does not already accept wagers for such
racetrack's racing events. The Company can enhance a proposal for its services
by offering the racetrack the opportunity to have its racing events wagered
upon at the Connecticut OTB. In return, racetracks generally receive 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 State of
Connecticut passed legislation authorizing the Company to simulcast live
racing events in up to six locations. The Company simulcasts at its Bradley
Teletheater and Sports Haven(R) locations as well as at its branches in New
Britain, Bristol and Hartford. 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 1997, the Company estimates that patrons
wagered approximately $54 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 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
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increased revenues for other parts of 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.
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 1997, the Company
derived approximately $11.8 million in service and sales revenues from its
French pari-mutuel wagering operations and $3.0 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 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 ("CBS") which provided sports wagering systems to 107 of the
113 casinos in Nevada and to the leading operator of sports wagering
facilities in Mexico. Through a distributor affiliated with the purchaser of
CBS, the Company expects to continue to provide pari-mutuel wagering terminals
and parts to the casinos and sports wagering facilities that generally use
systems manufactured by the Company.
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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 internationally. The Company does not
believe that these agreements will have a material impact on its ability to
conduct its business.
LOTTERY OPERATIONS
Lottery Operations have accounted for 15%, 27% and 17% of the Company's
total service revenues and product sales for the fiscal years 1997, 1996 and
1995, respectively.
The Company designs, installs, operates and maintains on-line computer-based
lottery systems and provides equipment for lottery systems both in the United
States and internationally. Lottery systems are required to process very large
transaction volumes. Such high performance requirements dictate the need for
sophisticated software applications that necessitate expertise in software
engineering and development. In the United States, the Company'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, and has a contract to deliver a system and terminals for a lottery
in Barbados. 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 terminal upgrades to TOTIP.
In connection with the Connecticut State Lottery, the Company provides all
equipment, personnel and services necessary to operate the lottery network of
approximately 3,200 terminals while retaining title to the equipment. On
December 15, 1997, the Company signed an agreement with the Connecticut
Lottery Corporation to service the Connecticut State Lottery through May 2003,
with five one-year options to extend the contract through May 2008. Under the
terms of the agreement, the Company will provide and operate a triplex on-line
system and manufacture and install approximately 3,200 new PROBE-L lottery
terminals. Revenues received by the Company from its operation of the
Connecticut State Lottery are based on a percentage of amounts wagered in the
lottery.
The Company's lottery products consist primarily of central processing
systems, including data communication networks, and on-line and on-line/off-
line computer-based lottery terminals. The lottery management system portion
of the product includes a lottery administration client-server network and
relational database. Lottery terminals are generally on-line to the central
system via telephone lines connected to the system's communication front-end
processors.
Sale of European Lottery Business
On April 15, 1997, the Company completed the sale of its European lottery
business for cash consideration of approximately $26.6 million, including
contingent consideration of approximately $1.6 million based upon a balance
sheet of the European lottery business, prepared as of such date. In addition,
the Company provided the purchaser with a letter of credit to secure certain
obligations of the Company under the sale agreement. At October 31, 1997, $1.5
million remains outstanding under the letter of credit which 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 the European lottery business nor the purchaser has on-line
lottery wagering terminals. Also under the agreement, the purchaser has a
right of first refusal to purchase the Company's remaining lottery business.
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 the European lottery business, the Company
agreed not to compete for three years in the on-line lottery business outside
of the United States and Canada except with respect to (a) existing customers
(including customers in Israel and Italy) not served by the European lottery
business and (b) certain identified proposed customers of the Company. The
non-competition covenants do not apply to the Company's
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right to sell certain terminals for lottery applications anywhere, except to
existing customers of the European lottery business.
CONTRACT PROCUREMENT
Contract awards by horse and greyhound racetracks, OTBs and casino/sports
wagering facilities and from state and foreign governments often involve a
lengthy competitive bid process, spanning from specification development to
contract negotiation and award. Contracts have a high dollar value and are
technically and commercially complex and may require substantial initial cash
outlays. Start up costs associated with contract awards typically involve
expenditures for items such as software development/customization, assembly of
wagering systems, and installation costs including electrical and carpentry
work, transportation and placement of equipment, and system implementation.
Such costs are primarily comprised of labor related expenses due to the
relative magnitude of software development and customization in the start up
phase. In the United States, lottery authorities generally commence the
contract award process by issuing a request for proposals inviting bids and
proposals from various lottery vendors. Internationally, lottery authorities
do not typically utilize such a formal bidding process, but rather negotiate
proposals with one or more potential vendors.
The Company's contracts for the provision of pari-mutuel services are
typically for terms of five years. Contracts representing 8%, 14%, 9%, and 26%
of the Company's annual pari-mutuel service revenues are scheduled to expire
in fiscal years 1998, 1999, 2000 and 2001, respectively. The Company's
contract to operate the Connecticut State Lottery has been renewed for five
years with five one-year renewal options. The Company historically has been
successful in renewing its largest contracts as they have come due for
renewal. However, there can be no assurance that the Company will continue to
be able to renew pari-mutuel systems operating contracts with its largest
customers or to further renew the lottery contract with the State of
Connecticut, and, if it is unable to do so, there would be a material adverse
effect on the Company.
SERVICE AND SUPPORT
The Company's staff of approximately 510 persons, including regional and
national managers and trained maintenance and field service personnel,
supports the operation of the Company's systems and communications networks.
The Company's personnel support its systems by performing routine system
maintenance and repairs of systems and equipment when needed.
RESEARCH AND PRODUCT DEVELOPMENT
The Company believes that its ability to attract new wagering system
customers and retain existing customers depends in part on its ability to
continue to incorporate technological advances into and to improve its product
lines. The Company maintains a development program directed toward systems
development as well as toward the improvement and refinement of its present
products and the expansion of their uses and applications. The Company employs
approximately 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 1997, the Company began limited terminal
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assembly at 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, as needed.
The Company normally has sufficient lead time between reaching an agreement
to serve a wagering facility and commencing actual operations at such
facility. In the event the current suppliers of central processing units were
no longer available, the Company believes that it would be able to adapt its
application software to hardware available from other sources within a time
frame sufficient to allow it to meet new contractual obligations, although the
price competitiveness of the Company's products might diminish. The lead time
for obtaining most of the electronic components used by the Company is
approximately 90 days. The Company believes that this is consistent with its
competitors' lead times and is also consistent with the needs of its
customers.
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 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 Powerhouse Technologies Inc. ("PTI"), formerly
Video Lottery Technologies, Inc., which operates its pari-mutuel wagering
systems business through its subsidiary United Wagering Systems, Inc., and
AmTote International, Inc. Video gaming industry terminal suppliers include
PTI, International Game Technology, WMS Industries Inc., Alliance Gaming, Inc.
and several smaller companies. The Company's competition outside of North
America is more fragmented, with competition being provided by several
international and regional companies. No single company maintains the leading
market position internationally, although certain companies possess regional
strengths.
Competition in the simulcasting business in North America currently is
fragmented. Other than the Company, only Roberts Television International,
Inc. has achieved a significant share of the market.
The on-line lottery business is also highly competitive. State and foreign
governments normally award contracts based on competitive bidding procedures.
Significant factors which influence the award of lottery contracts include
price, the ability to optimize lottery revenues through marketing capability
and applications knowledge, the quality, dependability and upgrade capability
of the network, the experience, financial condition and reputation of the
vendor, and the satisfaction of other requirements and qualifications which
the lottery authority may impose. 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 PTI, through its subsidiary Automated Wagering, Inc.
The market for the Company's products is affected by changing technology,
new legislation and evolving industry standards. The Company's ability to
anticipate such changes and to develop and introduce new and enhanced products
on a timely basis will be a significant factor in the Company's ability to
expand, remain competitive, attract new customers and retain existing
contracts. There can be no assurance that the Company will have the financial
or other resources to respond to such changes or to develop and introduce new
products on a timely basis.
9
<PAGE>
In connection with the sales of CBS and the European lottery business, the
Company entered into certain agreements not to compete which the Company
believes will not have a material impact on the Company's ability to conduct
its business.
REGULATION
General
Pari-mutuel wagering, sports wagering, video gaming and on-line lotteries
may be conducted in jurisdictions that have enacted enabling legislation. In
jurisdictions 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.
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
10
<PAGE>
also qualify under the standards of the Casino Control Act. The Company and
its licensed subsidiary may also be required to produce such information,
documentation and assurances as required by the regulators to establish the
integrity of all financial backers, who may be required to seek qualification
or waiver of qualification. For casino holding companies, the New Jersey
Commission traditionally has granted informal waivers at the staff level for
non institutional investors holding less than 15% of a debt issue and for
institutional investors holding less than 50% of a debt issue and less than
20% of the issuer's overall debt.
The New Jersey Commission has broad discretion in licensing matters and may
at any time condition a license or suspend or revoke a license or impose fines
upon a finding of disqualification or non-compliance. The New Jersey
Commission may require that persons holding five percent or more of the Class
A Common Stock of the Company qualify under the Casino Control Act. Under the
Casino Control Act, a security holder is rebuttably presumed to control a
publicly-traded corporation if the holder owns at least five percent of such
corporation's equity securities; however, for passive institutional investors,
qualification is generally not required for a position of less than 10%, and
upon a showing of good cause, qualification may be excused for a position of
10% or more. Failure to qualify could jeopardize the Company's license. In
addition, the New Jersey Racing Commission also licenses this subsidiary and
retains concurrent regulatory oversight over this subsidiary with the New
Jersey Commission.
The Company's rights to operate the Connecticut OTB system shall continue as
long as the Company holds all licenses required for the operation of the
system. In addition, the officers and directors and certain other employees of
the Company must be licensed. Licensees are generally required to submit to
background investigations and provide required disclosures. The Division of
Special Revenue of the State of Connecticut (the "Division") may revoke the
license to operate the system under certain circumstances, including a false
statement in the licensing disclosure materials, a transfer of ownership of
the licensed entity without Division approval and failure to meet financial
obligations. The 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
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
11
<PAGE>
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 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
12
<PAGE>
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 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 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 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
13
<PAGE>
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 October 31, 1997, the Company employed approximately 880 persons. Of
this total, approximately 510 persons were engaged in full-time field
operations, 200 in part-time tellering/cashiering, approximately 40 in
engineering and software product development, approximately 20 in marketing
and approximately 110 in financial, administration and other positions. Most
of the North American pari-mutuel employees of the Company involved in field
operations and repairs are represented by the International Brotherhood of
Electrical Workers under two separate contracts which have been renewed
through May 2000 and October 2001. The Company considers its employee
relations to be satisfactory.
EXECUTIVE OFFICERS OF THE COMPANY
Certain information concerning the executive officers of the Company as of
October 31, 1997 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
William Luke............ 50 Vice President and Chief Financial Officer
Gerald Lawrence......... 58 Vice President
Martin E. Schloss....... 51 Vice President, General Counsel and Secretary
</TABLE>
Executive Officers of the Company hold office for an indefinite term,
subject to the discretion of the Board of Directors of the Company.
Mr. A. Lorne Weil has been a director of the Company since December 1989,
Chairman of the Board since October 31, 1991 and Chief Executive Officer since
April 1992. 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. 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.
14
<PAGE>
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.
ITEM 2. PROPERTIES
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 20,800 square feet of warehouse space in Newark, Delaware. 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. See Note 9 to Consolidated Financial Statements for more
information about the Company's leases.
ITEM 3. LEGAL PROCEEDINGS
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of the stockholders of the Company was held on August 13,
1997 to elect five directors of the Company, to approve the Autotote
Corporation 1997 Incentive Compensation Plan and to ratify the appointment of
KPMG Peat Marwick LLP as auditors for the Company's next fiscal year. All
matters put before the stockholders passed as follows:
<TABLE>
<CAPTION>
DIRECTOR NOMINEES/OTHER MATTERS FOR AGAINST ABSTAIN
- ------------------------------- ---------- --------- -------
<S> <C> <C> <C>
A. Lorne Weil..................................... 27,453,373 334,514 --
Marshall Bartlett................................. 27,431,307 338,580 --
Larry Lawrence.................................... 27,456,316 313,571 --
Sir Brian Wolfson................................. 27,455,809 314,078 --
Alan J. Zakon..................................... 27,457,101 312,786 --
Approval of Autotote Corporation 1997 Incentive
Compensation Plan................................ 22,314,993 4,979,581 68,377
Ratification of appointment of KPMG Peat Marwick
LLP.............................................. 27,556,480 125,419 87,988
</TABLE>
15
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
The Company's Class A Common Stock is traded under the symbol "TTE" on the
American Stock Exchange. The following table sets forth, for the periods
indicated, the range of high and low closing prices of the Company's Class A
Common Stock.
<TABLE>
<CAPTION>
HIGH LOW
----- ----
<S> <C> <C>
Fiscal 1996
First Quarter................................................ $3.81 2.81
Second Quarter............................................... 3.81 2.88
Third Quarter................................................ 3.50 1.50
Fourth Quarter............................................... 2.00 1.00
Fiscal 1997
First Quarter................................................ $1.75 1.06
Second Quarter............................................... 1.50 1.00
Third Quarter................................................ 2.06 1.06
Fourth Quarter............................................... 3.13 1.63
</TABLE>
On January 23, 1998, the last reported sales price for the Class A Common
Stock on the American Stock Exchange was $2.31 per share. The approximate
number of holders of record of the Class A Common Stock as of January 23, 1998
was 2,383.
The Company has never paid any cash dividends on its Class A Common Stock.
The Board presently intends to retain all earnings for use in the Company's
business. Any future determination as to payment of dividends will depend upon
the financial condition and results of operations of the Company and such
other factors as are deemed relevant by the Board. Further, under the terms of
the Indenture governing the Company's 10 7/8% Senior Notes due 2004, the
Company and its Restricted Subsidiaries are not permitted to pay any cash
dividends or make certain other restricted payments (other than stock
dividends) on its Class A Common Stock.
RECENT SALES OF UNREGISTERED SECURITIES; USES OF PROCEEDS FROM REGISTERED
SECURITIES
In December 1996, the Company issued 2,963,590 shares of unrestricted Class
A Common Stock as part of the settlement of its stockholder litigation. The
shares were issued in reliance upon the exemption from registration provided
for under Section 3(a)(10) of the Securities Act of 1933, as amended (the
"Act").
In March 1997, the Company sold 797,500 shares of Class A Common Stock in
connection with an offering to its management and members of its Board of
Directors. The shares were issued in reliance upon the exemption from
registration provided for under Section 4(2) of the Act.
In April 1997, the Company issued 5,000 shares of Class A Common Stock in
connection with a consulting agreement. The shares were issued in reliance
upon the exemption from registration provided for under Section 4(2) of the
Act.
In July 1997, the Company issued $110 million aggregate principal amount of
10 7/8% Series A Senior Notes due 2004 to "qualified institutional buyers"
pursuant to Rule 144A under the Act, which were exchanged for $110 million
aggregate principal amount of 10 7/8% Series B Notes due 2004. The exchange
offer was completed in October 1997 pursuant to a registration statement on S-
4 (Registration No. 333-34465) which was declared effective on September 12,
1997 (see Note 7 to the Consolidated Financial Statements).
16
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
Selected historical financial data presented below as of and for the five
years ended October 31, 1997 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 following financial information reflects the acquisitions and dispositions
of certain businesses during the period 1992 through 1997 and should be read
in conjunction with Item 7, Management's Discussion and Analysis of Financial
Condition and Results of Operations, and the Consolidated Financial Statements
of the Company and the notes thereto, included in Item 8.
FIVE YEAR SUMMARY OF SELECTED
FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
--------------------------------------------
1997 1996 1995 1994 1993
-------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
SELECTED STATEMENT OF OPERATIONS
DATA:
Operating Revenues:
Services...................... $132,989 137,794 132,260 98,592 59,792
Sales......................... 24,343 38,441 20,924 50,458 25,070
-------- ------- ------- ------- -------
157,332 176,235 153,184 149,050 84,862
-------- ------- ------- ------- -------
Costs and Expenses:
Cost of services.............. 79,488 85,742 78,569 61,158 36,513
Cost adjustments and strike
expenses..................... -- -- -- 6,781 --
Cost of sales................. 15,396 25,864 15,661 35,753 11,679
Selling, general & administra-
tive......................... 29,452 32,853 36,540 25,298 10,956
Restructuring and write-off of
assets....................... -- (649) 18,241 8,576 --
Depreciation and amortiza-
tion......................... 36,728 40,853 35,463 25,418 11,809
Interest expense.............. 14,367 14,837 16,362 6,408 3,473
Other (income) expense........ 79 560 (436) (952) (298)
Litigation settlement......... -- 6,800 -- -- --
(Gain) loss on sale of busi-
ness......................... (1,823) 1,127 -- -- --
-------- ------- ------- ------- -------
Total costs and expenses.... 173,687 207,987 200,400 168,440 74,132
-------- ------- ------- ------- -------
Earnings (loss) before income
tax expense (benefit) and ex-
traordinary item............... (16,355) (31,752) (47,216) (19,390) 10,730
Income tax expense (benefit).... 906 2,443 2,673 (1,462) 1,292
-------- ------- ------- ------- -------
Earnings (loss) before extraor-
dinary item.................... (17,261) (34,195) (49,889) (17,928) 9,438
Extraordinary item.............. (426) -- -- (4,222) --
-------- ------- ------- ------- -------
Net earnings (loss)............. $(17,687) (34,195) (49,889) (22,150) 9,438
======== ======= ======= ======= =======
Net earnings (loss) per common
share.......................... $ (0.51) (1.09) (1.72) (0.79) 0.33
======== ======= ======= ======= =======
SELECTED BALANCE SHEET DATA (END
OF PERIOD):
Total assets.................... $153,541 196,793 241,021 241,597 187,105
Total long-term debt, including
current installments........... $149,857 169,024 177,264 143,955 76,987
Stockholders' equity (deficit).. $(33,240) (20,196) 11,857 55,721 76,079
Weighted average shares out-
standing....................... 34,469 31,305 28,965 28,174 28,210
</TABLE>
17
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
BACKGROUND
The Company operates in two business segments, Pari-mutuel Operations and
Lottery Operations. Pari-mutuel Operations include the North American and
international on-track and OTB pari-mutuel operations, simulcasting services,
Connecticut OTB operations, video gaming and CBS (the Company's sports
wagering service business which was sold in October 1996.) Lottery Operations
include both domestic and international lottery operations (including Tele
Control, the Company's European lottery business which was sold in April
1997), as well as systems and equipment sales.
The Company is the leading provider of computerized pari-mutuel wagering
systems to the North American Racing Industry and is also a leading provider
of such systems worldwide. The Company also owns and operates the Connecticut
OTB 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
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
its casino/sports wagering business for approximately $3.0 million and (ii) in
April 1997, sold its European lottery business for approximately $26.6
million. The proceeds from the sales of these businesses were used to reduce
the Company's outstanding indebtedness.
The sales of the casino/sports wagering business and the European lottery
business described above, as well as the acquisitions of simulcasting
operations and the French pari-mutuel business in fiscal 1995, which were
accounted for as purchases, affect the comparability of operations from period
to period (see Note 2 to Consolidated Financial Statements).
18
<PAGE>
RESULTS OF OPERATIONS:
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31,
------------------------
1997 1996 1995
-------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
PARI-MUTUEL OPERATIONS
Operating Revenues:
Service revenue.................................... $119,360 118,267 111,797
Sales revenue...................................... 14,866 10,172 15,539
-------- ------- -------
Total Revenue.................................... $134,226 128,439 127,336
======== ======= =======
Gross Profit (excluding depreciation and amortiza-
tion)............................................... $ 52,717 49,620 45,302
======== ======= =======
LOTTERY OPERATIONS
Operating Revenues:
Service revenue.................................... $ 13,629 19,527 20,463
Sales revenue...................................... 9,477 28,269 5,385
-------- ------- -------
Total Revenue.................................... $ 23,106 47,796 25,848
======== ======= =======
Gross Profit (excluding depreciation and amortiza-
tion)............................................... $ 9,731 15,009 13,652
======== ======= =======
COMPANY TOTAL
Operating Revenues:
Service revenue.................................... $132,989 137,794 132,260
Sales revenue...................................... 24,343 38,441 20,924
-------- ------- -------
Total Revenue.................................... $157,332 176,235 153,184
======== ======= =======
Gross Profit (excluding depreciation and amortiza-
tion)............................................... $ 62,448 64,629 58,954
======== ======= =======
</TABLE>
FISCAL 1997 COMPARED TO FISCAL 1996
Revenue Analysis
Revenues decreased 10.7% or $18.9 million to $157.3 million in the fiscal
year ended October 31, 1997 from $176.2 million in fiscal 1996.
Pari-mutuel Operations service revenues of $119.4 million for the fiscal
year 1997 improved $1.1 million or 1% from $118.3 million in the prior year.
This improvement reflects revenue increases of $4.6 million as a result of
growth in Handle in the Company's North American pari-mutuel and Connecticut
OTB operations, and the addition of new customers in the simulcasting
business. These increases were partially offset by the absence of $2.4 million
in revenue provided in the prior year period by the casino/sports wagering
business which was sold in October 1996 and a loss of $1.5 million in sales of
excess transponder time due to the unanticipated shutdown of one of the
satellites leased by the Company. The growth in Handle during fiscal 1997
compared to fiscal 1996 is attributable to the addition of six new North
American racetrack and OTB sites, full card simulcasting at three North
American racetrack customers, the increase in the number of VGM machines, and
the expansion of OTB operations in Connecticut to seven days a week in the
first quarter of fiscal 1997. Sales revenue in fiscal 1997 of $14.9 million
increased $4.7 million from $10.2 million in the prior year, due in part to a
$5.5 million export sale of a totalisator system to the Jockey Club of Peru.
Lottery Operations service revenues decreased $5.9 million during fiscal
1997 from $19.5 million to $13.6 million primarily because of the sale of the
European lottery business in April 1997. Sales revenues decreased
significantly in fiscal 1997 to $9.5 million from $28.3 million in fiscal
1996. This decrease is primarily attributable to the delivery of systems by
the European lottery business to several German lottery contract sites coupled
with deliveries by the Company of terminals and parts to Italy's TOTIP pari-
mutuel lottery pool in fiscal 1996, partially offset by the delivery of
approximately 450 terminals to the Israel lottery in fiscal 1997.
19
<PAGE>
Gross Profit Analysis
Total gross profits earned by the Company, exclusive of depreciation and
amortization, decreased $2.1 million, or 3%, to $62.5 million in fiscal 1997
as compared to $64.6 million in fiscal 1996.
Gross profits earned by the Pari-mutuel Operations of $52.7 million in
fiscal 1997 increased $3.1 million from $49.6 million in fiscal 1996,
principally due to increased North American pari-mutuel revenues and improved
simulcasting margins resulting from lower equipment costs. These increases
were partially offset by $0.4 million lower margins from the loss of sales of
excess transponder time, the absence of margin provided in the prior year by
the casino/sports wagering business which was sold in October 1996, and lower
profit on the Company's European pari-mutuel operations as the result of the
strengthening of the U.S. dollar early in the year.
Gross profits earned by the Lottery Operations totaled $9.7 million for
fiscal 1997, a decrease of $5.3 million compared to the fiscal 1996 level of
$15.0 million. This decline is attributable to the non-recurring delivery of
computer systems to the German Lottery in fiscal 1996, coupled with lower
European lottery service revenues due to the sale of the business unit in
April 1997 and a decrease in the number of terminals delivered to Italy's
TOTIP pari-mutuel lottery. Partly offsetting these declines were margins
earned on equipment delivered to the Company's customer in Israel.
Total gross profits on equipment sales were 37% for the year, as compared to
gross profits on such sales of 33% in fiscal 1996 as a result of a change in
product mix. Gross profits on services were approximately 40% for fiscal 1997,
a 2% improvement over margins earned in fiscal 1996, reflecting higher
revenues and improved operating efficiencies in the North American pari-
mutuel, OTB and simulcasting operations.
Expense Analysis
Selling, general and administrative expenses decreased $3.4 million or 10%
to $29.5 million in fiscal 1997 from $32.9 million in fiscal 1996, primarily
reflecting the absence of expenses for businesses sold in fiscal years 1996
and 1997. Excluding businesses sold, selling general and administrative
expenses increased 1% or $0.3 million, reflecting higher compensation costs,
partially offset by lower litigation expenses.
Depreciation and amortization expenses decreased $4.1 million or 10% to
$36.8 million in fiscal 1997 compared to $40.9 million in fiscal 1996. The
decrease resulted primarily from the absence of expenses related to the
businesses sold in fiscal 1996 and 1997. Excluding businesses sold,
depreciation and amortization expenses decreased $1.3 million or 4% as a
result of the non-recurring effect of depreciation on certain assets in fiscal
1996, partially offset by higher depreciation on fiscal 1996 and fiscal 1997
capital additions for North America's pari-mutuel and video gaming operations.
Interest expense was $14.4 million in fiscal 1997, as compared to $14.8
million in fiscal 1996. The $0.4 million decrease reflects lower borrowing
levels as a result of asset sales, partially offset by higher interest rates.
Income Taxes
Income tax expense was $0.9 million in fisca1 1997 compared to $2.4 million
in fiscal 1996. Income tax expense principally reflects foreign tax expense,
since no U.S. Federal tax benefit has been recognized on domestic operating
losses. The decrease in income tax expense principally reflects the sale of
the European lottery business.
FISCAL 1996 COMPARED TO FISCAL 1995
Revenue Analysis
Revenues increased 15% or $23.1 million to $176.2 million in the fiscal year
ended October 31, 1996 from $153.2 million in fiscal 1995.
20
<PAGE>
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 revenue 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 of the
Company's European lottery operation 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 is attributable to the delivery of computer
equipment by the Company's European lottery operations 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 off-track
betting revenues and higher simulcasting revenues were largely offset by
higher expenses in the Company's European pari-mutuel operations.
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 the Company's European lottery operations 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 in the Company's European lottery operations.
Expense Analysis
Selling, general and administrative expenses decreased $3.6 million or 10%
to $32.9 million in the fiscal year ended October 31, 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 the
fiscal year ended October 31, 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 European 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 the fiscal year ended October 31, 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.
21
<PAGE>
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.
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 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.
In fiscal 1995, the Company recorded $20.9 million of unusual charges
resulting substantially from the Companys 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
closing 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 estimated 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 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 anticipated total cash obligations
of approximately $5.9 million, of which $4.6 million was paid through October
31, 1997 and $0.6 million was reversed in fiscal 1996 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.
LIQUIDITY AND CAPITAL RESOURCES
On July 28, 1997, the Company issued $110 million of 10 7/8% Senior Notes
due August 1, 2004 (see Note 7 to Consolidated Financial Statements), which
were exchanged for $110 million of 10 7/8% Series B Notes due 2004 (the
"Notes") in connection with the Company's exchange offer in October 1997. The
Notes bear interest at a rate of 10 7/8% per annum payable semi-annually on
each February 1 and August 1. The Notes are senior,
22
<PAGE>
unsecured obligations of the Company, ranking senior in right and priority of
payment to all indebtedness of the Company that by its terms is expressly
subordinated to the Notes. The Notes are jointly and severally guaranteed by
substantially all of the Company's wholly-owned U.S. subsidiaries. The Notes
will be redeemable, in whole or in part, at the option of the Company, at any
time on or after August 1, 2001, at redemption prices of 105.438% in fiscal
year 2001, 102.719% in fiscal year 2002, and 100.000% in fiscal year 2003 and
thereafter, plus accrued and unpaid interest, if any, to the date of
redemption. In addition, at any time prior to August 1, 2000, the Company may,
at its option, redeem up to 35% of the aggregate principal amount of the Notes
originally issued with the net cash proceeds of one or more public equity
offerings, as defined, at a redemption price equal to 110.875% of the
principal amount to be redeemed plus accrued and unpaid interest to the date
of redemption, if any, provided, however, that at least 65% of the original
aggregate principal amount of the Notes remains outstanding immediately after
any such redemption. The indenture governing the Notes contains certain
covenants that, among other things, limit the ability of the Company and its
restricted subsidiaries, as defined, to incur additional indebtedness, create
certain liens, pay dividends, consummate certain asset sales, enter into
certain transactions with affiliates and merge or consolidate with any other
person or sell, assign, transfer, lease, convey or otherwise dispose of all or
substantially all of the assets of the Company. The net proceeds from the
offering, after deducting fees and expenses of approximately $4.9 million,
were approximately $105.1 million, of which approximately $93.6 million was
used to repay $91.4 million of indebtedness and $2.2 million of accrued
interest under the Company's previously existing senior bank credit facility
(the "Senior Facility"). In addition, approximately $4.1 million of the net
proceeds were used to repurchase, at a discount, Subordinated Debentures
totaling $5.0 million plus accrued interest and fees (see Note 7 to the
Consolidated Financial Statements). The balance of the net proceeds was used
for general corporate purposes.
In connection with the issuance of the Notes, the Company also entered into
a new revolving credit facility (the "Facility") with certain lenders which
matures in February 2001. The Facility provides for borrowings of up to $25
million, with a $15 million sublimit for letters of credit, subject to
compliance with certain covenants. The Facility requires mandatory commitment
reductions upon the occurrence of certain events, including asset sales and
the incurrence of certain indebtedness, in each case, in excess of specified
thresholds. In addition, the Company may make optional prepayments and
commitment reductions. Borrowings under the Facility are available for working
capital and general corporate purposes and will bear interest at the Base Rate
(as defined) plus a margin ranging from 1.00% to 1.75% per annum, or the
Eurodollar Rate (as defined) plus a margin ranging from 2.00% to 2.75% per
annum, in each case depending on the Company's performance as measured by the
ratio of debt (as defined) to EBITDA (as defined). Fees will be payable on
outstanding letters of credit equal to the applicable Eurodollar Rate margin
(2.5% as of October 31, 1997), plus a facing fee of 1/8% per annum. A
commitment fee of 1/2% per annum is payable on the unused amount of the
Facility. Obligations under the Facility are jointly and severally guaranteed
by substantially all of the Company's U.S. subsidiaries. In addition, the
Facility is secured by (i) first priority security interests in substantially
all tangible and intangible assets of the Company and its U.S. subsidiaries,
and (ii) a first priority lien on all of the capital stock of the Company's
U.S. subsidiaries and on 65% of the capital stock of the Company's non-U.S.
subsidiaries. The Facility contains certain covenants which limit the ability
of the Company to incur additional indebtedness; create liens; make restricted
payments, including dividends; engage in mergers, consolidations and asset
sales; make acquisitions, investments and capital expenditures; and engage in
certain transactions with certain subsidiaries and affiliates, in each case
beyond certain thresholds. The Facility also requires compliance with certain
financial covenants, including maintenance of minimum EBITDA and interest
coverage levels, and a maximum debt to EBITDA ratio. Although there were no
borrowings outstanding under the Facility at October 31, 1997, approximately
$1.9 million of letters of credit, including $1.5 million issued in connection
with the sale of the European lottery business are guaranteed under the new
Facility. As of October 31, 1997, the Company had approximately $23.1 million
available for borrowing under the Facility.
At October 31, 1997, the Company's available cash and borrowing capacity
totaled $41.3 million compared to $6.0 million at October 31, 1996. Net cash
provided by operating activities was $23.7 million for the year ended October
31, 1997. Utilizing $7.5 million of cash provided by operating activities, the
Company invested principally in contract expenditures and software systems
development. The balance of the cash provided by
23
<PAGE>
operating activities of $16.2 million, together with approximately $20.8
million of cash proceeds from the sale of the European lottery business and
the cash balance on hand at the business unit at the closing of the sale, plus
$1.0 million of proceeds from the sale of common stock, were used to reduce
borrowings by $32.5 million under the Company's Senior Facility prior to the
refinancing and by $0.9 million on other long-term loans.
As described in Note 7 to the Consolidated Financial Statements, the Company
had $23.1 million of cash borrowing availability under the Facility at October
31, 1997. The Company believes that, although it expects to incur a net loss
in fiscal 1998, its cash resources, anticipated cash flows from operations and
borrowing availability under the Facility should provide sufficient liquidity
to meet scheduled interest payments and anticipated capital expenditures
during the next twelve months. The Company believes that additional financing
will be required thereafter for capital expenditures and to enable it to meet
its debt service obligations, including principal payments under the Notes,
the Facility and the Subordinated Debentures.
The Company has been awarded a contract to service the Connecticut Lottery
and expects to finance its obligations under the contract to provide
approximately 3,200 lottery terminals by entering into a long-term financing
arrangement in fiscal 1998. There can be no assurance that the Company will be
able to secure such financing with terms favorable to the Company. In the
event the Company is unable to secure such financing, it will need to use
either some of the Company's existing cash or cash available under the
Facility.
EXTRAORDINARY ITEMS
In connection with the issuance of the Notes in the third quarter of fiscal
1997, and the subsequent repayment of all amounts outstanding under the Senior
Facility (see Notes 7 and 8 to the Consolidated Financial Statements), the
Company wrote-off $1.4 million of deferred financing fees associated with the
Senior Facility. The Company also used a portion of the net proceeds from the
offering of the Notes to repurchase $5.0 million of its Subordinated
Debentures for $4.1 million, resulting in a $0.9 million gain on the early
retirement of this debt. There were no tax benefits recognized on the net
extraordinary loss because the Company is currently in a tax loss carryforward
position.
RECENT ACCOUNTING PRONOUNCEMENTS
In 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. The Company intends to
implement SFAS 128, as required, in fiscal 1998.
Since the Company has experienced net losses in fiscal years 1997, 1996 and
1995, 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
fiscal years 1997, 1996 and 1995 as computed under SFAS 128 are thus equal to
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.
24
<PAGE>
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.
In October 1997, the American Institute of Certified Public Accountants
issued Statement of Position 97-2, "Software Revenue Recognition" (the "SOP").
The SOP established criteria for recognizing revenue in certain software sales
arrangements. The SOP is effective for fiscal year 1998 and will be adopted by
the Company on a prospective basis. The Company does not expect the SOP to
have a significant effect on the Company's financial position or results of
operations.
YEAR 2000
The Company is in the process of evaluating the effect of modifying computer
software systems to accommodate year 2000 transactions. These modifications
may result in additional programming expenses, but as the majority of the
Company's wagering systems are designed to process transactions that are
settled on a daily basis, it is expected that these added expenses will not
significantly affect the Company's financial position or operating results.
25
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULE
AUTOTOTE CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
FORM 10-K
(PAGE)
---------
<S> <C>
Independent Auditors' Report......................................... 27
Consolidated Financial Statements:
Balance Sheets as of October 31, 1997 and 1996..................... 28
Statements of Operations for the years ended October 31, 1997, 1996
and 1995.......................................................... 29
Statements of Stockholders' Equity (Deficit) for the years ended
October 31, 1997, 1996 and 1995................................... 30
Statements of Cash Flows for the years ended October 31, 1997, 1996
and 1995.......................................................... 31
Notes to Consolidated Financial Statements........................... 33
Schedule:
II. Valuation and Qualifying Accounts.............................. 62
</TABLE>
All other schedules are omitted as the required information is inapplicable
or the information is presented in the consolidated financial statements or
related notes.
26
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders Autotote Corporation:
We have audited the consolidated financial statements of Autotote
Corporation and subsidiaries as listed in the accompanying index. In
connection with our audits of the consolidated financial statements, we have
also audited the financial statement schedule as listed in the accompanying
index. These consolidated financial statements and the financial statement
schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with 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, 1997 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, 1997, 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
Short Hills, New Jersey
December 12, 1997
27
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
OCTOBER 31, 1997 AND 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1997 1996
--------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................... $ 18,207 5,988
Restricted cash......................................... 512 611
Accounts receivable, net of allowance for doubtful ac-
counts of $1,976 and $2,053 in 1997 and 1996, respec-
tively................................................. 13,560 18,257
Inventories............................................. 6,653 5,780
Unbilled receivables.................................... -- 6,901
Prepaid expenses, deposits and other current assets..... 2,276 3,131
--------- --------
Total current assets.................................. 41,208 40,668
--------- --------
Property and equipment, at cost........................... 180,170 186,249
Less accumulated depreciation........................... 103,781 90,369
--------- --------
Net property and equipment............................ 76,389 95,880
--------- --------
Goodwill, net of amortization............................. 5,916 21,024
Operating right, net of amortization...................... 15,848 16,848
Other assets and investments.............................. 14,180 22,373
--------- --------
$ 153,541 196,793
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current installments of long-term debt.................. $ 2,609 9,234
Accounts payable........................................ 8,698 14,242
Accrued liabilities..................................... 24,092 20,057
Income taxes payable.................................... 319 379
--------- --------
Total current liabilities............................. 35,718 43,912
--------- --------
Deferred income taxes..................................... 2,551 7,675
Other long-term liabilities............................... 1,264 5,612
Long-term debt, excluding current installments............ 112,248 119,790
Long-term debt, convertible subordinated debentures....... 35,000 40,000
--------- --------
Total liabilities..................................... 186,781 216,989
--------- --------
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, 35,335 and 31,474 shares outstanding
at October 31, 1997 and 1996, respectively............. 354 315
Class B non-voting common stock, par value $0.01 per
share, 700 shares authorized, none outstanding......... -- --
Additional paid-in capital.............................. 148,238 143,369
Accumulated losses...................................... (181,351) (163,664)
Treasury stock, at cost................................. (102) (102)
Currency translation adjustment......................... (379) (114)
--------- --------
Total stockholders' equity (deficit).................. (33,240) (20,196)
--------- --------
Commitments and contingencies (Notes 7, 9, 12 and 13)..... $ 153,541 196,793
========= ========
</TABLE>
See accompanying notes to consolidated financial statements.
28
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED OCTOBER 31, 1997, 1996 AND 1995
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1997 1996 1995
-------- ------- -------
<S> <C> <C> <C>
Operating revenues:
Services......................................... $132,989 137,794 132,260
Sales............................................ 24,343 38,441 20,924
-------- ------- -------
157,332 176,235 153,184
-------- ------- -------
Operating expenses (exclusive of depreciation and
amortization shown below):
Services......................................... 79,488 85,742 78,569
Sales............................................ 15,396 25,864 15,661
-------- ------- -------
94,884 111,606 94,230
-------- ------- -------
Total gross profit............................. 62,448 64,629 58,954
Selling, general and administrative expenses....... 29,452 32,853 36,540
Gain on sale of business........................... (1,823) -- --
Restructuring and write-off of assets.............. -- (649) 18,241
Depreciation and amortization...................... 36,728 40,853 35,463
-------- ------- -------
Operating loss................................. (1,909) (8,428) (31,290)
Other deductions:
Interest expense................................. 14,367 14,837 16,362
Litigation settlement............................ -- 6,800 --
Other (income) expense........................... 79 1,687 (436)
-------- ------- -------
14,446 23,324 15,926
-------- ------- -------
Loss before income tax expense and extraordinary
item............................................ (16,355) (31,752) (47,216)
Income tax expense................................. 906 2,443 2,673
-------- ------- -------
Loss before extraordinary item................... (17,261) (34,195) (49,889)
Extraordinary item--write-off of deferred financing
fees and expenses, net of gain on early retirement
of subordinated debt.............................. (426) -- --
-------- ------- -------
Net loss......................................... $(17,687) (34,195) (49,889)
======== ======= =======
Loss per common share:
Loss per common share before extraordinary item.. $ (0.50) (1.09) (1.72)
Extraordinary loss per common share.............. (0.01) -- --
-------- ------- -------
Loss per common share............................ $ (0.51) (1.09) (1.72)
======== ======= =======
Weighted average number of common shares
outstanding....................................... 34,469 31,305 28,965
======== ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
29
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED OCTOBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL CURRENCY TOTAL
COMMON PAID-IN ACCUMULATED TREASURY TRANSLATION STOCKHOLDERS'
STOCK CAPITAL LOSSES STOCK ADJUSTMENT EQUITY (DEFICIT)
------ ---------- ----------- -------- ----------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Balance, 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 expenses...... 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)
Issuance of Class A
common stock, net of
issuance expenses...... 9 952 -- -- -- 961
Issuance of Class A
common stock in
litigation settlement.. 30 3,470 -- -- -- 3,500
Deferred compensation... -- 447 -- -- -- 447
Currency translation
adjustment............. -- -- -- -- (265) (265)
Net loss................ -- -- (17,687) -- -- (17,687)
---- ------- -------- ---- ------ -------
Balance, October 31,
1997................... $354 148,238 (181,351) (102) (379) (33,240)
==== ======= ======== ==== ====== =======
</TABLE>
See accompanying notes to consolidated financial statements.
30
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED OCTOBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
-------- ------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.......................................... $(17,687) (34,195) (49,889)
-------- ------- -------
Adjustments to reconcile net loss to cash provided
by operating activities:
Depreciation and amortization................... 36,728 40,853 35,463
Restructuring charges and asset write-offs, net
of cash payments............................... -- (649) 17,359
Change in deferred income taxes, net of effects
of businesses sold............................. (784) 1,868 854
Litigation settlement, net of cash payments..... -- 4,250 --
(Gain) loss on sales of assets.................. (1,823) 1,401 314
Non-cash interest charges....................... -- 636 1,564
Non-cash extraordinary items.................... 426 -- --
Changes in operating assets and liabilities, net
of effects of acquisitions/dispositions of sub-
sidiaries:
Restricted cash............................... 99 671 (649)
Accounts receivable........................... 1,339 1,977 6,576
Inventories................................... (1,585) 5,920 (4,276)
Unbilled receivables.......................... 2,553 (3,182) 2,264
Accounts payable.............................. (3,314) (1,834) (616)
Accrued liabilities........................... 5,125 (3,110) (2,578)
Other........................................... 2,641 262 1,604
-------- ------- -------
Total adjustments............................. 41,405 49,063 57,879
-------- ------- -------
Net cash provided by operating activities........... 23,718 14,868 7,990
-------- ------- -------
Cash flows from investing activities:
Capital expenditures.............................. (2,262) (2,103) (9,990)
Wagering systems expenditures..................... (5,226) (7,138) (8,150)
Increase in other assets and investments.......... (2,336) (3,007) (13,262)
Purchase of companies, net of cash acquired....... -- -- (14,400)
Proceeds from sale of business and assets, net of
cash transferred................................. 21,056 4,684 1,000
Other............................................. (351) (325) 988
-------- ------- -------
Net cash provided by (used in) investing activi-
ties............................................... 10,881 (7,889) (43,814)
-------- ------- -------
Cash flows from financing activities:
Net repayments under lines of credit.............. -- -- (250)
Net borrowings (repayments) under revolving credit
facility......................................... (71,890) 2,610 27,832
Proceeds from issuance of long-term debt, net of
financing fees................................... 106,334 2,550 4,198
Payments on long-term debt........................ (57,395) (10,829) (2,367)
Net proceeds from issuance of common stock........ 961 -- 4,495
-------- ------- -------
Net cash provided (used) by financing activities.... (21,990) (5,669) 33,908
-------- ------- -------
Effect of exchange rate changes on cash............. (390) (313) 797
-------- ------- -------
Increase (decrease) in cash and cash equivalents.... 12,219 997 (1,119)
Cash and cash equivalents, beginning of year........ 5,988 4,991 6,110
-------- ------- -------
Cash and cash equivalents, end of year.............. $ 18,207 5,988 4,991
======== ======= =======
</TABLE>
(Continued)
31
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS--(CONTINUED)
YEARS ENDED OCTOBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
NON-CASH INVESTING AND FINANCING ACTIVITIES
1997
See notes 7, 8, 9 and 11 for a description of the gain on early retirement
of subordinated debt, the write-off of deferred financing fees, capital lease
transactions and the issuance of common stock in settlement of a stockholder
litigation.
1996 and 1995
See notes 7, 9, 11 and 12 for a description of the issuance of shares of
common stock in lieu of cash for interest payments, 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,
---------------------
1997 1996 1995
------- ------ ------
<S> <C> <C> <C>
Interest............................................... $10,199 14,318 12,504
Income taxes........................................... $ 938 2,291 3,260
</TABLE>
See accompanying notes to consolidated financial statements.
32
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1997 AND 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(1) DESCRIPTION OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Description of the Business
Autotote Corporation (the "Company") is the leading provider of
computerized pari-mutuel wagering systems to the North American Racing
Industry and is the exclusive licensed operator of substantially all
OTBs in the State of Connecticut. The Company is also a leading provider
of computerized pari-mutuel systems worldwide, with systems in
racetracks and OTBs in Europe, Central and South America, and Asia-
Pacific. In addition, the Company is the leading provider of Racing
Industry simulcasting services in the United States through its
broadcasting of live racing events via satellite to other racetracks and
OTBs. The Company also provides technologically advanced VGMs to the
North American Racing Industry for use at racetracks, as well as lottery
systems and equipment both in the United States and internationally.
(b) Principles of Consolidation
The accompanying consolidated financial statements include the accounts
of the Company and subsidiaries in which the Company's ownership is
greater than 50%. Investments in other entities where the Company has
the ability to exercise significant influence over the investee are
accounted for principally on the equity basis. Under the equity method,
investments are stated at cost plus the Company's equity in
undistributed earnings after acquisition. All significant inter-company
balances and transactions have been eliminated in consolidation.
(c) Cash and Cash Equivalents
The Company considers all highly liquid debt instruments with an
original maturity at the date of purchase of three months or less to be
cash equivalents.
(d) Restricted Cash
Restricted cash represents amounts on deposit by customers for TeleBet
wagering. State regulations require the Company to maintain such
balances until deposited amounts are wagered or returned to the
customer.
(e) Inventories
Inventories are stated at the lower of cost or market. Cost is
determined as follows:
<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.
33
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(1) DESCRIPTION OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES--(CONTINUED)
(f) Unbilled Receivables
Unbilled receivables represent costs and related earnings in excess of
payments made by customers.
(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................................... 3-10
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 $4,904
and $7,034 at October 31, 1997 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 its North
American lottery business, French pari-mutuel wagering business, and
simulcasting business is being amortized on a straight-line basis over
five years. The excess of costs over net assets acquired for its German
pari-mutuel wagering business is being amortized on a straight-line basis
over 10 years. The excess of costs over net assets acquired for the
European lottery business (which was sold in April 1997) was being
amortized on a straight-line basis over 7 years. Total goodwill amounted
to $5,916 and $21,024 net of accumulated amortization of $7,904 and
$13,822 as of October 31, 1997 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
$15,848 and $16,848 net of accumulated amortization of $4,357 and $3,357
at October 31, 1997 and 1996, respectively.
34
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(1) DESCRIPTION OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES--(CONTINUED)
(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 employment
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 the tax basis of existing assets and liabilities.
Under SFAS 109, the effect on deferred taxes of a change in tax rates is
recognized in income in the period that includes the enactment date.
(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) Stock-Based Compensation
Stock-based compensation is recognized using the intrinsic value method.
For disclosure purposes, pro forma net income and earnings per share data
are provided in accordance with Financial
35
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(1) DESCRIPTION OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES--(CONTINUED)
Accounting Standards No. 123, "Accounting for Stock-Based Compensation"
as if the fair value method had been applied.
(q) 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.
(r) Reclassification
Certain reclassifications have been made to the prior years consolidated
financial statements to conform to the current presentation.
(2) ACQUISITIONS AND DISPOSITIONS
Sale of 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 $26,600, including contingent
consideration of approximately $1,600. At closing, the Company provided the
purchaser with a letter of credit to secure certain obligations under the
sales agreement. At October 31, 1997, $1,500 remains outstanding under the
letter of credit which reduces to zero in specified amounts and on specified
dates through October 1998. The Company recorded a gain on the sale of its
European lottery business in the amount of $1,823 in fiscal 1997.
Under the terms of the sale, the purchaser has the right to license and
purchase the Company's terminals for use in lottery applications. Also under
the agreement, the purchaser has the right of first refusal to purchase the
Company's remaining lottery business. The Company, however, has no plans to
sell this business at the present time and remains committed to serving the
North American lottery market and its existing customers.
The following unaudited information shows the revenues, expenses and
operating income of the European lottery business that were included in the
Company's consolidated statements of operations for the fiscal years ended
October 31, 1997 and 1996. Interest and income tax expenses have not been
included in the table below.
<TABLE>
<CAPTION>
YEAR ENDED
OCTOBER 31,
--------------
1997 1996
------ ------
<S> <C> <C>
Operating revenue............................................ $6,119 27,126
Operating expenses, including selling, general and
administrative expenses, and depreciation and amortization
expenses.................................................... 6,181 25,877
------ ------
Operating (loss) income...................................... $ (62) 1,249
====== ======
</TABLE>
36
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(2) ACQUISITIONS AND DISPOSITIONS--(CONTINUED)
Acquisitions
In January 1995, the Company acquired substantially all of the assets of the
Simulcast Division of LDDS Corporation and the rights and obligations under
leases relating to eight C-band satellite transponders for a purchase price of
approximately $13,700 in cash. The excess of the purchase price over the
estimated fair values of the net assets acquired was approximately $5,300, and
has been recorded as goodwill which is being amortized over 5 years.
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 pari-mutuel network and other
customers, for cash of approximately $281, plus acquisition related costs. In
addition to the purchase consideration, the Company concurrently advanced the
SEPMO holding company approximately $2,000 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 purchased in fiscal 1996 for approximately $600. The excess of the
purchase price plus acquisition related costs over the estimated fair values
of the net assets acquired was approximately $3,200, and has been recorded as
goodwill which is being amortized over 5 years.
The acquisitions have 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 operating results of these acquisitions are included in the Company's
consolidated results of operations from the respective dates of the
acquisitions.
(3) INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
OCTOBER 31,
------------
1997 1996
------ -----
<S> <C> <C>
Parts........................................................... $5,261 3,295
Work-in-process................................................. 501 909
Finished goods.................................................. 244 1,028
Ticket paper.................................................... 647 548
------ -----
$6,653 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 4).
37
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(4) PROPERTY AND EQUIPMENT
Property and equipment, including assets under capital leases, consist of
the following:
<TABLE>
<CAPTION>
OCTOBER 31,
----------------
1997 1996
-------- -------
<S> <C> <C>
Machinery, equipment and deferred installation costs....... $153,852 156,816
Land and buildings......................................... 14,379 14,967
Transportation equipment................................... 355 414
Furniture and fixtures..................................... 3,083 4,739
Leasehold improvements..................................... 4,523 4,621
Construction in progress................................... 3,978 4,692
-------- -------
$180,170 186,249
======== =======
</TABLE>
Depreciation expense for the years ended October 31, 1997, 1996, and 1995
amounted to $21,790, $23,632, and $19,208, respectively.
For financial reporting purposes, at October 31, 1997 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.
(5) OTHER ASSETS AND INVESTMENTS
Other assets and investments (net) consist of the following:
<TABLE>
<CAPTION>
OCTOBER 31,
--------------
1997 1996
------- ------
<S> <C> <C>
Software systems development costs............................ $ 4,596 12,132
Deferred financing costs...................................... 4,823 2,056
Deferred transponder costs.................................... 1,406 2,531
Other intangible assets....................................... 885 921
Other assets.................................................. 2,470 4,733
------- ------
$14,180 22,373
======= ======
</TABLE>
In 1997 and 1996, excluding costs related to the Company's European lottery
business, the Company capitalized $1,513 and $524, respectively, of costs
related primarily to the development of 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 $4,962, $5,417 and $4,274 for the years ended October 31, 1997, 1996
and 1995, 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 1997, the Company capitalized
$5,411 in deferred financing fees, including $4,160 in deferred financing fees
and expenses related to the sale of the Notes. The Company also wrote-off, as
an extraordinary charge, $1,376 of previously deferred financing costs in
connection with the Company's repayment of its prior Senior Facility.
Amortization of deferred financing costs amounted to $1,268, $1,654 and $785
for the fiscal years ended October 31, 1997, 1996 and 1995, respectively.
38
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(5) OTHER ASSETS AND INVESTMENTS--(CONTINUED)
Deferred transponder costs arose in connection with the acquisition of the
Company's simulcasting business and are being amortized over a four year
period. Amortization expense amounted to $1,125, $1,125 and $844, for the
years ended October 31, 1997, 1996 and 1995, respectively.
(6) ACCRUED LIABILITIES
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
OCTOBER 31,
--------------
1997 1996
------- ------
<S> <C> <C>
Compensation and benefits..................................... $ 7,325 6,600
Taxes, other than income...................................... 1,778 1,367
Interest...................................................... 3,759 647
Other......................................................... 11,230 11,443
------- ------
$24,092 20,057
======= ======
</TABLE>
(7) LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
OCTOBER 31,
----------------
1997 1996
-------- -------
<S> <C> <C>
10 7/8% Series B Senior Notes Due 2004.................... $110,000 --
Revolver and Term Loans-prior Senior Facility............. -- 123,890
5.5% convertible subordinated debentures due August 2001.. 35,000 40,000
Secured term loans payable monthly through June 2002,
interest at 8%........................................... 1,590 787
Capital lease obligations, payable monthly through January
2000, interest from 7.93% to 12.0%....................... 893 1,516
Term Loan due in November 1999, interest at 8%............ 1,250 1,250
Various loans and bank facilities, interest from 5% to
11%...................................................... 1,124 1,581
-------- -------
Total long-term debt.................................... 149,857 169,024
Less current installments............................... 2,609 9,234
-------- -------
Long-term debt, excluding current installments.......... $147,248 159,790
======== =======
</TABLE>
On July 28, 1997, the Company issued $110 million of 10 7/8% Senior Notes
due August 1, 2004, which were exchanged for $110 million of 10 7/8% Series B
Notes due 2004 (the "Notes") in connection with the Company's exchange offer
in October 1997. The Notes bear interest at a rate of 10 7/8% per annum
payable semi-annually on each February 1 and August 1. The Notes are senior,
unsecured obligations of the Company, ranking senior in right and priority of
payment to all indebtedness of the Company that by its terms is expressly
subordinated to the Notes. The Notes are jointly and severally guaranteed by
substantially all of the Company's wholly-owned U.S. subsidiaries (see Note
22). The Notes will be redeemable, in whole or in part, at the option of the
Company, at any time on or after August 1, 2001, at redemption prices of
105.438% in fiscal year 2001, 102.719% in fiscal year 2002, and 100.000% in
fiscal year 2003 and thereafter, plus accrued and unpaid interest, if any, to
the date of redemption. In addition, at any time prior to August 1, 2000, the
Company may, at its option, redeem up to 35% of the aggregate principal amount
of the Notes originally issued with the net cash proceeds of one or more
public equity offerings, as defined, at a redemption price equal to 110.875%
of the principal amount to be redeemed plus accrued and unpaid interest to the
date of redemption, if any, provided,
39
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(7) LONG-TERM DEBT--(CONTINUED)
however, that at least 65% of the original aggregate principal amount of the
Notes remains outstanding immediately after any such redemption. The indenture
governing the Notes contains certain covenants that, among other things, limit
the ability of the Company and its restricted subsidiaries, as defined, to
incur additional indebtedness, create certain liens, pay dividends, consummate
certain asset sales, enter into certain transactions with affiliates and merge
or consolidate with any other person or sell, assign, transfer, lease, convey
or otherwise dispose of all or substantially all of the assets of the Company.
The net proceeds from the offering, after deducting fees and expenses of
approximately $4,900 were approximately $105,100, of which approximately
$93,590 was used to repay $91,390 of indebtedness and approximately $2,200 of
accrued interest under the Company's previously existing senior bank credit
facility (the "Senior Facility"). In addition, approximately $4,050 of the net
proceeds were used to repurchase, at a discount, Subordinated Debentures plus
accrued interest and fees. The balance of the net proceeds was used for
general corporate purposes.
In connection with the issuance of the Notes, the Company also entered into
a new revolving credit facility (the "Facility") with certain lenders which
matures in February 2001. The Facility provides, subject to certain terms and
conditions, for borrowings of up to $25,000 with a $15,000 sublimit for
letters of credit. The Facility requires mandatory commitment reductions upon
the occurrence of certain events, including asset sales and the incurrence of
certain indebtedness, in each case, in excess of specified thresholds. In
addition, the Company may make optional prepayments and commitment reductions.
Borrowings under the Facility are available for working capital and general
corporate purposes and will bear interest at the Base Rate (as defined) plus a
margin ranging from 1.00% to 1.75% per annum, or the Eurodollar Rate (as
defined) plus a margin ranging from 2.00% to 2.75% per annum, in each case
depending on the Company's performance as measured by the ratio of debt (as
defined) to EBITDA (as defined). Fees will be payable on outstanding letters
of credit equal to the applicable Eurodollar Rate margin (2.5% as of October
31, 1997), plus a facing fee of 1/8% per annum. A commitment fee of 1/2% per
annum is payable on the unused amount of the Facility. Obligations under the
Facility are jointly and severally guaranteed by substantially all of the
Company's U.S. subsidiaries. In addition, the Facility is secured by (i) first
priority security interests in substantially all tangible and intangible
assets of the Company and its U.S. subsidiaries, and (ii) a first priority
lien on all of the capital stock of the Company's U.S. subsidiaries and on 65%
of the capital stock of the Company's non-U.S. subsidiaries. The Facility
contains certain covenants which limit the ability of the Company to incur
additional indebtedness; create liens; make restricted payments, including
dividends; engage in mergers, consolidations and asset sales; make
acquisitions, investments and capital expenditures; and engage in certain
transactions with certain subsidiaries and affiliates, in each case beyond
certain thresholds. The Facility also requires compliance with certain
financial covenants, including maintenance of minimum EBITDA and interest
coverage levels, and a maximum debt to EBITDA ratio. Although there were no
borrowings outstanding under the Facility at October 31, 1997, approximately
$1,900 of letters of credit were guaranteed under the Facility, including
$1,500 issued in connection with the sale of the European lottery business. As
of October 31, 1997, the Company had approximately $23,100 available for
borrowing under the Facility.
The Company's prior senior bank credit facility (the "Senior Facility") at
October 31, 1996, after giving effect to a January 29, 1997 amendment and the
April 15, 1997 sale of the European lottery business, provided for: 1) a
$55,000 term loan (the "A Term Loan"), of which $51,000 was outstanding at
October 31, 1996, which required principal repayments of $7,000 in fiscal 1997
with the balance of $44,000 due in fiscal 1998; 2) a $5,000 term loan (the "B
Term Loan"), of which $1,000 was outstanding at October 31, 1996, which
matured April 30, 1997, and 3) a $75,000 revolving credit facility (the
"Revolver") which was to mature July 31, 1998. The outstanding balance under
the Revolver was $71,890 at October 31, 1996. Interest on borrowings under the
Senior Facility was calculated at the Prime lending rate plus a margin of
0.75%. A commitment fee of 0.5% per
40
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(7) LONG-TERM DEBT--(CONTINUED)
year was payable on the unused amount under the Revolver. A letter of credit
fee equal to 2.75% plus a facing fee of 1/8 of 1% per year was payable on each
letter of credit issued. In fiscal 1997, prior to the issuance of the Notes
and entering into the Facility, utilizing the net proceeds from operations and
the April 15, 1997 sale of the European lottery business, the Company made the
required $1,000 payment under the B Term Loan, a $21,000 payment under the A
Term Loan, and net repayments of $10,500 under the Revolver.
The 5.5% convertible subordinated debentures due 2001 (the "Debentures")
are convertible into 1,750 shares of Class A Common Stock at a conversion price
of $20.00 per share.
Upon consummation of the issuance of the Notes, the Company used a portion
of the proceeds to repurchase $5,000 aggregate principal amount of the
Debentures for $4,050 plus accrued interest, resulting in a $950 gain on early
retirement (see Note 8).
On November 6, 1995, the Company entered into a Letter Agreement (the "1995
Letter Agreement") with holders of the Debentures whereby the holders agreed
to accept 936 unregistered shares of the Company's Class A Common Stock in
lieu of cash for the August 1995 and February 1996 interest payments totaling
$2,200, plus demand and piggy-back registration rights with respect to the
unregistered shares.
The aggregate maturities of long-term debt for the next five fiscal years
and thereafter are as follows: 1998, $2,609; 1999, $1,109; 2000, $609; 2001,
$35,310; 2002, $143; and thereafter, $110,077.
(8) EXTRAORDINARY ITEMS
In connection with the issuance of the Notes and the subsequent repayment
of all amounts outstanding under the Senior Facility (see Note 7), the Company
wrote-off $1,376 of deferred financing fees associated with the Senior Facility.
The Company also used a portion of the net proceeds from the offering of the
Notes to repurchase $5,000 of its Subordinated Debt for $4,050, resulting in a
$950 gain on the early retirement of this debt. There were no tax benefits
recognized on the net extraordinary loss because the Company is currently in a
tax loss carryforward position.
(9) LEASES
At October 31, 1997, 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, 1997 are as follows:
1998, $8,134, 1999, $3,666; 2000, $1,371; 2001, $619; 2002, $399; and thereafter
$432. The Company also leases equipment as needed under various month-to-month
lease agreements. Total rental expense under these operating leases was $8,890,
$10,183 and $7,715 in the years ended October 31, 1997, 1996 and 1995,
respectively.
The Company entered into capital leases obligations of $141 and $1,023
during the years ended October 31, 1997 and 1995, respectively. There were no
new capital leases in fiscal 1996.
(10) FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of financial instruments is determined by reference to
market data and other valuation techniques as appropriate. The Company believes
the fair value of its financial instruments, principally cash and cash
equivalents, restricted cash, accounts receivable, other current assets,
accounts payable, and accrued liabilities approximates their recorded values.
41
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(10) FAIR VALUE OF FINANCIAL INSTRUMENTS--(CONTINUED)
Due to the recent issuance of the Notes the Company believes that the fair
value of the Notes approximates their recorded value. The Company was,
however, unable to determine the fair market value of its Senior Facility in
fiscal 1996 and the Debentures in fiscal years 1997 and 1996.
(11) CAPITAL STOCK
The Company has two classes of common stock consisting of Class A Common
Stock and Class B Non-voting Common Stock (Class B Common Stock). All shares
of Class A Common Stock and Class B Common Stock entitle holders to the same
rights and privileges except that the Class B Common Stock is non-voting. Each
share of Class B Common Stock is convertible into one share of Class A Common
Stock.
During 1997, the Company issued 2,964 shares of Class A Common Stock in
settlement of its stockholder litigation and issued 798 shares of Class A
Common Stock under an employee stock purchase offer. During 1996, the Company
issued 17 shares of Class A Common Stock in settlement of a PARS obligation
(see Note 12). During 1995, the Company issued 12 and 15 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 in
relation to its simulcasting business, respectively.
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 each.
Accordingly, the Company issued 936 shares in fiscal 1996 (see Note 7).
Warrants
At October 31, 1997, the Company had the following warrants outstanding,
including adjustments made in accordance with certain anti-dilution
provisions:
<TABLE>
<CAPTION>
EXERCISE
SHARES PRICE EXPIRATION
------ -------- ----------------
<S> <C> <C> <C>
Warrants to purchase Class A
Common Stock:
1991 Warrants............. 2,308 $1.64 October 31, 1999
1995 Warrants............. 387 $2.98 April 30, 2000
1996 Warrants............. 525 $1.25 April 20, 1998
-----
Total Class A Common
Stock Warrants......... 3,220
=====
Warrants to purchase Class B
Common Stock............... 147 $3.83 October 30, 2003
=====
</TABLE>
(12) STOCK OPTIONS
The Company has four stock option plans under which shares of Class A
Common Stock have been authorized and are reserved for issuance to employees,
officers and directors: the 1984 Stock Option Plan (the "1984 Plan")--1,350
shares; the 1992 Equity Incentive Plan (the "1992 Plan")--3,000 shares; the 1995
Equity Incentive Plan (the "1995 Plan")--4,000 shares, and the 1997 Incentive
Compensation Plan (the "1997 Plan")--1,600 shares.
In May 1995, the Company offered holders of stock options with exercise
prices above market value as of May 26, 1995 the right to cancel such options
in exchange for Performance Accelerated Restricted Stock Units
42
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(12) STOCK OPTIONS--(CONTINUED)
(the "PARS"). The PARS represent deferred shares of Class A Common Stock which
vest in 20% increments on the sixth, seventh, eighth, ninth and tenth
anniversaries of the date of grant, or, in certain circumstances, on an
accelerated basis based on the Company's stock trading at certain per share
prices, or at the discretion of the Board of Directors. Options to purchase
1,976 shares were exchanged for 504 PARS. Additionally, deferred shares with a
three year vesting schedule were granted to certain non-employee directors
under the 1992 Plan as follows: A total of 135 deferred shares at a fair
market value of $1.3125 per share were issued in fiscal 1997, a total of 50
deferred shares at a fair market value of $3.1875 per share were issued in
fiscal 1996 and 110 deferred shares at a fair market value of $4.1250 per
share were issued in fiscal 1995. Accordingly, the Company has recorded
compensation expense of $449, $346 and $166 in fiscal 1997, 1996 and 1995,
respectively. Additional compensation expense aggregating $1,447 will be
charged to expense through fiscal 2005 as the deferred shares become fully
vested.
Stock options granted under the Company's equity incentive plans are
exercisable at not less than the fair market value of the stock at the date of
grant, and none may be exercised more than 10 years from the date of grant.
Options are generally exercisable in four equal installments on the first,
second, third and fourth anniversaries of the date of grant. The Committee
may, in its discretion, accelerate the exercisability, the lapsing of
restrictions, or the expiration of deferral or vesting period of any award
under the plans. From time to time, the Company grants additional stock
options to individuals outside of the 1992, 1995 and 1997 Plans in recognition
of contributions made to the Company.
Information with respect to the Company's stock options are as follows:
<TABLE>
<CAPTION>
AVERAGE
STOCK OPTIONS SHARES PRICE (1)
------------- ------ ---------
<S> <C> <C>
Outstanding at October 31, 1994............................. 4,209 $10.27
Granted................................................... 634 6.77
Canceled.................................................. 156 15.86
Exchanged................................................. 1,887 15.51
Exercised................................................. 169 2.60
----- ------
Outstanding at October 31, 1995............................. 2,631 5.32
Granted................................................... 2,319 2.87
Canceled.................................................. 1,143 6.20
Exchanged................................................. 89 15.51
----- ------
Outstanding at October 31, 1996............................. 3,718 3.60
Granted................................................... 2,508 1.20
Canceled.................................................. 457 2.59
----- ------
Outstanding at October 31, 1997............................. 5,769 $ 2.63
===== ======
</TABLE>
- --------
(1) Weighted average exercise price.
43
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(12) STOCK OPTIONS--(CONTINUED)
Summarized information about stock options outstanding and exercisable at
October 31, 1997 is as follows:
<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
--------------------------------- ---------------------
EXERCISABLE AVERAGE AVERAGE AVERAGE
PRICE RANGE SHARES LIFE(1) PRICE(2) SHARES PRICE(2)
----------- ------ ------- -------- ------ --------
<S> <C> <C> <C> <C> <C>
$1.00 to 2.00 2,365 8.68 $1.12 270 $1.55
$2.01 to 3.00 1,975 7.34 2.70 862 2.58
$3.01 to 4.00 1,055 6.14 3.39 804 3.45
over $4.00 374 5.54 9.73 365 9.71
----- -----
5,769 2,301
===== =====
</TABLE>
- --------
(1) Weighted average contractual life remaining in years.
(2) Weighted average exercise price.
The number of shares and weighted average price of options exercisable at
October 31, 1997, 1996 and 1995 were 2,301 shares at $3.90, 1,950 shares at
$4.10, and 1,788 shares at $4.54, respectively. At October 31, 1997, 1996 and
1995, 3,677 shares, 2,228 shares and 3,383 shares, respectively, were
available for future grants under the terms of these plans. Outstanding
options expire prior to October 31, 2007, and are exercisable at prices
ranging from $1.06 to $17.00 per share.
Effective November 1, 1996, the Company adopted the provisions of Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). This statement defines a fair value method of
accounting for an employee stock option or similar equity instrument. However,
it allows an entity to continue to measure compensation cost for those
instruments using the intrinsic-value-based method of accounting prescribed by
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" provided it discloses the effect of SFAS 123 in footnotes to the
financial statements. The Company has chosen to continue to account for stock-
based compensation using the intrinsic value method. Accordingly, no stock
option related compensation expense has been recognized for its stock-based
compensation plans. Had the Company, however, elected to recognize
compensation cost based on fair value of the stock options at the date of
grant under SFAS 123, such costs would have been recognized ratably over the
vesting period of the underlying instruments and the Company's net loss and
net loss per share would have increased to the pro forma amounts indicated in
the table below.
Pro forma net loss and loss per common share for the years ended:
<TABLE>
<CAPTION>
OCTOBER 31,
-----------------
1997 1996
-------- -------
<S> <C> <C>
Net Loss:
As reported............................................. $(17,687) (34,195)
Pro forma............................................... (19,182) (35,133)
Loss per common share:
As reported............................................. (0.51) (1.09)
Pro forma............................................... (0.56) (1.12)
</TABLE>
Pro forma net loss reflects only options granted in 1996 and 1997.
Therefore, the full impact of calculating compensation cost for stock options
under SFAS 123 is not reflected in the pro forma net loss amounts presented
above because compensation cost for options granted prior to November 1, 1995
is not considered.
44
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(12) STOCK OPTIONS--(CONTINUED)
The fair value of the options granted was estimated using the Black-Scholes
option-pricing model based on the weighted average market price at date of
grant of $1.20 in fiscal 1997 and $2.87 in fiscal 1996 and the following
weighted average assumptions: risk-free interest rate of 6.1% for fiscal 1997
and 6.7% for fiscal 1996; expected option life of 7.0 years for fiscal 1997
and fiscal 1996; volatility of 81% for fiscal 1997 and fiscal 1996; and no
dividend yield in either year. The average fair values of options granted
during fiscal years 1997 and 1996 were $0.93 and $2.23, respectively.
(13) SERVICE CONTRACT ARRANGEMENTS
Service contracts for wagering systems in North America generally cover a
five-year period and provide for substantial related services such as
software, maintenance personnel, computer operators and certain operating
supplies. Under such contracts, the Company retains ownership of all equipment
located at the wagering facilities. The service contracts also provide for
certain warranties covering operation of the equipment, machines, display
equipment and central computing equipment. The breach of such warranties could
result in significant liquidated damages. The equipment is placed at customer
facilities under contracts generally providing for revenue based on the
greater of a percentage of total amounts wagered or, if appropriate, a
specified minimum.
Minimum annual payments expected to be received under service contracts in
effect as of October 31, 1997 with specified minimums are as follows: 1998,
$20,134; 1999, $16,040; 2000, $14,842; 2001, $11,511; 2002, $7,022; and
thereafter $8,459.
(14) EXPORT SALES AND MAJOR CUSTOMERS
Sales to foreign customers amounted to $14,230, $11,119 and $9,860 in 1997,
1996 and 1995, respectively. No single customer represented more than 10% of
revenues in any of these periods.
(15) PENSION PLANS
The Company has a defined benefit plan for union employees. Retirement
benefits under the plan are based upon the number of years of credited service
up to a maximum of thirty years for the majority of the employees. The
Company's policy is to fund the minimum contribution permissible by the
Internal Revenue Service.
The following are the components of pension expense related to the defined
benefit plan:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Service cost............................................... $ 67 62 63
Interest cost on projected benefit obligation.............. 97 89 82
Actual return on plan assets............................... (85) (19) (87)
Net amortization and deferral.............................. (8) (66) 16
---- --- ---
$ 71 66 74
==== === ===
</TABLE>
45
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(15) PENSION PLANS--(CONTINUED)
The assets and obligations of the defined benefit plan at October 31, 1997
and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
------ -----
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested benefits of
$1,131 and $1,170 at October 31, 1997 and 1996,
respectively............................................... $1,498 1,349
------ -----
Projected benefit obligation for services rendered to date.. 1,498 1,349
Plan assets at fair value (invested in insurance company
general accounts guaranteed as to principal)............... 1,419 1,230
------ -----
Projected benefit obligation in excess of plan assets....... 79 119
------ -----
Funded status............................................... (79) (119)
Unrecognized net obligation................................. 46 52
Unrecognized prior service cost............................. 73 80
Unrecognized net loss....................................... 295 273
------ -----
Prepaid pension cost........................................ $ 335 286
====== =====
</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 1997 and 1996 were
calculated using the unit credit method and reflect the following assumptions:
discount rate of 7.25% in 1997 and 1996, with a long-term rate of return on
assets of 8% and 9% in 1997 and 1996, respectively.
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
$403, $204 and $187 during the years ended October 31, 1997, 1996 and 1995,
respectively.
The Company has a 401K plan covering all employees who are not covered by a
collective bargaining agreement. Company contributions to the plan are at the
discretion of the Board of Directors. Pension expense for the years ended
October 31, 1997, 1996 and 1995 amounted to approximately $760, $814 and $839,
respectively. The Company has a 401K plan for all union employees which does
not provide for Company contributions.
(16) MANAGEMENT INCENTIVE COMPENSATION
The Company has an incentive compensation plan for key management personnel
based on business unit performance, overall performance of the Company and
individual performance. Management incentive compensation expense amounted to
$1,707, $439 and $1,157 in 1997, 1996 and 1995, respectively.
46
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(17) 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,
--------------------------
1997 1996 1995
-------- ------- -------
<S> <C> <C> <C>
Domestic............................................................. $(14,367) (28,714) (45,966)
Foreign.............................................................. (1,988) (3,038) (1,250)
-------- ------- -------
Consolidated loss before income tax expense (benefit) and
extraordinary item................................................. $(16,355) (31,752) (47,216)
======== ======= =======
<CAPTION>
Income tax expense (benefit) consists of:
CURRENT DEFERRED TOTAL
------- -------- -----
<S> <C> <C> <C>
1997 - Foreign.................................................... $ 938 (32) 906
====== ===== =====
1996 - Foreign.................................................... $ 575 1,868 2,443
====== ===== =====
1995 - Foreign.................................................... $1,819 854 2,673
====== ===== =====
</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,
--------------
1997 1996
------ ------
<S> <C> <C>
CURRENT DEFERRED TAX LIABILITY (ASSET)
Accrued stockholder litigation costs...................................... $ -- (2,690)
Accrued vacation.......................................................... (654) (666)
Inventory reserve......................................................... (653) (670)
Other accrued liabilities................................................. (1,313) (1,240)
Reserve for doubtful accounts............................................. (533) (420)
------ ------
Current deferred tax asset.............................................. (3,153) (5,686)
Accrued foreign contract reserve.......................................... -- 2,833
------ ------
Current deferred tax asset, net......................................... (3,153) (2,853)
------ ------
</TABLE>
47
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(17) INCOME TAX EXPENSE (BENEFIT)--(CONTINUED)
<TABLE>
<CAPTION>
OCTOBER 31,
----------------
1997 1996
------- -------
<S> <C> <C>
NONCURRENT DEFERRED TAX LIABILITY (ASSET)
Intangible assets-difference in amortization periods... $ 1,020 881
Property and equipment differences in depreciation
methods............................................... 7,094 7,705
Other, net............................................. (781) 1,351
Interest charge, Domestic International Sales Corp..... 4,989 4,716
------- -------
Noncurrent deferred tax liability, net............... 12,322 14,653
------- -------
Net operating loss carryforward........................ (48,193) (41,498)
Foreign tax credit carryforward........................ (279) (474)
Alternative minimum tax credits........................ (184) (184)
Research and experimentation credits................... (135) (150)
------- -------
Noncurrent deferred tax asset........................ (48,791) (42,306)
Valuation allowance.................................... 42,173 38,181
------- -------
Noncurrent deferred tax asset, net................... (6,618) (4,125)
------- -------
Noncurrent deferred tax liability.................... 5,704 10,528
------- -------
Net deferred tax liability on balance sheet.......... $ 2,551 7,675
======= =======
</TABLE>
The aggregate deferred tax assets before valuation allowance at October 31,
1997, and 1996 were $52,725 and $47,992, respectively. The aggregate deferred
tax liabilities at October 31, 1997 and 1996 were $13,103 and $17,486,
respectively.
The actual tax expense differs from the "expected" tax benefit (computed by
applying the U.S. Federal corporate rate of 34% to loss before income taxes
(benefit) and extraordinary item) as follows:
<TABLE>
<CAPTION>
OCTOBER 31,
-------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Computed "expected" tax benefit................. $(5,561) (10,796) (16,053)
Increase (reduction) in income taxes resulting
from:
Unused net operating loss..................... 4,155 9,661 15,450
Foreign tax differential...................... 1,782 3,276 3,098
Other, net.................................... 530 302 178
------- ------- -------
$ 906 2,443 2,673
======= ======= =======
</TABLE>
The Company has regular tax net operating loss carryforwards of
approximately $1,794 that expire in 2005, $1,222 that expire in 2006, $954
that expire in 2008, $38,810 that expire in 2009, $40,777 that expire in 2010,
$25,406 that expire in 2011, and $12,220 that expire in 2012.
The Company has minimum tax credit carryforwards (which can be carried
forward indefinitely) of approximately $184, regular foreign tax credits of
approximately $279 and research and experimentation credit carryforwards of
approximately $135. Regular foreign tax credits of $279 expire in 1998. The
research and experimentation credits expire from 1998 to 2003.
The net changes in the valuation allowance for deferred tax assets for the
years ended October 31, 1997 and 1996 were increases of $3,992 and $13,808,
respectively.
48
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(17) INCOME TAX EXPENSE (BENEFIT)--(CONTINUED)
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred
tax asset will not be realized. The ultimate realization of deferred tax
assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible. Management
considers the scheduled reversal of deferred tax liabilities, projected future
taxable income, 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, 1997 will be allocated as follows:
<TABLE>
<S> <C>
Income tax benefit that would be reported in the consolidated
statements of operations.......................................... $39,323
Additional capital (benefit from exercise of stock options)....... 2,850
-------
$42,173
=======
</TABLE>
(18) BUSINESS AND GEOGRAPHIC SEGMENTS
The following tables represent revenues, profits, depreciation and assets
by business and geographic segments for the years ended October 31, 1997, 1996
and 1995. Corporate expenses are allocated among industry and geographic
segments.
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
--------------------------
1997 1996 1995
-------- ------- -------
<S> <C> <C> <C>
BUSINESS SEGMENTS
Service revenue and product sales
Pari-mutuel operations......................... $134,226 128,439 127,336
Lottery operations............................. 23,106 47,796 25,848
-------- ------- -------
$157,332 176,235 153,184
======== ======= =======
Operating income (loss)
Pari-mutuel operations......................... $ (1,866) (10,293) (19,412)
Lottery operations............................. (43) 1,865 (11,878)
-------- ------- -------
$ (1,909) (8,428) (31,290)
======== ======= =======
Depreciation and amortization
Pari-mutuel operations......................... $ 28,413 31,068 26,861
Lottery operations............................. 8,315 9,785 8,602
-------- ------- -------
$ 36,728 40,853 35,463
======== ======= =======
Assets
Pari-mutuel operations......................... $148,154 152,868 188,220
Lottery operations............................. 5,387 43,925 52,801
-------- ------- -------
$153,541 196,793 241,021
======== ======= =======
Capital and wagering systems expenditures
Pari-mutuel operations......................... $ 7,359 8,135 14,723
Lottery operations............................. 129 1,106 3,417
-------- ------- -------
$ 7,488 9,241 18,140
======== ======= =======
</TABLE>
49
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(18) BUSINESS AND GEOGRAPHIC SEGMENTS--(CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
--------------------------
1997 1996 1995
-------- ------- -------
<S> <C> <C> <C>
GEOGRAPHIC SEGMENTS
Service revenue and product sales
North America.................................. $125,402 120,589 114,943
Europe......................................... 28,780 49,656 34,227
Asia........................................... 3,150 5,990 4,014
-------- ------- -------
$157,332 176,235 153,184
======== ======= =======
Operating income (loss)
North America.................................. $ (4,744) (6,373) (25,960)
Europe......................................... 2,102 (1,573) (4,500)
Asia........................................... 733 (482) (830)
-------- ------- -------
$ (1,909) (8,428) (31,290)
======== ======= =======
Depreciation and amortization
North America.................................. $ 31,180 32,195 27,296
Europe......................................... 5,468 8,658 8,167
Asia........................................... 80 -- --
-------- ------- -------
$ 36,728 40,853 35,463
======== ======= =======
Assets
North America.................................. $139,262 146,929 180,637
Europe......................................... 13,463 49,864 60,384
Asia........................................... 816 -- --
-------- ------- -------
$153,541 196,793 241,021
======== ======= =======
Capital and wagering systems expenditures
North America.................................. $ 7,199 8,518 15,798
Europe......................................... 289 723 2,342
Asia........................................... -- -- --
-------- ------- -------
$ 7,488 9,241 18,140
======== ======= =======
</TABLE>
50
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(19) SELECTED QUARTERLY FINANCIAL DATA--(UNAUDITED)
Selected quarterly financial data for the years ended October 31, 1997 and
1996 is as follows:
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31, 1997
----------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
<S> <C> <C> <C> <C>
Total operating revenues................ $35,515 41,921 35,518 44,078
Gross profit............................ 13,960 16,714 14,590 17,184
Loss before extraordinary item.......... (7,423) (4,691) (1,712) (3,435)
Extraordinary item...................... -- -- (426) --
Net loss................................ (7,423) (4,691) (2,138) (3,435)
Loss per common share before
extraordinary item..................... (0.23) (0.14) (0.05) (0.09)
Extraordinary item...................... -- -- (0.01) --
Loss per common share................... $ (0.23) (0.14) (0.06) (0.09)
======= ====== ====== ======
Weighted average shares outstanding..... 32,734 34,498 35,312 35,335
======= ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31, 1996
----------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
<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>
(20) UNUSUAL ITEMS
In the third quarter of fiscal 1996, the Company recorded charges in other
deductions of $647 for costs incurred in connection with the Company's
proposed but uncompleted third quarter 1996 debt offering, and charges in
selling, general and administrative expense of $569 for contractual payments
related to the departure of the President of the Company. Partially offsetting
these costs was the reversal of $649 of 1995 restructuring cost accruals
because of the Company's current plan to continue limited manufacturing of
wagering terminals at its plant in Ireland.
In fiscal 1995, the Company recognized unusual charges of $20,932
substantially resulting from the Company's restructuring, and certain valuation
adjustments.
Restructuring charges of $11,601 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 $11,601 included $2,064 in employee
termination benefits; $1,139 attributable to the cancellation of certain
leasehold contracts; $3,188 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; $4,287 in capitalized software systems development costs
written-off in connection with the Company's
51
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(20) UNUSUAL ITEMS--(CONTINUED)
decision to terminate support for certain of its domestic lottery products and
$923 in other miscellaneous asset valuation adjustments and expenses.
The Company wrote-off $6,640 relating to certain investments and other non-
current assets which included $2,750 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 $2,576 primarily attributable to lottery
terminals, and $1,314 attributable to other assets. Technical limitations led
to the Company's re-evaluation of the continued viability of the lottery
terminals. The remaining $2,691 of unusual charges included miscellaneous
asset valuation adjustments, principally consisting of receivable write-offs
of $1,592 and severance costs of $390.
In addition, the Company recorded $1,679 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 $5,859, of which $4,640 was paid through October
31, 1997 and $649 was reversed in fiscal 1996 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.
(21) LITIGATION
In addition to routine legal proceedings incidental to the conduct of its
business, the Company and certain of its officers and directors were named as
defendants in a number of lawsuits commenced in February 1995 as class actions
in the United States District Court for the District of Delaware. These
lawsuits were consolidated into one class action in June 1995. The parties
entered into a definitive Stipulation and Agreement of Settlement dated July
19, 1996 (the "Settlement Agreement") related to these claims.
The Settlement Agreement was finalized on December 24, 1996, at which time
the Company paid $7,500 in cash plus 2,964 shares of Class A Common Stock
which had an aggregate value of $3,500 based on the average price of the
Company's Class A Common Stock for 10 trading days preceding the final hearing
in the District Court. Insurance companies providing directors and officers
insurance contributed approximately $6,500 of the cash portion of the
settlement, with $1,250 of that amount in the form of a loan to the Company,
with the payment terms subject to negotiation.
The Company accrued a charge of $6,800 against earnings in fiscal 1996 to
reflect the settlement and anticipated legal fees. There will be no further
charges against earnings as a result of the Settlement Agreement.
(22) FINANCIAL INFORMATION FOR GUARANTOR SUBSIDIARIES AND NON-GUARANTOR
SUBSIDIARIES
The Company conducts substantially all of its business through its domestic
and foreign subsidiaries. On July 28, 1997, the Company issued $110,000
aggregate principal amount of Notes bearing interest at a rate of 10 7/8%. The
proceeds from the issuance of the Notes were used to repay all amounts
outstanding under the Senior Facility (see Note 7). The Notes are jointly and
severally guaranteed by substantially all of the Company's wholly owned
domestic subsidiaries (the "Guarantor Subsidiaries").
Presented below is condensed consolidating financial information for
Autotote Corporation (the "Parent Company"), the Guarantor Subsidiaries and
the wholly owned foreign subsidiaries and the non-wholly owned
52
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(22) FINANCIAL INFORMATION FOR GUARANTOR SUBSIDIARIES AND NON-GUARANTOR
SUBSIDIARIES--(CONTINUED)
domestic and foreign subsidiaries (the "Non-Guarantor Subsidiaries") as of
October 31, 1997 and October 31, 1996 and for the fiscal years ended October
31, 1997, 1996 and 1995. The condensed consolidating financial information has
been presented to show the nature of assets held, results of operations and
cash flows of the Parent Company, Guarantor Subsidiaries and Non-Guarantor
Subsidiaries assuming the guarantee structure of the Notes was in effect at
the beginning of the periods presented. Separate financial statements for
Guarantor Subsidiaries are not presented based on management's determination
that they would not provide additional information that is material to
investors.
The condensed consolidating financial information reflects the investments
of the Parent Company in the Guarantor and Non-Guarantor Subsidiaries using
the equity method of accounting. In addition, corporate interest and
administrative expenses have not been allocated to the subsidiaries.
53
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
OCTOBER 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
PARENT GUARANTOR NON-GUARANTOR ELIMINATING
COMPANY SUBSIDIARIES SUBSIDIARIES ENTRIES CONSOLIDATED
------- ------------ ------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and cash
equivalents.......... $15,582 328 2,297 -- 18,207
Accounts receivable,
net.................. -- 10,547 3,013 -- 13,560
Other current assets.. 711 6,223 2,791 (284) 9,441
Property and
equipment, net....... 161 67,071 9,302 (145) 76,389
Investment in
subsidiaries......... 54,760 -- -- (54,760) --
Goodwill.............. 211 2,635 3,070 -- 5,916
Other assets.......... 5,937 24,895 528 (1,332) 30,028
------- ------- ------ ------- -------
Total assets........ $77,362 111,699 21,001 (56,521) 153,541
======= ======= ====== ======= =======
LIABILITIES AND
STOCKHOLDERS' EQUITY
(DEFICIT)
Current liabilities... $14,812 14,515 3,921 (139) 33,109
Current installments
of long-term debt.... 1,250 474 910 (25) 2,609
Long-term debt,
excluding current
installments......... 145,000 323 1,925 -- 147,248
Other non-current
liabilities.......... 1,111 538 2,166 -- 3,815
Intercompany
balances............. (51,571) 54,467 (3,112) 216 --
Stockholders' equity
(deficit)............ (33,240) 41,382 15,191 (56,573) (33,240)
------- ------- ------ ------- -------
Total liabilities
and stockholders'
equity (deficit)... $77,362 111,699 21,001 (56,521) 153,541
======= ======= ====== ======= =======
</TABLE>
54
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
OCTOBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
PARENT GUARANTOR NON-GUARANTOR ELIMINATING
COMPANY SUBSIDIARIES SUBSIDIARIES ENTRIES CONSOLIDATED
-------- ------------ ------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and cash
equivalents.......... $ 3,376 261 2,351 -- 5,988
Accounts receivable,
net.................. -- 9,557 8,700 -- 18,257
Other current assets.. 704 5,135 10,795 (211) 16,423
Property and
equipment, net....... 158 83,522 12,649 (449) 95,880
Investment in
subsidiaries......... 65,402 -- -- (65,402) --
Goodwill.............. 217 4,021 16,786 -- 21,024
Other assets.......... 3,184 29,142 8,537 (1,642) 39,221
-------- ------- ------ ------- -------
Total assets........ $ 73,041 131,638 59,818 (67,704) 196,793
======== ======= ====== ======= =======
LIABILITIES AND
STOCKHOLDERS' EQUITY
(DEFICIT)
Current liabilities... $ 9,855 16,788 7,988 47 34,678
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)............ (20,196) 34,519 33,426 (67,945) (20,196)
-------- ------- ------ ------- -------
Total liabilities
and stockholders'
equity (deficit)... $ 73,041 131,638 59,818 (67,704) 196,793
======== ======= ====== ======= =======
</TABLE>
55
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED STATEMENT OF OPERATIONS
YEAR ENDED OCTOBER 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
NON-
PARENT GUARANTOR GUARANTOR ELIMINATING
COMPANY SUBSIDIARIES SUBSIDIARIES ENTRIES CONSOLIDATED
-------- ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Operating revenues...... $ -- 129,130 30,614 (2,412) 157,332
Operating expenses...... -- 80,303 16,907 (2,326) 94,884
-------- ------- ------ ------ -------
Gross profit.......... -- 48,827 13,707 (86) 62,448
Selling, general and
administrative
expenses............... 10,963 12,696 5,694 99 29,452
Gain on sale of
business............... (1,823) -- -- -- (1,823)
Depreciation and
amortization........... 69 28,423 8,578 (342) 36,728
-------- ------- ------ ------ -------
Operating income
(loss)............... (9,209) 7,708 (565) 157 (1,909)
Interest expense........ 14,269 (228) 497 (171) 14,367
Other (income) expense.. (326) (413) 746 72 79
-------- ------- ------ ------ -------
Income (loss) before
equity in income of
subsidiaries, income
taxes, and
extraordinary items.... (23,152) 8,349 (1,808) 256 (16,355)
Equity in income of
subsidiaries .......... 4,716 -- -- (4,716) --
Income tax expense...... 201 113 592 -- 906
-------- ------- ------ ------ -------
Net income (loss) before
extraordinary items.... (18,637) 8,236 (2,400) (4,460) (17,261)
Extraordinary items:
(Write-off) of
deferred financing
fees and expenses,
net of gain on early
retirement of debt... 950 (1,376) -- -- (426)
-------- ------- ------ ------ -------
Net income (loss)....... $(17,687) 6,860 (2,400) (4,460) (17,687)
======== ======= ====== ====== =======
</TABLE>
56
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED STATEMENT OF OPERATIONS
YEAR ENDED OCTOBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
NON-
PARENT GUARANTOR GUARANTOR ELIMINATING
COMPANY SUBSIDIARIES SUBSIDIARIES ENTRIES CONSOLIDATED
--------- ------------ ------------ ----------- ------------
<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 in loss of
subsidiaries and income
taxes ................. (33,124) (393) 1,574 191 (31,752)
Equity in loss of
subsidiaries........... (671) -- -- 671 --
Income tax expense...... 400 200 1,843 -- 2,443
--------- ------- ------ ------ -------
Net income (loss)....... $ (34,195) (593) (269) 862 (34,195)
========= ======= ====== ====== =======
</TABLE>
57
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED STATEMENT OF OPERATIONS
YEAR ENDED OCTOBER 31, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
NON-
PARENT GUARANTOR GUARANTOR ELIMINATING
COMPANY SUBSIDIARIES SUBSIDIARIES ENTRIES CONSOLIDATED
-------- ------------ ------------ ----------- ------------
<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 in loss of
subsidiaries and income
taxes.................. (32,312) (13,681) (301) (922) (47,216)
Equity in 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>
58
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED STATEMENT OF CASH FLOWS
YEAR ENDED OCTOBER 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
NON-
PARENT GUARANTOR GUARANTOR ELIMINATING
COMPANY SUBSIDIARIES SUBSIDIARIES ENTRIES CONSOLIDATED
-------- ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Net income (loss)....... $(17,687) 6,860 (2,400) (4,460) (17,687)
Depreciation and
amortization......... 69 28,423 8,578 (342) 36,728
Equity in income of
subsidiaries......... (4,716) -- -- 4,716 --
Gain on sale of
business............. (1,823) -- -- -- (1,823)
Non-cash extraordinary
items................ (950) 1,376 -- -- 426
Other non-cash
adjustments.......... 3,264 40 (658) -- 2,646
Changes in working
capital.............. 5,004 (4,531) 2,942 13 3,428
-------- ------- ------ ------ -------
Net cash provided by
(used in) operating
activities............. (16,839) 32,168 8,462 (73) 23,718
-------- ------- ------ ------ -------
Cash flows from
investing activities:
Capital and wagering
systems
expenditures......... (49) (5,415) (2,062) 38 (7,488)
Proceeds from sale of
business and assets
disposals............ 23,216 260 (2,420) -- 21,056
Other assets and
investments.......... (442) (1,463) (642) (140) (2,687)
-------- ------- ------ ------ -------
Net cash provided by
(used in) investing
activities............. 22,725 (6,618) (5,124) (102) 10,881
-------- ------- ------ ------ -------
Cash flows from
financing activities:
Net repayments under
revolving credit
facility............. -- (71,890) -- -- (71,890)
Net proceeds from
issuance of long
term-debt............ 105,100 -- 1,234 -- 106,334
Payments on long-term
debt................. (4,350) (52,224) (846) 25 (57,395)
Other, principally
intercompany
balances............. (94,432) 98,631 (3,401) 163 961
-------- ------- ------ ------ -------
Net cash provided by
(used in) financing
activities............. 6,318 (25,483) (3,013) 188 (21,990)
-------- ------- ------ ------ -------
Effect of exchange rate
changes on cash........ 2 -- (379) (13) (390)
Increase/(decrease) in
cash and cash
equivalents............ 12,206 67 (54) -- 12,219
Cash and cash
equivalents, beginning
of year................ 3,376 261 2,351 -- 5,988
-------- ------- ------ ------ -------
Cash and cash
equivalents, end of
year................... $ 15,582 328 2,297 -- 18,207
======== ======= ====== ====== =======
</TABLE>
59
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED STATEMENT OF CASH FLOWS
YEAR ENDED OCTOBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
NON-
PARENT GUARANTOR GUARANTOR ELIMINATING
COMPANY SUBSIDIARIES SUBSIDIARIES ENTRIES CONSOLIDATED
-------- ------------ ------------ ----------- ------------
<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 loss of
subsidiaries......... 671 -- -- (671) --
Other non-cash
adjustments.......... 7,188 441 (13) 152 7,768
Changes in working
capital.............. 373 (2,274) 2,431 (88) 442
-------- ------- ------ ---- -------
Net cash provided by
(used in) operating
activities............. (25,923) 27,248 13,605 (62) 14,868
-------- ------- ------ ---- -------
Cash flows from
investing activities:
Capital and wagering
systems
expenditures......... (114) (7,863) (1,262) (2) (9,241)
Proceeds from asset
disposals............ 3,000 1,024 660 -- 4,684
Other assets and
investments.......... (1,470) 144 (2,673) 667 (3,332)
-------- ------- ------ ---- -------
Net cash provided by
(used in) investing
activities............. 1,416 (6,695) (3,275) 665 (7,889)
-------- ------- ------ ---- -------
Cash flows from
financing activities:
Net borrowings under
revolving credit
facility............. -- 2,610 -- -- 2,610
Net proceeds from
issuance of long
term-debt............ -- 1,626 924 -- 2,550
Payments on long-term
debt................. -- (8,930) (1,926) 27 (10,829)
Other, principally
intercompany
balances............. 24,112 (15,947) (7,391) (774) --
-------- ------- ------ ---- -------
Net cash provided by
(used in) financing
activities............. 24,112 (20,641) (8,393) (747) (5,669)
-------- ------- ------ ---- -------
Effect of exchange rate
changes on cash........ 386 (1) (842) 144 (313)
-------- ------- ------ ---- -------
Increase/(decrease) in
cash and cash
equivalents............ (9) (89) 1,095 -- 997
Cash and cash
equivalents, beginning
of year................ 3,385 350 1,256 -- 4,991
-------- ------- ------ ---- -------
Cash and cash
equivalents, end of
year................... $ 3,376 261 2,351 -- 5,988
======== ======= ====== ==== =======
</TABLE>
60
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED STATEMENT OF CASH FLOWS
YEAR ENDED OCTOBER 31, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
NON-
PARENT GUARANTOR GUARANTOR ELIMINATING
COMPANY SUBSIDIARIES SUBSIDIARIES ENTRIES CONSOLIDATED
-------- ------------ ------------ ----------- ------------
<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 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)
Purchase of companies,
net of cash
acquired............. (747) (13,653) -- -- (14,400)
Other assets and
investments.......... (1,727) (3,619) (4,724) (1,204) (11,274)
-------- ------- ------- ------- -------
Net cash provided by
(used in) investing
activities............. (2,535) (34,406) (7,797) 924 (43,814)
-------- ------- ------- ------- -------
Cash flows from
financing activities:
Net borrowings under
lines of credit...... -- -- (250) -- (250)
Net proceeds from
issuance of long
term-debt............ -- 30,227 1,803 -- 32,030
Payments on long-term
debt................. -- (805) (1,562) -- (2,367)
Net proceeds from
issuance of common
stock................ 4,495 -- -- -- 4,495
Other, principally
intercompany
balances............. 20,028 (9,993) (10,071) 36 --
-------- ------- ------- ------- -------
Net cash provided by
(used in) financing
activities............. 24,523 19,429 (10,080) 36 33,908
-------- ------- ------- ------- -------
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>
61
<PAGE>
SCHEDULE II
AUTOTOTE CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
THREE YEARS ENDED OCTOBER 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
---------------------
CHARGED
BALANCE AT 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,
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
YEAR ENDED OCTOBER 31,
1997
Allowance for doubtful
accounts............... $2,053 1,070 -- 1,147 1,976
</TABLE>
- --------
(1) Amounts related to acquired companies
(2) Amounts written off
62
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE MATTERS
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information relating to directors of the Company is incorporated herein by
reference to the Company's proxy statement issued in connection with the 1998
Annual Meeting of Stockholders under the caption "Election of Directors."
Information relating to executive officers of the Company is included in Part
I of this Form 10-K as permitted in General Instruction [G3].
ITEM 11. EXECUTIVE COMPENSATION
Information relating to executive compensation under the caption "Executive
Compensation; Certain Arrangements," in the Company's proxy statement issued
in connection with the 1998 Annual Meeting of Stockholders is incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information relating to security ownership of certain beneficial owners and
management under the caption, "Security Ownership" in the Company's proxy
statement issued in connection with the 1998 Annual Meeting of Stockholders is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information under the caption "Certain Arrangements Between the Company and
its Directors and Officers" in the Company's proxy statement issued in
connection with the 1998 Annual Meeting of Stockholders is incorporated herein
by reference.
63
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements--See Index to Consolidated Financial Statements
attached hereto, page 26.
2. Financial Statements Schedule--See Index to Consolidated Financial
Statements attached hereto, page 26.
Exhibits--The following is a list of 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 Due 2004, dated as
of July 28, 1997 (incorporated by reference to Exhibit 4.1).
4.3 Registration Rights Agreement, dated as of July 28, 1997, among the
Company, the Guarantors and Donaldson, Lufkin & Jenrette Securities
Corporation.(4)
4.4 Certificate representing share of Class A Common Stock of the
Company.(1)
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 Stock Purchase Agreement dated July 15, 1994 among the Company, Marvin
H. Sugarman, Robert Melican, Racing Technology, Inc. and Marvin H.
Sugarman Productions, Inc.(10)
10.7 Asset Purchase Agreement dated January 12, 1995 between Autotote
Communication Services, Inc. and IDB Communications Group Inc.(11)
10.8 Purchase Agreement dated October 14, 1994 between Autotote
Corporation, Yves Alexandre, Marie A. Alexandre and Frederic
Alexandre. (English summary attached to French original.)(12)
10.9 Purchase Agreement among the Company, Autotote Enterprises, Inc., and
the State of Connecticut, Division of Special Revenue, dated June 30,
1993.(13)
10.10 Stock Purchase Agreement between the Company and General Instrument
Corporation dated May 18, 1993.(14)
10.11 Purchase and Sale Agreement between the Company and Sven Eriksson
dated May 27, 1993.(15)
10.12 Agreement among ETAG Electronic Totalisator AG, Gerhard Harwalik,
Peter Freudenschuss, Peter Tinkl and Manfred Harwalik dated July 27,
1993.(16)
10.13 Purchase Agreement among certain purchasers and Autotote Corporation
dated August 13, 1993 with respect to the 5 1/2% Convertible
Subordinated Debentures due 2001.(16)
10.14 1995 Equity Incentive Plan.(+)
10.15 1992 Equity Incentive Plan, as amended and restated.(+)
10.16 Registration Rights Agreement, dated as of November 6, 1995, between
the Company and Hartford Stock Fund and Hartford Advisers Fund, (the
"Funds") dated as of November 6, 1995.(18)
10.17 Interest Agreement, dated as of November 6, 1995, between the Company
and the Funds.(19)
</TABLE>
64
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.18 Letter Agreement, dated as of January 3, 1995, between the Company and
Martin E. Schloss.(20)*
10.19 Agreement of Purchase and Sale, dated January 19, 1996, between
Autotote Systems, Inc. and Fusco Properties, L.P. ("Fusco").(21)
10.20 Lease Agreement, dated as of January 19, 1996, between Fusco and
Autotote Systems, Inc.(22)
10.21 Employment Agreement, dated February 22, 1996, between the Company and
William Luke.(23)*
10.22 Promissory Note dated May 13, 1996 between the Company and A. Lorne
Weil.(24)
10.23 Stock Transfer Agreement among the Company and American Wagering,
Inc., dated October 25, 1996, with respect to all outstanding stock of
Autotote CBS, Inc.(25)
10.24 Stock Purchase Agreement among the Company and Scientific Games
Holding Corp., Tele Control Kommunikations und Computersysteme Aktien
Gesellschaft.(26)
10.25 1997 Incentive Compensation Plan.(27)*
21.1 List of Subsidiaries(+).
23 Consent of KPMG Peat Marwick LLP(+).
99.7 Warrant to Purchase Class B Nonvoting Common Stock of Autotote
Corporation dated October 30, 1992 issued to Various lenders.(28)
99.8 Warrant Agreement dated as of September 14, 1995 (the "1995 Warrant
Agreement"), as amended as of January 29, 1997.(29)
99.9 Warrant Agreement dated as of January 26, 1996 (the "1996 Warrant
Agreement"), as amended as of January 29, 1997.(30)
99.10 Amendment dated January 29, 1997 amending both the 1995 Warrant
Agreement and the 1996 Warrant Agreement. (31)
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.
(9) Incorporated by reference to Exhibit 10.39 to the Company's 1992 10-K.
(10) Incorporated by reference to Exhibit 10.19 to the Company's 1994 10-K.
(11) Incorporated by reference to Exhibit 10.20 to the Company's 1994 10-K.
(12) Incorporated by reference to Exhibit 10.21 to the Company's 1994 10-K.
(13) Incorporated by reference to Exhibit 2.1 to the Company's Current Report
on Form 8-K dated July 1, 1993.
(14) Incorporated by reference to Exhibit 2.1 to the Company's Current Report
on Form 8-K dated June 22, 1993.
(15) Incorporated by reference to Exhibit 2.2 to the Company's Current Report
on Form 8-K dated June 22, 1993.
65
<PAGE>
<TABLE>
<C> <S>
(16) Incorporated by reference to Exhibit 2.1 to the Company's Current Report
on Form 8-K dated September 8, 1993.
(17) Incorporated by reference to Exhibit 10 to the Company's Current Report
on Form 8-K dated September 8, 1993.
(18) Incorporated by reference to Exhibit 10.36 to the 1995 10-K.
(19) Incorporated by reference to Exhibit 10.37 to the 1995 10-K.
(20) Incorporated by reference to Exhibit 10.40 to the 1995 10-K.
(21) Incorporated by reference to Exhibit 10.42 to the Company's Annual
Report on Form 10-K/A for the fiscal year ended October 31, 1995, dated
February 22, 1996 (the "1995 10-K/A").
(22) Incorporated by reference to Exhibit 10.43 to the 1995 10-K/A.
(23) Incorporated by reference to Exhibit 10.45 to the Company's Quarterly
Report on Form 10-Q for the quarter ended January 31, 1996.
(24) Incorporated by reference to Exhibit 10.47 to the Company's Quarterly
Report on Form 10-Q for the quarter ended April 30, 1996.
(25) Incorporated by reference to Exhibit 10.25 to the Company's Registration
Statement on Form S-4 (Registration No. 333-34465) which became
effective September 12, 1997 (the "1997 S-4").
(26) Incorporated by reference to Exhibit 10.27 to the Company's Current
Report on Form 8-K dated April 15, 1997.
(27) Incorporated by reference to Exhibit 10.1 to the Company's Registration
Statement on Form S-8 (Registration No. 333-44979) which became
effective January 27, 1998.
(28) Incorporated by reference to Exhibit 10.34 to the Company's 1992 10-K.
(29) Incorporated by reference to Exhibit 99.8 to the Company's Annual Report
on Form 10-K/A for the fiscal year ended October 31, 1996, dated
November 18, 1997 (the "1996 10-K/A").
(30) Incorporated by reference to Exhibit 99.9 to the 1997 S-4.
(31) Incorporated by reference to Exhibit 99.10 to the 1997 S-4.
(32) Incorporated by reference to Exhibit 28.1 to the 1996 10-K/A.
</TABLE>
- --------
* Includes management contracts and compensation plans and arrangements.
(+) Filed herewith.
(b) A Form 8-K Report, reporting on other events pursuant to Item 5, was
filed on August 11, 1997, in connection with:
(i) Senior Notes Offering. On July 28, 1997, Autotote Corporation (the
"Company") completed a private offering (the "Offering") under Rule 144A of
the Securities Act of 1933, as amended of $110 million aggregate principal
amount of 10 7/8% Senior Notes due 2004 with net proceeds to the Company of
approximately $105.1 million. The Notes are guaranteed by substantially all
of the Company's existing wholly owned United States subsidiaries.
(ii) Credit Facility. In connection with the Offering, the Company
entered into a new 3.5 year revolving credit facility which, subject to
certain terms and conditions, provides for borrowings of up to $25.0
million, with a $15.0 million sublimit for letters of credit.
66
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
Autotote Corporation
Dated: January 28, 1998
/s/ A. Lorne Weil
By: _________________________________
A. LORNE WEIL, CHAIRMAN OF THE
BOARD, PRESIDENT AND CHIEF
EXECUTIVE OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES INDICATED ON JANUARY 28, 1998.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ A. Lorne Weil Chairman of the Board, January 28, 1998
_____________________________________ President and Chief
A. LORNE WEIL Executive Officer, and
Director (principal
executive officer)
/s/ William Luke Vice President and Chief January 28, 1998
_____________________________________ Financial Officer
WILLIAM LUKE (principal financial officer)
/s/ DeWayne E. Laird Corporate Controller January 28, 1998
_____________________________________ (principal accounting
DEWAYNE E. LAIRD officer)
/s/ Sir Brian Wolfson Director January 28, 1998
_____________________________________
SIR BRIAN WOLFSON
/s/ Larry J. Lawrence Director January 28, 1998
_____________________________________
LARRY J. LAWRENCE
/s/ Marshall Bartlett Director January 28, 1998
_____________________________________
MARSHALL BARTLETT
/s/ Alan J. Zakon Director January 28, 1998
_____________________________________
ALAN J. ZAKON
</TABLE>
67
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE
----------- ----------- ----
<C> <S> <C>
21 List of Subsidiaries
23 Consent of KPMG Peat Marwick LLP
10.14 1995 Equity Incentive Plan, as amended.
10.15 1992 Equity Incentive Plan, as amended and restated.
</TABLE>
68
<PAGE>
<TABLE>
<CAPTION>
BOARD OF DIRECTORS OFFICERS TRANSFER AGENT
<S> <C> <C>
A. Lorne Weil A. Lorne Weil American Stock Transfer &
Chairman, President and Chief Chairman of the Board, Trust Company
Executive Officer of Autotote President and 40 Wall Street
Corporation Chief Executive Officer New York, NY 10005
Larry J. Lawrence William Luke
Vice Chairman of the Board Vice President and Chief STOCK INFORMATION
General Partner of Lawrence, Financial Officer At the close of business on
Smith & Horey III, L.P. January 23, 1998, a total of
Martin E. Schloss 35,416,534 shares of Class A
Sir Brian Wolfson Vice President Common Stock were
Former Chairman of Wembley plc General Counsel and outstanding. There were 2,383
Secretary holders of record on such date.
Alan J. Zakon
Former Managing Director of Gerald Lawrence Autotote Corporation trades on
Bankers Trust Corporation Vice President the American Stock Exchange
Pari-Mutuel Group Executive under the symbol "TTE".
Marshall Bartlett
Former Executive Vice President DeWayne E. Laird
and Chief Operating Officer of Corporate Controller AUDITORS
Bourns Inc. KPMG Peat Marwick LLP
Robert C. Becker Short Hills, New Jersey
Treasurer
</TABLE>
<PAGE>
AUTOTOTE CORPORATION
750 LEXINGTON AVENUE, 25TH FLOOR
NEW YORK, NEW YORK 10022
212-754-2233
[LOGO OF AUTOTOTE CORPORATION APPEARS HERE]
<PAGE>
Exhibit 10.14
AUTOTOTE CORPORATION
1995 EQUITY INCENTIVE PLAN, AS AMENDED
1. PURPOSE
The purpose of this 1995 Equity Incentive Plan (the "Plan") is to advance
the interests of Autotote Corporation (the "Company") by enhancing its ability
to attract and retain employees and other persons or entities, other than
directors and executive officers of the Company, who are in a position to make
significant contributions to the success of the Company and its subsidiaries
through ownership of shares of the Company's Class A Common Stock ("Stock").
The Plan is intended to accomplish these goals by enabling the Company to
grant awards in the form of Options, Stock Appreciation Rights, Restricted Stock
or Unrestricted Stock Awards, Deferred Stock Awards, Performance Awards, Loans
or Supplement Grants, or combinations thereof, all as more fully described below
("Awards").
2. ADMINISTRATION
The Plan will be administered by the Board of Directors of the Company (the
"Board"). The Board will have authority, not inconsistent with the express
provisions of the Plan and in addition to other authority granted under the
Plan, to (a) grant Awards at such time or times as it may choose; (b) determine
the size of each Award, including the number of shares of Stock subject to the
Award; (c) determine the type or types of each Award; (d) determine the terms
and conditions of each Award; (e) waive compliance by a person who has received
an Award under the Plan that remains outstanding (a "Participant") with any
obligations to be performed by the Participant under an Award and waive any term
or condition of an Award; (f) amend or cancel an existing Award in whole or in
part (and, if an award is canceled, grant another Award in its place on such
terms as the Board shall specify), except that the Board may not, without the
consent of the holder of an Award, take any action under this clause with
respect to such Award if such action would adversely affect the rights of such
holder; (g) prescribe the form or forms of instruments that are required or
deemed appropriate under the Plan, including any written notices and elections
required of Participants, and change such forms from time to time; (h) adopt,
amend and rescind rules and regulations for the administration of the Plan; and
(i) interpret the Plan and decide any questions and settle all controversies and
disputes that may arise in connection with the Plan. Such determination and
actions of the Board, and all other determinations and actions of the Board made
or taken under authority granted by any provision of the Plan, will be
conclusive and will bind all parties. Nothing in this paragraph shall be
construed as limiting the power of the Board to make adjustments under Section
7.3, Section 7.4 or Section 8.6.
The Board may, in its discretion, delegate some or all of its powers with
respect to the Plan to a committee (the "Committee"), in which event all
references (as appropriate) to the Board hereunder shall be deemed to refer to
the Committee. The Committee, if one is appointed, shall consist of directors
and executive officers, and may have one or more
<PAGE>
members at any given time. A majority of the members of the Committee shall
constitute a quorum, and all determinations of the Committee shall be made by a
majority of its members. Any determination of the Committee under the Plan may
be made without notice or meeting of the Committee by a writing signed by a
majority of the Committee members.
3. EFFECTIVE DATE AND TERM OF PLAN
The Plan will become effective on May 26, 1995. The Plan will terminate at
such time as no shares remain available for delivery under the Plan and the
Company and Participants no longer have any rights or obligations with respect
to outstanding Awards under the Plan.
4. SHARES SUBJECT TO THE PLAN/1/
Subject to the adjustment as provided in Section 8.6 below, the aggregate
number of shares of Stock that may be delivered under the Plan will be 4
million. If any Award or portion thereof terminates without delivery of Stock
or if Stock delivered in connection with any Award is forfeited (including any
case in which an Award or portion thereof payable in Stock or cash is satisfied
in cash rather than Stock), the number of shares of Stock subject to such Award
will be available for future grants. For purposes of the Plan, shares withheld
and shares equal to the number of shares surrendered in payment of the exercise
price or mandatory withholding taxes relating to an Award will be deemed not to
have been delivered under the Plan.
Stock delivered under the Plan may be either authorized but unissued Stock
or previously issued Stock acquired by the Company and held in treasury. No
fractional shares of Stock will be delivered under the Plan.
5. ELIGIBILITY AND PARTICIPATION/2/
Those persons eligible to receive Awards under the Plan will be persons in
the employ of the Company or any of its subsidiaries ("Employees") and such
other persons, included in the term "employee", as defined in General
Instruction A (1) (a) to Form S-8, if such other person, in the opinion of the
Board, is in a position to make a significant contribution to the success of the
Company or its subsidiaries, provided that no person who is then serving as a
director or executive officer of the Company may receive an Award under the
Plan.
6. TYPES OF AWARDS
6.1. Options
- ------------------------
/1/ Increased from 2 million to 4 million by the Board of Directors on October
23, 1997.
/2/ Eligibility provision amended by the Board of Directors on February 21,
1996.
<PAGE>
(a) Nature of Options. An Option is an Award entitling the recipient on
exercise thereof to purchase Stock at a specified exercise price ("Option").
Options granted under the Plan will be non-qualified options, meaning options
that do not qualify as "incentive stock options" as defined in Section 422 of
the Internal Revenue Code of 1986, as amended (the "Code").
(b) Exercise Price. The exercise price of an Option will be determined by
the Board, subject to the following:
(1) In no case may the exercise price paid for Stock which is part of
an original issue of authorized Stock be less than the par value per share
of the Stock.
(2) The Board may reduce the exercise price of an Option at any time
after the time of grant.
(c) Duration of Options. The latest date on which an Option may be
exercised will be the tenth anniversary of the day immediately preceding the
date the Option was granted, or such earlier date as may have been specified by
the Board at the time the Option was granted.
(d) Exercise of Options. An Option will become exercisable at such time
or times, and on such conditions, as the Board may specify. The Board may at any
time accelerate the time at which all or any part of the Option may be
exercised.
Any exercise of an Option must be in writing, signed by the proper person
and delivered or mailed to the Company, accompanied by (1) any documents
required by the Board and (2) payment in full in accordance with paragraph (e)
below for the number of shares for which the Option is exercised.
(e) Payment for Stock. Stock purchased on exercise of an Option must be
paid for as follows: (1) in cash or by check (acceptable to the Company in
accordance with guidelines established for this purpose), bank draft or money
order payable to the order of the Company or (2), if so permitted by the
instrument evidencing the Option or by the Board at or after grant of the
Option, (i) through the delivery of shares of Stock which have been outstanding
for at least six months (unless the Board expressly approves a shorter period)
and which have a fair market value on the last business day preceding the date
of exercise equal to the exercise price, or (ii) by delivery of a promissory
note of the Option holder to the Company, payable on such terms as are specified
by the Board, or (iii) by delivery of an unconditional and irrevocable
undertaking by a broker to deliver promptly to the Company sufficient funds to
pay the exercise price, or (iv) by any combination of the permissible forms of
payment; provided, that if the Stock delivered upon exercise of the Option is an
original issue of authorized Stock, at least so much of the exercise price as
represents the par value of such Stock must be paid other than by the Option
holder's promissory note.
(f) Discretionary Payments. If the market price of shares of Stock
subject to an Option (other than an Option which is in tandem with a Stock
Appreciation Right as described in Section 6.2 below) exceeds the exercise price
of the Option at the time of its exercise, the Board may cancel the Option and
cause the Company to pay in cash or in shares of Common Stock (at a price per
share equal to the fair market value per share) to
<PAGE>
the person exercising the Option an amount equal to the difference between the
fair market value of the Stock which would have been purchased pursuant to the
exercise (determined on the date the Option is canceled) and the aggregate
exercise price which would have been paid. The Board may exercise its discretion
to take such action only if it has received a written request from the person
exercising the Option, but such a request will not be binding on the Board.
6.2. Stock Appreciation Rights.
(a) Nature of Stock Appreciation Rights. A Stock Appreciation Right is an
Award entitling the recipient on exercise of the Right to receive, an amount, in
cash or Stock or a combination thereof (such form to be determined by the
Board), determined in whole or in part by reference to appreciation in Stock
value (a "Stock Appreciation Right").
In general, a Stock Appreciation Right entitles the Participant to receive,
with respect to each share of Stock as to which the Right is exercised, the
excess of the share's fair market value on the date of exercise over its fair
market value on the date the Right was granted. However, the Board may provide
at the time of grant that the amount the recipient is entitled to receive will
be adjusted upward or downward under rules established by the Board to take into
account the performance of the Stock in comparison with the performance of other
stocks or an index or indices of other stocks. The Board may also grant Stock
Appreciation Rights that provide that, following a Change in Control of the
Company, as defined below, the holder of such Right will be entitled to receive,
with respect to each share of Stock subject to the Right, an amount equal to the
excess of a specified value (which may include an average of values) for a share
of Stock during a period preceding such Change in Control over the fair market
value of a share of Stock on the date the Right was granted. "Change in
Control"/3/ is the occurrence of any of the following: (i) when any "person" as
defined in Section 3(a)(9) of the Securities Exchange Act of 1934 and as used in
Sections 13(d) and 14(d) thereof, including a "group" as defined in Section
13(d) but excluding the Company and any subsidiary and any employee benefit plan
sponsored or maintained by the Company or any subsidiary (including any trustee
of such plan acting as trustee), directly or indirectly becomes the "beneficial
owner" (as defined in Rule 13d-3 under the Act) of securities of the Company
representing at least 40% (or such greater percentage as the Board may specify
in any grant of Stock Appreciation Rights) of the combined voting power of the
Company's then outstanding securities; or (ii) the occurrence of a transaction
requiring stockholder approval for the acquisition of the Company by an entity
other than the Company or a subsidiary through purchase of assets, or by merger,
or otherwise.
(b) Grant of Stock Appreciation Rights. Stock Appreciation Rights may be
granted in tandem with, or independently of, Options granted under the Plan. A
Stock Appreciation Right granted in tandem with an Option may be granted either
at or after the time the Option is granted.
(c) Rules Applicable to Tandem Awards. When Stock Appreciation Rights are
granted in tandem with Options, the following will apply:
- --------------------------
/3/ Term "Change in Control" defined by the Board of Directors on February 21,
1996.
<PAGE>
(1) The Stock Appreciation Right will be exercisable only at such
time or times, and to the extent, that the related Option is exercisable
and will be exercisable in accordance with the procedure required for
exercise of the related Option.
(2) The Stock Appreciation Right will terminate and no longer be
exercisable upon the termination or exercise of the related Option, except
that a Stock Appreciation Right granted with respect to less than the full
number of shares covered by an Option will not be reduced until the number
of shares as to which the related Option has been exercised or has
terminated exceeds the number of shares not covered by the Stock
Appreciation Right.
(3) The Option will terminate and no longer be exercisable upon the
exercise of the related Stock Appreciation Right.
(4) The Stock Appreciation Right will be transferable only with the
related Option, to the extent permitted hereunder.
(d) Exercise of Independent Stock Appreciation Rights. A Stock
Appreciation Right not granted in tandem with an Option will become exercisable
at such time or times, and on such conditions, as the Board may specify. The
Board may at any time accelerate the time at which all or any part of the Right
may be exercised.
Any exercise of an independent Stock Appreciation Right must be in writing,
signed by the proper person and delivered or mailed to the Company, accompanied
by any other documents required by the Board.
6.3. Restricted and Unrestricted Stock.
(a) Nature of Restricted Stock Award. Restricted Stock is an Award
entitling the recipient to acquire shares of Stock subject to the restrictions
described in paragraph (d) below ("Restricted Stock"), provided that, if the
shares to be received are part of an original issue of authorized Stock, the
recipient shall pay at least so much of the exercise price as represents the par
value of such Stock in cash, services previously provided, or some other form of
lawful consideration under the Delaware General Corporation Law as may be
specified by the Board.
(b) Acceptance of Award. A Participant who is granted a Restricted Stock
Award will have no rights with respect to such Award unless the Participant
accepts the Award by written instrument, in such form as may be specified by the
Board, delivered or mailed to the Company and accompanied by payment in full of
the specified purchase price, if any, of the shares covered by the Award.
Payment may be by certified or bank check or other instrument acceptable to the
Board.
(c) Rights as a Stockholder. A Participant who receives Restricted Stock
will have all the rights of a stockholder with respect to the Stock, including
voting and dividend rights, subject to the restrictions described in paragraph
(d) below and any other conditions imposed by the Board at the time of grant.
Unless the Board otherwise determines, certificates evidencing shares of
Restricted Stock will remain in the possession of the Company until such shares
are free of all restrictions under the Plan, and shall bear such legend as the
Board may specify.
<PAGE>
(d) Restrictions. Except as otherwise specifically provided by the Plan,
Restricted Stock may not be sold, assigned, transferred, pledged or otherwise
encumbered or disposed of, and, if the Participant ceases to be an Employee or
otherwise suffers a Status Change (as defined at Section 7.2 (a) below) for any
reason, shall be forfeited to the Company (in which case any cash consideration
paid to the Company under Section 6.3(a) above will be refunded, but no other
form of such consideration shall be refunded). These restrictions will lapse at
such time or times, and on such conditions, as the Board may specify. The Board
may at any time accelerate the time at which the restrictions on all or any part
of the shares will lapse.
(e) Notice of Election. Any Participant making an election under Section
83(b) of the Code with respect to Restricted Stock must provide a copy thereof
to the Company within ten days of the filing of such election with the Internal
Revenue Service.
(f) Other Awards Settled with Restricted Stock. The Board may, at the time
any Award described in this Section 6 is granted, provide that any or all the
Stock delivered pursuant to the Award will be Restricted Stock.
(g) Unrestricted Stock. The Board may, in its sole discretion, approve the
grant or sale to any recipient of shares of Stock free of restrictions under the
Plan ("Unrestricted Stock"), provided that, if the shares to be received are
part of an original issue of authorized Stock, the recipient shall pay at least
so much of the exercise price as represents the par value of such Stock in cash,
services previously provided, or some other form of lawful consideration under
the Delaware General Corporation Law as may be specified by the Board.
6.4. Deferred Stock.
A Deferred Stock Award entitles the recipient to receive shares of Stock to
be delivered in the future ("Deferred Stock"). Delivery of the Stock will take
place at such time or times, and on such conditions, as the Board may specify.
The Board may at any time accelerate the time at which delivery of all or any
part of the Stock will take place. At the time any Award described in this
Section 6 is granted, the Board may provide that, at the time Stock would
otherwise be delivered pursuant to the Award, the Participant will instead
receive an instrument evidencing the Participant's right to future delivery of
Deferred Stock.
6.5. Performance Awards; Performance Goals.
(a) Nature of Performance Awards. A Performance Award entitles the
recipient to receive, without payment, an amount in cash or Stock or a
combination thereof (such form to be determined by the Board) following the
attainment of Performance Goals (a "Performance Award"). Performance Goals may
be related to personal performance, corporate performance, departmental
performance or any other category of performance deemed by the Board to be
important to the success of the Company. The Board will determine the
Performance Goals, the period or periods during which performance is to be
measured and all other terms and conditions applicable to the Award.
(b) Other Awards Subject to Performance Condition. The Board may, at the
time any Award described in this Section 6 is granted, impose the condition (in
addition to
<PAGE>
any conditions specified or authorized in this Section 6 or any other provision
of the Plan) that Performance Goals be met prior to the Participant's
realization of any specified payment or benefit under the Award.
6.6. Loans and Supplemental Grants.
(a) Loans. The Company may make a loan to a Participant ("Loan"), either
on the date of or after the grant of any Award to the Participant. A Loan may be
made either in connection with the purchase of Stock under the Award or with the
payment of any Federal, state and local income tax with respect to income
recognized as a result of the Award. The Board will have full authority to
decide whether to make a Loan and to determine the amount, terms and conditions
of the Loan, including the interest rate (which may be zero), whether the Loan
is to be secured or unsecured or with or without recourse against the borrower,
the terms on which the Loan is to be repaid and the conditions, if any, under
which it may be forgiven. However, no Loan may have a term (including
extensions) exceeding ten years in duration.
(b) Supplemental Grants. In connection with any Award, the Board may at
the time such Award is made or at a later date, provide for and grant a cash
award to the Participant ("Supplemental Grant") not to exceed an amount equal to
(1) the amount of any federal, state and local income tax on ordinary income for
which the Participant may be liable with respect to the Award, determined by
assuming taxation at the highest marginal rate, plus (2) an additional amount on
a grossed-up basis intended to make the Participant whole on an after-tax basis
after discharging all the Participant's income tax liabilities arising from all
payments under this Section 6. Any payments under this subsection (b) will be
made at the time the Participant incurs Federal income tax liability with
respect to the Award.
7. EVENTS AFFECTING OUTSTANDING AWARDS
7.1. Death.
If a Participant dies, the following will apply:
(a) All Options and Stock Appreciation Rights held by the Participant
immediately prior to death, to the extent then exercisable, may be exercised by
the Participant's executor or administrator or the person or persons to whom the
Option or Right is transferred by will or the applicable laws of descent and
distribution, at any time within the one year period ending with the first
anniversary of the Participant's death (or such shorter or longer period as the
Board may determine), and shall thereupon terminate. In no event, however, shall
an Option or Stock Appreciation Right remain exercisable beyond the latest date
on which it could have been exercised without regard to this Section 7. Except
as otherwise determined by the Board, all Options and Stock Appreciation Rights
held by a Participant immediately prior to death that are not then exercisable
shall terminate at death.
(b) Except as otherwise determined by the Board, all Restricted Stock held
by the Participant will be forfeited and transferred to the Company (and, in the
event the certificates representing such Restricted Stock are held by the
Company, such Restricted
<PAGE>
Stock will be so transferred without any further action by the Participant) in
accordance with Section 6.3 above.
(c) Any payment or benefit under a Deferred Stock Award, Performance
Award, or Supplemental Grant to which the Participant was not irrevocably
entitled prior to or upon the occurrence of death will be forfeited and the
Award canceled as of the time of death, unless otherwise determined the Board.
7.2. Termination of Service (Other Than By Death).
If a Participant who is an Employee ceases to be an Employee for any reason
other than death, or if there is a termination (other than by reason of death)
of the consulting, service or similar relationship in respect of which a non-
Employee Participant was granted an Award hereunder (such termination of the
employment or other relationship being hereinafter referred to as a "Status
Change"), the following will apply:
(a) Except as otherwise determined by the Board, all Options and Stock
Appreciation Rights held by the Participant that were not exercisable
immediately prior to the Status Change shall terminate at the time of the Status
Change. Any Options or Rights that were exercisable immediately prior to the
Status Change will continue to be exercisable for a period of three months (or
such longer period as the Board may determine), and shall thereupon terminate,
unless the Award provides by its terms for immediate or earlier termination in
the event of a Status Change or unless the Status Change results from a
discharge for cause which in the opinion of the Board casts such discredit on
the Participant as to justify immediate termination of the Award. In no event,
however, shall an Option or Stock Appreciation Right remain exercisable beyond
the latest date on which it could have been exercised without regard to this
Section 7. For purposes of this paragraph, in the case of a Participant who is
an Employee, a Status Change shall not be deemed to have resulted by reason of
(i) a sick leave or other bona fide leave of absence approved for purposes of
the Plan by the Board, so long as the Employee's right to reemployment is
guaranteed either by statute or by contract, or (ii) a transfer of employment
between the Company and a subsidiary or between subsidiaries.
(b) Except as otherwise determined by the Board, all Restricted Stock held
by the Participant at the time of the Status Change must be forfeited and
transferred to the Company (and, in the event the certificates representing such
Restricted Stock are held by the Company, such Restricted Stock will be so
transferred without any further action by the Participant) in accordance with
Section 6.3 above.
(c) Any payment or benefit under a Deferred Stock Award, Performance
Award, or Supplemental Grant to which the Participant was not irrevocably
entitled prior to the Status Change will be forfeited and the Award canceled as
of the date of such Status Change, unless otherwise determined by the Board.
7.3. Acquisition Transactions.
Notwithstanding any other provision of the Plan or of any Award to the
contrary, in the event of a consolidation or merger in which the Company is not
the surviving corporation or which results in the acquisition of substantially
all the Company's outstanding Stock by a
<PAGE>
single person or entity or by a group of persons and/or entities acting in
concert or in the event of the sale or transfer of substantially all the
Company's assets (an "acquisition transaction"), all outstanding Awards will
terminate as of the effective date of the acquisition transaction, and the
following will apply:
(a) Each outstanding Option and Stock Appreciation Right will become
exercisable in full ten days prior to the anticipated effective date of the
proposed acquisition transaction unless otherwise expressly provided at the time
of grant.
(b) Each outstanding share of Restricted Stock will become free of all
restrictions and conditions ten days prior to the anticipated effective date of
the proposed acquisition transaction.
(c) Conditions on Deferred Stock Awards, Performance Awards and
Supplemental Grants which relate only to the passage of time and continued
employment will be removed ten days prior to the anticipated effective date of
the proposed acquisition transaction. Performance or other conditions (other
than conditions relating only to the passage of time and continued employment)
will continue to apply unless otherwise provided in the instrument evidencing
the Awards or in any other agreement between the Participant and the Company or
unless otherwise agreed to by the Board.
(d) The Board may in its sole discretion, prior to the effective date of
the acquisition transaction, forgive all or any portion of the principal of or
interest on a Loan.
7.4. Dissolution or Liquidation Transactions.
In the event of a dissolution or liquidation of the Company (a "covered
transaction"), all outstanding Awards will terminate as of the effective date of
the covered transaction, and the following rules shall apply:
(a) Subject to paragraph (b) below, the Board may in its sole discretion,
prior to the effective date of the covered transaction, (1) make each
outstanding Option and Stock Appreciation Right exercisable in full, (2) remove
the restrictions from each outstanding share of Restricted Stock, (3) cause the
Company to make any payment and provide any benefit under each outstanding
Deferred Stock Award, Performance Award, and Supplemental Grant which would have
been made or provided with the passage of time had the transaction not occurred
and the Participant not suffered a Status Change (or died), and (4) forgive all
or any portion of the principal of or interest on a Loan.
(b) If an outstanding Award is subject to performance or other conditions
(other than conditions relating only to the passage of time and continued
employment) which will not have been satisfied at the time of the covered
transaction, the Board may in its sole discretion remove such conditions. If it
does not do so, however, such Award will terminate as of the date of the covered
transaction notwithstanding paragraph (a) above.
8. GENERAL PROVISIONS
8.1. Documentation of Awards.
<PAGE>
Awards will be evidenced by such written instruments, if any, as may be
prescribed by the Board from time to time. Such instruments may be in the form
of agreements to be executed by both the Participant and the Company, or
certificates, letters or similar instruments, which need not be executed by the
Participant but acceptance of which will evidence agreement to the terms
thereof.
8.2. Rights as a Stockholder, Dividend Equivalents.
Except as specifically provided by the Plan, the receipt of an Award will
not give a Participant rights as a stockholder; the participant will obtain such
rights, subject to any limitations imposed by the Plan or the instrument
evidencing the Award, upon actual receipt of Stock. However, the Board may, on
such conditions as it deems appropriate, provide that a Participant will receive
a benefit in lieu of cash dividends that would have been payable on any or all
Stock subject to the Participant's Award had such Stock been outstanding.
Without limitation, the Board may provide for payment to the Participant of
amounts representing such dividends, either currently or in the future, or for
the investment of such amounts on behalf of the Participant.
8.3. Conditions on Delivery of Stock.
The Company will not be obligated to deliver any shares of Stock pursuant
to the Plan or to remove restrictions from shares previously delivered under the
Plan (a) until all conditions of the Award have been satisfied or removed, (b)
until, in the opinion of the Company's counsel, all applicable federal and state
laws and regulation have been complied with, (c) if the outstanding Stock is at
the time listed on any stock exchange, until the shares to be delivered have
been listed or authorized to be listed on such exchange upon official notice of
issuance, and (d) until all other legal matters in connection with the issuance
and delivery of such shares have been approved by the Company's counsel. If the
sale of Stock has not been registered under the Securities Act of 1933, as
amended, the Company may require, as a condition to exercise of the Award, such
representations or agreements as counsel for the Company may consider
appropriate to avoid violation of such Act and may require that the certificates
evidencing such Stock bear an appropriate legend restricting transfer.
If an Award is exercised by the Participant's legal representative, the
Company will be under no obligation to deliver Stock pursuant to such exercise
until the Company is satisfied as to the authority of such representative.
8.4. Tax Withholding.
The Company will withhold from any cash payment made pursuant to an Award
an amount sufficient to satisfy all federal, state and local withholding tax
requirements (the "withholding requirements").
In the case of an Award pursuant to which Stock may be delivered, the Board
will have the right to require that the Participant or other appropriate person
remit to the Company an amount sufficient to satisfy the withholding
requirements, or make other arrangements
<PAGE>
satisfactory to the Board with regard to such requirements, prior to the
delivery of any Stock. If and to the extent that such withholding is required,
the Board may permit the Participant or such other person to elect at such time
and in such manner as the Board provides to have the Company hold back from the
shares to be delivered, or to surrender and deliver to the Company, Stock having
a value calculated to satisfy the withholding requirement.
8.5. Nontransferability of Awards.
No Award (other than an Award in the form of an outright transfer of cash
or Unrestricted Stock) may be transferred other than by will or by the laws of
descent and distribution, and during an employee's lifetime an Award requiring
exercise may be exercised only by the Participant (or in the event of the
Participant's incapacity, the person or persons legally appointed to act on the
Participant's behalf).
8.6. Adjustments in the Event of Certain Transactions.
(a) In the event of a stock dividend, stock split or combination of
shares, recapitalization or other change in the Company's capitalization, or
other distribution to common stockholders other than normal cash dividends,
after the effective date of the Plan, the Board will make any appropriate
adjustments to the maximum number of shares and kind of shares or securities
that may be delivered under the Plan under Section 4 above.
(b) In any event referred to in paragraph (a), the Board will also make
any appropriate adjustments to the number and kind of shares of stock or
securities subject to Awards then outstanding or subsequently granted, any
exercise prices relating to Awards and any other provision of Awards affected by
such change. The Board may also make such adjustments to take into account
material changes in law or in accounting practices or principles, mergers,
consolidations, acquisitions, dispositions or similar corporate transactions, or
any other event, if it is determined by the Board that adjustments are
appropriate to avoid distortion in the operation of the Plan.
8.7. Employment Rights, Etc.
Neither the adoption of the Plan nor the grant of Awards will confer upon
any person any right to continued retention by the Company or any subsidiary as
an Employee or otherwise, or affect in any way the right of the Company or
subsidiary to terminate an employment, service or similar relationship at any
time. Except as specifically provided by the Board in any particular case, the
loss of existing or potential profit in Awards granted under the Plan will not
constitute an element of damages in the event of termination of an employment,
service or similar relationship even if the termination is in violation of an
obligation of the Company to the Participant.
8.8. Deferral of Payments.
The Board may agree at any time, upon request of the Participant, to defer
the date on which any payment under an Award will be made.
8.9. Past Services as Consideration.
<PAGE>
Where a Participant purchases Stock under an Award for a price equal to the
par value of the Stock, the Board may determine that such price has been
satisfied by past services rendered by the Participant.
9. EFFECT, DISCONTINUANCE, CANCELLATION, AMENDMENT AND TERMINATION
Neither adoption of the Plan nor the grant of Awards to a Participant will
affect the Company's right to grant to such Participant awards that are not
subject to the Plan, to issue to such Participant Stock as a bonus or otherwise,
or to adopt other plans or arrangements under which Stock may be issued to
Employees.
The Board (but not the Committee) may at any time or times amend the Plan,
and the Board (or Committee) may at any time or times amend any outstanding
Award, for any purpose which may at the time be permitted by law, and the Board
(but not the Committee) may at any time terminate the Plan as to any further
grants of Awards.
<PAGE>
Exhibit 10.15
AUTOTOTE CORPORATION
1992 EQUITY INCENTIVE PLAN
As Amended and Restated
Effective as of October 31, 1997
1. PURPOSE
The purpose of this Equity Incentive Plan (the "Plan" ) is to advance
the interests of Autotote Corporation (the "Company") by enhancing its ability
to attract and retain employees and other persons or entities who are in a
position to make significant contributions to the success of the Company and its
subsidiaries through ownership of shares of the Company's Class A Common Stock
("Stock").
The Plan is intended to accomplish these goals by enabling the Company
to grant awards ("Awards") in the form of Options, Stock Appreciation Rights,
Restricted Stock or Unrestricted Stock Awards, Performance Awards, Loans or
Supplement Grants, or combinations thereof, all as more fully described below.
2. ADMINISTRATION
The Plan will be administered by the Board of Directors of the Company
(the "Board"). The Board will have authority, not inconsistent with the express
provisions of the Plan and in addition to other authority granted under the
Plan, to (a) grant Awards at such time or times as it may choose; (b) determine
the size of each Award, including the number of shares of Stock subject to the
Award; (c) determine the type or types of each Award; (d) determine the terms
and conditions of each Award; (e) waive compliance by a Participant (as defined
below) with any obligations to be performed by the Participant under an Award
and waive any term or condition of an Award; (f) amend or cancel an existing
Award in whole or in part (and if an award is canceled, grant another Award in
its place on such terms as the Board shall specify), except that the Board may
not, without the consent of the holder of an Award, take any action under this
clause with respect to such Award if such action would materially adversely
affect the rights of such holder; (g) prescribe the form or forms of instruments
that are required or deemed appropriate under the Plan, including any written
notices and elections required of
<PAGE>
Participants, and change such forms from time to time; (h) adopt, amend and
rescind rules and regulations for the administration of the Plan; and (i)
interpret the Plan and decide any questions and settle all controversies and
disputes that may arise in connection with the Plan. Determinations and actions
of the Board under the preceding sentence and all other determinations and
actions of the Board made or taken under authority granted by any provision of
the Plan, will be conclusive and will bind all parties. Nothing in this
paragraph shall be construed as limiting the power of the Board to make
adjustments under Section 7.3, Section 7.4 or Section 9.6.
The Board may, in its discretion, delegate some or all of its powers
with respect to the Plan to a committee (the "Committee"), in which event all
references (as appropriate) to the Board hereunder shall be deemed to refer to
the Committee. The Committee, if one is appointed, shall consist of at least two
directors. A majority of the members of the Committee shall constitute a quorum,
and all determinations of the Committee shall be made by a majority of its
members. Any determination of the Committee under the Plan may be made without
notice or meeting of the Committee by a writing signed by a majority of the
Committee members.
3. EFFECTIVE DATE AND TERM OF PLAN
The Plan became effective on February 18, 1993.
No Award may be granted under the Plan after December 17, 2002 (the
"Term of the Plan"), but Awards previously granted may extend beyond that date.
4. SHARES SUBJECT TO THE PLAN
Subject to the adjustment as provided in Section 9.6 below, the
aggregate number of shares of Stock, that may be delivered under the Plan will
be 3,000,000. If any Award requiring exercise by the Participant for delivery of
Stock terminates without having been exercised in full, or if any Award payable
in Stock or cash is satisfied in cash rather than Stock, the number of shares of
Stock as to which such Award was not exercised or for which cash was substituted
will be available for future grants.
Stock delivered under the Plan may be either authorized but unissued
Stock or previously issued Stock acquired by the Company and held in treasury.
No fractional shares of Stock will be delivered under the Plan.
<PAGE>
5. ELIGIBILITY AND PARTICIPATION
Those eligible to receive Awards under the Plan ("Participants") will
be employees of the Company and its subsidiaries ("Employees") and such other
persons included in the term "employee", as defined in General Instruction
A(1)(a) to Form S-8, including persons who are serving as directors of the
Company ("Non-Employee Directors"), if such person (other than Non-Employee
Directors) is determined, in the opinion of the Board, to be in a position to
make a significant contribution to the success of the Company or its
subsidiaries. A "subsidiary" for purposes of the Plan will be a corporation in
which the Company owns, directly or indirectly, stock possessing 50% or more of
the total combined voting power of all classes of stock.
6. TYPES OF AWARDS
6.1. Options.
-------
(a) Nature of Options. An Option is an Award entitling the
-----------------
recipient on exercise thereof to purchase Stock at a specified exercise
price.
Both "incentive stock options," as defined in Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code") (any Option intended
to qualify as an incentive stock option being, hereinafter referred to as
an "ISO"), and Options that are not incentive stock options, may be granted
under the Plan. ISOs shall be awarded only to Employees.
(b) Exercise Price. The exercise price of an Option will be
--------------
determined by the Board subject to the following:
(i) The exercise price of an ISO shall not be less than
100% (110% in the case of an ISO granted to a ten-percent
shareholder) of the fair market value of the Stock subject to the
Option, determined as of the time the Option is granted. A "ten-
percent shareholder" is any person who at the time of grant owns,
directly or indirectly, or is deemed to own by reason of the
attribution rules of section 424(d) of the Code, stock possessing
more than 10% of the
<PAGE>
total combined voting power of all classes of stock of the
Company or of any of its subsidiaries.
(ii) In no case may the exercise price paid for Stock which
is part of an original issue of authorized Stock be less than the
par value per share of the Stock.
(iii) The Board may reduce the exercise price of an Option
(other than a Non-Employee Director Option) at any time after the
time of grant, but in the case of an Option originally awarded as
an ISO, only with the consent of the Participant.
(c) Duration of Options. The latest date on which an Option
-------------------
may be exercised will be the tenth anniversary (fifth anniversary, in the
case of an ISO granted to a ten-percent shareholder) of the day immediately
preceding the date the Option was granted, or such earlier date as may have
been specified by the Board at the time the Option was granted.
(d) Exercise of Options. An Option will become exercisable at
-------------------
such time or times, and on such conditions, as the Board may specify. The
Board may at any time accelerate the time at which all or any part of such
an Option may be exercised.
Any exercise of an Option must be in writing, signed by the
proper person and delivered or mailed to the Company, accompanied by (1)
any documents required by the Board and (2) payment in full in accordance
with paragraph (e) below for the number of shares for which the Option is
exercised.
(e) Payment for Stock. Stock purchased on exercise of an Option
-----------------
must be paid for as follows: (1) in cash or by check (acceptable to the
Company in accordance with Guidelines established for this purpose), bank
draft or money order payable to the order of the Company or (2) if so
permitted by the instrument evidencing such Option, (i) through the
delivery of shares of Stock which, if acquired pursuant to exercise of an
Option, have been outstanding for at least six months and which have a fair
market value on the last business day preceding the date of exercise equal
to the exercise price, or (ii) by delivery of a promissory note of the
Option holder to the Company, payable on such terms as are
<PAGE>
specified by the Board, or (iii) by delivery of an unconditional and
irrevocable undertaking by a broker to deliver promptly to the Company
sufficient funds to pay the exercise price, or (iv) by any combination of
the possible forms of payment; provided, that if the Stock delivered upon
exercise of the Option is an original issue of authorized Stock, at least
so much of the exercise price as represents the par value of such Stock
must be paid other than by the Option holder's promissory note.
(f) Discretionary Payments. If the market price of shares of
----------------------
Stock subject to an Option (other than an Option which is in tandem with a
Stock Appreciation Right as described in Section 6.2 below) exceeds the
exercise price of the Option at the time of its exercise, the Board may
cancel the Option and cause the Company to pay in cash or in shares of
Common Stock (at a price per share equal to the fair market value per
share) to the person exercising the Option an amount equal to the
difference between the fair market value of the Stock which would have been
purchased pursuant to the exercise (determined on the date the Option is
cancelled) and the aggregate exercise price which would have been paid.
6.2. Stock Appreciation Rights.
-------------------------
(a) Nature of Stock Appreciation Rights. A Stock Appreciation
-----------------------------------
Right is an Award entitling the recipient on exercise of the Right to
receive, an amount, in cash or Stock or a combination thereof (such form to
be determined by the Board), determined in whole or in part by reference to
appreciation in Stock value.
In general, a Stock Appreciation Right entitles the Participant
to receive, with respect to each share of Stock as to which the Right is
exercised, the excess of the share's fair market value on the date of
exercise over its fair market value on the date the Right was granted.
However, the Board may provide at the time of grant that the amount the
recipient is entitled to receive will be adjusted upward or downward under
rules established by the Board to take into account the performance of the
Stock in comparison with the performance of other stocks or an index or
indices of other stocks. The Board may also grant Stock Appreciation Rights
that provide, that following a Change in Control of the
<PAGE>
Company, as defined below, the holder of such Right will be entitled to
receive, with respect to each share of Stock subject to the Right, an
amount equal to the excess of a specified value (which may include an
average of values) for a share of Stock during a period preceding such
Change in Control over the fair market value of a share of Stock on the
date the Right was granted. "Change in Control" shall mean the occurrence
of any of the following: (i) When any "person" as defined in Section
3(a)(9) of the 1934 Act and as used in Sections 13(d) and 14(d) thereof
including a "group" as defined in Section 13(d) of the 1934 Act but
excluding the Company and any subsidiary and any employee benefit plan
sponsored or maintained by the Company or any subsidiary (including any
trustee of such plan acting as trustee), directly or indirectly, becomes
the "beneficial owner" (as defined in Rule 13d-3 under the 1934 Act) of
securities of the Company representing at least 40 percent (or such greater
percentage as the Board may specify in any grant of Stock Appreciation
Rights) of the combined voting power of the Company's then outstanding
securities; or (ii) The occurrence of a transaction requiring stockholder
approval for the acquisition of the Company by an entity other than the
Company or a subsidiary through purchase of assets, or by merger, or
otherwise.
(b) Grant of Stock Appreciation Rights. Stock Appreciation
----------------------------------
Rights may be granted in tandem with, or independently of, Options granted
under the Plan. A Stock Appreciation Right granted in tandem with an Option
which is not an ISO may be granted either at or after the time the Option
is granted. A Stock Appreciation Right granted in tandem with an ISO may be
granted only at the time the Option is granted.
(c) Rules Applicable to Tandem Awards. When Stock Appreciation
---------------------------------
Rights are granted in tandem with Options, the following will apply:
(i) The Stock Appreciation Right will be exercisable only
at such time or times, and to the extent, that the related Option
is exercisable and will be exercisable in accordance with the
procedure required for exercise of the related Option.
(ii) The Stock Appreciation Right will terminate and no
longer be exercisable upon the termination or exercise of the
related Option, except that a Stock Appreciation Right
<PAGE>
granted with respect to less than the full number of shares
covered by an Option will not be reduced until the number of
shares as to which the related Option has been exercised or has
terminated exceeds the number of shares not covered by the Stock
Appreciation Right.
(iii) The Option will terminate and no longer be exercisable
upon the exercise of the related Stock Appreciation Right.
(iv) The Stock Appreciation Right will be transferable only
with the related Option.
(v) A Stock Appreciation Right granted in tandem with an ISO
may be exercised only when the market price of the Stock subject
to the Option exceeds the exercise price of such option.
(d) Exercise of Independent Stock Appreciation Rights. A Stock
-------------------------------------------------
Appreciation Right not granted in tandem with an Option will become
exercisable at such time or times, and on such conditions, as the Board may
specify. The Board may at any time accelerate the time at which all or any
part of the Right may be exercised.
Any exercise of an independent Stock Appreciation Right must be
in writing, signed by the proper person and delivered or mailed to the
Company, accompanied by any other documents required by the Board.
6.3. Restricted and Unrestricted Stock.
---------------------------------
(a) Nature of Restricted Stock Award. A Restricted Stock Award
--------------------------------
entitles the recipient to acquire, for a purchase price equal to par value,
if required under applicable law, shares of Stock subject to the
restrictions described in paragraph (d) below ("Restricted Stock").
(b) Acceptance of Award. A Participant who is granted a
-------------------
Restricted Stock Award will have no rights with respect to such Award
unless the Participant accepts the Award by written instrument delivered or
mailed to the Company accompanied by payment in full of the specified
purchase price, if
<PAGE>
any, of the shares covered by the Award. Payment may be by certified or
bank check or other instrument acceptable to the Board.
(c) Rights as a Stockholder. A Participant who receives
-----------------------
Restricted Stock will have all the rights of a stockholder with respect to
the Stock, including voting and dividend rights, subject to the
restrictions described in paragraph (d) below and any other conditions
imposed by the Board at the time of grant. Unless the Board otherwise
determines, certificates evidencing shares of Restricted Stock may be kept
in the possession of the Participant prior to the lapse of restrictions on
such shares.
(d) Restrictions. Except as otherwise specifically provided by
------------
the Plan, Restricted Stock may not be sold, assigned, transferred, pledged
or otherwise encumbered or disposed of, and if the Participant ceases to be
an Employee or otherwise suffers a Status Change (as defined at Section
7.2(a) below) for any reason, must be offered to the Company for purchase
for the amount of cash paid for the Stock, or forfeited to the Company if
no cash was paid. These restrictions will lapse at such time or times, and
on such conditions, as the Board may specify. The Board may at any time
accelerate the time at which the restrictions on all or any part of the
shares will lapse.
(e) Notice of election. Any Participant making an election
------------------
under Section 83(b) of the Code with respect to Restricted Stock must
provide a copy thereof to the Company within 10 days of the filing of such
election with the Internal Revenue Service.
(f) Other Awards Settled with Restricted Stock. The Board may,
------------------------------------------
provide that any or all the Stock delivered pursuant to the Award will be
Restricted Stock.
(g) Unrestricted Stock. The Board may, in its sole discretion,
------------------
approve the sale to any Participant of shares of Stock free of restrictions
under the Plan for a price which is not less than the par value, if
required by applicable law, of the Stock.
<PAGE>
(h) Notwithstanding the foregoing, the terms of Restricted Stock
granted to Non-Employee Directors under Section 8 ("Non-Employee Director
Restricted Stock") shall be as set forth in that Section.
6.4. Performance Awards; Performance Goals.
-------------------------------------
(a) Nature of Performance Awards. A Performance Award entitles
----------------------------
the recipient to receive, without payment, an amount in cash or Stock or a
combination thereof (such form to be determined by the Board) following the
attainment of Performance Goals. Performance Goals may be related to
personal performance, corporate performance, departmental performance or
any other category of performance deemed by the Board to be important to
the success of the Company. The Board will determine the Performance Goals,
the period or periods during which performance is to be measured and all
other terms and conditions applicable to the Award.
(b) Other Awards Subject to Performance Condition. The Board
---------------------------------------------
may, at the time any Award described in this Section 6 is granted, impose
the condition (in addition to any conditions specified or authorized in
this Section 6 or any other provision of the Plan) that Performance Goals
be met prior to the Participant's realization of any payment or benefit
under the Award.
6.5. Loans and Supplemental Grants.
-----------------------------
(a) Loans. The Company may make a loan to a Participant
-----
("Loan"), either on the date of or after the grant of any Award to the
Participant. A Loan may be made either in connection with the purchase of
Stock under the Award or with the payment of any Federal, state and local
income tax with respect to income recognized as a result of the Award. The
Board will have full authority to decide whether to make a Loan and to
determine the amount, terms and conditions of the Loan, including the
interest rate (which may be zero), whether the Loan is to be secured or
unsecured or with or without recourse against the borrower, the terms on
which the Loan is to be repaid and the conditions, if any, under which it
may be forgiven. However, no Loan may have a term (including extensions)
exceeding ten years in duration.
<PAGE>
(b) Supplemental Grants. In connection with any Award, the
-------------------
Board may at the time such Award is made or at a later date, provide for
and grant a cash award to the Participant ("Supplemental Grant") not to
exceed an amount equal to (1) the amount of any federal, state and local
income tax on ordinary income for which the Participant may be liable with
respect to the Award, determined by assuming taxation at the highest
marginal rate, plus (2) an additional amount on a grossed-up basis intended
to make the Participant whole on an after-tax basis after discharging all
the Participant's income tax liabilities arising from all payments under
this Section 6. Any payments under this subsection (b) will be made at the
time the Participant incurs Federal income tax liability with respect to
the Award.
6.6. Other Stock-Based Awards.
------------------------
The Board may authorize other types of stock-based awards which the Board
may grant to such Participants, and in such amounts and subject to such terms
and conditions, as the Board shall in its discretion determine, subject to the
provisions of the Plan. Such awards may entail the transfer of actual shares of
Stock to Participants,or payment in cash or otherwise of amounts based on the
value of shares of Stock.
7. EVENTS AFFECTING CERTAIN OUTSTANDING AWARDS
7.1. Death.
-----
If a Participant dies, the following will apply to Awards other
than Non-Employee Director Restricted Stock:
(a) All Options and Stock Appreciation Rights held by the
Participant immediately prior to death, to the extent then exercisable, may
be exercised by the Participant's executor or administrator or the person
or persons to whom the Option or Right is transferred by will or the
applicable laws of descent and distribution, at any time within the one
year period ending with the first anniversary of the Participant's death
(or such shorter or longer period as the Board may determine), and shall
thereupon terminate. In no event, however, shall an Option or Stock
Appreciation Right remain exercisable
<PAGE>
beyond the latest date on which it could have been exercised without regard
to this Section 7. Except as otherwise determined by the Board, all Options
and Stock Appreciation Rights held by a Participant immediately prior to
death that are not then exercisable shall terminate at death.
(b) Except as otherwise determined by the Board, all Restricted
Stock held by the Participant must be transferred to the Company (and, in
the event the certificates representing such Restricted Stock are held by
the Company, such Restricted Stock will be so transferred without any
further action by the Participant) in accordance with Section 6.3 above.
(c) Any payment or benefit under a Performance Award or
Supplemental Grant to which the Participant was not irrevocably entitled
prior to death will be forfeited and the Award canceled as of the time of
death, unless otherwise determined by the Board.
7.2. Termination of Service (Other Than By Death).
--------------------------------------------
If a Participant who is an Employee ceases to be an Employee for any reason
other than death, or if there is a termination (other than by reason of death)
of the consulting, service or similar relationship in respect of which a
Participant was granted an Award hereunder (such termination of the employment
or other relationship being hereinafter referred to as a "Status Change"), the
following will apply to Awards other than Non-Employee Director Restricted
Stock:
(a) Except as otherwise determined by the Board, all Options and
Stock Appreciation Rights held by the Participant that were not exercisable
immediately prior to the Status Change shall terminate at the time of the
Status Change. Any Options or Rights that were exercisable immediately
prior to the Status Change will continue to be exercisable for a period of
three months (or such longer period as the Board may determine), and shall
thereupon terminate, unless the Award provides by its terms for immediate
termination in the event of a Status Change or unless the Status Change
results from a discharge for cause which in the opinion of the Board casts
such discredit on the Participant as to justify immediate termination of
the Award. In no event, however, shall an Option or Stock Appreciation
Right remain exercisable beyond the latest date on which it could have been
exercised
<PAGE>
without regard to this Section 7. For purposes of this paragraph, in the
case of a Participant who is an Employee, a Status Change shall not be
deemed to have resulted by reason of (i) a sick leave or other bona fide
leave of absence approved for purposes of the Plan by the Board, so long as
the Employee's right to reemployment is guaranteed either by statute or by
contract, or (ii) a transfer of employment between the Company and a
subsidiary or between subsidiaries, or to the employment of a corporation
(or a parent or subsidiary corporation of such corporation) issuing or
assuming an option in a transaction to which section 424(a) of the Code
applies.
(b) Except as otherwise determined by the Board, all Restricted
Stock held by the Participant at the time of the Status Change must be
transferred to the Company (and, in the event the certificates representing
such Restricted Stock are held by the Company, such Restricted Stock will
be so transferred without any further action by the Participant) in
accordance with Section 6.3 above.
(c) Any payment or benefit under a Performance Award or Supplemental
Grant to which the Participant was not irrevocably entitled prior to the
Status Change will be forfeited and the Award cancelled as of the date of
such Status Change unless otherwise determined by the Board.
7.3. Acquisition Transactions.
------------------------
Notwithstanding any other provision of the Plan or of any Award to the
contrary (other than Section 9.10), in the event of a consolidation or merger in
which the Company is not the surviving corporation or which results in the
acquisition of substantially all the Company's outstanding Stock by a single
person or entity or by a group of persons and/or entities acting in concert or
in the event of the sale or transfer of substantially all the Company's assets
(an "acquisition transaction"), all outstanding Awards will terminate as of the
effective date of the acquisition transaction, and the following will apply:
(a) Each outstanding Option and Stock Appreciation Right will become
exercisable in full 10 days prior to the anticipated effective date of the
proposed acquisition transaction unless otherwise expressly provided at the
time of grant.
<PAGE>
(b) Each outstanding share of Restricted Stock (including Non-
Employee Director Restricted Stock) will become free of all restrictions
and conditions 10 days prior to the anticipated effective date of the
proposed acquisition transaction.
(c) Conditions on Performance Awards and Supplemental Grants which
relate only to the passage of time and continued employment will be removed
10 days prior to the anticipated effective date of the proposed acquisition
transaction. Performance or other conditions (other than conditions
relating only to the passage of time and continued employment) will
continue to apply unless otherwise provided in the instrument evidencing
the Awards or in any other agreement between the Participant and the
Company or unless otherwise agreed to by the Board.
(d) The Board may, in its sole discretion, prior to the effective
date of the acquisition transaction, forgive all or any portion of the
principal of or interest on a Loan.
7.4. Dissolution or Liquidation Transactions.
---------------------------------------
In the event of a dissolution or liquidation of the Company (a "covered
transaction"), all outstanding Awards (including Non-Employee Director
Restricted Stock) will terminate as of the effective date of the covered
transaction, and the following rules shall apply:
(a) Subject to paragraph (b) below, the Board may in its sole
discretion, prior to the effective date of the covered transaction, (1)
make each outstanding Option and Stock Appreciation Right exercisable in
full, (2) remove the restrictions from each outstanding share of Restricted
Stock (including Non-Employee Director Restricted Stock), (3) cause the
Company to make any payment and provide any benefit under each outstanding
Performance Award and Supplemental Grant and (4) forgive all or any portion
of the principal of or interest on a Loan.
(b) If an outstanding Award is subject to performance or other
conditions (other than conditions relating only to the passage of time and
continued employment) which will not have been satisfied at the time of the
covered transaction, the Board may in its sole discretion remove such
<PAGE>
conditions. If it does not do so, however, such Award will terminate as of
the date of the covered transaction notwithstanding paragraph (a) above.
8. CERTAIN AWARDS TO NON-EMPLOYEE DIRECTORS
8.1. Automatic Grants of Non-Employee Director Restricted Stock.
----------------------------------------------------------
(a) Grants of Non-Employee Director Restricted Stock. The grants
------------------------------------------------
of Awards of Non-Employee Director Restricted Stock under this Section 8
shall be as follows:
(i) On November 1, 1997 and on each anniversary of November
1, 1997 through and including November 1, 2000, in addition to shares
of Non-Employee Director Restricted Stock granted pursuant to
sections 8.1(a)(ii) or (iii), each Non-Employee Director shall be
granted an Award of 10,000 shares of Non-Employee Director Restricted
Stock upon the terms and subject to the conditions set forth in the
Plan including this Section 8. With respect to any individual who
becomes a Non-Employee Director after November 1, 1997 (provided such
individual has not previously received a grant pursuant to the first
sentence of this Section 8.1(a)(i)), such individual shall be granted
as of the date of his election or appointment as a Non-Employee
Director an Award of 10,000 shares of Non-Employee Director
Restricted Stock upon the terms and subject to the conditions set
forth in the Plan including this Section 8.
(ii) With respect to any Non-Employee Director who becomes a
Vice Chairman of the Board after March 1, 1997 (provided such
individual has not previously received a grant pursuant to the first
clause of this Section 8.1(a)(ii)), such individual shall be granted
as of the date of his election or appointment as Vice Chairman an
Award of 15,000 shares of Non-Employee Director Restricted Stock upon
the terms and subject to the conditions set forth in the Plan
including this Section 8.
<PAGE>
(iii) With respect to any Non-Employee Director who becomes the
Chairman of the Executive Committee after March 1, 1997 (provided
such individual has not previously received a grant pursuant to the
first clause of this Section 8.1(a)(iii)), such individual shall be
granted as of the date of his election or appointment as the Chairman
an Award of 55,000 shares of Non-Employee Director Restricted Stock
upon the terms and subject to the conditions set forth in the Plan
including this Section 8.
(iv) If on any date when Non-Employee Director Restricted
Stock is to be granted pursuant to Section 8.1(a)(i), (ii) or (iii),
the total number of shares of Stock as to which Non-Employee Director
Restricted Stock is to be granted exceeds the number of shares of
Stock remaining available under the Plan, there shall be a pro rata
reduction in the number of shares of Stock as to which each Non-
Employee Director is granted on such day.
8.2. Certain Terms of Non-Employee Director Restricted Stock.
-------------------------------------------------------
(a) Nature of Restricted Stock Award. A Non-Employee Director
--------------------------------
Restricted Stock Award entitles the recipient to acquire, for a purchase
price equal to par value, if required by applicable law, shares of Stock
subject to the restrictions described in paragraph (d) below ("Non-Employee
Director Restricted Stock").
(b) Acceptance of Award. A Participant who is granted a
-------------------
Non-Employee Director Restricted Stock Award will have no rights with
respect to such Award unless the Participant accepts the Award by written
instrument delivered or mailed to the Company accompanied by payment in
full of the specified purchase price, if any, of the shares covered by the
Award. Payment may be by certified or bank check or other instrument
acceptable to the Board.
(c) Rights as a Stockholder. A Participant who receives
-----------------------
Non-Employee Director Restricted Stock will have all the rights of a
stockholder with respect to the Stock, including voting and dividend
rights, subject to the restrictions described in paragraph (d) below and
any other conditions imposed by the Board at the time of grant. Unless the
Board otherwise determines, certificates evidencing shares of
<PAGE>
Non-Employee Director Restricted Stock may be kept in the possession of the
Participant prior to the lapse of restrictions on such shares.
(d) Restrictions. Except as otherwise specifically provided
------------
herein, Non-Employee Director Restricted Stock may not be sold, assigned,
transferred, pledged or otherwise encumbered or disposed of, and if the
Participant ceases to serve as a director of the Company for any reason
other than death, Disability, retirement at or after age 65, or upon
failure to be renominated or reelected to the Board of Directors, must be
offered to the Company for purchase for the amount of cash paid for the
Stock, or forfeited to the Company if no cash was paid. These restrictions
shall lapse on one-third of the shares of Non-Employee Director Restricted
Stock granted under the Plan (rounded to the nearest whole number of
shares) (i.e., Non-Employee Director Restricted Stock will "vest") at the
close of business on the day before each of the first, second and third
anniversaries of the date of grant, provided that such restrictions shall
lapse on an accelerated basis as to all shares of Non-Employee Director
Restricted Stock at the time the Participant ceases to serve as a director
due to death, Disability (as defined below), retirement at or after age 65,
upon the failure to be renominated or reelected to the Board of Directors,
or in the circumstances specified in Sections 7.3 and 7.4 of the Plan. For
purposes of the Plan, a Disability shall mean a physical or mental
incapacity of long duration which, in the reasonable determination of the
Board, renders the Participant unable to perform the duties of a director
of the Company.
(e) Notice of election. Any Participant making an election under
------------------
Section 83(b) of the Code with respect to Non-Employee Director Restricted
Stock must provide a copy thereof to the Company within 10 days of the
filing of such election with the Internal Revenue Service.
8.3. Prior Awards of Non-Employee Director Deferred Stock.
----------------------------------------------------
Notwithstanding any other provisions of the Plan, any outstanding Awards of
deferred stock made to Non-Employee Directors under the Plan as in effect prior
to its March 1, 1997 amendment and restatement shall remain in effect subject to
the terms and conditions applicable to such Awards at the time such Awards were
granted.
<PAGE>
9. GENERAL PROVISIONS
9.1. Documentation of Awards.
-----------------------
Awards will be evidenced by such written instruments, if any, as may be
prescribed by the Board from time to time. Such instruments may be in the form
of agreements to be executed by both the Participant and the Company, or
certificates, letters or similar instruments, which need not be executed by the
Participant but acceptance of which will evidence agreement to the terms
thereof.
9.2. Rights as a Stockholder, Dividend Equivalents.
---------------------------------------------
Except as specifically provided by the Plan, the receipt of an Award will
not give a Participant rights as a stockholder; the participant will obtain such
rights, subject to any limitations imposed by the Plan or the instrument
evidencing the Award, upon actual receipt of Stock. However, the Board may, on
such conditions as it deems appropriate, provide that a Participant will receive
a benefit in lieu of cash dividends that would have been payable on any or all
Stock subject to the Participant's Award had such Stock been outstanding.
Without limitation, the Board may provide for payment to the Participant of
amounts representing such dividends, either currently or in the future, or for
the investment of such amounts on behalf of the Participant.
9.3. Conditions on Delivery of Stock.
-------------------------------
The Company will not be obligated to deliver any shares of Stock pursuant
to the Plan or to remove restrictions from shares previously delivered under the
Plan (a) until all conditions of the Award have been satisfied or removed, (b)
until, in the opinion of the Company's counsel, all applicable federal and state
laws and regulation have been complied with, (c) if the outstanding Stock is at
the time listed on any stock exchange, until the shares to be delivered have
been listed or authorized to be listed on such exchange upon official notice of
issuance, and (d) until all other legal matters in connection with the issuance
and delivery of such shares have been approved by the Company's counsel. If the
sale of Stock has not been registered under the Securities Act of 1933, as
amended, the Company may require, as a condition to exercise of the Award, such
representations or agreements as counsel for the Company may consider
appropriate to avoid violation of such Act and may require that the certificates
evidencing such Stock bear an appropriate legend restricting transfer.
<PAGE>
If an Award is exercised by the Participant's legal representative, the
Company will be under no obligation to deliver Stock pursuant to such exercise
until the Company is satisfied as to the authority of such representative.
9.4. Tax Withholding.
---------------
As a condition to the receipt of any shares of Stock pursuant to any Award
or the lifting of restrictions on any Award, or in connection with any other
event that gives rise to a federal or other governmental tax withholding
obligation on the part of the Company relating to an award (including, without
limitation, FICA tax), the Company may require that the Participant remit to the
Company or the Company may withhold from any cash payment made to the
Participant an amount sufficient to satisfy all federal. state and local
withholding tax requirements (the "withholding requirements").
In the case of an Award pursuant to which Stock may be delivered, the Board
will have the right to require that the Participant or other appropriate person
remit to the Company an amount sufficient to satisfy the withholding
requirements, or make other arrangements satisfactory to the Board with regard
to such requirements, prior to the delivery of any Stock. If and to the extent
that such withholding is required, the Board may permit the Participant or such
other person to elect at such time and in such manner as the Board provides to
have the Company hold back from the shares to be delivered, or to deliver to the
Company, Stock having a value calculated to satisfy the withholding requirement.
If at the time an ISO is exercised the Board determines that the Company
could be liable for withholding requirements with respect to a disposition of
the Stock received upon exercise, the Board may require as a condition of
exercise that the person exercising the ISO agree (a) to inform the Company
promptly of any disposition (within the meaning of section 424(c) of the Code)
of Stock received upon exercise, and (b) to give such security as the Board
deems adequate to meet the potential liability of the Company for the
withholding requirements and to augment such security from time to time in any
amount reasonably deemed necessary by the Board to preserve the adequacy of such
security.
<PAGE>
9.5. Nontransferability of Awards.
----------------------------
No Award (other than an Award in the form of an outright transfer of cash
or Unrestricted Stock) may be transferred other than by will or by the laws of
descent and distribution, and during a Participant's lifetime an Award requiring
exercise may be exercised only by the Participant (or in the event of the
Participant's incapacity, the person or persons legally appointed to act on the
Participant's behalf).
9.6. Adjustments in the Event of Certain Transactions.
------------------------------------------------
(a) In the event of a stock dividend, stock split or combination of
shares, recapitalization or other change in the Company's capitalization, or
other distribution to common stockholders other than normal cash dividends,
after the effective date of the Plan, the Board will make any appropriate
adjustments to the maximum number of shares that may be delivered under the Plan
under Section 4 above.
(b) In any event referred to in paragraph (a), the Board will also make
any appropriate adjustments to the number and kind of shares of stock or
securities subject to Awards then outstanding or subsequently granted, including
the number and kind to be automatically granted as Non-Employee Director
Deferred Stock under Section 8.1, any exercise prices relating to Awards and any
other provision of Awards affected by such change. The Board may also make such
adjustments to take into account material changes in law or in accounting
practices or principles, mergers, consolidations, acquisitions, dispositions or
similar corporate transactions, or any other event, if it is determined by the
Board that adjustments are appropriate to avoid distortion in the operation of
the Plan. Adjustments relating to Non-Employee Director Deferred Stock shall be
made solely to preserve, without increasing, the value of such Awards, to
prevent dilution or enlargement of Participants rights, and shall in any case be
subject to Section 9.10.
9.7. Employment Rights, Etc.
-----------------------
Neither the adoption of the Plan nor the grant of Awards will confer upon
any person any right to continued retention by the Company or any subsidiary as
an Employee or otherwise, or affect in any way the right of the Company or
subsidiary to terminate an employment, service or similar relationship at any
time.
<PAGE>
Except as specifically provided by the Board in any particular case, the
loss of existing or potential profit in Awards granted under the Plan will not
constitute an element of damages in the event of termination of an employment,
service or similar relationship even if the termination is in violation of an
obligation of the Company to the Participant.
9.8. Deferral of Payments.
--------------------
The Board may agree at any time, upon request of the Participant, to defer
the date on which any payment under an Award will be made.
9.9. Past Services as Consideration.
------------------------------
Where a Participant purchases Stock under an Award for a price equal to the
par value of the Stock, the Board may determine that such price has been
satisfied by past services rendered by the Participant.
9.10. Compliance with Certain 1934 Act Rules.
--------------------------------------
It is the intent of the Company that any grant of Awards to and other
transactions by a Participant who is subject to Section 16 of the 1934 Act
comply in all respects with applicable provisions of Rule 16b-3 under the 1934
Act. Accordingly, if any action pursuant to this Plan or any Award agreement
may not comply with the requirements of Rule 16b-3 as then applicable to any
such transaction, such action will be taken so as to conform to the applicable
requirements of Rule 16b-3 so that such Participant shall avoid liability under
Section 16(b).
10. EFFECT, DISCONTINUANCE, CANCELLATION, AMENDMENT AND TERMINATION
Neither adoption of the Plan nor the grant of Awards to a Participant will
affect the Company's right to grant to such Participant awards that are not
subject to the Plan, to issue to such Participant Stock as a bonus or otherwise,
or to adopt other plans or arrangements under which Stock will be issued to
Employees or other persons eligible to participate in the Plan.
<PAGE>
The Board may at any time or times amend the Plan or any outstanding Award
for any purpose which may at the time be permitted by law, or may at any time
terminate the Plan as to any further grants of Awards, provided that (except to
the extent expressly required or permitted by the Plan) no such amendment will,
without the approval of the stockholders of the Company, effectuate a change for
which stockholder approval is required in order for the Plan to continue to
qualify for the award of ISOs under section 422 of the Code and to continue to
qualify under Rule 16b-3 promulgated under Section 16 of the 1934 Act.
11. GOVERNING LAW.
All rights and obligations under the Plan shall be construed and
interpreted in accordance with the laws of the State of Delaware, without giving
effect to principles of conflict of laws.
<PAGE>
Exhibit 21
AUTOTOTE CORPORATION SUBSIDIARIES
Autotote Management Corporation (Delaware) (100%)
Newark Holdings, Inc. (Delaware) (100%)
Autotote Systems, Inc. (Delaware) (100%)
Autotote International, Inc. (Delaware) (100%)
Autotote Canada Inc. (Ontario) (100%)
Autotote Worldwide Limited (Non-Resident Ireland (Bermuda)) (99%, 1% NHI)
Autotote Worldwide Services, Limited (Ireland) (100%)
Autotote Enterprises, Inc. (Connecticut) (100%)
Autotote Keno Corporation (Nebraska) (100%)
Big Red Lottery Services, Ltd. (Nebraska) (20%)
Lincoln's Big Lottery Services, Ltd. (Nebraska) (20%)
Gretna's Big Red Lottery Services, Ltd. (Nebraska) (20%)
Autotote Lottery Corporation (Delaware) (100%)
Autotote Lottery Canada Inc. (Ottawa) (100%)
Autotote Israel Ltd. (Israel) (80%)
ETAG Electronic Totalisator AG (Switzerland) (100%)
TEK Turfelektronik GMBH (Germany) (100%)
Datek Toto Dienstielstung GMBH (Germany) (50%)
TEK Totalisator Service GMBH (Germany) (50%)
ETAG Electronic Totalisator GesMBH (Austria) (100%)
Autotote Communication Services, Inc., (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%)
Autotote Panama, Inc. (Panama) (100%)
<PAGE>
Exhibit 23
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Autotote Corporation:
We consent to the incorporation by reference in the registration statements
(No's 33-82612, 33-46594, 33-27737, 333-05811, 333-44983 and 333-44979) on Form
S-8 of Autotote Corporation of our report dated December 12, 1997, relating to
the consolidated balance sheets of Autotote Corporation and subsidiaries as of
October 31, 1997, and 1996, 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, 1997,
which report appears in the Form 10-K of Autotote Corporation for the year ended
October 31, 1997.
KPMG Peat Marwick LLP
Short Hills New Jersey
January 28, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF AUTOTOTE CORPORATION AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> OCT-31-1997
<CASH> 18,207
<SECURITIES> 0
<RECEIVABLES> 15,536
<ALLOWANCES> 1,976
<INVENTORY> 6,653
<CURRENT-ASSETS> 41,208
<PP&E> 180,170
<DEPRECIATION> 103,781
<TOTAL-ASSETS> 153,541
<CURRENT-LIABILITIES> 35,718
<BONDS> 35,000
0
0
<COMMON> 354
<OTHER-SE> (33,594)
<TOTAL-LIABILITY-AND-EQUITY> 153,541
<SALES> 157,332
<TOTAL-REVENUES> 157,332
<CGS> 94,884
<TOTAL-COSTS> 94,884
<OTHER-EXPENSES> 64,436
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14,367
<INCOME-PRETAX> (16,355)
<INCOME-TAX> 906
<INCOME-CONTINUING> (17,261)
<DISCONTINUED> 0
<EXTRAORDINARY> (426)
<CHANGES> 0
<NET-INCOME> (17,687)
<EPS-PRIMARY> (0.51)
<EPS-DILUTED> (0.51)
</TABLE>
