-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Qt6hgiNJRJOiyJ5A5uEYPi2jBRcMt1jVrUUtFx9L/10GrkrMM4ihlV7OsQzCKsEw Ytt3YdWf6tQGSRwnA9bzHw== 0000950109-96-000435.txt : 19960131 0000950109-96-000435.hdr.sgml : 19960131 ACCESSION NUMBER: 0000950109-96-000435 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19951031 FILED AS OF DATE: 19960129 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: AUTOTOTE CORP CENTRAL INDEX KEY: 0000750004 STANDARD INDUSTRIAL CLASSIFICATION: CALCULATING & ACCOUNTING MACHINES (NO ELECTRONIC COMPUTERS) [3578] IRS NUMBER: 810422894 STATE OF INCORPORATION: DE FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-13063 FILM NUMBER: 96508446 BUSINESS ADDRESS: STREET 1: 888 7TH AVENUE CITY: NEW YORK STATE: NY ZIP: 10106-1894 BUSINESS PHONE: 3027374300 MAIL ADDRESS: STREET 1: 100 BELLEVUE ROAD CITY: NEWARK STATE: NJ ZIP: 19714 FORMER COMPANY: FORMER CONFORMED NAME: UNITED TOTE INC DATE OF NAME CHANGE: 19920317 10-K 1 FORM 10-K ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------- FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED: OCTOBER 31, 1995, OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______ TO ______ COMMISSION FILE NUMBER: 0-13063 AUTOTOTE CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 81-0422894 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 750 LEXINGTON AVENUE, 25TH FLOOR NEW YORK, NEW YORK 10022 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 754-2233 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Class A Common Stock, $.01 par value Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such report), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K ((S)229.405) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. --- The aggregate market value of voting stock held by nonaffiliates of the registrant as of January 25, 1996, was approximately $72,748,583 (based on the last sale price of such stock as reported by NASDAQ National Market). EXHIBIT INDEX APPEARS ON PAGE 72 ================================================================================ [LOGO OF AUTOTOTE APPEARS HERE] 1995 ANNUAL REPORT AND FORM 10-K AUTOTOTE CORPORATION designs and sells computerized wagering equipment and provides facilities management for use in racetracks, off-track wagering, lotteries and legalized sports betting facilities. The Company's systems are in place in the United States, Europe, Central and South America, Canada, Mexico, New Zealand, China and the Far East. AS OF JANUARY 25, 1996, 30,942,295 SHARES OF THE REGISTRANT'S CLASS A COMMON STOCK, $.01 PAR VALUE PER SHARE ("CLASS A COMMON STOCK"), WERE ISSUED AND OUTSTANDING. PART I ITEM 1. BUSINESS INTRODUCTION Autotote Corporation ("Autotote" or the "Company") believes it is one of the leading worldwide providers of computerized pari-mutuel wagering systems due to its customer base and its position in the North American market and the experience of the Company's officers in the industry. The Company believes that it is the leading provider of pari-mutuel wagering systems in North America, based on gross monies wagered ("Handle") as well as industry experience of the Company's officers. The Company was originally incorporated in the state of Delaware under the name United Tote, Inc. on July 2, 1984. FOR INFORMATION ON THE COMPANY'S BUSINESS AND GEOGRAPHIC SEGMENTS, SEE NOTE 22 TO CONSOLIDATED FINANCIAL STATEMENTS. PARI-MUTUEL SYSTEMS The Company's pari-mutuel customers include some of the largest North American pari-mutuel facilities, such as Southern California Off-Track Wagering, Inc., the Ontario Jockey Club and the New York Racing Association. Each customer of the Company usually enters into a service contract, which generally has a term of five years, and pursuant to which the Company provides the pari-mutuel system, as well as the operations, maintenance and supervisory personnel necessary to operate the system, while the mutuel clerks who issue tickets on the Company's teller-operated terminals to patrons of the facility are employed by the facility. Under the service contracts, the Company retains ownership of the equipment. Additional software and other support functions are provided by the Company. Revenues received by the Company from the operation of its pari-mutuel wagering systems are generally based upon a percentage of the Handle, subject in many instances to minimum fees which are usually exceeded under normal operating conditions. Minimum fees under the Company's service contracts are 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 and the reliability of the predicted number of racing days to occur during the term of the contract. The Company's larger contracts generally do not provide for minimum payments. In its service contracts, the Company makes certain warranties which may cover one or more of the following requirements: (i) that the wagering system operate in accordance with certain specifications, pass certain acceptance tests, and be installed and operational by a certain date, (ii) that the Company maintain the system in good, accurate and efficient operating condition, (iii) that the Company keep a certain level of spare equipment on hand, (iv) that the system not cease to be operational for more than a specified number of races or period of time, and (v) that counterfeit tickets not be accepted and processed. Upon a breach of such warranties, the Company generally is responsible for liquidated damages, which may be substantial, subject in some cases to a maximum daily and/or annual amount. These provisions present ongoing potential for substantial expense. The Company maintains insurance against certain losses arising out of breaches of warranties and damages payable pursuant to such contract damages clauses, with a deductible of $50,000 per error and a coverage limit of $11 million. This insurance is designed to protect the Company against claims for damages resulting from major computer related interruptions, but does not cover the failure to make terminal repairs on a timely basis. Although the Company believes that these levels of insurance are adequate for its needs, there can be no assurance that the Company will be able to continue to obtain such insurance on reasonable terms or at all or 2 that such insurance will be sufficient to protect the Company against material loss. Liquidated damages paid by the Company equaled less than 1/2 of 1% of operating revenues for each of the fiscal years 1995, 1994 and 1993 (the Company's fiscal year ends on October 31), respectively. As a general matter, all of the Company's wagering systems contracts contain liquidated damages provisions. NETWORKS As part of its strategy to enable its pari-mutuel customers to increase Handle by offering additional wagering opportunities to the public, the Company has created regional networks which transmit wagering data between tracks, off-track betting ("OTB") facilities and casinos. The Company has established networks in California, Florida, Illinois, Pennsylvania, West Virginia, Connecticut, New Jersey, Washington, Oregon, Michigan, Ontario, Alberta, Puerto Rico and Mexico and has also developed national networks, one linking Nevada casinos with racetracks throughout the country, another linking nine casinos in Atlantic City, New Jersey with racetracks in other locations, and another linking racetracks in the United States to OTB facilities in Mexico. SIMULCASTING The Company believes that simulcasting live racing is a significant avenue for growth in the racing industry. Simulcasting is the process of transmitting the audio and video signal of a live racing performance from a track to a satellite for retransmission to wagering locations around the country. Simulcasting provides racetracks the opportunity to increase revenues by receiving transmissions from other racetracks and sending their signals to as many wagering locations as possible. In its simulcasting operations, the Company receives a per transmission fixed fee and normally receives an additional monthly fixed fee for decoders. On July 20, 1994, the Company acquired Marvin H. Sugarman Productions, Inc. and its affiliate, Racing Technology, Inc., sports simulcasting companies and established a new subsidiary, Autotote Communications Services, Inc., to provide simulcasting services. The Company believes that Autotote Communication Services, Inc. is a leading simulcaster of live horse and greyhound racing events to OTB patrons in North America. Autotote Communication Services, Inc. currently simulcasts races from racetracks to numerous OTB sites and racetracks throughout the United States and the Caribbean. Autotote Communication Services, Inc. uses digital technology to simulcast racing events to over 850 OTB sites. The Company believes that this technology will further its strategy with respect to the North American simulcasting business by enabling the Company to launch new interactive and transactional channels on an expanded network. In fiscal 1995, the Company expanded its North American simulcasting business by acquiring substantially all of the assets of the Simulcast Division of LDDS Corporation (formerly IDB Communications Group, Inc.) ("IDB") and the rights and obligations under leases relating to eight C-band satellite transponders on the Hughes Communications Galaxy-VI Satellite for $13.7 million in cash. From time to time, satellite transponder time not used for providing simulcasting services to the racing industry is sold to other users of satellite transponders. (See Management's Discussion and Analysis of Financial Condition and Results of Operations.) The Company sold some of its transponder time in satisfaction of requirements of a Waiver (as such term is defined below) to the Company's Senior Bank Credit Facility. VIDEO GAMING The Company's latest wagering terminal, the PROBE(R) XLC, functions in video gaming applications such as keno, video poker and other games. The Company believes video gaming machines ("VGMs") are more likely to be approved for operation at racetracks than at other locations, since racetracks already provide a form of wagering and are subject to an existing regulatory structure. Accordingly, the Company believes that it is well positioned to participate in the VGM market if the trend of legalizing VGMs continues. The Company has installed an aggregate of 1,000 PROBE(R) XLC terminals, communications equipment and related equipment at two racetracks in West Virginia, for which it is compensated based on a percentage of net terminal income. In 3 addition, the Company sold a system, terminals and communications equipment to the Manitoba Lottery Commission. The Company also entered into a contract in April 1994 to supply VGMs in Mexico. While initial shipment of approximately 600 terminals to Mexico took place in 1994, continued economic and political turmoil in Mexico has caused the Company to conclude that any revenue from this project is unlikely and as a result the Company incurred a charge in fiscal 1995 of $2.7 million (see Management's Discussion and Analysis of Financial Condition and Results of Operations). In fiscal 1995, the Company also received an initial VGM order for New Zealand with additional orders from that country anticipated to be received in fiscal 1996. SPORTS WAGERING The Company provides sports wagering systems to 107 out of 113 facilities in Nevada and at the leading operator of sports wagering facilities in Mexico. Casinos and other sports wagering facilities generally purchase the computerized wagering system from the Company and enter into an agreement with the Company for repair and maintenance of the system and software support. Under purchase agreements, the Company sells its sports wagering system to the facility and provides training for the system operators and sell/cash terminal clerks. The Company does not generally provide the operations and supervisory personnel necessary to operate the system as it does with pari-mutuel wagering systems. INTERNATIONAL PARI-MUTUEL OPERATIONS In servicing export markets, the Company generally sells, delivers and installs pari-mutuel wagering systems rather than operating them pursuant to service contracts. The Company generally designs a customized system to meet the unique needs of each customer, including game designs, language preferences, network communications standards and other key elements. The Company also provides the customer with a royalty-free license for use of the Company's proprietary system software, as well as technical assistance, support, accessories and spare parts. The Company's personnel participate in the installation and then train the customer's personnel. In addition to terminal and equipment sales in a total of 20 countries, the Company has installed central "hub" systems in Denmark, Finland, Korea, Chile, Venezuela, Panama, Argentina, Germany and Mexico. In its international sales contracts, the Company makes certain warranties and may provide performance bonds regarding the operation and reliability of its pari-mutuel wagering systems. The terms of such bonds may require significant collateral in the form of cash, cash equivalents or letters of credit. In the case of such international contracts, liquidated damages may be payable by the Company in the event of late deliveries and/or a portion of the purchase price may be retained to secure the Company's performance. The Company maintains insurance against losses arising out of breach of warranty and payable pursuant to such contract damages clauses with a deductible of $50,000 per error and with a coverage limit of $11 million. To date, the Company has not paid liquidated damages in connection with its international sales. 4 The Company's acquisition of ETAG Electronic Totalisator AG and its affiliates (collectively, the "ETAG Group") in fiscal 1993 increased the Company's participation in the international pari-mutuel market through the provision of wagering equipment and services. The ETAG Group provides pari- mutuel wagering systems and certain linked services to approximately 35 racetracks in Germany and Austria, including all of the harness racetracks in such countries. A 50%-owned ETAG Group affiliate operates four OTB parlors in Germany under service contracts. On November 1, 1994, the Company acquired 80% of the capital stock of the holding company of SEPMO S.A., ("SEPMO"), a French supplier of wagering systems and services, for $281,000 plus acquisition related costs. In addition to the purchase consideration, the Company concurrently advanced the SEPMO holding company approximately $2.0 million for purposes of repaying certain convertible debt and purchasing the minority holdings in certain subsidiary companies. In July 1995, a scheduled purchase of an additional 5% of the holding Company of SEPMO was made for $61,000. The remaining 15% of the capital stock of the holding company of SEPMO is scheduled to be purchased over a period of three years at a purchase price to be determined by a formula based on the results of operations of SEPMO on a consolidated basis, provided that the aggregate purchase price for such additional shares will be at least the equivalent of 3 million French francs and not in excess of the equivalent of 9 million French francs (approximately $600,000 and $1,800,000, respectively, based on exchange rates in effect at October 31, 1995). SEPMO currently provides wagering systems to approximately 45 racetracks and 430 terminals at 120 OTB locations throughout France. SEPMO also provides wagering systems to customers in Turkey, the Middle East and North Africa. In December 1994, the Company entered into a preliminary agreement to acquire an 88% interest in certain gaming and information technology assets of Elettronica Ingegneria Sistemi S.p.A. ("EIS"), an Italian company which designs and develops integrated computer and communications networks and software for pari-mutuel and lottery applications. While the Company has decided not to pursue the acquisition, it maintains a close relationship with EIS. In fiscal 1994, the Company had sales of approximately $27.3 million to EIS consisting mainly of sales of TOTIP terminals. See "Lottery Systems" below. In fiscal 1995, the Company had sales of approximately $2.0 million to EIS which consisted mainly of sales of pari-mutuel terminals and equipment. OPERATION OF OFF-TRACK BETTING ESTABLISHMENTS The Company currently operates 11 OTB locations statewide including teletheaters in New Haven and Windsor Locks, Connecticut. In July 1993, the Company, through its Autotote Enterprises, Inc. ("AEI") subsidiary, purchased the exclusive right to operate the Connecticut OTB system from the State of Connecticut. On April 27, 1995, the Company opened its simulcast/multi- entertainment facility in New Haven, Connecticut called Sports Haven(TM). As a result, wagering in the New Haven area has shown daily increases of over 150% compared to wagering at the Company's former location in the New Haven Coliseum. This new facility features simulcasting, dining facilities, a sports bar, a disco and dance floor, a game room and multiple food and beverage facilities. The Company also continues to modernize and upgrade the Connecticut OTB and to expand its simulcasting from racetracks throughout the country. In offering its patrons signals from over 50 Thoroughbred, Standardbred, Greyhound tracks and Jai Alai frontons, the Connecticut OTB has become the largest simulcast operation in terms of signals offered in the United States. The operation of the Connecticut OTB subjects the Company to a Connecticut pari-mutuel tax of 3 1/2% of all monies wagered and requires the Company to pay liquidated damages in the event that certain performance standards are not met. The percentage of total Handle which the Company may receive as operating revenues from the Connecticut OTB is determined by law and ranges from 15% to 25%, depending on the type of wagers for events occurring in the State of Connecticut, and varies with respect to events which occur in other states. The Company believes its success in managing the privatization of the Connecticut OTB system may provide additional privatization opportunities in other states. 5 LOTTERY SYSTEMS Through its subsidiary Autotote Lottery Corporation ("Autotote Lottery"), the Company operates the Connecticut State Lottery, providing all equipment, personnel and services necessary to operate the lottery network while retaining title to the equipment. The Company has installed its latest generation lottery system, utilizing its UNIX-based Aegis central system, which features open systems architecture and symmetrical multiprocessors, at the Connecticut State Lottery. The Company's contract for the Connecticut State Lottery expires in 1998. Autotote Lottery also provides services to the Massachusetts State Lottery under a technical support contract which expires in June 1996, as well as equipment and services to Loto Quebec and the Israeli national lottery. During 1992, a foreign subsidiary of the Company entered into an agreement with EIS to provide up to 10,000 terminals to automate Italy's TOTIP pool, a nationwide lottery based on horse racing. During fiscal 1993, the Company delivered the initial 300 terminals, was awarded the entire contract amount, and received an order to supply an additional 3,000 terminals for the TOTIP pool. The Company delivered the remaining terminals during fiscal 1994. In fiscal 1995, the Company delivered an additional 1,000 terminals bringing the total number installed to 14,000. In addition, 10,000 terminals received memory upgrades in fiscal 1995. Additionally, the Company's subsidiary Tele Control Beteiligungs- Gesellschaft GmbH and its affiliates (collectively, the "Tele Control Group"), acquired in fiscal 1993 and based in Vienna, Austria, develops high volume transaction processing programs principally for on-line lotteries and other wagering applications and, to a lesser extent, for banking and credit card applications, and provides related software support. The Tele Control Group has installed lottery systems in Austria, Switzerland and The Netherlands and is supplying the lottery central system hardware and software to five German states. The Tele Control Group's technology includes "open system" features, with central systems and software capable of operating with terminals and components from other suppliers. The Tele Control Group has also developed a proprietary integrated computer system which can execute a wide variety of wagering applications including pari-mutuel wagering and lottery and video games such as keno. MARKETING The Company directs its marketing to horse and greyhound racetracks, jai alai frontons, and OTB and sports wagering facilities with respect to pari- mutuel contracts, state and national governments with respect to lottery contracts and end users with respect to the Connecticut OTB. In New York State, off-track betting is conducted by regional or statewide government off- track wagering authorities. Bidding by the Company for lottery contracts and for New York pari-mutuel contracts is therefore subject to applicable public bidding laws and attendant risks of delays, challenges to contract awards and resulting litigation. Contract awards often involve a lengthy competitive bid process, running 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. The request for proposals usually indicates certain requirements specific to the jurisdiction, such as particular games which will be required, particular pricing mechanisms, the experience required of the vendor and the amount of any performance bonds that must be furnished. After the bids have been evaluated and a particular vendor's bid has been accepted, the lottery authority and the vendor generally negotiate a contract in more detailed terms. Once the contract has been finalized, the vendor begins to install the lottery system. After the expiration of the initial contract term and all 6 extensions thereof, a lottery authority in the United States may either negotiate further extensions or commence a new competitive bidding process. Some states require, as a condition of bidding for a lottery contract, that a prospective bidder's wagering system be operating in another state. Internationally, certain lottery authorities utilize a formal bidding process, while others negotiate proposals with one or more potential vendors. There can be no assurance that the Company will be the successful bidder for any of these contracts. COMPANY PRODUCTS Pari-mutuel wagering systems used by racetrack facilities typically have three central processing units and a significant number of ticket issuing terminals. 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. Pari-mutuel wagering systems used by inter-track and off-track betting facilities typically include ticket issuing terminals installed at several different racetracks or off-track facilities, respectively, and the central processing system which communicates with the wagering systems at the on-track locations via telephone or data communication lines. Sports wagering systems typically have two central processing units, peripherals, and ticket issuing terminals. The Company has designed customized software for the sports wagering industry which can be tailored for individual customer management information and other requirements. Prices for the Company's products vary among contracts and customers as a result of negotiations between the Company and its customers and the custom features selected by the customers. The Company also designs, provides and supports the proprietary applications software for its pari- mutuel systems. The Company's domestic lottery products consist primarily of central processing systems, including data communication networks, and on-line/off- line lottery terminals. The lottery management system portion of the product includes a client-server database. Lottery terminals are generally on-line to the central system via telephone lines connected to the system's communications front end processor. The Company develops a number of wagering terminal products. The PROBE(R) horse racing and sports betting terminal instantly converts from a teller operated terminal to a self service terminal, permitting race track operators to tailor such terminals to their particular needs at any given time. The PROBE(R) XLC terminals, or VGMs, allow the patron to play card games, video slots, keno and bet on horse races, all on the same terminal, and then watch the race on the picture-in-picture while continuing to play video games. Tiny TIM is a small wagering terminal for use in the home or box seats of the track. The PROBE(R) L, which has been developed for the Company's lottery systems, utilizes a standard PC(Intel) processor in order to take advantage of software development products currently available. The TOTIP and the P-88 terminals have been developed for use in low sales volume locations or locations with poor or expensive telephone communications. The Company also develops communication controllers designed to efficiently connect terminals to a central system and public display systems, such as matrix boards and video graphic systems. SERVICE AND SUPPORT The Company's staff of approximately 500 trained maintenance and field service personnel supports the operation of the Company's systems and communications networks. These personnel include regional and national managers which support the Company's systems by performing routine system maintenance and repairs of systems and equipment when needed. SOFTWARE SYSTEMS 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. 7 The Company employs approximately 133 people in connection with engineering and software systems development. Software systems and product development expenditures were $12.2 million in 1995 as compared to $10.3 million in 1994. The increase in expenditures arises primarily from the Company's investment in its UNIBET lottery software developed for the international market. In connection with the Company's fiscal 1995 third quarter restructuring and asset valuation charges, the Company incurred a charge of $6.4 million representing valuation adjustments based on the Company's assessment of the future recoverability of certain capitalized software systems development costs. (see Management's Discussion and Analysis of Financial Condition and Results of Operations). INTELLECTUAL PROPERTY The Company has a number of registered trademarks in the United States and in Europe and other common law trademark rights for certain of its products. The software and control systems for the Company's wagering systems are also protected by copyright and trade secret laws. Currently, Autotote Lottery holds 10 patents: five in the United States and one each in Australia, Canada, Hong Kong, Israel and South Africa. Two of the United States patents have been licensed to another corporation, for which a licensing fee is paid. The Company does not believe that patent protection is a vital competitive factor in the computerized wagering market but believes that other factors, such as those discussed in "Competition" below, are more important to the success of the Company. Nevertheless, the Company will seek patent protection where appropriate. PRODUCTION PROCESSES; SOURCES AND AVAILABILITY OF COMPONENTS Production of the Company's wagering systems and component products primarily involves the assembly of electronic components into more complex systems and products, generally through contracts with third parties. The Company believes that it has satisfactory relations with its manufacturers. The Company normally has sufficient lead time between reaching an agreement to service a wagering facility and commencing actual operations at such facility. In the event the current suppliers of central processing units were no longer available, the Company believes that it would be able to adapt its application software to hardware available from other sources within a time frame sufficient to allow it to meet new contractual obligations, although the price competitiveness of the Company's products might diminish. The lead time for obtaining most of the electronic components used by the Company is approximately 120 days. The Company believes that this is consistent with its competitors' lead times and is also consistent with the needs of its customers. BACKLOG The backlog of the Company's orders for sales of its products believed to be firm was approximately $18.0 million as of October 31, 1995, compared to approximately $11.0 million as of October 31, 1994. The increase is primarily associated with hardware sales in connection with European lottery contracts. Approximately 90% of the backlog as of October 31, 1995 is expected to be filled in fiscal 1996. This backlog information does not include revenues attributable to multi-year wagering systems contracts, a multi-year lottery service contract, revenues attributable to the operation of the Connecticut OTB, or maintenance contracts. COMPETITION The Company competes primarily on the basis of product design, performance, reliability, pricing, and customer service. The Company competes with several pari-mutuel wagering system companies in North America. Certain of those companies are significantly larger in terms of assets, revenues and net worth. The Company's principal competitor in the pari-mutuel business has been Video Lottery Technologies, Inc. ("VLT") which operates its pari-mutuel business through its subsidiary United Wagering Systems, Inc. ("United"). VLT has also announced the formation of a ten year strategic technology partnership with Electronic Data Systems 8 Corp., ("EDS"), which owns a minority equity position in VLT. Another competitor in the pari-mutuel business has been GTECH Holdings Corporation ("GTECH"), which operates its pari-mutuel business through its subsidiary AmTote International, Inc. ("AmTote"). Both GTECH and EDS have substantially greater resources than the Company. However, VLT has recently announced that it intends to sell United and GTECH has announced that it plans to sell AmTote. The effects of these announcements on the Company's competition is not clear at this time. The Company also competes with International Totalisator Systems, Inc. and other smaller pari-mutuel companies. Other video gaming terminal suppliers include International Game Technology, WMS Industries Inc., Bally Gaming International, Inc. and several smaller companies. 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. Likewise, competition among providers of sports wagering systems is, for the most part, between smaller regional companies. Additionally, some casinos have designed their own sports wagering systems. The on-line lottery business is highly competitive. State and foreign governments normally award contracts based on rigorous competitive bidding procedures. In the vendor evaluation process, price is important but usually not the sole or necessarily the most important criterion for selection. Other significant factors which influence the award of lottery contracts include the ability to optimize lottery revenues through marketing capability and applications knowledge; the quality, dependability and upgrade capability of the network; the experience, financial condition and reputation of the vendor; and the satisfaction of other requirements and qualifications which the lottery authority may impose. The Company's major competitors in the on-line lottery business include GTECH, Automated Wagering International, Inc., (a subsidiary of VLT), Essnet AB, and several other companies. Competition in the simulcasting business in North America is fragmented. REGULATION General Pari-mutuel wagering, sports wagering, video gaming and on-line lotteries may operate 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 of the Company. Pari-Mutuel Wagering More than 40 states (including Puerto Rico and the Virgin Islands), all of the Canadian provinces and many foreign countries have authorized pari-mutuel wagering on horse races and 19 states and many foreign countries have authorized pari-mutuel wagering on dog races. In addition, Connecticut, Rhode Island, Nevada and Florida also allow pari-mutuel betting on jai alai matches. Companies which manufacture, distribute and operate pari-mutuel wagering systems in these jurisdictions are subject to the regulations of the applicable regulatory authorities there. These authorities generally require the Company, as well as its directors, officers, certain employees and holders of 5% or more of the Company's common stock, to obtain various licenses, permits and approvals. Regulatory authorities may also conduct background investigations of the Company and its key personnel and stockholders in order to insure the integrity of the wagering system. These authorities have the power to refuse, revoke or restrict a license for any cause they deem reasonable. The loss of a license in one jurisdiction may cause a Company's licensing status to come under review in other jurisdictions as well. 9 A subsidiary of the Company, Autotote Systems, Inc. ("ASI"), is licensed by the New Jersey Casino Control Commission ("New Jersey Commission") as a gaming-related casino service industry ("CSI") 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 CSI 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. As the parent corporation of Autotote Systems, Inc., the Company must also qualify under the standards of the Casino Control Act. Autotote Systems, Inc., the licensee of the New Jersey Commission, may also be required to produce such information, documentation and assurances as required by the regulators to establish the integrity of all financial and other backers. The New Jersey Commission has broad discretion in licensing matters and may at any time condition a license or suspend or revoke a license or impose fines upon a finding of disqualification or non-compliance. The New Jersey Commission may require that persons holding five percent or more of the Class A Common Stock of the Company, including any holder of the Company's 5 1/2% convertible subordinated debentures due 2001 (the "Debentures") who acquires five percent or more of the Class A Common Stock upon conversion of the Debentures, 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. There can be no assurance that if a Debenture holder (or affiliated group) acquired five percent or more of the Company's Class A Common Stock, such holder would be found qualified under the Casino Control Act. Failure to qualify could jeopardize the Company's license. The Company's rights to operate the Connecticut OTB system shall continue as long as the Company and AEI, the Company's wholly-owned Connecticut subsidiary, hold all licenses required for the operation of the system. In addition, the officers and directors of both companies and certain personnel of AEI must be licensed. Licensees are generally required to submit to background investigations and provide required disclosures. The Division of Special Revenue of the State of Connecticut (the "Division") may revoke the license to operate the system under certain circumstances, including a false statement in the licensing disclosure materials, a transfer of ownership of the licensed entity without Division approval and failure to meet financial obligations. The Company has also agreed to comply with regulations proposed by the Division which regulate certain aspects of the system's operation. The approval of the Connecticut regulatory authorities is required before any off- track betting facility is closed or relocated or any new branch or simulcast facility is established. Sports Wagering Sports wagering is currently authorized in numerous foreign countries, including Mexico and 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 "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 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 Act is also inapplicable to pari-mutuel betting on horse and dog racing and jai alai. Companies which manufacture, sell or distribute sports wagering equipment are also subject to the various laws and regulations of the countries and states which permit sports wagering. These rules primarily concern the responsibility, financial stability and character of the sports wagering equipment companies, as well as the individuals financially interested or involved in the gaming operations. The rules generally resemble the regulations which govern the pari-mutuel wagering industry. Companies and individuals are required to be licensed before they may manufacture, distribute, own or operate sports wagering equipment; they are subject to 10 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 is active. There can be no assurance that subsequent regulations will not be burdensome to the Company, its personnel or its stockholders. Video Gaming Coin or voucher operated gambling devices offering electronic, video versions of slots, poker, black-jack and similar games are known as VGMs, 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 manufactures and supplies terminals and wagering systems designed for use as VGMs, VLTs or slot machines. Approximately sixteen states (Colorado, Delaware, Illinois, Indiana, Iowa, Louisiana, Mississippi, Montana, Nevada, New Jersey, North Dakota, Oregon, Rhode Island, South Carolina, South Dakota, and West Virginia) 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 also authorized their use. Government officials in other states are presently considering proposals to legalize video gaming, video lottery or slot machines in their states. Legislators have been enthusiastic about the potential of video gaming to raise significant non-tax revenues. Some officials, however, are reluctant to expand gaming opportunities or have expressed a desire to limit video gaming to established wagering facilities if video gaming is authorized in their jurisdiction at all. Companies that manufacture, sell or distribute VGMs, VLTs or slot machines are subject to various provincial, state, county and municipal laws and regulations. The primary purposes of these rules are (1) to insure the responsibility, financial stability and character of equipment manufacturers and their key personnel and stockholders through licensing requirements, (2) to insure the integrity and randomness of the machines, and (3) to prohibit the use of VGMs, VLTs or slot machines at unauthorized locations or for the benefit of undesirable individuals or entities. The regulations governing VGMs, VLTs and slot machines generally resemble the pari-mutuel and sports wagering regulations in all the basic elements described above. However, every jurisdiction has differing terminal design and operational requirements, and terminals generally must be certified by local regulatory authorities before being distributed in any particular jurisdiction. These requirements may require the Company or its subsidiaries to modify its terminals to some degree in order to achieve certification in particular locales. In addition, the intrastate movement of such devices in a jurisdiction where they will be used by the general public is usually allowed only upon prior notification and/or approval of the relevant regulatory authorities. West Virginia and Rhode Island have licensed the Company or its subsidiaries to supply VLTs to authorized locations in those states. The Company intends to apply for all necessary licenses in other jurisdictions that may now or in the future authorize video gaming, 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. 11 Federal law also affects the Company's video gaming activities. The Federal Gambling Devices Act of 1962 (the "Devices Act") makes it unlawful for any person to manufacture, deliver or receive gambling devices, including VGMs, VLTs and slot machines, across interstate lines unless that person has first registered with the Attorney General of the United States, or to transport such devices into jurisdictions where their possession is not specifically authorized by state law. The Devices Act permits states to exempt themselves from its prohibition on transportation, and several states that authorize the manufacture or use of such devices within their jurisdictions have done so. The 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 in compliance with all of the Devices Act's record-keeping and equipment identification requirements. On-Line Lottery At the present time, 36 states, the District of Columbia, Puerto Rico, all the Canadian Provinces and many foreign countries authorize lotteries. Once authorized, the award of lottery contracts and ongoing operation of lotteries in the United States is highly regulated. Although certain of the features of a lottery, such as the percentage of gross revenues which must be paid back to players in prize money, are usually established by legislation, the lottery authorities generally exercise significant authority, including the determination of the types of games played, the price of each wager, the manner in which the lottery is marketed, and the selection of the vendors of equipment and services. To ensure the integrity of the contract award and wagering process, most jurisdictions require detailed background disclosure on a continuous basis from, and conduct background investigations of, the vendor, its subsidiaries and affiliates and its principal shareholders. Background investigations of the vendor's employees who will be directly responsible for the operation of the system are also generally conducted, and most states reserve the right to require the removal of employees whom they deem to be unsuitable or whose presence they believe may adversely affect the operational security or integrity of the lottery. Certain jurisdictions also require extensive personal and financial disclosure and background checks from persons and entities beneficially owning a specified percentage (typically five percent or more) of the Company's securities. The failure of such beneficial owners to submit to such background checks and provide such disclosure could result in the imposition of penalties upon such beneficial owners and could jeopardize the award of a lottery contract to the Company or provide grounds for termination of an existing lottery contract. The international jurisdictions in which the Company markets its lottery systems also usually have legislation and regulations governing lottery operations. The regulation of lotteries in these international jurisdictions typically varies from the regulation of lotteries in the United States. In addition, restrictions are often imposed on foreign corporations seeking to do business in such jurisdictions. United States and international regulations affecting lotteries are subject to change. The Company cannot predict with certainty the impact on its business of changes in regulations. Simulcasting The Federal Communications Commission (the "FCC") regulates the use and transfer of earth station licenses used to operate the Company's simulcasting operations. To obtain an earth station license, the applicant must file an application with the FCC. The FCC then places the application on public notice and solicits comments for a thirty-day period, during which no action is taken on the application. At the expiration of the public notice period, assuming no objections are received from the public, the FCC usually will grant the application within two to three weeks if it determines that the granting of such applications is in the public interest. Before being granted, the Company's applications for assignment of the earth station licenses originally held by IDB to the Company required a ruling by the FCC that the Company's two foreign directors (who are citizens of Canada and the United Kingdom, respectively) did not adversely affect the public interest. The applications 12 for licenses were granted on June 27, 1995. In accordance with such licenses, the Company became obligated to pay to the FCC an annual fee on a per-station basis and file renewal applications annually. Failure to comply with these obligations in a timely fashion may result in the assessment of fines or forfeitures. With respect to the Company's ownership of Autotote Communication Services, Inc., the Company's application requesting approval of the transfer of control of the earth station licenses held by Marvin H. Sugarman Productions to Autotote Communication Services, Inc., has also been approved. Autotote Communication Services, Inc. has since transferred four licenses to other parties and has received FCC approval for such transfers. EMPLOYEES As of October 31, 1995, the Company employed approximately 1,040 persons. Of this total approximately 500 were engaged in full-time field operations, 250 in part-time tellering/cashiering for AEI, approximately 130 in engineering and software product development, approximately 40 in marketing and approximately 120 in financial, administration and other positions. Most of the North American pari-mutuel employees of the Company's subsidiary ASI involved in field operations and repairs are represented by the International Brotherhood of Electrical Workers (the "IBEW") under two separate contracts, both of which expire in 1997. ASI's former contracts with Local 3 IBEW expired on May 31, 1994, and on August 22, 1994, ASI's field service employees represented by IBEW went on strike for a new collective bargaining agreement. On October 25, 1994, the employees ratified a new three year agreement and returned to work. Certain of the persons employed by the Company in Austria and Germany are members of national workers councils. The Company considers its employee relations to be satisfactory. EXECUTIVE OFFICERS AND DIRECTORS OF THE COMPANY The directors and executive officers of Autotote Corporation as of October 31, 1995 were as follows:
DIRECTOR NAME AGE POSITION SINCE - ---- --- -------- -------- A. Lorne Weil........... 49 Chairman of the Board and Chief Executive Officer 1989 Sir Brian Wolfson....... 59 Vice Chairman of the Board(1) 1988 Alan J. Zakon........... 60 Vice Chairman of the Board(1)(2)(3) 1993 Larry J. Lawrence....... 53 Director(1)(2)(3)(4) 1989 Marshall Bartlett....... 70 Director(2)(3) 1991 Thomas H. Lee........... 51 Director(1)(4) 1991 Thomas C. DeFazio....... 54 President and Chief Operating Officer -- Michael D. Harris....... 53 Vice President -- Gerald Lawrence......... 56 Vice President -- Martin E. Schloss....... 49 Vice President, General Counsel and Secretary --
- -------- (1)Member of Executive Committee (2)Member of Audit Committee (3)Member of Compensation Committee (4)Member of Stock Option Committee All directors hold office until the next annual meeting of stockholders and thereafter until their successors have been elected and qualified. Officers of the Company hold office for an indefinite term, subject to the discretion of the Board of Directors of the Company ("the Board"). Mr. A. Lorne Weil has been a director of the Company since December 1989, Chairman of the Board since October 31, 1991 and Chief Executive Officer since April 1992. From 1982 until 1989, Mr. Weil was a director and consultant to the holding company of ASI. From October 1990 until April 1992, Mr. Weil held various senior management positions at the Company and its subsidiaries. From 1979 to November 1992 he was the President of Lorne Weil, Inc., a firm providing strategic planning and corporate development services to the high technology industry. Mr. Weil is currently a director of Fruit of the Loom, Inc. and General Growth Properties, Inc. 13 Sir Brian Wolfson has been a director of the Company since 1988 and a Vice Chairman of the Board since May 1995. He served as Acting President and Chief Executive Officer from June 1991 until October 31, 1991. From 1987 until May 1995 he was the Chairman, and from May 1995 to September 1995 was the Deputy Chairman, of Wembley plc, a United Kingdom corporation whose holdings include The Wembley Stadium, Arena and Conference Centre and Exhibition Halls in London. Sir Brian is currently a director of Kepner-Tregoe, Inc. and Fruit of the Loom, Inc. Mr. Alan J. Zakon has been a director of the Company since 1993 and a Vice Chairman of the Board since May 1995. From 1989 until April 1995, he served as a managing director of Bankers Trust Corporation. From 1989 until 1990, Mr. Zakon served as Chairman of the Strategic Policy Committee of Bankers Trust Corporation. From 1986 until 1989, Mr. Zakon served as Chairman of the Board of Boston Consulting Group. Mr. Zakon is currently a director of Arkansas Best Freight Corporation, Augat, Inc., Hechinger Corporation, and Boyle Leasing Technologies. Mr. Larry J. Lawrence has been a director of the Company since December 1989. He is co-founder and since 1985 has been managing partner of Lawrence Venture Partners, the general partner of Lawrence, Tyrrell, Ortale & Smith, a private equity fund manager. Since 1990, he has been managing partner of LTOS II Partners, the general partner of Lawrence, Tyrrell, Ortale & Smith II and since May 1995 has been the general partner of LSH Partners III, L.P., the general partner of Lawrence, Smith & Horey III. Mr. Lawrence is currently a director of Earth Technology Corporation as well as several private companies. Mr. Lawrence served as a director of ASI until it was acquired by the Company in 1989. Mr. Marshall Bartlett has been a director of the Company since December 1991. From June 1993 through May 1994, Mr. Bartlett was employed by the Company in various capacities. Mr. Bartlett was Executive Vice President and Chief Operating Officer of Bourns Inc., an electronic component manufacturer from 1979 until his retirement in 1991. Mr. Thomas H. Lee has been a director of the Company since December 1991. Mr. Lee founded the Thomas H. Lee Company in 1974 and since that time has served as its President. Mr. Lee is currently a director of General Nutrition Companies, Inc., Health o Meter Products, Inc., Hills Stores Company, J. Baker, Inc., Finlay Fine Jewelry Corporation, Playtex Family Products Inc., and Livent Inc. as well as several private companies. Mr. Lee is also a general partner of the ML-Lee Acquisition Fund, L.P., ML-Lee Acquisition Fund II, L.P. and the ML-Lee Acquisition Fund (Retirement Accounts) II, L.P. (the "ML-Lee Acquisition Funds"), Chairman and Trustee of Thomas H. Lee Advisors I, and a general partner of Thomas H. Lee Advisors II, L.P., the investment advisors to the ML-Lee Acquisition Funds. He is the general partner of THL Equity Advisors Limited Partnership, the general partner of and investment advisor to Thomas H. Lee Equity Partners, L.P. In February 1991, Hills Department Stores, Inc., of which Mr. Lee was Chairman of the Board, filed for protection under Chapter 11 of the United States Bankruptcy Code. Mr. Lee was a director of ASI until it was acquired by the Company in 1989. Mr. Thomas C. DeFazio has been President and Chief Operating Officer of the Company since October 1995. From April 1995 to October 1995, Mr. DeFazio was Executive Vice President and Chief Financial Officer of the Company. From 1991 to April 1995, Mr. DeFazio was a member of the Board of Directors, Executive Vice President and Chief Financial Officer of Smith Corona Corporation. From 1986 to 1991, he was employed in various capacities by General Instrument Corporation, including as Vice President of Finance, Chief Financial Officer and Treasurer. In July 1995, Smith Corona Corporation filed for protection under Chapter 11 of the United States Bankruptcy Code. Mr. Michael D. Harris has been Vice President of the Company and President of Autotote Systems Group, a division of the Company, since April 1995. Mr. Harris served as President and Chief Executive Officer of Dittler Brothers Incorporated from January 1993 to March 1995. From June 1989 to December 1992, Mr. Harris served as President of Arcata Graphics Company, and from June 1991 to December 1992 he also served as Vice President and Division Manager of Arcata Graphics Buffalo. 14 Mr. Gerald Lawrence has been Vice President of the Company since November 1994 and President of Autotote Gaming Group, a division of the Company, since April 1995. From January 1991 to August 1994, he held the position of Executive Vice President of The New York Racing Association, Inc. From November 1984 through December 1990, he served as Executive Vice President and Chief Operating Officer of Churchill Downs Incorporated. Mr. Martin E. Schloss has been Vice President and General Counsel of the Company since December 1992 and Secretary since May 1995. From July 1992 until December 1992, Mr. Schloss provided consulting services to and was employed by the Company. From 1976 to 1992, Mr. Schloss served in various positions in the legal department of General Instrument Corporation, with the exception of a hiatus of approximately one and one-half years. ITEM 2. PROPERTIES The Company leases approximately 12,000 square feet for its corporate headquarters at 750 Lexington Avenue, 25th Floor, New York, New York 10022. In January 1995, the Company sold its manufacturing facility in Newark, Delaware for $870,000. In January 1996, the Company entered into a sale-leaseback transaction of its administration and development facility aggregating approximately 40,000 square feet located in Newark, Delaware. The sale- leaseback arrangement established a sale price of $1 million and provides the Company with a lease term of up to ten years. The Company leases approximately 16,000 square feet of office and warehouse space in Rocky Hill, Connecticut in order to operate the Connecticut State Lottery. The Company leases approximately 2,700 square feet of warehouse space in Stanton, Delaware, leases office space for its regional sales support office in Tampa, Florida and 10,000 square feet of warehouse space in Tampa, Florida. The Company also leases 27,000 square feet for its facility in Vienna, Austria. In fiscal 1995, the Company completed construction of a new facility of 19,250 square feet for its sports wagering business in Las Vegas, Nevada. The Company leases space for the Connecticut OTB locations in Norwalk, Bridgeport, West Haven, East Haven, Meriden, New Britain, Bristol, Waterbury and Torrington and a teletheater in New Haven. AEI purchased teletheaters in Windsor Locks and in New Haven, both of which relate to the operation of the Connecticut OTB. The Company constructed a sports entertainment complex at its teletheater facility in New Haven, where the central off-track betting computer operations for the Connecticut OTB are located. The Company is in the process of discontinuing its leased 13,000 square feet lottery support facility in Owings Mills, Maryland, its 10,000 square feet manufacturing facility in Ballymahon, Ireland, and its 7,000 square feet facility in Athlone, Ireland. ITEM 3. LEGAL PROCEEDINGS 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 fifteen lawsuits commenced in February 1995 as class actions in the United States District Court for the District of Delaware; those lawsuits were subsequently consolidated into one class action (the "Consolidated Action"). The complaint alleges that the Company and certain of its officers and directors violated federal securities laws and seeks remedies of unspecified monetary damages and awards of fees and expenses. On August 15, 1995, the Company and certain officers and directors answered the complaint in the Consolidated Action and denied the substance of the allegations. The putative class consists of purchasers of the Company's Class A Common Stock and put and call options between March 1994 and January 1995. The likelihood of success and the ultimate outcome of the litigation cannot be evaluated at the present time, and no provision for liability, if any, that may result from the consolidated litigation has been recognized in the Company's financial statements. In the event of a judgment against, or settlement by, the Company and the named officers and directors, approximately $15 million of any such amount may be payable by the Company's insurance carriers on behalf of the named officers and directors, subject to any defenses such 15 insurance carriers may have. Any amount of a judgment or settlement award in excess of $15 million, or any portion of any judgment or settlement attributable solely to the Company, would be the responsibility of the Company, and there can be no assurance that the Company would have the financial resources to fund payments pursuant to a judgment or settlement award. The Company is the subject of informal inquiries by the Securities and Exchange Commission ("SEC") into certain press releases issued by the Company in 1993 and 1994. The ultimate outcome of these inquiries cannot be predicted at this time. ASI and the Company were recently defendants in an arbitration claim in Singapore by Multivest (PTE) Limited ("Multivest"). The subject matter of the arbitration involved a joint venture in which Multivest was a party and had agreed to acquire and contribute equipment and facilities necessary to operate an on-line lottery system in the Guangdong Province of the People's Republic of China. Multivest contracted with ASI to provide the lottery system. The arbitration claim alleged breach of contract by ASI with respect to its confidentiality obligations thereunder. The claim sought damages in the amount of approximately $250 million. The claim was dismissed on October 12, 1995, and Multivest was ordered to pay the Company Singapore $120,000 for costs and expenses incurred and Singapore $62,235 as reimbursement for money paid by the Company for the expenses of the arbitration panel. In addition, the Company is proceeding with its counterclaims in the amount of approximately $800,000. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Annual Meeting of the stockholders of the Company was held on August 22, 1995 to elect six directors of the Company and to ratify the selection of KPMG Peat Marwick LLP as the Company's independent accountants. All the matters put before the stockholders passed with voting as follows:
DIRECTOR NOMINEES: FOR AGAINST ABSTAIN ------------------ --- ------- ------- A. Lorne Weil.................................... 21,967,618 361,386 -0- Sir Brian Wolfson................................ 21,969,512 359,696 -0- Alan J. Zakon.................................... 21,969,112 360,096 -0- Larry J. Lawrence................................ 21,969,512 359,696 -0- Marshall Bartlett................................ 21,968,412 360,796 -0- Thomas H. Lee.................................... 21,968,312 360,896 -0- KPMG Peat Marwick LLP ........................... 22,131,397 160,010 37,801
16 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 "TOTE" in the National Market of the National Association of Securities Dealers, Inc. ("NASDAQ"). 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 in the NASDAQ National Market adjusted to reflect (i) a three-for-two stock split in the form of a stock dividend of one share of Class A Common Stock for every two shares outstanding effective on June 30, 1993, and (ii) a two-for-one stock split in the form of a stock dividend of one share of Class A Common Stock for every share outstanding on October 25, 1993.
HIGH LOW ------ ------ Fiscal 1994 First Quarter............................................. $28.50 $18.50 Second Quarter............................................ $29.25 $17.75 Third Quarter............................................. $21.75 $15.00 Fourth Quarter............................................ $20.25 $13.25 Fiscal 1995 First Quarter............................................. $17.38 $ 6.75 Second Quarter............................................ $ 7.38 $ 4.38 Third Quarter............................................. $ 4.63 $ 2.69 Fourth Quarter............................................ $ 5.00 $ 2.81
As of October 31, 1995, the Company had approximately 586 holders of record of its Class A Common Stock. 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. Under the terms of the Company's Senior Bank Credit Facility, the Company is not permitted to pay any cash dividends or make any other distributions (other than stock dividends) on its Class A Common Stock. See Bank Credit Agreements in Management's Discussion and Analysis of Financial Condition and Results of Operations and Note 10 to Consolidated Financial Statements. ITEM 6. SELECTED FINANCIAL DATA Selected historical financial data presented below as of and for the five years ended October 31, 1995 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 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. The following financial information gives effect to (i) a three-for-two stock split in the form of a stock dividend of one share of Class A Common Stock for every two shares outstanding paid on June 30, 1993 and (ii) a two-for-one stock split in the form of a stock dividend of one share of Class A Common Stock for each share outstanding paid on October 25, 1993. The following financial data also reflects the 1994 acquisition of Marvin H. Sugarman Productions and its affiliate Racing Technology, Inc. which has been accounted for as a pooling of interests. Accordingly, the historical financial data has been restated to reflect the pooling. 17 FIVE YEAR SUMMARY OF SELECTED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED OCTOBER 31, ------------------------------------------------ 1995 1994 1993 1992 1991 -------- -------- -------- -------- -------- Selected Statement of Opera- tions Data: Operating Revenues: Wagering systems.......... $132,260 $ 98,592 $ 59,792 $ 40,526 $ 39,104 Wagering equipment & other sales.................... 20,924 50,458 25,070 7,838 8,942 -------- -------- -------- -------- -------- 153,184 149,050 84,862 48,364 48,046 Expenses & Costs: Wagering systems.......... 78,569 61,158 36,513 20,713 20,692 Inventory, equipment & contract adjustments..... -- 3,939 -- -- -- Strike expenses........... -- 2,842 -- -- -- Wagering equipment & other sales.................... 15,661 35,753 11,679 4,606 5,080 Selling, general & administrative........... 36,540 25,298 10,956 6,419 7,234 Write-off of investments & other assets............. 6,640 4,737 -- -- -- Restructuring............. 11,601 3,839 -- -- -- Depreciation and amortization............. 35,463 25,418 11,809 7,840 11,137 Interest, net............. 15,974 6,103 3,240 5,804 8,999 Other income.............. (48) (647) (65) (487) (6) Proceeds of insurance claim.................... -- -- -- (3,000) -- Write-off of financing fees & expenses.......... -- 4,222 -- -- -- Write-off of goodwill & other intangible assets.. -- -- -- -- 77,721 Operations of divested businesses............... -- -- -- -- 4,818 Divestiture expenses...... -- -- -- -- 1,338 Litigation expenses....... -- -- -- (382) 660 -------- -------- -------- -------- -------- 200,400 172,662 74,132 41,513 137,673 Net earnings (loss)......... $(49,889) $(22,150) $ 9,438 $ 5,727 $(77,543) Net earnings (loss) per common share (Primary)..... $ (1.72) $ (.79) $ .33 $ .37 $ (4.42) Net earnings (loss) per common share (Fully diluted)............ $ (1.72) $ (.79) $ .33 $ .36 $ (4.42) Selected Balance Sheet Data (End of period): Total assets................ $241,021 $241,597 $187,105 $ 62,950 $ 45,431 Total long-term debt, including current installments............... $177,264 $143,955 $ 76,987 $ 57,231 $ 54,326 Stockholders' equity (defi- ciency).................... $ 11,857 $ 55,721 $ 76,079 $(20,972) $(28,775) Weighted average shares outstanding (Primary)...... 28,965 28,174 28,210 15,425 17,546 Weighted average shares outstanding (Fully diluted)............ 28,965 28,174 28,911 15,911 17,546
18 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS BACKGROUND The Company incurred a loss of $49.9 million, or $1.72 per share, in fiscal 1995 of which $22.8 million was attributable to fiscal 1995 third quarter unusual charges substantially resulting from the Company's restructuring, which includes the closing of two facilities and a reduction in personnel, certain asset valuation adjustments, and bank credit agreement fees. As a result of these charges, the Company anticipates total cash obligations of approximately $5.9 million, $1.1 million of which was paid in fiscal 1995 and the balance to be paid in fiscal 1996. Restructuring charges of $11.6 million were attributable to the closing of the lottery support facility in Owings Mills, Maryland and the scaling back of certain international activities, including the closing of the Company's manufacturing facility in Ballymahon, Ireland. As a direct result of the restructuring, the Company anticipates annualized savings of $5.5 million. The Company also wrote off certain investments and other non-current assets which totaled $6.6 million and included $2.7 million attributable to the Company's Mexican video gaming machine contracts, $2.6 million attributable to European wagering terminals, and $1.3 million attributable to other assets. Also included in the third quarter charges was $1.7 million in bank financing costs primarily relating to a waiver of certain financial covenants of the Company's Senior Bank Credit Facility agreement. The remaining third quarter charges included miscellaneous asset valuation adjustments and severance. The Company has evaluated its business strategies and rationalized the support for certain products, systems and operations. As a result of the restructuring and other cost reduction efforts, the Company believes that its streamlined operations will improve its future cash generation. Included in the fiscal 1994 loss of $22.2 million, or $0.79 per share, were restructuring charges of approximately $3.8 million resulting from closing the Company's Newark, Delaware manufacturing facility and discontinuation of certain product lines; a $4.7 million write-off of certain assets principally related to domestic and overseas projects; costs of $2.8 million incurred as a result of a strike by the field service employees of the Company's subsidiary, Autotote Systems, Inc. ("ASI"); and an extraordinary item consisting of a non- cash write-off of financing fees and expenses of $4.2 million associated with the Company's repayment of its prior senior bank credit facility. The fiscal 1994 restructuring charge was incurred as part of the Company's plan to reduce manufacturing costs and utilize its working capital more effectively. The Company has satisfied all cash obligations, consisting primarily of costs of plant shutdown and employee severance, arising from the fiscal 1994 restructuring. Additional factors contributing to the loss in fiscal 1994 included charges of $7.5 million to operating expenses for payments in 1994 to former stockholders of the Tele Control Group pursuant to contingent payment provisions in the Tele Control Group acquisition agreement; inventory, equipment and contract adjustments resulting in charges of $3.9 million, of which $3.3 million related to corrections to the financial statements delivered by the seller in connection with the Company's acquisition of Marvin H. Sugarman Productions, Inc., and its affiliate Racing Technology, Inc. for periods prior to the acquisition; and adjustments to the tax liability relating to certain income generated from the Company's international operations. The consolidated statements of operations for the years ended October 31, 1995, 1994 and 1993 reflect the following acquisitions accounted for by the purchase method of accounting: Autotote Lottery and the ETAG Group in June 1993, the right to operate the Connecticut OTB in July 1993, the Tele Control Group in September 1993, 80% of the outstanding stock of the holding company of SEPMO S.A. in November 1994 and substantially all of the assets of the Simulcast Division of LDDS Corporation (formerly IDB Communications Group, Inc.) in January 1995. Historically, the Company's revenues have come from two sources: service contracts and sales contracts for equipment and software. Service revenue pursuant to multi-year service contracts is typically based on Handle. The first quarter of the fiscal year is traditionally the weakest for service revenue for seasonal reasons. Sales revenue usually reflects a limited number of large sales which do not recur on an annual basis, but which historically have given rise to terminal sales and the provision of systems software to existing customers. The Company's ability to expand is dependent upon its ability to fulfill and retain its existing contracts and obtain additional contracts. The sale and delivery of wagering systems and equipment depend on various factors, 19 including customer requirements as to the capabilities and features of the system and the delivery schedule. Consequently, revenue and operating results could vary substantially as a result of the timing of revenue recognition from major equipment sales. The timing of these sales can affect not only annual performance, but can make quarterly results highly variable and unpredictable. FISCAL 1995 COMPARED TO FISCAL 1994 Revenue Analysis Total revenues increased 3% or $4.1 million to $153.2 million fiscal 1995 from $149.1 million in fiscal 1994. Wagering system revenues increased 34% or $33.7 million to $132.3 million, compared to $98.6 million in fiscal 1994. The wagering systems revenues increase reflects continued improvement in the Company's North American off-track betting and pari-mutuel businesses; significant growth in the Company's simulcasting operations, largely reflecting the 1995 IDB asset acquisition; and increased revenues for the Company's European lottery operations. Additionally, the acquisition of SEPMO in November 1994 contributed $8.7 million to the fiscal 1995 increase. Offsetting the wagering systems revenue improvement was a decrease in wagering equipment and other sales revenues of $29.6 million, from $50.5 million in fiscal 1994 to $20.9 million in fiscal 1995, largely due to the inclusion in fiscal 1994 of $25.8 million in revenues attributable to the sale of MAX 2000 terminals to EIS for sale to Italy's TOTIP pool and $6.3 million in revenues associated with the commencement of certain international lottery contracts received by the Company's Tele Control subsidiary. Partially offsetting the decline in equipment sales and other revenues were $4.5 million in equipment sales attributable to the Company's November 1994 acquisition of SEPMO. Expense Analysis Total gross margins, exclusive of depreciation and amortization, increased $13.6 million, or 30%, to $59.0 million in fiscal 1995 as compared to $45.4 million in fiscal 1994. Excluding 1994 inventory, equipment and contract adjustments of $3.9 million and strike expenses of $2.8 million, total gross margins increased $6.8 million primarily due to a $16.3 million increase in wagering systems gross margin. The first quarter acquisition of SEPMO contributed $4.6 million in wagering systems gross margin. Other increases were seen in simulcasting, primarily attributable to the acquisition of the IDB assets, and improvements for North American pari-mutuel and off-track betting businesses and European lottery operations. Offsetting the wagering systems gross margins improvement was a decline of $9.4 million in gross margins on wagering equipment and other sales primarily due to the 1994 MAX 2000 terminal sales, partially offset by sales attributable to the fiscal year 1995 acquisition of SEPMO. Selling, general and administrative expenses include marketing, sales, administrative, engineering and software development, finance, legal and other expenses. These expenses increased to $36.5 million for fiscal 1995 from $25.3 million in fiscal 1994, an increase of $11.2 million or 44%. Approximately $4.2 million of the increase is due to the acquisition of SEPMO. Additional increases in fiscal 1995 selling, general and administrative expenses primarily reflect increased expenses for market development, legal and other professional fees, and increased expenses attributable to expanded North American simulcasting and European lottery operations. Software systems and product development expenditures were $12.2 million in fiscal 1995 compared to $10.3 million in fiscal 1994, of which $6.0 million were capitalized. The increase arises primarily from increased spending for its UNIBET lottery software developed for the international market. Included in third quarter fiscal 1995 charges was $6.4 million representing valuation adjustments based on the Company's assessment of the future recoverability of certain capitalized software systems development costs. Depreciation and amortization expenses increased 40% to $35.5 million in fiscal 1995 from $25.4 million in fiscal 1994. The increased depreciation and amortization was primarily due to the acquisitions of SEPMO and the IDB assets; capital additions for North American pari-mutuel and video gaming operations; and increased amortization attributable to capitalized software systems development costs for European lottery operations. 20 Interest expense increased $10.0 million to $16.4 million in fiscal 1995 compared to $6.4 million in fiscal 1994. The increase primarily reflects increased borrowings to finance capital additions for North American pari- mutuel and video gaming operations; the acquisitions of SEPMO and the IDB assets; $2.4 million in 1995 bank credit agreement fees and other financing costs primarily related to a waiver of certain financial covenant violations under the Company's Senior Bank Credit Facility agreement; and the 1994 capitalization of interest costs on certain capital projects. Fiscal 1994 results included a $4.2 million write-off of deferred financing fees relating to the 1993 senior bank credit facility. This write-off was classified as an extraordinary item in the accompanying financial statements. Income Taxes Income tax expense was $2.7 million in fiscal 1995 as compared to a benefit of $1.5 million in fiscal 1994. Income tax expense for fiscal 1995 principally reflects foreign tax expense. No tax benefit has been recognized on fiscal 1995 domestic operating losses reflecting management's opinion that, more likely than not, the benefit of deferred tax assets principally related to operating loss carryforwards in excess of the scheduled reversal of deferred tax liabilities, will not be realized. Net Earnings (Loss) The net loss for fiscal 1995 was $49.9 million, or $1.72 per share on 29.0 million shares outstanding, compared to a net loss of $22.2 million, or $0.79 per share on 28.2 million shares outstanding, in fiscal 1994 which included an extraordinary charge of $4.2 million. Excluding the effect of the extraordinary non-cash charge of $4.2 million to write-off financing fees and expenses associated with the Company's repayment of its prior senior bank credit facility, the net loss for fiscal 1994 was $18.0 million or $0.64 per share. FISCAL 1994 COMPARED TO FISCAL 1993 Revenue Analysis Total revenues increased 76% or $64.2 million to $149.1 million for the year ended October 31, 1994 from $84.9 million in fiscal 1993. The 1993 acquisitions, completed in the second half of fiscal 1993, contributed $61.3 million to revenues in fiscal 1994 and $17.1 million to revenues in fiscal 1993. Wagering equipment and other sales revenues, exclusive of equipment and other sales revenue attributable to the Tele Control and Autotote Lottery subsidiaries of $10.0 million in fiscal 1994 and $1.6 million in fiscal 1993, increased $16.9 million in 1994 compared to 1993. Wagering equipment sales revenue in 1994 included large equipment sales and a software upgrade totaling $7.7 million to foreign customers; $25.8 million attributable to the completion of the Company's contract to deliver the MAX 2000 terminals to Italy's TOTIP pool; and $6.3 million in revenues associated with the commencement of certain international lottery contracts received by the Company's Tele Control subsidiary. Exclusive of revenues attributable to the 1993 acquisitions, wagering systems revenues increased from $44.9 million in fiscal 1993 to $48.1 million in fiscal 1994, primarily due to the full year effect of revenue generated from wagering system contracts which became operational during fiscal 1993 and fiscal 1994, offset in part by severe winter weather experienced in the Northeast and an earthquake in California. Wagering systems revenues attributable to the 1993 Acquisitions totaled $50.5 million in fiscal 1994 and $14.9 million in fiscal 1993. Expense Analysis Total gross margins, exclusive of depreciation and amortization, increased $8.7 million, or 24%, to $45.4 million in fiscal 1994 as compared to $36.7 million in fiscal 1993. Excluding 1994 inventory, equipment and contract adjustments of $3.9 million and strike expenses of $2.8 million, total gross margins increased $15.4 million. The increase in total gross margins was primarily due to a $14.1 million increase in wagering systems 21 gross margins, to $37.4 million in fiscal 1994 compared to $23.3 million in fiscal 1993, reflecting the effect of the 1993 acquisitions. Fiscal 1994 wagering equipment and other sales margins of $14.7 million increased $1.3 million versus fiscal 1993 as the favorable fiscal 1994 effect of the 1993 acquisitions and fiscal 1994 MAX 2000 terminal margins were, in part, offset by unusually high 1993 wagering equipment and other sales gross margins exceeding 50% due to the inclusion of certain licensing and contract milestone related revenues recognized in fiscal 1993. Additionally, fiscal 1994 wagering equipment and other sales gross margins were unfavorably impacted by $7.5 million included in wagering equipment and other sales operating expenses, reflecting payments in 1994 to former Tele Control Group stockholders pursuant to contingent payment provisions in the Tele Control Group acquisition agreement as a result of the award of lottery contracts to the Tele Control Group in fiscal 1994. Offsetting the effect of this adjustment was $6.3 million in wagering equipment and other revenues associated with the commencement of these contracts. Fiscal 1994 total gross margins were impacted by non-cash inventory, equipment and contract adjustments of $3.9 million and strike expenses of $2.8 million. Inventory, equipment and contract adjustments consisted principally of corrections to financial statements delivered by the seller in connection with the Company's acquisition in July 1994 of Marvin H. Sugarman Productions, Inc. and Racing Technology, Inc. for periods prior to the acquisition. The acquisition was accounted for on a "pooling of interests" basis. Strike expenses consist of contract labor, security, legal and other costs incurred as a result of a strike by the field service employees of ASI. The strike affected approximately 275 of ASI's field service employees and was settled in late October 1994. Selling, general and administrative expenses include marketing, sales, administrative, engineering and product development, finance, legal and other expenses. These expenses increased to $25.3 million for fiscal 1994 from $11.0 million in fiscal 1993, an increase of $14.3 million or 131%. Approximately $4.9 million of the increase is due to the full year effect of selling, general and administrative expenses related to the 1993 acquisitions. Additional increases in fiscal 1994 selling, general and administrative expenses reflected the strengthening of the Company's management structure; the Company's expanded multicontinent business; and expansion of the Company's international and North American marketing efforts, specifically in the on- line lottery and sports wagering businesses and increased product development expenses. The Company also incurred significant accounting, legal and consulting fees associated with the audit of its fiscal 1994 financial statements, resulting in a charge of approximately $1 million. Software systems and product development expenditures in fiscal 1994 were $10.3 million, up from $5.6 million in fiscal 1993, reflecting increases in new product development and enhancements to existing products. Approximately $6.0 million of software systems development costs were capitalized in 1994 versus $2.4 million in 1993. Depreciation and amortization expenses increased 115% to $25.4 million in fiscal 1994 from $11.8 million in fiscal 1993. The increase is due in part to increases in amortization and depreciation as a result of management's final review of the allocation of purchase price and the useful life of goodwill and certain other assets recorded in connection with the 1993 acquisitions. This final review resulted in $5.3 million in increased annual depreciation and amortization with respect to the 1993 acquisitions. The increase also reflected the full year effect of amortization and depreciation associated with the 1993 acquisitions and increased depreciation with respect to capital additions made in North America to the Company's wagering systems base during fiscal years 1993 and 1994. Interest expense increased $2.9 million to $6.4 million in fiscal 1994 compared to $3.5 million in fiscal 1993. The increase primarily reflects increased borrowings associated with the construction of wagering systems equipment and with the 1993 acquisitions. Interest costs of $819,000 and $1.1 million were capitalized in 1993 and 1994, respectively, reflecting additional costs of construction of wagering systems placed in service pursuant to wagering systems contracts. 22 Income Taxes Effective income tax rates before extraordinary item were approximately 8% in fiscal 1994 compared to 12% for fiscal 1993. The rate for fiscal 1994 reflects the non-tax deductible nature of the payments in 1994 to former Tele Control Group stockholders included in wagering equipment sales operating expenses, the mix in earnings between foreign and domestic operations, increased non- deductible goodwill amortization and an increase in the tax liability relating to certain income generated from the Company's international operations. The loss in 1994 did not permit the recognition of a tax benefit related to the extraordinary write-off of financing fees and expenses of $4.2 million associated with the Company's repayment of its prior senior credit facility. The rate for 1993 differs from the U.S. statutory tax rate of 34% principally due to foreign earnings taxed at a lower income tax rate than the U.S. tax rate, the utilization of foreign tax credits and other business credits in 1993 and adjustments to prior years' income tax accruals. Net Earnings (Loss) The net loss for fiscal 1994 was $22.2 million or $0.79 per share compared to fiscal 1993 net earnings of $9.4 million or $0.33 per share. Without giving effect to the extraordinary non-cash charge of $4.2 million to write-off financing fees and expenses associated with the Company's repayment of its prior senior bank credit facility, the net loss for fiscal 1994 was $18.0 million or $0.64 per share. The earnings/(loss) per share was calculated using approximately 28.2 million weighted average shares outstanding in both fiscal 1994 and fiscal 1993. The weighted average shares outstanding for fiscal 1993 have been adjusted for 3-for-2 and 2-for-1 stock splits which occurred during fiscal 1993. LIQUIDITY AND CAPITAL RESOURCES In fiscal 1995, net cash provided by operating activities was $8.0 million. Included in fiscal 1995 operating results were $17.4 million in non-cash restructuring and asset valuation adjustments. The Company anticipated total cash obligations arising from restructuring and other unusual charges to be approximately $5.9 million, of which $1.1 million was paid in fiscal 1995 with the balance to be paid in fiscal 1996. In fiscal 1995, the Company invested $8.2 million in expenditures for equipment under wagering systems and simulcasting contracts. The Company also invested $14.4 million in acquisitions consisting of $13.7 million for substantially all of the assets of IDB and the rights relating to eight C-band satellite transponders (the "IDB Acquisition"), and approximately $.3 million plus acquisition related costs to acquire SEPMO, a supplier of wagering systems and services to the French off-track betting network and other customers. In addition to the purchase consideration, the Company concurrently advanced the SEPMO holding company approximately $2.0 million for purposes of repaying certain convertible debt and purchasing the minority holdings in certain subsidiary companies. The Company invested $10.0 million in fiscal 1995 in capital expenditures, including $5.6 million in the Company's simulcasting facilities located in Connecticut and $2.3 million for the construction of a building in Las Vegas, with the balance attributable to leasehold improvements and other equipment. Increases in other assets and investments principally reflect capitalized software systems development costs. Net cash provided by financing activities consisted primarily of $27.8 million of net borrowings under the Company's Senior Bank Credit Facility of which $13.7 million was used for the IDB Acquisition. The Company also obtained $2.1 million of construction/mortgage financing for its building in Las Vegas. In the fourth quarter of fiscal 1995, the Company raised $4.42 million from issuance of Class A Common Stock pursuant to a Regulation S offering. Net proceeds of the offering were used to repay borrowings under the Company's Senior Bank Credit Facility. At October 31, 1995, the Company's cash and cash equivalents, exclusive of restricted cash, totaled $5.0 million as compared to $6.1 million at October 31, 1994. The Company's wagering systems contracts are capital intensive, requiring substantial initial cash outlays which are recouped over time from cash flows from the contracts. The amounts of the Company's future capital 23 expenditures for wagering systems equipment will depend on the Company's ability to enter into service contracts with new customers, and to renew existing contracts with system upgrades. Each new customer may require the manufacture and assembly of a new wagering system unless the dates of operations and requirements of a new wagering facility allow an existing system to be used at such facility. Under some circumstances, the Company may be required to begin manufacture of wagering systems prior to the award of a contract in a competitive bidding situation. Expenditures related to the sale of the Company's wagering equipment are generally funded, in part, by customer advance payments. As of October 31, 1995, the Company was in compliance with certain waivers to the Senior Bank Credit Facility, as described in Note 10 of the Consolidated Financial Statements, such waivers expiring on January 31, 1996. The Company had $3.9 million available for borrowing under the Senior Bank Credit Facility at October 31, 1995. On January 26, 1996, the Company entered into an Amended and Restated Credit Agreement with its Banks (the "Amended and Restated Senior Bank Credit Facility"), as described in Note 10 to Consolidated Financial Statements, which matures on April 30, 1998. The Amended and Restated Senior Bank Credit Facility contains provisions for quarterly principal payments beginning January 31, 1996, with total scheduled principal payments in fiscal 1996 of $8 million. As a result, the Company has shown $8 million of its borrowings under the Senior Bank Credit Facility as a current liability. Contributing to the Company's negative working capital position at October 31, 1995 were $3.7 million in restructuring liabilities. The Company believes that its cash resources at October 31, 1995 and its forecasted cash flows arising from operations for fiscal 1996 provide sufficient liquidity to meet scheduled principal payments and anticipated capital expenditures in the coming fiscal year arising from current commitments. There can be no assurances that the Company can do so. The Company believes that additional financing and/or assets sales will be required to meet its scheduled principal payments and capital requirements in subsequent fiscal years, and is currently exploring financing and asset sales alternatives while simultaneously developing programs to reduce its level of ongoing expenditures. The Company will be required to evaluate its capital outlays and commitments in light of availability and timing of additional financing, which currently remains uncertain. BANK CREDIT AGREEMENTS On April 28, 1994, the Company entered into an Amended and Restated Bank Credit Agreement (the "Senior Bank Credit Facility") with the lenders thereto and with Bankers Trust Company ("BT") as agent which provided for a $125.0 million, five-year revolving credit facility. The Senior Bank Credit Facility was subsequently amended in December 1994 pursuant to which the Company was provided, subject to certain terms and conditions, an additional $10 million of availability. The Company was in violation of certain covenants of the Senior Bank Credit Facility as of October 31, 1994. On February 21, 1995, the Company entered into an amendment to the Senior Bank Credit Facility (the "Fourth Amendment and Consent"), which waived the covenant defaults, amended certain financial covenants and consented to a revised calculation of certain financial ratio covenants as a result of which the Company was in compliance with the provisions of the Senior Bank Credit Facility. The Company was also in violation of certain covenants under the Senior Bank Credit Facility at various times throughout fiscal 1995. The Company obtained a number of waivers and consents during the year (the "Waivers"). Pursuant to the Waivers, the Banks agreed to, among other things, waive compliance by the Company with certain financial ratios and financial condition tests specified in the Senior Bank Credit Facility for a period beginning on January 31, 1995 and ending on January 31, 1996 (the "Waiver Period"); provided, however, that the Company comply with certain modified financial ratios and tests and fulfill certain other requirements by specified dates. These requirements, among others, included: (a) issuing to the Banks warrants to purchase an aggregate of 385,000 shares of Class A Common Stock at an exercise price of $3.00 per share (the "1995 Lender Warrants"); (b) entering into an arrangement satisfactory to the Banks with the Debenture Holders, pursuant to which arrangement the Debenture Holders would agree to defer all cash payments otherwise due from August 15, 1995 until February 14, 1996; and (c) making arrangements satisfactory to the Banks to 24 raise additional cash through the issuance of equity interests in the Company or the sale of assets of the Company or any of its subsidiaries in an aggregate amount of at least $5.0 million. The Waivers also restricted the Company's capital expenditures, acquisitions, sale of equity and assets, and incurrence of lease and debt obligations, and required the Company to deliver to the Banks weekly, monthly and quarterly certificates of the Company's Chief Financial Officer, setting forth certain actual and projected financial information. In connection with the Waivers, in addition to the 1995 Lender Warrants, the Banks earned a fee of 1% of $135 million, payable the earlier of June 30, 1996, or when the Company raised at least $10 million through asset or equity sales which is still payable under the Amended and Restated Senior Bank Credit Facility. On September 13, 1995, the Company issued to the Banks the warrants referred to in clause (a) of the preceding paragraph. In connection with clause (b) of the preceding paragraph, the Company reached an agreement regarding interest payments due on the Debentures, evidenced by a letter agreement dated as of September 28, 1995 (the "Letter Agreement"), with the Debenture Holders as described below. In connection with clause (c), the Company received $4.42 million (after deducting commissions paid to the placement agent) through the sale of 1.56 million shares of Class A Common Stock in accordance with the provisions of a Regulation S offering of securities, and $1.2 million from the sale of assets and transponder time, in satisfaction of Waiver requirements. On January 26, 1996, the Company entered into an Amended and Restated Credit Agreement with lenders to the Senior Bank Credit Facility (the "Amended and Restated Senior Bank Credit Facility"), pursuant to which current commitments of each lender under the Senior Bank Credit Facility, totaling $135 million, are continued as the Amended and Restated Senior Bank Credit Facility, which provides for: 1) a $55 million term loan (the "A Term Loan"), 2) a $5 million term loan (the "B Term Loan"), and 3) a $75 million revolving credit facility (the "Revolver"), which includes a $25 million sublimit for letters of credit. $5 million of outstanding Revolving B Facility loans and $50 million of outstanding Revolving A Facility loans are constituted as the A Term Loan. $5 million of outstanding Revolving B Facility loans are constituted as the B Term Loan. The balance of all outstanding Revolving A Facility loans are converted into loans under the Revolver. The A Term Loan provides for certain quarterly principal repayments, including a $15 million principal repayment on April 30, 1997 and a $32 million principal repayment at maturity on November 1, 1997. The B Term Loan provides for certain quarterly principal repayments through its maturity on January 31, 1997. The Revolver matures on April 30, 1998. The Amended and Restated Senior Bank Credit Facility contains various financial and other covenants, including restrictions on the Company's acquisitions, indebtedness, investments and capital expenditures, and covenants that prohibit the payment of cash dividends on the Company's stock and distributions to stockholders. The Amended and Restated Senior Bank Credit Facility permits voluntary prepayments, and requires Mandatory Repayments upon the occurrence of certain events and in certain amounts, including: 1) with certain limited exceptions, 100% of the net proceeds of assets sales, with a $1 million per year exclusion; 2) 100% of the net proceeds of debt raised; 3) certain net proceeds of equity sales, based on a sliding scale; and 4) 75% of annual "Excess Cashflow", as defined. In addition to customary events of default, a Change of Control of the Company (as defined) constitutes an event of default under the Amended and Restated Senior Bank Credit Facility. The Amended and Restated Senior Bank Credit Facility is guaranteed by the Company and its subsidiaries and is secured by substantially all of the assets of the Company and its subsidiaries. Borrowings under the Amended and Restated Senior Bank Credit Facility bear interest at the Base Rate (as defined) plus a margin ranging from 1.25% to 2.25%, or the Eurodollar Rate (as defined) plus a margin ranging from 2.25% to 3.25% per year, in each case depending on the Company's performance as measured by the ratio of Bank Debt, as defined, to earnings before interest, taxes, depreciation and amortization ("EBITDA"); and in all cases an additional 2% in the event of certain defaults. A commitment fee of 0.5% per year is payable on the unused amount under the Revolver. A letter of credit fee equal to the applicable margin on Eurodollar loans then in effect plus a facing fee of 1/8 of 1% per year is payable on each letter of credit issued. As a closing fee, the Company issued to the Banks warrants to purchase 525,000 shares of Class A Common Stock, subject to adjustments, at an exercise price of $1.25 per share (the "1996 Lender Warrants"). (See Note 15 to the Consolidated Financial Statements.) As of October 31, 1995, the Company had approximately $3,937,000 available for borrowing under its Revolver, and $1,786,000 in outstanding letters of credit. 25 DEBENTURES On August 20, 1993 the Company issued $40,000,000 principal amount of 5.5% convertible subordinated debentures due 2001 ("The Debentures") in a private placement. The Debentures are convertible into 2,000,000 shares of Class A Common Stock at a conversion price of $20.00 per share. $17,500,000 of the proceeds were used to complete the Tele Control acquisition, $10,000,000 of the proceeds were applied to borrowings under the Senior Bank Credit Facility and the remainder was used for capital expenditures and other corporate purposes. On November 6, 1995, the Company entered into an Agreement with holders of its Debentures whereby the holders would receive unregistered shares of Class A Common Stock in lieu of cash for interest payments due on August 15, 1995 and February 15, 1996 on the Debentures. (See Note 10 to Consolidated Financial Statements.) RECENT ACCOUNTING PRONOUNCEMENTS In March 1995, the Financial Accounting Standards Board ("FASB") issued SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" ("SFAS No. 121"), effective for fiscal years beginning after December 15, 1995. SFAS No. 121, requires, among other things, that long-lived assets and certain identifiable intangibles to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Impairment losses should be based upon the fair value of the asset, and reported in the period in which the recognition criteria are first applied and met. The Company believes that the implementation of SFAS No. 121 will not have a material impact on its financial position or results of operations. In October 1995, the "FASB" issued SFAS No. 123, "Accounting for Stock-Based Compensation". This pronouncement permits the Company to choose either a new fair value based method or the current AFB opinion 25 intrinsic value based method of accounting for its stock based compensation arrangements. The Company intends to retain the intrinsic value based method of accounting for its stock based compensation arrangements and provide the footnote disclosures as required by SFAS No. 123 in fiscal 1996. Consequently, implementation of this pronouncement will not impact the Company's financial position or results of operations. 26 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE AUTOTOTE CORPORATION AND SUBSIDIARIES
FORM 10-K (PAGE) --------- Independent Auditors' Report......................................... 29 Consolidated Financial Statements: Balance Sheets as of October 31, 1995 and 1994..................... 30 Statements of Operations for the years ended October 31, 1995, 1994 and 1993.......................................................... 31 Statements of Stockholders' Equity for the years ended October 31, 1995, 1994 and 1993............................................... 32 Statements of Cash Flows for the years ended October 31, 1995, 1994 and 1993.......................................................... 33 Notes to Consolidated Financial Statements........................... 35 Schedule: II. Valuation and Qualifying Accounts................................ 58
All other schedules are omitted as the required information is inapplicable or the information is presented in the consolidated financial statements or related notes. 27 AUTOTOTE CORPORATION AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE OCTOBER 31, 1995, 1994 AND 1993 (WITH INDEPENDENT AUDITORS' REPORT THEREON) 28 INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders Autotote Corporation: We have audited the consolidated financial statements of Autotote Corporation and subsidiaries as listed in the accompanying index. In connection with our audits of the consolidated financial statements, we have also audited the financial statement schedule as listed in the accompanying index. These consolidated financial statements and the financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Autotote Corporation and subsidiaries as of October 31, 1995 and 1994, and the results of their operations and their cash flows for each of the years in the three- year period ended October 31, 1995, in conformity with generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. KPMG Peat Marwick LLP New York, New York December 11, 1995, except for Note 10 which is as of January 26, 1996. 29 AUTOTOTE CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS OCTOBER 31, 1995 AND 1994 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1995 1994 --------- ------- ASSETS Current assets: Cash and cash equivalents................................ $ 4,991 6,110 Restricted cash.......................................... 1,282 633 Accounts receivable, net of allowance for doubtful ac- counts of $1,679 and $498 in 1995 and 1994, respective- ly...................................................... 21,700 27,492 Inventories.............................................. 12,497 7,062 Unbilled receivables..................................... 4,166 6,015 Prepaid expenses, deposits and other current assets...... 3,121 4,526 --------- ------- Total current assets................................... 47,757 51,838 --------- ------- Property and equipment, at cost............................ 186,005 159,062 Less accumulated depreciation............................ 67,745 41,144 --------- ------- Net property and equipment............................. 118,260 117,918 --------- ------- Goodwill, net of amortization.............................. 26,986 23,052 Operating right, net of amortization....................... 17,848 18,933 Other assets and investments............................... 30,170 29,856 --------- ------- $ 241,021 241,597 ========= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable and other short-term borrowings............ $ -- 250 Current installments of long-term debt................... 10,772 792 Accounts payable......................................... 16,448 15,618 Accrued liabilities...................................... 23,783 17,477 Income taxes payable..................................... 1,878 2,245 --------- ------- Total current liabilities.............................. 52,881 36,382 --------- ------- Deferred income taxes...................................... 5,807 4,953 Other long-term liabilities................................ 3,984 1,378 Long-term debt, excluding current installments............. 126,492 103,163 Long-term debt, convertible subordinated debentures........ 40,000 40,000 --------- ------- Total liabilities...................................... 229,164 185,876 --------- ------- Stockholders' equity: Preferred stock, par value $1.00 per share, 2,000 shares authorized, none outstanding............................ -- -- Class A common stock, par value $0.01 per share, 99,300 shares authorized, 30,528 and 28,748 shares outstanding at October 31, 1995 and 1994, respectively.............. 306 288 Class B non-voting common stock, par value $0.01 per share, 700 shares authorized, none outstanding.......... -- -- Additional paid-in capital............................... 140,050 134,864 Accumulated deficit...................................... (129,469) (79,580) Treasury stock, at cost.................................. (295) -- Translation adjustment................................... 1,265 149 --------- ------- Total stockholders' equity............................. 11,857 55,721 --------- ------- Commitments and contingencies (Notes 8, 10, 12, 14, 16, 18 and 23)................................................... $ 241,021 241,597 ========= =======
See accompanying notes to consolidated financial statements. 30 AUTOTOTE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED OCTOBER 31, 1995, 1994 AND 1993 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1995 1994 1993 -------- ------- ------ Operating revenues: Wagering systems.................................. $132,260 98,592 59,792 Wagering equipment and other sales................ 20,924 50,458 25,070 -------- ------- ------ 153,184 149,050 84,862 -------- ------- ------ Operating expenses (exclusive of depreciation and amortization shown below): Wagering systems.................................. 78,569 61,158 36,513 Inventory, equipment and contract adjustments..... -- 3,939 -- Strike expenses................................... -- 2,842 -- Wagering equipment and other sales................ 15,661 35,753 11,679 -------- ------- ------ 94,230 103,692 48,192 -------- ------- ------ Total gross profit.............................. 58,954 45,358 36,670 -------- ------- ------ Selling, general and administrative expenses........ 36,540 25,298 10,956 Write-off of investments and other assets........... 6,640 4,737 -- Restructuring....................................... 11,601 3,839 -- Depreciation and amortization....................... 35,463 25,418 11,809 -------- ------- ------ Operating income (loss)......................... (31,290) (13,934) 13,905 -------- ------- ------ Other deductions (income): Interest expense.................................. 16,362 6,408 3,473 Interest income................................... (388) (305) (233) Other income...................................... (48) (647) (65) -------- ------- ------ 15,926 5,456 3,175 -------- ------- ------ Earnings (loss) before income tax expense (bene- fit) and extraordinary item.................... (47,216) (19,390) 10,730 Income tax expense (benefit)........................ 2,673 (1,462) 1,292 -------- ------- ------ Earnings (loss) before extraordinary item....... (49,889) (17,928) 9,438 Extraordinary item--write-off of financing fees........................................... -- 4,222 -- -------- ------- ------ Net earnings (loss)............................. $(49,889) (22,150) 9,438 ======== ======= ====== Earnings (loss) per common share: Earnings (loss) per common share before extraordi- nary item........................................ $ (1.72) (0.64) 0.33 Extraordinary item--write-off of financing fees... -- (0.15) -- -------- ------- ------ Earnings (loss) per common share.................. $ (1.72) (0.79) 0.33 ======== ======= ====== Weighted average number of common shares outstand- ing................................................ 28,965 28,174 28,210 ======== ======= ======
See accompanying notes to consolidated financial statements. 31 AUTOTOTE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED OCTOBER 31, 1995, 1994 AND 1993 (IN THOUSANDS)
ADDITIONAL TOTAL PREFERRED COMMON PAID-IN ACCUMULATED TREASURY TRANSLATION STOCKHOLDERS' STOCK STOCK CAPITAL DEFICIT STOCK ADJUSTMENT EQUITY --------- ------ ---------- ----------- -------- ----------- ------------- Balances, October 31, 1992................... $ 4 178 50,571 (66,860) (4,865) -- (20,972) Exercise of stock op- tions.................. -- 1 232 -- 154 -- 387 Issuance of common stock in exchange for subordinated debentures............. -- -- 5,958 -- 3,009 -- 8,967 Conversion of Series B preferred stock........ (4) -- (123) -- 127 -- -- Dividends on Series B preferred stock........ -- -- -- (8) -- -- (8) Exercise of warrants.... -- 21 1,620 -- -- -- 1,641 Issuance of Class A com- mon stock, net of issu- ance expenses.......... -- 79 75,132 -- 1,575 -- 76,786 Currency translation ad- justment............... -- -- -- -- -- (160) (160) Net earnings............ -- -- -- 9,438 -- -- 9,438 ----- --- ------- -------- ------ ----- ------- Balances, October 31, 1993................... -- 279 133,390 (57,430) -- (160) 76,079 Exercise of stock op- tions.................. -- 4 1,398 -- -- -- 1,402 Exercise of warrants.... -- 5 76 -- -- -- 81 Currency translation ad- justment............... -- -- -- -- -- 309 309 Net loss................ -- -- -- (22,150) -- -- (22,150) ----- --- ------- -------- ------ ----- ------- Balance, October 31, 1994................... -- 288 134,864 (79,580) -- 149 55,721 Exercise of stock op- tions.................. -- 2 439 -- (235) -- 206 Issuance of Class A com- mon stock, net of issu- ance expenses.......... -- 16 4,521 -- -- -- 4,537 Exercise of warrants.... -- -- 60 -- (60) -- -- Deferred compensation... -- -- 166 -- -- -- 166 Currency translation ad- justment............... -- -- -- -- -- 1,116 1,116 Net loss................ -- -- -- (49,889) -- -- (49,889) ----- --- ------- -------- ------ ----- ------- Balance, October 31, 1995................... $ -- 306 140,050 (129,469) (295) 1,265 11,857 ===== === ======= ======== ====== ===== =======
See accompanying notes to consolidated financial statements. 32 AUTOTOTE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED OCTOBER 31, 1995, 1994 AND 1993 (IN THOUSANDS)
1995 1994 1993 -------- ------- -------- Cash flows from operating activities: Net earnings (loss)............................. $(49,889) (22,150) 9,438 Adjustments to reconcile net earnings (loss) to cash provided by operating activities: Depreciation and amortization................. 35,463 25,418 11,809 Write-off of non-cash financing fees.......... -- 4,222 -- Restructuring charges and asset write-offs, net of cash payments......................... 17,359 8,576 -- Change in deferred income taxes............... 854 (989) (785) Non-cash interest charges..................... 1,564 -- -- Changes in operating assets and liabilities, net of effects of purchase/disposition of subsidiaries: Restricted cash............................. (649) (633) -- Accounts receivable......................... 6,576 (10,579) (9,285) Inventories................................. (4,276) 3,467 2,387 Unbilled receivables........................ 2,264 (6,015) -- Prepaid expense, deposits and other current assets..................................... 157 (1,778) (1,287) Accounts payable............................ (616) 2,812 2,727 Accrued liabilities......................... (2,578) 6,114 980 Income taxes payable........................ (367) (215) 1,012 Other......................................... 2,128 (808) (2,674) -------- ------- -------- Total adjustments........................... 57,879 29,592 4,884 -------- ------- -------- Net cash provided by operating activities......... 7,990 7,442 14,322 -------- ------- -------- Cash flows from investing activities: Capital expenditures............................ (9,990) (19,533) (3,277) Expenditures for equipment under wagering sys- tems contracts................................. (8,150) (39,932) (46,500) Increase in other assets and investments........ (13,262) (20,629) (6,467) Payment for operating right..................... -- -- (20,000) Purchase of companies, net of cash acquired..... (14,400) -- (34,653) Proceeds from sale of buildings................. 1,000 -- -- Other........................................... 988 (350) -- -------- ------- -------- Net cash used in investing activities............. (43,814) (80,444) (110,897) -------- ------- -------- Cash flows from financing activities: Net borrowings (repayments) under lines of cred- it............................................. (250) (474) (1,417) Net borrowings under senior bank credit facili- ty............................................. 27,832 101,448 -- Proceeds from issuance of long-term debt........ 4,198 17,556 86,054 Payments on long-term debt...................... (2,367) (51,562) (57,554) Net proceeds from issuance of common stock...... 4,495 1,483 78,815 Dividends paid.................................. -- -- (8) -------- ------- -------- Net cash provided by financing activities......... 33,908 68,451 105,890 -------- ------- -------- Effect of exchange rate changes on cash........... 797 137 3 -------- ------- -------- Increase (decrease) in cash and cash equivalents.. (1,119) (4,414) 9,318 Cash and cash equivalents, beginning of year...... 6,110 10,524 1,206 -------- ------- -------- Cash and cash equivalents, end of year............ $ 4,991 6,110 10,524 ======== ======= ========
(Continued) 33 AUTOTOTE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS--(CONTINUED) YEARS ENDED OCTOBER 31, 1995, 1994 AND 1993 NON-CASH INVESTING AND FINANCING ACTIVITIES 1995 See notes 8, 15 and 16 for a description of capital lease transactions, the exchange of services for common stock and the exchange of stock options for Performance Accelerated Restricted Stock. 1994 Net transfers from goodwill to property and equipment were $6,751,000 in accordance with finalization of purchase price allocations for the 1993 acquisitions. See notes 3 and 8 for a description of acquisitions and capital lease transactions. 1993 See notes 8 and 10 for a description of capital lease transactions and the exchange of Subordinated Debentures for common stock. Supplemental cash flow information Cash paid during the year for:
OCTOBER 31, ------------------- 1995 1994 1993 ------- ----- ----- (IN THOUSANDS) Interest (net of interest capitalized of $81, $1,113 and $819 in 1995, 1994 and 1993, respectively)...... $12,504 4,979 3,139 Income taxes......................................... $ 3,260 2,386 852
See accompanying notes to consolidated financial statements. 34 AUTOTOTE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OCTOBER 31, 1995 AND 1994 (1) Description of the Business and Summary of Significant Accounting Policies (a) Description of the Business The Company and its subsidiaries are primarily engaged in the design, sale and operation of computerized wagering systems for pari-mutuel wagering, sports/race wagering, simulcasting services and lottery applications in the United States, Europe and Asia, as well as the operation of certain off-track betting concerns in the United States and Europe. (b) Principles of Consolidation The accompanying consolidated financial statements include the accounts of Autotote Corporation (the Company) and subsidiaries in which the Company's ownership is greater than 50%. Investments in other entities where the Company has the ability to exercise significant influence over the investee are accounted for principally on the equity basis. Under the equity method, investments are stated at cost plus the Company's equity in undistributed earnings after acquisition. All significant inter-company balances and transactions have been eliminated in consolidation. (c) Cash and Cash Equivalents The Company considers all highly liquid debt instruments with an original maturity at the date of purchase of three months or less to be cash equivalents. (d) Restricted Cash Restricted cash represents amounts on deposit by customers for TeleBet wagering. State regulations require the Company to maintain such balances until deposited amounts are wagered or returned to the customer. (e) Inventories Inventories are stated at the lower of cost or market. Cost is determined as follows:
ITEM COST METHOD ---- ----------- Parts............................. First-in, first-out or weighted moving average. Work-in-process & Finished goods.. Specific identification or weighted moving average for direct material and labor; other fixed and variable production costs are allocated as a percentage of direct labor cost. Ticket paper...................... First-in, first-out
The Company adjusts inventory accounts on a periodic basis to reflect the impact of potential obsolescence. (f) Unbilled Receivables Unbilled receivables represent costs and related earnings in excess of payments made by customers. 35 AUTOTOTE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (g) Property and Equipment Property and equipment are stated at cost. Depreciation of property and equipment is calculated using the straight-line method over the estimated useful lives of the assets as follows:
ESTIMATED LIFE ITEM IN YEARS ---- -------------- Machinery and equipment................................... 3-7 Buildings................................................. 15-40 Transportation............................................ 3-7 Furniture and fixtures.................................... 5-10 Building and leasehold improvements....................... 5-30
Depreciation expense includes the amortization of capital leased assets. (h) Deferred Installation Costs Certain installation costs consisting of installation materials, customer contracted software and installation labor associated with leased systems are deferred and amortized over the lives of the leases unless such costs are reimbursed by the lessee, in which case such amounts are included in revenue and cost of sales. Deferred installation costs, net of accumulated depreciation, included in property and equipment were approximately $9,482,000 and $11,725,000 at October 31, 1995 and 1994, 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 SEPMO and IDB is being amortized on a straight-line basis over five years. The excess of costs over net assets acquired for Autotote Lottery, Tele Control, and ETAG is being amortized on a straight-line basis over 5, 7 and 10 years, respectively. The balance of goodwill is being amortized over forty years. Total goodwill amounted to $26,986,000 and $23,052,000 net of accumulated amortization of $8,673,000 and $3,740,000 as of October 31, 1995 and 1994, respectively. The Company assesses the recoverability of this intangible asset by determining whether the amortization of the goodwill balance over its remaining life can be recovered through undiscounted future cash flows of the acquired operation and other considerations. The amount of impairment of goodwill, if any, is measured based on projected discounted future cash flows. (j) Operating Right On July 1, 1993, the Company acquired the exclusive right to operate the Connecticut off-track betting system. This operating asset is being amortized on a straight-line basis over twenty years and amounted to $17,848,000 and $18,933,000 net of accumulated amortization of $2,357,000 and $1,162,000 at October 31, 1995 and 1994, respectively. (k) Other Assets and Investments The Company capitalizes costs associated with internally developed and/or purchased software systems for new products and enhancements to existing products that meet technological feasibility and recoverability tests. The Company also capitalizes costs associated with the procurement of long-term financing, and costs attributable to transponder leases, patents, trademarks, marketing rights, and non- 36 AUTOTOTE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 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 major contracts for the sale of wagering systems are recognized concurrent with achieving specified milestones in connection with the contract. Revenue for contracted software development is recognized on the percentage of completion method based on the ratio of approximate cost incurred to the total estimated cost. 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 there are no, or insignificant, post-delivery obligations, 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 earned. Revenues from wagering system service, 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. (m) Income Taxes The Company adopted Statement of Financial Accounting Standard (SFAS) No. 109, "Accounting for Income Taxes," effective November 1, 1993. The new standard replaces SFAS No. 96, which the Company adopted previously. The cumulative effect of adopting SFAS 109 is immaterial since the recognized benefit of deferred tax assets for the Company remains unchanged from SFAS 96. Prior period financial statements have not been restated. Under SFAS 109, income taxes are calculated using the asset and liability method. Under the asset and liability method, deferred income taxes are calculated by applying enacted statutory tax rates to cumulative temporary differences between financial statement carrying amounts and tax bases of existing assets and liabilities. Under SFAS 109, the effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. (n) Earnings (Loss) Per Common Share Earnings per common share are based on the weighted average number of shares of common stock outstanding during the period and the dilutive effect of stock options, warrants and other common stock equivalents. Common stock equivalents for 1995 and 1994 are not included in the calculation of loss per share since their inclusion would be anti- dilutive. There were no material common stock equivalents in 1993. (o) Effect of Stock Splits All information referring to shares of Class A Common Stock or common stock equivalents, earnings per share, and other related information has been adjusted to reflect the effects of the Company's three-for-two and two-for-one stock splits in the form of stock dividends, effected on June 30, 1993 and October 25, 1993, respectively. 37 AUTOTOTE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (p) 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. Gains or losses resulting from foreign currency transactions are included in other income (deductions) in the consolidated statements of operations. (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. 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) Unusual Items In the third quarter of 1995, the Company recognized unusual charges of $22.8 million, substantially resulting from the Company's restructuring, certain valuation adjustments, and bank credit agreement fees. As a result of these charges, the Company anticipates total cash obligations of approximately $5.9 million, $1.1 million of which was paid in fiscal 1995 and the balance to be paid in fiscal 1996. Restructuring charges of $11.6 million were attributable to the closure of the Owings Mills Lottery support facility and the scaling back of certain international activities, including the closure of the Company's manufacturing facility in Ballymahon, Ireland. The write-off of investments and other non-current assets of $6.6 million included $2.7 million attributable to European wagering terminals, and $1.3 million attributable to other assets. Also included was $1.7 million in bank financing costs primarily relating to a waiver of certain financial covenants of the Company's Senior Bank Credit Facility agreement. The remaining charges included miscellaneous asset valuation adjustments and severance. During fiscal 1994, the Company recognized unusual charges of $15.2 million. These charges included $3.9 million principally for corrections consisting of inventory, equipment and contract adjustments of which $3.3 million was in connection with the acquisition of MHSP and RTI, (see Note 3); $2.8 million for costs incurred as a result of a strike by the field service employees of the Company's subsidiary, Autotote Systems, Inc.; $4.7 million for the write- off of certain assets principally related to domestic and overseas projects; and charges of $3.8 million resulting from closing the Company's Newark, Delaware manufacturing facility and the discontinuation of certain product lines. The Company has satisfied all cash obligations with respect to the 1994 unusual charges. (3) Acquisitions 1995 On November 1, 1994, the Company acquired 80% of the outstanding capital stock of the holding company of SEPMO S.A., ("SEPMO"), a French supplier of wagering systems and services to the French off-track 38 AUTOTOTE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) betting network and other customers, for cash of approximately $281,000, plus acquisition related costs. In addition to the purchase consideration, the Company concurrently advanced the SEPMO holding company approximately $2 million for purposes of repaying certain convertible debt and purchasing the minority holdings in certain subsidiary companies. The remaining 20% of the capital stock of the holding company of SEPMO was scheduled to be purchased over a four year period at a price to be determined by formula based on the results of operations of SEPMO on a consolidated basis during the period, provided that the aggregate purchase price for such additional shares will be at least the equivalent of 3 million French francs and not in excess of the equivalent of 9 million French francs (approximately $600,000 and $1,800,000, respectively, based on exchange rates in effect at October 31, 1995). In July 1995, the Company purchased an additional 5% of the holding company of SEPMO's stock for $61,000. The acquisition has been accounted for by the purchase method of accounting, and accordingly, the purchase price has been allocated to the assets acquired based on estimates of fair values at the date of acquisition. The excess of the purchase price plus acquisition related costs over the estimated fair values of the net assets acquired was $3.2 million, and has been recorded as goodwill which is being amortized over 5 years. Currently, certain officers of SEPMO retain the remaining 15% of the capital stock of SEPMO's holding company. In January 1995, the Company acquired substantially all of the assets of the Simulcast Division of LDDS Corporation (formerly IDB Communications Group, Inc.) ("IDB") and the rights and obligations under leases relating to eight C- band satellite transponders for a purchase price of $13.7 million in cash. The acquisition has been accounted for by the purchase method of accounting, and accordingly, the purchase price has been allocated to the assets acquired based on estimates of fair values at the date of acquisition. The excess of the purchase price over the estimated fair values of the net assets acquired was $5.3 million, and has been recorded as goodwill which is being amortized over 5 years. From time to time, satellite transponder time not used for providing simulcasting services to the racing industry is sold to other users of satellite transponders. The Company sold some of its transponder time in satisfaction of requirements of a Waiver (as such term is defined below) to the Company's Senior Bank Credit Facility. The operating results of these acquisitions are included in the Company's consolidated results of operations from the respective dates of the acquisitions. 1994 On July 20, 1994, Marvin H. Sugarman Productions, Inc. ("MHSP") and Racing Technology, Inc. ("RTI") were acquired in an exchange of 500,000 shares of the Company's Class A Common Stock for all of the outstanding shares of MHSP and RTI. The transaction was accounted for as a pooling of interests and accordingly, the accompanying consolidated financial statements have been restated to include the accounts and operations of MHSP and RTI for all periods prior to the acquisition. Prior to the acquisition, MHSP and RTI used the calendar year as their respective fiscal years. The financial results of MHSP and RTI were conformed to the fiscal year end of the Company as part of the restatement. Separate results of the combining companies and the combined amounts for the preacquisition 1993 fiscal year are summarized below:
YEAR ENDED OCTOBER 31, 1993 ----------------- NET NET REVENUES EARNINGS -------- -------- (IN THOUSANDS) Autotote................................................... $79,478 9,020 MHSP & RTI................................................. 5,384 418 ------- ----- Combined................................................. $84,862 9,438 ======= =====
39 AUTOTOTE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 1993 In fiscal 1993, the Company made several acquisitions. At October 31, 1993, the allocations of the purchase prices were based on preliminary estimates with the excess of the purchase price over the estimated fair value of the assets acquired based on the preliminary estimates of allocation of purchase price for each acquisition to be amortized on a straight-line basis over 40 years. During 1994, the allocations of the purchase prices were finalized and the useful life of the excess of the purchase price over the estimated fair value of the net assets acquired was determined. On June 22, 1993, the Company acquired all of the outstanding stock of ETAG Electronic Totalisator Gesellschaft m.b.H. and its affiliated companies (the "ETAG Group"). The ETAG Group leases wagering systems to harness racetracks in Germany and Austria and provides maintenance services to customers on a per diem basis. In addition, the ETAG Group sells computerized wagering systems to third parties, holds a 50% interest in a joint venture which operates off- track betting parlors in Germany and held a 25% investment in the Tele Control Group (a provider of on-line lottery systems) which was subsequently acquired. The Company paid an aggregate purchase price of $10,550,000 in cash, and agreed to pay 10% (or 5% in certain cases) of the net increase in revenues on a consolidated basis for the members of the ETAG Group for the calendar years 1993 through 1995, with payment to be made following the end of the respective calendar year. The acquisition was accounted for using the purchase method; accordingly, the assets and liabilities of the acquired entities have been recorded at their estimated fair value at the date of acquisition with a portion of the purchase price being allocated to property and equipment. The excess of purchase price over the estimated fair value of the net assets acquired is being amortized on a straight-line basis over 10 years (see Note 1 (i)). The operating results of the ETAG Group have been included in the consolidated statement of operations since the date of acquisition. On June 25, 1993, the Company acquired all of the outstanding stock of General Instrument Lottery Corporation ("Autotote Lottery") for $7,825,000 in cash. Autotote Lottery generally conducts business under one of three contractual arrangements: operating contracts, in which it provides personnel, equipment and services while retaining ownership of the equipment; technical and software support contracts, in which it provides certain services but sells the equipment; and sales contracts, in which it sells the equipment for a fixed price, without providing personnel and services. The acquisition was accounted for using the purchase method; accordingly, the assets and liabilities have been recorded at their estimated fair value at the date of acquisition with a portion of the purchase price being allocated to property and equipment. The excess of purchase price over the estimated fair value of the net assets acquired is being amortized on a straight-line basis over 5 years (see Note 1 (i)). The operating results of Autotote Lottery have been included in the consolidated statement of operations since the date of acquisition. On September 8, 1993, the Company acquired 73% of the Tele Control Group from several individuals in addition to the 25% interest in the Tele Control Group which the Company acquired as a result of its acquisition of the ETAG Group. The Tele Control Group develops high volume transaction processing programs principally for on-line lotteries and other wagering applications, and to a lesser extent, for banking and credit card applications, and provides related software support. The Company paid a purchase price of $17,500,000 in cash at the closing. In March 1994, the Company acquired the remaining 2% interest in the Tele Control Group for a $123,000 cash purchase price. In 1994, the Company made an additional contingent cash payment of $7,500,000 based upon the signing of certain lottery contracts. Accordingly, this payment has been identified to these contracts and classified as operating expense in the accompanying consolidated statement of operations. The acquisition was accounted for using the purchase method; accordingly, the assets and liabilities of the acquired entities have been recorded at their estimated fair value at the date of acquisition. The excess of purchase price over the estimated fair value of the net assets acquired is being amortized on a straight-line basis over 7 years (see Note 1 (i)). The operating results of the Tele Control Group have been included in the consolidated statement of operations since the date of acquisition. 40 AUTOTOTE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The following table presents unaudited pro forma results of operations as if the acquisitions had occurred at the beginning of the 1993 fiscal year presented. These pro forma results have been prepared for comparative purposes only and do not purport to be indicative of what would have occurred had the acquisition been made at the beginning of fiscal year 1993 or of results which may occur in the future. These pro forma results do not reflect the 1994 acquisition of MHSP and RTI, accounted for as a pooling of interests.
(UNAUDITED) YEAR ENDED OCTOBER 31, 1993 ---------------- (IN THOUSANDS) Revenue................................................... $93,863 Operating income.......................................... 15,845 Earnings before income taxes.............................. 11,084 Earnings per common share................................. $ 0.35
(4) Inventories Inventories consist of the following:
OCTOBER 31, ---------------- 1995 1994 -------- ------- (IN THOUSANDS) Parts........................................................ $ 4,667 3,864 Work-in-process.............................................. 4,724 2,318 Finished goods............................................... 2,541 443 -------- ------ 11,932 6,625 Ticket paper................................................. 565 437 -------- ------ $12,497 7,062 ======== ======
Work-in-process includes costs for equipment expected to be sold. Costs incurred for equipment associated with specific wagering system contracts not yet placed in service are classified as construction in progress in property and equipment (see Note 5). (5) Property and Equipment Property and equipment, including assets under capital leases, consist of the following:
OCTOBER 31, ---------------- 1995 1994 -------- ------- (IN THOUSANDS) Machinery, equipment and deferred installation costs....... $144,628 124,482 Land and buildings......................................... 20,169 15,425 Transportation equipment................................... 656 543 Furniture and fixtures..................................... 4,488 2,742 Leasehold improvements..................................... 4,972 889 Construction in progress................................... 11,092 14,981 -------- ------- $186,005 159,062 ======== =======
Depreciation expense for the years ended October 31, 1995, 1994, and 1993 amounted to $19,208,000, $14,256,000 and $10,278,000, respectively. 41 AUTOTOTE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Interest costs of $81,000 and $1,113,000 were capitalized in 1995 and 1994, respectively, as additional costs of qualifying property during the construction period and are included in the category land and buildings in 1995 and in machinery and equipment in 1994. For financial reporting purposes, at October 31, 1995 and 1994, costs for equipment associated with specific wagering systems contracts not yet placed in service are recorded as construction in progress. When the equipment is placed in service at wagering facilities, the related costs are transferred from construction in progress to machinery and equipment. Under wagering systems contracts, the Company retains ownership of all equipment located at wagering facilities. (6) Other Assets and Investments Other assets and investments (net) consist of the following:
OCTOBER 31, -------------- 1995 1994 ------- ------ (IN THOUSANDS) Software systems development costs............................ $15,872 15,085 Deferred financing costs...................................... 1,943 2,338 Deferred transponder costs.................................... 3,656 -- Other intangible assets....................................... 2,143 5,633 Other assets.................................................. 6,556 6,800 ------- ------ $30,170 29,856 ======= ======
In 1995, the Company capitalized $7,355,000 of costs associated with development of its lottery software, principally its UNIBET software developed for the international market, as well as $2,380,000 of costs related primarily to video gaming and pari-mutuel terminal applications. In 1995, the Company wrote-off $6,378,000 of capitalized costs relating primarily to lottery software and wagering terminal applications development. This write-off is included in the Company's third quarter 1995 restructuring costs. In 1994, the Company capitalized $6,012,000 of costs primarily related to lottery and video lottery systems. Capitalized costs are amortized on a straight-line basis over a period of five years. Amortization of capitalized software systems development costs was $4,274,000, $2,245,000 and $758,000 for the years ended October 31, 1995, 1994 and 1993, 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 1995, the Company capitalized $405,000 incurred in connection with its 1995 financing programs and expensed $321,000 of fees incurred during the year which had no future benefit. In 1994, the Company wrote off $4.2 million of deferred financing fees and expenses associated with the Company's repayment of its prior senior credit facility with Heller Financial Group, Inc. Amortization expense was $785,000, $534,000 and $475,000 for the years ended October 31, 1995, 1994 and 1993, respectively. Deferred transponder costs arose in connection with the acquisition of IDB and are being amortized over a four year period. Amortization expense in 1995 amounted to $844,000. (7) Related Party Transactions In connection with the acquisition of the Tele Control Group, the Company has assumed a contract with IMMOC leasing, a real estate concern substantially owned by certain employees of the Company, to rent the 42 AUTOTOTE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) premises for a minimum period of 15 years. Consequently the Company has annual rental commitments of approximately $620,000 through the year 2006. Rental payments made to this concern were $613,000, $433,000 and $24,000 for the years ended October 31, 1995, 1994 and 1993, respectively. Future minimum lease payments related to this commitment have been included in Note 8. In 1995 and 1994, a director of the Company had a consulting arrangement with the Company whereby he received $100,000 in each year for consulting services. The arrangement was terminated in 1995. The Company has a senior bank credit facility with Bankers Trust Company, a company of which a director of the Company was a managing director. At October 31, 1995 and 1994, $66,000 and $243,000, respectively, was due from DATEK, an unconsolidated 50% investee of ETAG. Rental payments for office space totaling $93,000 were paid to the Company's Chief Executive Officer in 1993. In the opinion of management of the Company, the foregoing transactions were effected at rates which approximate those which the Company would have realized or incurred had the transactions been effected with independent third parties. (8) Leases At October 31, 1995, 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, 1995 are as follows: 1996, $9,425,000; 1997, $9,251,000; 1998, $9,486,000; 1999, $5,111,000; 2000, $1,695,000; and thereafter $4,429,000. The Company also leases equipment as needed under various month-to-month lease agreements. Total rental expense under these operating leases was $7,715,000, $3,211,000 and $1,196,000 in the years ended October 31, 1995, 1994 and 1993, respectively. The Company entered into capital lease obligations of $1,023,000, $587,000 and $1,062,000 during the years ended October 31, 1995, 1994 and 1993, respectively. (9) Notes Payable and Other Short Term Borrowings At October 31, 1994, the Company had short term borrowings in the amount of $250,000 with a European bank. Interest on the facility is based on LIBOR (approximately 5.1875% at October 31, 1994). The facility was repaid in full during 1995. 43 AUTOTOTE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (10) Long-Term Debt Long-term debt consists of the following:
OCTOBER 31, ---------------- 1995 1994 -------- ------- (IN THOUSANDS) Senior Bank Credit Facility, due April 1999, interest payable at .25% to 1.25% over prime or 1.25% to 2.25% over Eurodollar rate (as defined), (8.125% at October 31, 1995), secured by the assets of the Company.............. $129,280 101,448 5.5% subordinated debentures due August, 2001, convertible into Class A Common Stock at $20.00 per share, interest due semi-annually commencing February 1994............... 40,000 40,000 Mortgage loan due in monthly installments of $17,565 through August 2005 with remaining balance due September 2005; interest payable at 8%, secured by the facility.... 2,093 -- Capital lease obligations, due in monthly installments through January 2000, interest rates ranging from 7.93% to 11.0%................................................. 1,985 1,386 Mortgage loan due in monthly installments of $7,700 through April 2003, interest payable at 11%.............. 1,033 -- Term loan due July 1996, interest payable at 11.03%....... 359 -- Various term loans due in installments through March 1999 at interest rates ranging from 7.33% to 13.75%........... 1,056 -- Term loan due in monthly installments of $39,000, interest payable at approximately 8%, secured by the equipment.... 731 728 Irish Development Authority grant, due upon shut-down of plant.................................................... 531 82 Commercial Development Revenue Bond, interest payable at 88% of prime rate (8.75% at October 31, 1995), due in monthly installments of $7,433 plus interest, through February 1997, secured by buildings and improvements..... 126 216 Note payable--Video equipment vendor, payable in monthly installments of $2,099 including interest at 11%, due September 15, 1999....................................... 70 95 -------- ------- Total long-term debt...................................... 177,264 143,955 Less current installments................................. 10,772 792 -------- ------- Long-term debt, excluding current installments............ $166,492 143,163 ======== =======
On April 28, 1994, the Company entered into an Amended and Restated Bank Credit Agreement (the "Senior Bank Credit Facility") with the lenders thereto and with Bankers Trust Company ("BT") as agent which provided for a $125.0 million, five-year revolving credit facility. The Senior Bank Credit Facility was subsequently amended in December 1994 pursuant to which the Company was provided, subject to certain terms and conditions, an additional $10 million of availability. The Company was in violation of certain covenants of the Senior Bank Credit Facility as of October 31, 1994. On February 21, 1995, the Company entered into an amendment to the Senior Bank Credit Facility (the "Fourth Amendment and Consent"), which waived the covenant defaults, amended certain financial covenants and consented to a revised calculation of certain financial ratio covenants as a result of which the Company was in compliance with the provisions of the Senior Bank Credit Facility. 44 AUTOTOTE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The Company was also in violation of certain covenants under the Senior Bank Credit Facility at various times throughout fiscal 1995. The Company obtained a number of waivers and consents during the year (the "Waivers"). Pursuant to the Waivers, the Banks agreed to, among other things, waive compliance by the Company with certain financial ratios and financial condition tests specified in the Senior Bank Credit Facility for a period beginning on January 31, 1995 and ending on January 31, 1996 (the "Waiver Period"); provided, however, that the Company comply with certain modified financial ratios and tests and fulfill certain other requirements by specified dates. These requirements, among others, included: (a) issuing to the Banks warrants to purchase an aggregate of 385,000 shares of Class A Common Stock at an exercise price of $3.00 per share (the "1995 Lender Warrants"); (b) entering into an arrangement satisfactory to the Banks with the Debenture Holders, pursuant to which arrangement the Debenture Holders would agree to defer all cash payments otherwise due from August 15, 1995 until February 14, 1996; and (c) making arrangements satisfactory to the Banks to raise additional cash through the issuance of equity interests in the Company or the sale of assets of the Company or any of its subsidiaries in an aggregate amount of at least $5.0 million. The Waivers also restricted the Company's capital expenditures, acquisitions, sale of equity and assets, and incurrence of lease and debt obligations, and required the Company to deliver to the Banks weekly, monthly and quarterly certificates of the Company's Chief Financial Officer, setting forth certain actual and projected financial information. In connection with the Waivers, in addition to the 1995 Lender Warrants, the Banks earned a fee of 1% of $135 million, payable the earlier of June 30, 1996, or when the Company raised at least $10 million through asset or equity sales which is still payable under the Amended and Restated Senior Bank Credit Facility. On September 13, 1995, the Company issued to the Banks the warrants referred to in clause (a) of the preceding paragraph. In connection with clause (b) of the preceding paragraph, the Company reached an agreement regarding interest payments due on the Debentures, evidenced by a letter agreement dated as of November 6, 1995 (the "Letter Agreement"), with the Debenture Holders as described below. In connection with clause (c), the Company received $4.42 million (after deducting commissions paid to the placement agent) through the sale of 1.56 million shares of Class A Common Stock in accordance with the provisions of a Regulation S offering of securities, and $1.2 million from the sale of assets and excess transponder time, in satisfaction of Waiver requirements. On January 26, 1996, the Company entered into an Amended and Restated Credit Agreement with lenders to the Senior Bank Credit Facility (the "Amended and Restated Senior Bank Credit Facility"), pursuant to which current commitments of each lender under the Senior Bank Credit Facility, totaling $135 million, are continued as the Amended and Restated Senior Bank Credit Facility, which provides for: 1) a $55 million term loan (the "A Term Loan"), 2) a $5 million term loan (the "B Term Loan"), and 3) a $75 million revolving credit facility (the "Revolver"), which includes a $25 million sublimit for letters of credit. $5 million of outstanding Revolving B Facility loans and $50 million of outstanding Revolving A Facility loans are constituted as the A Term Loan. $5 million of outstanding Revolving B Facility loans are constituted as the B Term Loan. The balance of all outstanding Revolving A Facility loans are converted into loans under the Revolver. The A Term Loan provides for certain quarterly principal repayments, including a $15 million principal repayment on April 30, 1997 and a $32 million principal repayment at maturity on November 1, 1997. The B Term Loan provides for certain quarterly principal repayments through its maturity on January 31, 1997. The Revolver matures on April 30, 1998. The Amended and Restated Senior Bank Credit Facility contains various financial and other covenants, including restrictions on the Company's acquisitions, indebtedness, investments and capital expenditures, and covenants that prohibit the payment of cash dividends on the Company's stock and distributions to stockholders. The Amended and Restated Senior Bank Credit Facility permits voluntary prepayments, and requires Mandatory Repayments upon the occurrence of certain events and in certain amounts, including: 1) with certain limited expectations, 100% of the net proceeds of assets sales, with a $1 million per year exclusion; 2) 100% of the net proceeds of debt raised; 3) certain net proceeds of equity sales, based on a sliding scale; and 4) 75% of annual "Excess Cashflow," as defined. In addition to customary events of default, a Change of Control of the Company (as defined) constitutes an event of default under the Amended and Restated Senior Bank Credit Facility. The 45 AUTOTOTE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Amended and Restated Senior Bank Credit Facility is guaranteed by the Company and its subsidiaries and is secured by substantially all of the assets of the Company and its subsidiaries. Borrowings under the Amended and Restated Senior Bank Credit Facility bear interest at the Base Rate (as defined) plus a margin ranging from 1.25% to 2.25%, or the Eurodollar Rate (as defined) plus a margin ranging from 2.25% to 3.25% per year, in each case depending on the Company's performance as measured by the ratio of Bank Debt, as defined, to the Company's earnings before interest, taxes, depreciation and amortization; and in all cases an additional 2% in the event of certain defaults. A commitment fee of 0.5% per year is payable on the unused amount under the Revolver. A letter of credit fee equal to the applicable margin on Eurodollar loans then in effect plus a facing fee of 1/8 of 1% per year is payable on each letter of credit issued. As a closing fee, the Company issued to the Banks warrants to purchase 525,000 shares of Class A Common Stock, subject to adjustments, at an exercise price of $1.25 per share (the "1996 Lender Warrants") (see Note 15). On August 20, 1993 the Company issued $40,000,000 principal amount of 5.5% convertible subordinated debentures due 2001 (the Debentures) in a private placement. The Debentures are convertible into 2,000,000 shares of Class A Common Stock at a conversion price of $20.00 per share. $17,500,000 of the proceeds were used to complete the Tele Control Group acquisition, $10,000,000 of the proceeds were applied to borrowings under the Senior Bank Credit Facility and the remainder was used for capital expenditures and other corporate purposes. On November 6, 1995, the Company entered into a Letter Agreement with holders of its 5.5% Convertible Subordinated Debentures whereby the holders would receive unregistered shares of Class A Common Stock in lieu of cash for interest payments due in August 1995 and February 1996 in the amount of $1,100,000 each. The Agreement provides demand and piggy-back registration rights to the Debenture holders with respect to the unregistered shares. In November 1995, the Company issued 422,500 shares of Class A Common Stock in payment of the interest due in August 1995. The number of shares of Class A Common Stock to be issued in payment of the February 1996 interest will be calculated by dividing $1.1 million by the average of the closing prices of the Class A Common Stock for 20 consecutive trading days immediately preceding February 15, 1996 on the NASDAQ national market and multiplying the resultant by 1.5. The Debentures Holders have agreed that the payments of interest in the manner described above will not be considered an event of default under the Debentures. Deferred financing costs associated with a 1993 Senior Bank Credit Facility were charged to expense in 1994 in conjunction with the refinancing of that facility with the Senior Bank Credit Facility discussed above. The write-off of these deferred financing costs has been classified as an extraordinary item in the accompanying statements of operations. In connection with the construction of its Las Vegas facility, in October 1994, the Company entered into a $2.1 million construction loan with interest at 1.5% above prime rate. This construction loan was refinanced in September 1995 with a 10 year balloon mortgage bearing interest at 8%. Mortgage payments are based on a 20 year amortization period and the mortgage is secured by a first deed of trust on the property. As of October 31, 1995, the Company had approximately $3,937,000 available for borrowing under its Revolver, with $1,783,000 in outstanding letters of credit and $129,280,000 in outstanding borrowings. The aggregate maturities of long-term debt for the next five fiscal years and thereafter are as follows: 1996, $10,772,000; 1997, $21,271,000; 1998, $102,219,000; 1999, $482,000; 2000, $251,000; and thereafter, $42,269,000. 46 AUTOTOTE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (11) Income Tax Expense (Benefit) The consolidated earnings (loss) before income taxes (benefit) and extraordinary item, by domestic and foreign source, is as follows:
YEAR ENDED OCTOBER 31, ------------------------- 1995 1994 1993 -------- ------- ------ (IN THOUSANDS) Domestic......................................... $(45,966) (26,090) 2,921 Foreign.......................................... (1,250) 6,700 7,809 -------- ------- ------ Consolidated earnings (loss) before income taxes (benefit) and extraordinary item................ $(47,216) (19,390) 10,730 ======== ======= ======
Income tax expense (benefit) consists of:
CURRENT DEFERRED TOTAL ------- -------- ------ (IN THOUSANDS) 1995: Federal........................................... $ -- -- -- Foreign........................................... 1,819 854 2,673 State............................................. -- -- -- ------ ------ ------ $1,819 854 2,673 ====== ====== ====== 1994: Federal........................................... $ (579) (5,670) (6,249) Foreign........................................... 106 4,681 4,787 State............................................. -- -- -- ------ ------ ------ $ (473) (989) (1,462) ====== ====== ====== 1993: Federal........................................... $ 724 (968) (244) Foreign........................................... 1,054 199 1,253 State............................................. 283 -- 283 ------ ------ ------ $2,061 (769) 1,292 ====== ====== ======
47 AUTOTOTE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Temporary differences between the financial statement carrying amounts and tax bases of assets and liabilities that give rise to significant portions of the deferred tax liability (asset) relate to the following:
OCTOBER 31, ----------------- 1995 1994 -------- ------- (IN THOUSANDS) CURRENT DEFERRED TAX LIABILITY (ASSET) Accrued restructuring costs........................... $ (1,948) (1,326) Accrued vacation...................................... (685) (566) Accrued loss on contracts............................. (742) (497) Inventory reserve..................................... (571) (393) Other accrued liabilities............................. (883) (798) Reserve for doubtful accounts......................... (417) (31) Other, net............................................ -- (149) -------- ------- Current deferred tax asset.......................... (5,246) (3,760) Accrued foreign contract reserve...................... 5,116 3,842 -------- ------- Current deferred tax liability (asset), net......... (130) 82 -------- ------- NONCURRENT DEFERRED TAX LIABILITY (ASSET) Intangible assets difference in amortization periods.. 776 102 Intercompany sales to affiliates...................... 280 280 Property and equipment due to differences in financial reporting and tax depreciation methods............... 8,330 8,738 Other, net............................................ 504 -- Interest charge, Domestic International Sales Corp.... 4,495 4,416 -------- ------- Noncurrent deferred tax liability, net.............. 14,385 13,536 -------- ------- Net operating loss carryforward....................... (31,728) (12,823) Foreign tax credit carryforward....................... (759) (1,030) Alternative minimum tax credits....................... (184) (184) Research and experimentation credits.................. (150) (150) Other, net............................................ -- (372) -------- ------- Noncurrent deferred tax asset....................... (32,821) (14,559) Valuation allowance................................... 24,373 5,894 -------- ------- Noncurrent deferred tax asset, net.................. (8,448) (8,665) -------- ------- Noncurrent deferred tax liability................... 5,937 4,871 -------- ------- Net deferred tax liability on balance sheet......... $ 5,807 4,953 ======== =======
The aggregate deferred tax assets before valuation allowance at October 31, 1995, and 1994 were $38,067,000 and $18,319,000, respectively. The aggregate deferred tax liabilities at October 31, 1995 and 1994 were $19,501,000 and $17,378,000, respectively. Deferred tax liabilities were increased by $2,955,000 during the year ended October 31, 1994 to reflect the final allocation of purchase price to the assets and liabilities of business acquired. 48 AUTOTOTE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The actual tax expense (benefit) differs from the "expected" tax expense (benefit) (computed by applying the U.S. Federal corporate rate of 34% to earnings (loss) before income taxes (benefit) and extraordinary item) as follows:
OCTOBER 31, ----------------------- 1995 1994 1993 -------- ------ ----- (IN THOUSANDS) Computed "expected" tax expense (benefit)......... $(16,053) (6,593) 3,648 Increase (reduction) in income taxes resulting from: Additional provision for foreign source income.. -- 1,754 -- Unused net operating loss....................... (15,450) -- -- Valuation allowance for deferred tax assets..... -- 384 -- Foreign tax differential........................ 3,098 2,654 (841) Utilization of net operating loss carryforward.. -- -- (470) Utilization of foreign tax credits.............. -- -- (377) Utilization of alternative minimum tax credits.. -- -- (71) Utilization of research and experimentation credits........................................ -- -- (38) Non-deductible goodwill......................... 118 182 -- State income taxes, net of federal benefit...... -- -- 187 Interest charge, Domestic International Sales Corp. ......................................... -- -- 58 Other, net...................................... 60 157 (804) -------- ------ ----- $ 2,673 (1,462) 1,292 ======== ====== =====
As a result of the 1994 loss and the allocation of income tax benefit to continuing operations, no deferred tax benefit remained to be allocated to the extraordinary loss or additional capital. The Company has regular tax net operating loss carryforwards of approximately $1,794,000 that expire in 2005, $1,222,000 that expire in 2006, $954,000 that expire in 2008, $29,910,000 that expire in 2009 and $45,440,000 that expire in 2010. To the extent that tax carryforwards are realized through reduction of income taxes payable in future periods, deferred tax liabilities will be reinstated at the then current rate. The Company has Minimum Tax Credit (MTC) carryforwards (which can be carried forward indefinitely) of approximately $184,000, regular foreign tax credits of approximately $759,000 and research and experimentation credit carryforwards of approximately $150,000. Regular foreign tax credits of $285,000 expire in 1996, $195,000 expire in 1997, and the balance of $279,000 expire in 1998. The research and experimentation credits expire from 1997 to 2003. The valuation allowance for deferred tax assets in the amount of $5,894,000 was established in 1994. The net change in the valuation allowance for the year ended October 31, 1995 was an increase of $18,479,000. 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. Management does not believe it is more likely than not that the benefit of deferred tax assets in excess of the scheduled reversal of deferred tax liabilities will be realized. 49 AUTOTOTE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Subsequently recognized tax benefits relating to the valuation allowance for deferred tax assets as of October 31, 1995 will be allocated as follows (in thousands): Income tax benefit that would be reported in the consolidated statements of operations......................................... $21,523 Additional capital (benefit from exercise of stock options)....... 2,850 ------- $24,373 =======
(12) 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 for 1995, 1994 and 1993:
1995 1994 1993 ---- ---- ---- (IN THOUSANDS) Service cost............................................. $ 63 78 60 Interest cost on projected benefit obligation............ 82 81 71 Actual return on plan assets............................. (87) (32) (51) Net amortization and deferral............................ 16 (38) (17) ---- --- --- $ 74 89 63 ==== === ===
The assets and obligations of the defined benefit plan at October 31, 1995 and 1994 are as follows:
1995 1994 ------- ------- (IN THOUSANDS) Actuarial present value of benefit obligations: Accumulated benefit obligation, including vested benefits of $1,135,000 and $1,007,000 at October 31, 1995 and 1994, respectively...................................... $ 1,255 1,148 ------- ------ Projected benefit obligation for services rendered to date.................................................... 1,272 1,148 Plan assets at fair value (invested in insurance company general accounts guaranteed as to principle)............ 1,043 970 ------- ------ Projected benefit obligation in excess of plan assets.... 229 178 ------- ------ Funded status............................................ (229) (178) Unrecognized net obligation.............................. 57 63 Unrecognized prior service cost.......................... 88 74 Unrecognized net loss.................................... 209 176 ------- ------ Prepaid pension cost..................................... $ 125 135 ======= ======
The accumulated benefit obligation represents the actuarial present value of benefits based upon the benefit multiplied by the participants' historical years of service. The accumulated and projected benefit obligation for 1995 and 1994 were calculated using the unit credit method and reflect the following assumptions: discount rate of 7.25% in 1995 and 7.50% in 1994, with a 9% long-term rate of return on assets. 50 AUTOTOTE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 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 $187,000, $313,000 and $365,000 during the years ended October 31, 1995, 1994 and 1993, respectively. The Company has a 401(K) plan covering all employees who are not covered by a collective bargaining agreement. Company contributions to the plan are at the discretion of the Board of Directors. Pension expense for the years ended October 31, 1995, 1994 and 1993 amounted to approximately $839,000, $756,000 and $522,000, respectively. The Company has a 401K plan for all union employees which does not provide for Company contributions. (13) Management Incentive Compensation Upon acquisition of Autotote Systems, Incorporated, the Company assumed the obligations of an inactive management incentive compensation plan which is included in the accompanying financial statements net of future tax benefits. The obligations of the plan will be satisfied, upon favorable termination of employment, through the issuance of 53,250 shares of Class A Common Stock at a stated value of $3.33 per share. The Company also makes cash awards to key management personnel based on contractual commitments, overall profitability of the Company, as well as individual performance. Management incentive compensation expense amounted to $1,157,000, $884,000 and $200,000 in 1995, 1994 and 1993, respectively. (14) Service Contract Arrangements Service arrangements for wagering systems in North America generally cover a five-year period and provide for substantial related services such as software, maintenance personnel, computer operators, and certain operating supplies. They also provide for certain warranties covering operation of the equipment, machines, display equipment, and central computing equipment. The breach of such warranties could result in significant liquidated damages. The equipment is placed at customer facilities under contracts generally providing for revenue based on the greater of a percentage of total amounts wagered or a specified minimum. The Company also has service contracts based on a percentage of total amounts wagered with no specified minimum. Minimum annual payments expected to be received under service contracts in effect as of October 31, 1995 with a specified minimum aggregate $44,614,000 as follows: 1996, $16,368,000; 1997, $8,947,000; 1998, $7,153,000; 1999, $5,141,000; 2000, $3,365,000; and thereafter $3,640,000 . Included in wagering systems revenues are minimum payments received under service contracts of $25,131,000, $12,002,000 and $11,700,000 in 1995, 1994 and 1993, respectively. (15) 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. On April 1, 1993, the Company completed a public offering of Class A Common Stock which resulted in the sale of 11,412,000 shares of the Company's Class A Common Stock at a price of $9.00 per share. Of the 11,412,000 shares sold, 9,214,000 shares were sold for the account of the Company resulting in net proceeds, before expenses of the offering, of $77,708,000 while 2,198,000 shares were sold to the public by certain selling stockholders. 51 AUTOTOTE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) During 1995, the Company issued 12,000 and 15,000 shares of unregistered Class A Common Stock in exchange for early termination of a services contract and in payment for services provided to the Company related to MHSPI, respectively. In October 1995, the Company completed a private placement of its Class A Common Stock which raised net proceeds of $4,420,089 through the sale of 1,562,849 shares in accordance with the provisions of the Regulation S. These shares have not been registered under the Securities Act of 1933 and may not be offered for sale or sold in the United States absent registration or an applicable exemption from registration requirements. The Company will use the net proceeds after deducting expenses of the offering to repay a portion of the revolving loans outstanding under its Senior Bank Credit Facility. In November 1995, the Company entered into an Agreement with holders of its 5.5% Convertible Subordinated Debentures whereby the holders would receive unregistered shares of Class A Common Stock in lieu of cash for interest payments due in August 1995 and February 1996 in the amount of $1,100,000 each. Additional information is set forth in Note 10. The voting rights, dividend rate, redemption price, rights of conversion, rights upon liquidation and other preferences of the undesignated preferred stock are subject to determination by the Board of Directors. At October 31, 1992, the Company had outstanding Series B Convertible Preferred Stock. Each share was convertible into common stock at the liquidation preference divided by the conversion price, as defined. In January 1993, the conversion privilege on all outstanding shares of Series B Convertible Preferred Stock was exercised. Warrants In 1992, the Company issued to lenders warrants exercisable at $3.83 per share to purchase 592,074 shares of Class B Common Stock of the Company (the 1992 Lender Warrants) representing, in the aggregate, 3% of the then fully diluted outstanding shares of the Company. The Company also granted the lenders an option to purchase 3% of any future issuance of securities of the Company below market value, with certain exceptions, at the same price at which any such securities are then issued (the "1992 Options"). In addition, a warrant to purchase 873,000 shares of Class B Common Stock at $0.01 per share, issued to lenders in 1991, was increased to 1,173,000 shares. This warrant was exercised in April 1993. An option issued to lenders in 1991, providing the lenders the right to purchase 5% of any issuance of securities of the Company subsequent to October 31, 1991, at the same price at which any such securities are then issued, was amended to apply only to below market issuances (the "1991 Option"). The 1992 Lender Warrants gave the lenders certain registration rights and expires November 1, 2003. The 1992 option had a term of 10 years and gave the Lenders certain registration rights. In October 1994, the Board approved the exchange of certain outstanding 1992 Lender Warrants for warrants to purchase Class A Common Stock. In October 1994, a holder of 1992 Lender Warrants acquired 354,546 shares of Class A Common Stock through a cashless exercise of 445,281 1992 Lender Warrants. Upon exercise, the holder canceled its 1991 Options and its 1992 Options. At October 31, 1995, 146,793 of warrants were outstanding to purchase Class B Common Stock. On September 13, 1995, pursuant to the Waivers obtained from the Banks under the Senior Bank Credit Facility, the Company issued to the Banks warrants to purchase an aggregate of 385,000 shares of Class A Common Stock at an exercise price of $3.00 per share (the 1995 Lender Warrants). The 1995 Lender Warrants give the Banks certain registration rights and expire on April 30, 1999. At October 31, 1995, 385,000 1995 Lender Warrants remain outstanding. 52 AUTOTOTE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) At October 31, 1995, warrants were outstanding to purchase 2,264,493 shares of Class A Common Stock issued in connection with the 1991 debenture amendment. During 1995 and 1994, 36,120 and 48,156 warrants were exercised, respectively. On January 26, 1996, pursuant to the 1995 Credit Agreement Amendment and Restatement obtained from the Banks, the Company issued to the Banks warrants to purchase an aggregate of 525,000 shares of Class A Common Stock at an exercise price of $1.25 per share (the 1996 Lender Warrants). (see Note 10.) (16) Stock Options On July 17, 1984, the Company adopted the 1984 Stock Option Plan (the 1984 Plan) under which 562,500 shares of Class A Common Stock were reserved for issuance to employees including officers and directors who are also employees. In Fiscal Year 1992, the Company increased the number of shares of Class A Common Stock available for delivery under the 1984 Plan to 1,350,000. On December 17, 1992, the Company adopted the 1992 Equity Incentive Plan (the 1992 Plan) under which 900,000 shares of Class A Common Stock were reserved for issuance to employees including officers and directors. At the August 10, 1994 Annual Meeting, shareholders approved an increase in the number of shares which may be delivered under the 1992 Plan to 3,000,000. In May 1995, the Company adopted the 1995 Equity Incentive Plan (the 1995 Plan) under which 2,000,000 shares of Class A Common Stock were reserved for issuance to employees, including officers and directors. In May 1995, the Company offered holders of stock options with exercise prices above market value as of May 26, 1995 the right to cancel such options in exchange for Performance Accelerated Restricted Stock Units (the PARS). The PARS represent deferred shares of Class A Common Stock which vest in 20% increments on the sixth, seventh, eighth, ninth and tenth anniversaries, or, in certain circumstances, on an accelerated basis based on the Company's stock being traded at certain per share prices, or at the discretion of the Board of Directors. Options to purchase 1,887,200 shares were exchanged for 478,705 PARS of which 263,072 were issued under the 1995 Plan and 215,633 were issued under the 1992 Plan. Additionally, a total of 110,000 PARS with a three year vesting schedule were issued to certain directors under the 1992 Plan. In accordance with the exchange of options for PARS, the Company has recorded compensation expense of $166,000 in 1995. Additional compensation expense totaling $2,262,000 will be charged to expense through 2005. Options granted under the Company's equity incentive plans are exercisable at the fair market value of the stock at the date of grant. From time to time, the Company grants additional stock options to individuals outside of the 1992 and 1995 Plans in recognition of contributions made to the Company. 53 AUTOTOTE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Information with respect to the Company's stock options are as follows:
STOCK OPTIONS NUMBER OF SHARES PRICE RANGE ------------- ---------------- ------------- Outstanding at October 31, 1992.............. 2,040,000 Granted.................................... 1,884,900 $ 4.84-$26.25 Exercised.................................. 174,695 $ 1.59-$ 3.50 --------- Outstanding at October 31, 1993.............. 3,750,205 Granted.................................... 891,400 $15.75-$22.00 Canceled................................... 3,800 $15.75 Exercised.................................. 428,503 $ 1.59-$13.50 --------- Outstanding at October 31, 1994.............. 4,209,302 Granted.................................... 634,000 $ 3.19-$15.00 Canceled................................... 156,100 $ 4.84-$26.25 Exchanged.................................. 1,887,200 $ 4.84-$26.25 Exercised.................................. 168,999 $ 1.59-$ 4.84 --------- Outstanding at October 31, 1995.............. 2,631,003 =========
At October 31, 1995, 1,791,603 options to acquire shares of Class A Common Stock were exercisable. Outstanding options expire prior to April 30, 2005, and are exercisable at prices ranging from $1.59 to $21.00 per share. (17) Fair Value of Financial Instruments The fair value of financial instruments is determined by reference to market data and other valuation techniques as appropriate. The Company believes the fair value of its financial instruments, principally accounts receivable, accounts payable, and accrued liabilities, except for its long-term debt, and subordinated debentures, approximates their recorded values. With respect to the Company's Senior Bank Credit Facility, the Company is unable to determine the fair value of this instrument due to the defaults experienced during the year prior to obtaining the January 1996 Amended and Restated Senior Bank Credit Facility. Similarly, the Company is unable to obtain an independent appraisal of the fair market value of its $40,000,000 subordinated debentures. (18) Litigation The Company and certain of its officers and directors have been 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 putative class consists of purchasers of Class A Common Stock and put and call options between March 1994 and January 1995. The consolidated class action complaint alleges that the Company and certain of its officers and directors violated federal securities laws and seeks remedies of unspecified monetary damages and awards of fees and expenses. The defendants answered the complaint in August 1995, denying any violation of federal securities law. Discovery has commenced pursuant to a court ordered discovery plan. The likelihood of success and the ultimate outcome of the consolidated litigation cannot be evaluated until discovery is complete. No provision for liability, if any, that may result from the consolidated litigation has been recognized in the Company's financial statements. In the event of a judgment against, or settlement by, the Company and the named officers and directors, approximately $15 million of any such amount may be payable by the Company's insurance carriers on behalf of the named officers and directors, subject to any defenses such insurance carriers may have. Any amount of a judgment or settlement award in excess of $15 million, or any portion of any judgment or settlement attributable solely to the Company, would be the 54 AUTOTOTE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) responsibility of the Company, and there can be no assurance that the Company would have the financial resources to fund payments pursuant to a judgment or settlement award. (19) Export Sales and Major Customers Sales to foreign customers amounted to $9,860,000, $6,073,000 and $10,067,000 in 1995, 1994 and 1993, respectively. A single customer represented $27,290,000 of fiscal 1994 revenues. (20) Accrued Liabilities Accrued liabilities consist of the following:
OCTOBER 31, -------------- 1995 1994 ------- ------ (IN THOUSANDS) Compensation and benefits................................ $ 7,944 4,833 Taxes, other than income................................. 1,295 575 Customer advances on sales contracts..................... 743 1,420 Sales and use tax........................................ 1,009 1,932 Contract reserves........................................ 1,320 2,171 Interest................................................. 2,069 813 Restructuring costs...................................... 3,710 -- Other.................................................... 5,693 5,733 ------- ------ $23,783 17,477 ======= ======
(21) Selected Quarterly Financial Data (Unaudited) Selected quarterly financial data for the years ended October 31, 1995 and 1994 is as follows:
YEAR ENDED OCTOBER 31, 1995 ---------------------------------------------- FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER ---------- ---------- ---------- ---------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Total operating revenues...... $31,117 37,132 38,722 46,213 Gross profit.................. 12,874 14,960 13,770 17,350 Net loss...................... (5,931) (8,958) (29,246) (5,754) Loss per common share......... $ (0.21) (0.31) (1.01) (0.20) ========== ========= ========== ========== Weighted average shares out- standing..................... 28,810 28,913 28,928 29,201 ========== ========= ========== ========== YEAR ENDED OCTOBER 31, 1994 ---------------------------------------------- FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER ---------- ---------- ---------- ---------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Total operating revenues...... $28,289 38,446 41,136 41,179 Gross profit.................. 11,206 14,172 10,830 9,150 Net earnings (loss) before ex- traordinary item............. (103) 953 (2,214) (16,564) ---------- --------- ---------- ---------- Extraordinary item............ -- (4,222) -- -- ---------- --------- ---------- ---------- Net loss...................... $ (103) (3,269) (2,214) (16,564) ========== ========= ========== ========== Earnings (loss) per common share, before extraordinary item......................... $ 0.00 0.03 (0.08) (0.58) Extraordinary item............ -- (0.15) -- -- ---------- --------- ---------- ---------- Earnings (loss) per common share........................ $ 0.00 (0.12) (0.08) (0.58) ========== ========= ========== ========== Weighted average shares out- standing..................... 27,987 28,107 28,196 28,434 ========== ========= ========== ==========
55 AUTOTOTE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (22) Business and Geographic Segments The following tables represent revenues, profits, depreciation and assets by business and geographic segments for the years ended October 31, 1995, 1994 and 1993. Corporate expenses are allocated among industry and geographic segments.
YEAR ENDED OCTOBER 31, --------------------------- 1995 1994 1993 --------- ------- ------- (IN THOUSANDS) BUSINESS SEGMENTS Service contract revenue and product sales Pari-mutuel/sports betting................... $ 73,455 55,581 64,104 Lottery operations........................... 25,848 56,162 6,514 Off-track betting concerns................... 39,218 29,725 8,860 Simulcasting services........................ 14,663 7,582 5,384 --------- ------- ------- $ 153,184 149,050 84,862 ========= ======= ======= Operating income (loss) Pari-mutuel/sports betting................... $ (19,977) (16,348) 9,601 Lottery operations........................... (11,878) 4,953 1,764 Off-track betting concerns................... 2,674 1,780 1,766 Simulcasting services........................ (2,109) (4,319) 774 --------- ------- ------- $ (31,290) (13,934) 13,905 ========= ======= ======= Depreciation and amortization Pari-mutuel/sports betting................... $ 20,758 15,908 10,420 Lottery operations........................... 8,602 7,067 422 Off-track betting concerns................... 2,291 1,561 207 Simulcasting services........................ 3,812 882 760 --------- ------- ------- $ 35,463 25,418 11,809 ========= ======= ======= Assets Pari-mutuel/sports betting................... $ 128,317 146,809 126,386 Lottery operations........................... 52,801 46,038 34,206 Off-track betting concerns................... 40,064 41,042 22,734 Simulcasting services........................ 19,839 7,708 3,779 --------- ------- ------- $ 241,021 241,597 187,105 ========= ======= ======= Capital expenditures and expenditures for equipment under wagering systems contracts Pari-mutuel/sports betting................... $ 5,189 40,074 47,115 Lottery operations........................... 3,417 1,511 1,313 Off-track betting concerns................... 6,965 14,272 173 Simulcasting services........................ 2,569 3,608 1,176 --------- ------- ------- $ 18,140 59,465 49,777 ========= ======= =======
56 AUTOTOTE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEAR ENDED OCTOBER 31, -------------------------- 1995 1994 1993 -------- ------- ------- (IN THOUSANDS) GEOGRAPHIC SEGMENTS Service contract revenue and product sales North America................................. $114,943 91,915 70,744 Europe........................................ 34,227 50,350 14,118 Asia.......................................... 4,014 6,785 -- -------- ------- ------- $153,184 149,050 84,862 ======== ======= ======= Operating income (loss) North America................................. $(25,708) (20,515) 6,380 Europe........................................ (5,518) 4,389 7,525 Asia.......................................... (64) 2,192 -- -------- ------- ------- $(31,290) (13,934) 13,905 ======== ======= ======= Depreciation and amortization North America................................. $ 27,548 19,653 11,647 Europe........................................ 7,149 5,715 162 Asia.......................................... 766 50 -- -------- ------- ------- $ 35,463 25,418 11,809 ======== ======= ======= Assets North America................................. $180,637 196,232 140,677 Europe........................................ 60,384 45,365 46,428 Asia.......................................... -- -- -- -------- ------- ------- $241,021 241,597 187,105 ======== ======= ======= Capital expenditures and expenditures for equip- ment under wagering systems contracts North America................................. $ 15,798 57,460 49,462 Europe........................................ 2,342 2,005 315 Asia.......................................... -- -- -- -------- ------- ------- $ 18,140 59,465 49,777 ======== ======= =======
57 SCHEDULE II AUTOTOTE CORPORATION AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS THREE YEARS ENDED OCTOBER 31, 1995 (IN THOUSANDS)
ADDITIONS ----------------------- BALANCE AT CHARGED TO CHARGED BALANCE AT BEGINNING COSTS AND TO OTHER END OF OF PERIOD EXPENSES ACCOUNTS (1) DEDUCTIONS (2) PERIOD ---------- ---------- ------------ -------------- ---------- YEAR ENDED OCTOBER 31, 1993 Allowance for doubtful accounts............... $823 423 78 350 974 YEAR ENDED OCTOBER 31, 1994 Allowance for doubtful accounts............... $974 625 -- 1,101 498 YEAR ENDED OCTOBER 31, 1995 Allowance for doubtful accounts............... $498 1,372 169 360 1,679
- -------- (1) Amounts related to acquired companies (2) Amounts written off 58 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 See "Executive Officers and Directors of the Company" in Part I of this Annual Report. DELINQUENT FILINGS Under the securities laws of the United States, the Company's directors, its officers, and any persons holding more than ten percent of the Company's Class A Common Stock are required to report their ownership of the Company's Class A Common Stock and any changes in that ownership to the Securities and Exchange Commission. Specific due dates for these reports have been established and the Company is required to report in this Annual Report any failure to file by these dates during fiscal 1995. On January 26, 1996, Marshall Bartlett, Sir Brian Wolfson, Alan J. Zakon filed a Form 5 with the SEC for options they received in May 1995. Mr. Bartlett, Sir Wolfson and Mr. Zakon did not file a Form 4 with respect to such options. On January 26, 1996 A. Lorne Weil, Martin A. Schloss and Gerald Lawrence filed a Form 5 with the SEC in connection with an exchange of options for restricted stock awarded under the Company's 1992 Equity Incentive Plan. Mr. Lawrence did not file a Form 4 with respect to 1,000 shares of Class A Common Stock that he purchased in fiscal 1995. Finally, on January 26, 1996, Michael D. Harris and Alan Cigich filed a Form 5 with the SEC. Mr. Harris, Mr. Lawrence and Mr. Cigich did not file Form 3 when they became officers of the Company. All filings on Form 5 described above, except for Mr. Cigich, were not made on a timely basis. In making these statements, the Company has primarily relied on copies of the reports that the directors, officers and 10% holders have filed with the SEC. 59 ITEM 11. EXECUTIVE COMPENSATION EXECUTIVE COMPENSATION The following table shows the compensation paid by the Company for services rendered for fiscal 1993, 1994 and 1995 to the chief executive officer and the four highest paid executive officers of the Company who received more than $100,000 in salary and bonuses during fiscal 1995 and who served as executive officers during fiscal 1995 (the "Named Executive Officers"). SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION (1) LONG TERM COMPENSATION AWARDS -------------------- -------------------------------------- (A) (B) (C) (D) (F) (G) (I) --- ---- ------- ------- ---------- ---------- ------------ RESTRICTED SECURITIES STOCK UNDERLYING ALL OTHER NAME AND PRINCIPAL POSITION SALARY BONUS AWARD OPTIONS COMPENSATION AT FISCAL YEAR-END YEAR ($) ($) ($) (11) (#) ($) - --------------------------- ---- ------- ------- ---------- ---------- ------------ A. Lorne Weil........... 1995 408,800 -- 534,001(5) -- 12,700(8) Chief Executive Officer 1994 408,800 -- -- -- 13,500(9) 1993 391,300 200,000 -- 600,000(5) 900(10) Thomas C. DeFazio....... 1995 148,100 170,000(2) -- 200,000 3,000(8) President and Chief Operating Officer Martin E. Schloss....... 1995 175,000 13,000 70,272(6) -- 7,600(8) Vice President, General 1994 135,600 115,000(3) -- 65,000(6) 6,200(9) Counsel and Secretary 1993 125,000 -- -- -- 300(10) Gerald Lawrence......... 1995 184,600 50,000 137,000(7) 100,000(7) -- Vice President Michael D. Harris....... 1995 129,800 75,000(4) -- 150,000 1,500(8) Vice President
- -------- (1) Amounts shown include cash and non-cash compensation earned by the Named Executive Officers. (2) Includes a relocation allowance of $110,000 and a $60,000 bonus for fiscal 1995. (3) Consists of fiscal 1994 bonus of $60,000 and special bonus of $55,000 to recognize contributions to the Company's longer-term strategic goals. These bonuses were initially payable in three equal installments in 1995, 1996 and 1997 as long as Mr. Schloss is employed by the Company. However, the Compensation Committee of the Board has decided to terminate the deferred compensation plan and to pay out the second and third installments in 1996. (4) Consists of a signing bonus of $25,000 and a fiscal bonus of $50,000. (5) On May 25, 1995, Mr. Weil exchanged options received in 1993 to purchase 600,000 shares of Class A Common Stock, constituting all of his options having exercise prices in excess of $4.13 per share (the average of the bid and asked trading prices of the Class A Common Stock on May 25, 1995) ("Underwater Options"), for an award under the Company's 1992 Equity Incentive Plan of 129,298 deferred shares of Class A Common Stock ("Deferred Shares") which will be issued in the future subject to vesting provisions relating to a lengthy period of future service with the Company or the achievement of certain performance goals for the Company as measured by the price of Class A Common Stock. (6) On May 25, 1995, Mr. Schloss exchanged all of his Underwater Options, constituting options to purchase 65,000 shares of Class A Common Stock, for an award of 17,015 Deferred Shares under the Company's 1992 Equity Incentive Plan. The vesting of such Deferred Shares will require either a lengthy period of future service or the achievement of certain performance goals for the Company as measured by the price of the Class A Common Stock. 60 (7) On May 25, 1995, Mr. Lawrence exchanged all of his Underwater Options, constituting options to purchase 100,000 shares of Class A Common Stock, for an award of 33,172 Deferred Shares under the Company's 1992 Equity Incentive Plan. The vesting of such Deferred Shares will require either a lengthy period of future service or the achievement of certain performance goals for the Company as measured by the price of the Class A Common Stock. (8) Amounts of All Other Compensation for fiscal 1995 include the following: (i) Contributions to the Company's defined contribution retirement plan for salaried employees:Mr. Weil, $7,500; Mr. Schloss, $7,500. (ii) Life insurance coverage: Mr. Weil $5,200; Mr. Schloss, $100. (iii) COBRA medical coverage: Mr. DeFazio, $3,000; Mr. Harris, $1,500. (9) Amounts of All Other Compensation for fiscal 1994 include the following: (i) Contributions to the Company's defined contribution retirement plan for salaried employees:Mr. Weil, $7,500; Mr. Schloss, $5,800. (ii) Life insurance coverage: Mr. Weil, $6,000; Mr. Schloss, $400. (10) Amounts of All Other Compensation for fiscal 1993 include the following:Life insurance coverage: Mr. Weil, $900; Mr. Schloss, $300. (11) The number and value of the aggregate restricted stock holdings at October 31, 1995, is as follows: (i) Number of shares: Mr. Weil, 129,298; Mr. Schloss, 17,015; Mr. Lawrence, 33,172. (ii) Value of shares: Mr. Weil, $387,894; Mr. Schloss, $51,045; Mr. Lawrence, $99,516. (iii) In the event the Company declares a dividend on the Class A Common Stock, the restricted stocks listed above would receive dividend(s). The table below sets forth information with respect to stock options granted to the Named Executive Officers for fiscal 1995. OPTIONS GRANTED IN LAST FISCAL YEAR
POTENTIAL REALIZABLE VALUE AT ASSUMED ANNUAL RATES OF STOCK PRICE APPRECIATION FOR INDIVIDUAL GRANTS OPTION TERM -------------------------------------------- ------------------- (A) (B) (C) (D) (E) (F) (G) --- ----------- ----------- -------- ---------- -------- ---------- NUMBER OF % OF TOTAL SECURITIES OPTIONS UNDERLYING GRANTED TO EXERCISE OPTIONS EMPLOYEES OR BASE GRANTED (1) IN PRICE EXPIRATION 5% 10% NAME (#) FISCAL YEAR ($/SH) DATE ($) ($) ---- ----------- ----------- -------- ---------- -------- ---------- A. Lorne Weil........... -- 0.00% N/A N/A N/A N/A Thomas C. DeFazio....... 200,000 31.55% $4.375 17-Apr-00 $241,746 $ 534,196 Martin E. Schloss....... -- 0.00% N/A N/A N/A N/A Gerald Lawrence ........ 100,000(2) 15.77% $15.00 11-Nov-99 $414,422 $ 915,765 Michael D. Harris....... 150,000 23.66% $ 4.50 24-Apr-05 $424,504 $1,075,776
- -------- (1) All options were granted under the Company's 1992 Equity Incentive Plan. Options become exercisable in three equal installments on the first, second and third anniversaries of the date of grant. The options may, subject to certain requirements, be exercised through the delivery of cash and/or Class A Common Stock. The options permit the optionee to request that the Company withhold shares sufficient to satisfy withholding tax requirements. The options are not transferable otherwise than by will or the laws of descent and distribution, in which case, and in the case of disability, they are exercisable for the following 12 months or the term of the option, whichever is shorter, for the full number of shares the optionee was entitled to purchase at the time of his death or disability. In the event of a termination of employment by 61 the Company other than for cause or death or disability, an optionee has the right to exercise his option at any time within the three months following such termination or the term of the option, whichever is shorter, for the full number of shares he was entitled to purchase at the time of termination. In the event of termination for cause, the options shall be terminated. (2) In July 1995, Mr. Lawrence exchanged all of his Underwater Options, constituting options to purchase 100,000 shares of Class A Common Stock, for an award of 33,172 Deferred Shares under the Company's 1992 Equity Incentive Plan. The vesting of such Deferred Shares will require either a lengthy period of future service or the achievement of certain performance goals for the Company as measured by the price of the Class A Common Stock. The table below sets forth information for the Named Executive Officers with respect to fiscal 1995 year-end option values. AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR, AND FY-END OPTION VALUE
(A) (B) (C) (D) (E) --- ----------- ----------- ---------------- ---------------- NUMBER OF SECURITIES VALUE OF UNDERLYING UNEXERCISED UNEXERCISED IN-THE-MONEY SHARES OPTIONS AT OPTIONS AT ACQUIRED OCT. 31, 1995(#) OCT. 31, 1995($) ON VALUE EXERCISABLE/ EXERCISABLE/ NAME EXERCISE(#) REALIZED($) UNEXERCISABLE UNEXERCISABLE ---- ----------- ----------- ---------------- ---------------- A. Lorne Weil........ -0- -0- 1,125,000/-0- $346,500/-0- Thomas C. DeFazio.... -0- -0- -0-/200,000 -0-/-0- Martin E. Schloss.... -0- -0- 40,000/-0- -0-/-0- Gerald Lawrence...... -0- -0- -0-/-0- -0-/-0- Michael D. Harris.... -0- -0- -0-/150,000 -0-/-0-
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION As of May 25, 1995, the Compensation Committee of the Board consisted of Marshall Bartlett, Larry J. Lawrence and Alan J. Zakon. Until then, the Compensation Committee consisted of Larry J. Lawrence, Alan J. Zakon and Sir Brian Wolfson. Sir Brian served as Acting President and Chief Executive Officer of the Company from June 1991 until October 31, 1991. Effective December 1, 1994 the Company has a wagering systems service contract with Lincoln Greyhound Racetrack, a facility owned by Wembley plc, a United Kingdom corporation of which Sir Brian Wolfson, a director of the Company, was deputy chairman until September 1995. The Company has a Senior Bank Credit Facility with Bankers Trust Company, a company of which Alan J. Zakon, a director of the Company, was a managing director from 1989 until April 1995. From June 1994 until June 1995, Mr. Bartlett had a consulting arrangement with the Company whereby he received $100,000 of which $41,667 was paid for consulting services in fiscal 1994, with the balance paid in fiscal 1995. As a result of the acquisition of Tele Control, the Company has assumed a contract with IMMOC leasing, a real estate concern substantially owned by certain employees of the Company, to rent premises for a minimum period of 15 years. Consequently the Company has annual rental commitments of approximately $620,000 through the year 2006. Rental payments made to this concern were $613,000, $24,000 and $613,000 for fiscal 1995, 1994 and 1993, respectively. 62 CERTAIN ARRANGEMENTS BETWEEN THE COMPANY AND ITS DIRECTORS AND OFFICERS Employee Agreements Effective November 1, 1992, the Company and Mr. Weil entered into a five- year employment agreement (the "Employment Agreement") that provides for a base salary of $400,000, subject to annual increases in accordance with the Consumer Price Index, a performance bonus of 25% of base salary if the Company meets its budgeted earnings per share, an additional performance bonus based on excess earnings per share, not to exceed an additional 25% of base salary, and a performance bonus of up to 50% of base salary at the discretion of the Board of Directors. If the Company terminates Mr. Weil's employment under the Employment Agreement other than for cause, Mr. Weil is entitled to collect his base salary for twelve months following such termination, plus a portion of the annual earnings per share-based performance bonuses. In connection with the Employment Agreement, Mr. Weil received a five-year option to purchase 600,000 shares of Class A Common Stock of the Company at an exercise price of $3.50 per share. The option originally was exercisable in three equal annual installments on November 1, 1993, November 1, 1994 and November 1, 1995. In August 1993, the Compensation Committee accelerated the vesting period of the option such that the option became exercisable in full. Effective April 17, 1995, the Company and Mr. Thomas DeFazio entered into a three-year employment agreement (the "DeFazio Employment Agreement") that provides for an annual base salary of $275,000 and an annual performance bonus of up to 45% of base salary. Fifty percent of the bonus will be based on the formula set forth in the Company's executive compensation plan as in effect from time to time and the remaining 50% of the bonus will be based on achievement of objectives to be established by the Chief Executive Officer and the Board in their sole discretion. Under the DeFazio Employment Agreement, the Company has also paid Mr. DeFazio a relocation allowance of $110,000, a prorated portion of which, however, must be returned to the Company by Mr. DeFazio in the event he terminates his employment or the Company terminates his employment for cause at any time prior to April 17, 1997. If the Company terminates Mr. DeFazio's employment under the DeFazio Employment Agreement other than for cause, Mr. DeFazio would be entitled to collect an amount equal to the greater of (i) one year's base salary or (ii) the product of Mr. DeFazio's then current monthly salary multiplied by the number of months remaining under the initial term of the DeFazio Employment Agreement. In connection with the DeFazio Employment Agreement, Mr. DeFazio received a five- year option to purchase 200,000 shares of Class A Common Stock at an exercise price of $4.375 per share. The option will become exercisable in three equal installments, on each of the first, second and third anniversaries of the date of grant. If during a period of 12 months following a change of control of the Company, the Company terminates Mr. DeFazio's employment other than for cause, Mr. DeFazio will be entitled to collect a lump-sum payment equal to his base salary for the remainder of the term under the DeFazio Employment Agreement, and Mr. DeFazio's stock option will become exercisable in full. 63 Effective April 24, 1995, the Company and Mr. Michael Harris entered into an employment agreement (the "Harris Employment Agreement"), pursuant to which Mr. Harris assumed the position of Vice President of the Company and President of Autotote Systems, a division of the Company, for an initial term of 18 months with automatic extension for 12 month periods. The Harris Employment Agreement provides for an annual base salary of $250,000 with annual reviews based on written performance appraisals and an annual bonus of up to 45% of base salary, one-third of which will be based on overall Company results, one- third on the performance of Autotote Systems and one-third on discretionary factors determined by the Chief Executive Officer and the Board. Mr. Harris received a bonus payment of $50,000 on October 31, 1995 and is guaranteed an additional bonus payment of $50,000 on May 31, 1996, which later payment will be considered part of his fiscal 1996 year end bonus. Mr. Harris also received a signing bonus of $25,000 and a relocation allowance in an amount which will provide after tax reimbursement of the moving expenses and transaction costs incurred by Mr. Harris in connection with his relocation, including the difference between the net sales price of his home and its cost. Either party may terminate the Harris employment agreement with 30 days prior written notice. If the Company terminates Mr. Harris' employment under the Harris Employment Agreement other than for cause, Mr. Harris will be entitled to collect a lump sum payment equal to the base salary for the remainder of the term under the Harris Employment Agreement plus any earned bonus. In connection with the Harris Employment Agreement, Mr. Harris received a ten- year option to purchase 150,000 of Class A Common Stock at an exercise price of $4.50 per share. The option will become exercisable in three equal installments, on each of the first, second and third anniversaries of the date of grant. If the Company terminates Mr. Harris' employment under the Harris Employment Agreement other than for cause, an option for 50,000 shares of Class A Common Stock of the Company will vest immediately if none of the stock options have vested as of the termination date. In the event of a sale of substantially all of the Company's stock or assets, Mr. Harris will be entitled to receive a payment equal to his base salary and any potential bonuses due over the remaining term of the Harris Employment Agreement, and Mr. Harris' option will become exercisable in full. On November 14, 1994, the Company and Mr. Gerald Lawrence entered into a one-year employment agreement (the "Lawrence Employment Agreement") to employ Mr. Lawrence as Vice President in charge of North American Pari-mutuel Operations. The Lawrence Employment Agreement provides for a base salary of $200,000 and a performance bonus of up to 45% of the base salary. For fiscal 1995, Mr. Lawrence is guaranteed a minimum bonus of $50,000. In connection with the Lawrence Employment Agreement, Mr. Lawrence received a five-year option to purchase 100,000 shares of Class A Common Stock of the Company at a price of $15.00 per share, which option is exercisable in three equal installments. On May 25, 1995, Mr. Lawrence exchanged such stock option for an award of 33,172 Deferred Shares under the Company's 1992 Equity Incentive Plan. The vesting of such Deferred Shares will require either a lengthy period of future service or the achievement of certain performance goals for the Company as measured by the price of the Class A Common Stock. In the event that the Company terminates Mr. Lawrence's employment other than for cause, Mr. Lawrence is entitled to receive his base salary for twelve months following such termination. By letter, dated January 3, 1995, the Company confirmed to Mr. Martin Schloss that in the event the Company terminates Mr. Schloss' employment, he will be entitled to receive severance pay, at the time of such termination, of not less than one year base salary plus all accrued but unpaid bonus installments earned by him, and Mr. Schloss will retain all unexercised options to purchase Class A Common Stock held by him at the time of such termination, which options will remain exercisable in accordance with their terms. Directors' Compensation Effective as of May 25, 1995, each director who is not an employee of the Company is paid an annual retainer of $20,000, as well as $1,000 plus expenses for each Board meeting attended, $1,000 plus expenses for each committee meeting attended in person and held on a day other than on which a Board meeting is held and $500 plus expenses for each committee meeting attended held on the same day as a Board meeting or by telephone. Members of the Executive Committee do not receive fees for attending meeting thereof. In lieu of the foregoing compensation, Thomas H. Lee Company, of which Mr. Lee is president, receives $5,000 per month for his services as a director. 64 In May 1995, Mr. Bartlett, Sir Brian Wolfson and Mr. Zakon each received an award of 10,000 shares of Class A Common Stock issuable in the future ("Non- Employee Director Deferred Stock"), and each of Sir Brian Wolfson and Mr. Zakon received a one time award of 40,000 shares of Non-Employee Director Deferred Stock. The shares of Non-Employee Director Deferred Stock were awarded under the Company's 1992 Equity Incentive Plan and vest, on a cumulative basis, as to one-third of the shares of Non-Employee Director Deferred Stock on each of the first three anniversaries of the date of grant or in full if the non-employee director ceases to serve as a director as a result of death, disability, retirement at or after the age of 65, or the failure to be renominated or reelected, or in the event of a consolidation or merger of the Company or a sale of substantially all of the Company's assets. From June 1994 until June 1995, Mr. Bartlett had a consulting arrangement with the Company whereby he received $100,000 of which $41,667 was paid for consulting services in fiscal 1994. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT SECURITY OWNERSHIP The following table sets forth certain information as of October 31, 1995 as to the security ownership of those persons owning of record or known to the Company to be the beneficial owners of more than five percent of the outstanding Class A Common Stock of the Company, each of the Company's directors and Named Executive Officers and the Company's executive officers and directors as a group. Except as otherwise indicated, the stockholders listed on the table have sole voting and investment power with respect to the shares indicated. Share figures reflect (i) a three-for-two stock split in the form of a stock dividend of one share of Class A Common Stock for every two shares outstanding paid on June 30, 1993 and (ii) a two-for-one stock split in the form of a stock dividend of one share of Class A Common Stock for each share outstanding paid on October 25, 1993.
AMOUNT AND NATURE NAME AND ADDRESS OF PERCENT OF OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP (1) CLASS A COMMON STOCK (1) - ------------------- ------------------------ ------------------------ Thomas H. Lee......................... 4,023,465 (10) 12.95% State of Wisconsin Investment Board... 2,810,500 (5) 9.21% P.O. Box 7842 Madison, WI 53707 A. Lorne Weil......................... 2,417,092 (6) 7.50% Larry J. Lawrence..................... 2,412,123 (9) 7.65% Wellington Management Company......... 2,000,000 (3) 6.15% 75 State Street Boston, MA 02109 The Kaufman Fund, Inc. ............... 1,994,000 (4) 6.53% 140 East 45th Street, 43rd Floor New York, NY 10017 Lawrence, Tyrrell, Ortale & Smith..... 1,867,952 (2) 5.93% 515 Madison Avenue New York, New York 10022 Martin E. Schloss..................... 55,000 (14) * Alan J. Zakon......................... 32,000 (12) * Marshall Bartlett..................... 30,000 (8) * Sir Brian Wolfson..................... 30,000 (11) * Thomas C. DeFazio..................... 20,000 (7) * Gerald Lawrence....................... 1,000 (13) * Michael D. Harris..................... -- -- All Directors and Executive Officers as a group (10 people) (6)(7)(8)(9)(10)(11)(12)(13)(14)(15).. 9,020,680 26.61%
65 - -------- * Less than 1% (1) For purposes of determining beneficial ownership of the Company's Class A Common Stock, owners of Class A warrants and options exercisable within sixty days are considered to be the beneficial owners of the shares of Class A Common Stock into which such securities are convertible or for which such securities are exercisable. The percentage ownership of the outstanding Class A Common Stock reported herein is based on the assumption (expressly required by the applicable rules of the Securities and Exchange Commission) that only the person whose ownership is being reported has exercised his warrants or options for Class A Common Stock. (2) Includes 965,469 warrants exercisable within 60 days owned by Lawrence, Tyrrell, Ortale & Smith. (3) Represents shares of Class A Common Stock issuable upon conversion of $40,000,000 of Debentures due 2001 convertible within 60 days owned by Wellington Management Company. (4) Based on Schedule 13G, dated September 30, 1995, as filed with the Securities and Exchange Commission, The Kaufmann Fund, Inc. holds 1,994,000 shares of Class A Common Stock. (5) Based on a Schedule 13F filed with the Securities and Exchange Commission on September 30, 1995, the State of Wisconsin Investment Board holds 2,810,500 shares of Class A Common Stock. (6) Includes shares held in the name of Lorne Weil 1989 Trust of which Mr. Weil is Trustee. Also includes shares of Class A Common Stock warrants to purchase 577,920 exercisable within 60 days owned by Mr. Weil, some of which are held in the name of Lorne Weil 1989 Trust, and options to purchase 1,125,000 shares of Class A Common Stock exercisable within 60 days by Mr. Weil. Mr. Weil's address is c/o the Company. See "Management--Employment Agreements." Effective March 25, 1994, Mr. Weil entered into a swap transaction (the "Swap") with BT in respect of 500,000 shares of the Class A Common Stock of the Company held by him (the "Swap Shares"). Mr. Weil continues to hold sole voting power over the Swap Shares which serve as collateral for the Swap transaction; however, Mr. Weil may substitute other collateral for the Swap Shares. Under the Swap arrangement (i) Mr. Weil is obligated to pay BT (a) at the end of each quarter during the five (5) year term of the Swap (the "Term") the amount of any dividends declared during such quarter on the Swap and (b) at the end of the Term, any appreciation during the Term in the price of the Swap Shares above $26.7769 per share, (ii) BT is obligated to pay Mr. Weil (x) at the end of each quarter during the Term, the amount equal to the three (3) month London Interbank Offered Rate less 2.125% of the Calculation Amount (as defined in the Swap documents) of $13,388,500, and (y) at the end of the Term, an amount equal to any depreciation during the Term, in the price of the Swap Shares below $26.7769 per share. Mr. Weil will pay BT an annual fee in consideration of its entering into the Swap. The Swap is for a five (5) year period, but will terminate if Mr. Weil dies or if certain other events occur during such period. Mr. DeFazio's address is c/o the Company. (7) Represents 20,000 shares of Class A Common Stock owned by Mr. Thomas DeFazio. (8) Represents shares issuable upon exercise of options to purchase 30,000 shares of Class A Common Stock exercisable within 60 days owned by Mr. Bartlett. Mr. Bartlett's address is c/o the Company. (9) Includes 902,483 shares and warrants to purchase 965,469 shares of Class A Common Stock exercisable within 60 days held by the partnership of Lawrence, Tyrrell, Ortale & Smith (see footnote 2) and warrants to purchase 41,742 shares of Class A Common Stock exercisable within 60 days owned by Mr. Lawrence. Mr. Lawrence is a general partner of Lawrence Venture Partners, the sole general partner of such partnership. Mr. Lawrence's address is c/o the Company. (10) Includes warrants to purchase 542,109 shares of Class A Common Stock exercisable within 60 days and 1,535,100 shares owned by the 1989 Thomas H. Lee Nominee Trust and 1,946,256 shares owned by Thomas H. Lee Equity Partners, L.P., which are deemed to be beneficially owned by Mr. Lee. Mr. Lee is a general partner of THL Equity Advisors Limited Partnership, which is general partner of Thomas H. Lee Equity Partners, L.P. Mr. Lee's address is c/o the Company. (11) Represents shares issuable upon the exercise of 30,000 options exercisable within 60 days owned by Mr. Wolfson. Mr. Wolfson's address is c/o the Company. (12) Includes options to purchase 30,000 shares of Class A Common Stock exercisable within 60 days owned by Mr. Zakon. Mr. Zakon's address is c/o the Company. 66 (13) Represents 1,000 shares of Class A Common Stock owned by Mr. Gerald Lawrence. Mr. Lawrence's address is c/o the Company. (14) Includes options to purchase 40,000 shares of Class A Common Stock exercisable within 60 days owned by Mr. Schloss. Mr. Schloss' address is c/o the Company. (15) Includes warrants to purchase 2,127,240 shares of Class A Common Stock and options to purchase 1,255,000 shares of Class A Common Stock exercisable within 60 days. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The Company has its Senior Bank Credit Facility with BT, a company of which Alan J. Zakon, a director of the Company, was a managing director from 1989 until April 1995. The Company has a service contract with Lincoln Greyhound Racetrack, a facility owned by Wembley plc, a United Kingdom corporation of which Sir Brian Wolfson, a director of the Company, was deputy chairman until September 1995. From June 1994 until June 1995, Mr. Bartlett had a consulting arrangement with the Company whereby he received $100,000 of which $41,667 was paid for consulting services in fiscal 1994. The Company believes that all of these transactions were on terms no less favorable than could have been obtained from unaffiliated third parties. 67 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 27. 2. Financial Statements Schedule--See Index to Consolidated Financial Statements attached hereto, page 27. Exhibits--The following is a list of exhibits:
EXHIBIT NUMBER DESCRIPTION ------- ----------- 3.1 Certificate of Incorporation of the Company, as amended through June 29, 1995.(15) 3.2 Bylaws of the Company.(6) 4.1 Certificate representing share of Class A Common Stock of the Company.(6) 10.1 1984 Stock Option Plan, as amended.(6)* 10.4 Definitive Agreement Governing the Split Off of United Tote World Wide, Inc. and UT Wisconsin, Inc. from United Tote, Inc. dated as of October 31, 1991 and Exhibits and Schedules thereto (including the Tax Sharing Agreement dated as of October 31 1991).(5) 10.5 Letter Agreement, dated as of October 31, 1991, between the Company, Wembley, Inc., United Tote Company, and Autotote Limited.(5) 10.6 Allocation Agreement dated as of October 31, 1991 between Autotote Limited and United Tote Company.(5) 10.7 Loan Agreement dated March 17, 1982 between the Company and The Delaware Economic Development Authority.(7) 10.8 First Mortgage and Security Agreement dated March 17, 1982 between the Company and Delaware Trust Company.(7) 10.9 Form of Option dated March 3, 1992 issued to A. Lorne Weil.(7)* 10.10 Form of Option dated December 13, 1991 issued to Marshall Bartlett.(7)* 10.11 Employment Agreement dated November 1, 1992, of A. Lorne Weil and Autotote Corporation.(7)* 10.12 Amended and Restated Credit Agreement dated as of April 28, 1994 among Autotote Systems, Inc., Bankers Trust Company and other lenders.(12) 10.13 First Amendment to Credit Agreement dated June 20, 1994 among Autotote Systems, Inc., Bankers Trust Company and other lenders.(13) 10.14 Second Amendment to Credit Agreement dated August 20, 1994 among Autotote Systems, Inc., Bankers Trust Company and other lenders.(13) 10.15 Third Amendment to Credit Agreement dated December 27, 1994 among Autotote Systems, Inc., Bankers Trust Company and other lenders.(13) 10.16 Employment Agreement dated July 18, 1994 between the Company and Marvin H. Sugarman.(13)* 10.17 Employment Agreement dated December 30, 1993 between the Company and Dennis C. Wallach.(13)* 10.18 Employment Agreement between Gerald Lawrence and the Company dated November 14, 1994.(13)* 10.19 Stock Purchase Agreement dated July 15, 1994 among the Company, Marvin H. Sugarman, Robert Melican, Racing Technology, Inc. and Marvin H. Sugarman Productions, Inc.(13)
68
EXHIBIT NUMBER DESCRIPTION ------- ----------- 10.20 Asset Purchase Agreement dated January 12, 1995 between Autotote Communication Services, Inc. and IDB Communications Group Inc.(13) 10.21 Purchase Agreement dated October 14, 1994 between Autotote Corporation, Yves Alexandre, Marie A. Alexandre and Frederic Alexandre. (English summary attached to French original.)(13) 10.22 1992 Equity Incentive Plan, as amended.(8) 10.23 Purchase Agreement among the Company, Autotote Enterprises, Inc., and the State of Connecticut, Division of Special Revenue, dated June 30, 1993.(10) 10.24 Stock Purchase Agreement between the Company and General Instrument Corporation dated May 18, 1993.(9) 10.25 Purchase and Sale Agreement between the Company and Sven Eriksson dated May 27, 1993.(9) 10.26 Agreement among ETAG Electronic Totalisator AG, Gerhard Harwalik, Peter Freudenschuss, Peter Tinkl and Manfred Harwalik dated July 27, 1993.(11) 10.27 Purchase Agreement among certain purchasers and Autotote Corporation dated August 13, 1993.(11) 10.28 Fourth Amendment to Credit Agreement dated February 21, 1995 among Autotote Systems, Inc., Bankers Trust Company and other lenders.(13) 10.29 1995 Equity Incentive Plan. 10.30 Waiver, Consent, Agreement and Fifth Amendment, dated as of July 19, 1995, among the Registrant, Autotote Systems, Inc., the lenders party to the Credit Agreement and Bankers Trust Company, as Agent.(14) 10.31 Consent Agreement and Sixth Amendment, dated as of August 30, 1995, among the Registrant, Autotote Systems, Inc., the lenders party to the Credit Agreement and Bankers Trust Company, as Agent.(14) 10.32 Consent Agreement, dated as of September 8, 1995, among the Registrant, Autotote Systems, Inc., the lenders party to the Credit Agreement and Bankers Trust Company, as Agent.(14) 10.33 Consent Agreement, dated as of September 11, 1995, among the Registrant, Autotote Systems, Inc., the lenders party to the Credit Agreement and Bankers Trust Company, as Agent.(14) 10.34 Consent Agreement, dated as of September 14, 1995, among the Registrant, Autotote Systems, Inc., the lenders party to the Credit Agreement and Bankers Trust Company, as Agent.(14) 10.35 1992 Equity Incentive Plan, as amended and restated. 10.36 Registration Rights Agreement, dated as of November 6, 1995, between the Registrant and Hartford Stock Fund and Hartford Advisers Fund (the "Fund"), dated as of November 6, 1995, between the Registrant and Funds. 10.37 Interest Agreement, dated as of November 6, 1995, between the Registrant and the Funds. 10.38 Employment Agreement, dated April 17, 1995, between the Registrant and Thomas C. DeFazio.* 10.39 Employment Agreement dated April 24, 1995, between the Registrant and Michael D. Harris.* 10.40 Letter Agreement, dated January 3, 1995, between the Registrant and Martin E. Schloss.* 21 List of Subsidiaries. 23 Consent of KPMG Peat Marwick LLP. 28.1 Copy of Final Judgment and Order of the United States District Court for the District of Delaware dated August 28, 1991.(7)
- -------- (*)Includes management contracts and compensation plans and arrangements. (1) Incorporated by reference to the Company's Registration Statement on Form S-1 (Registration No. 2-92090) which became effective on August 23, 1984. (2) Incorporated by reference to the Company's Form 8-K dated November 30, 1988. (3) Incorporated by reference to the Company's Form 8-K dated April 11, 1989. (4) Incorporated by reference to the Company's Form 8-K dated December 11, 1989. 69 (5) Incorporated by reference to the Company's Form 8-K dated November 14, 1991, as amended by Form 8 dated December 10, 1991. (6) Incorporated by reference to the Company's Registration Statement on Form S-8 (Registration No. 33-46594) which became effective March 20, 1992. (7) Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1992. (8) Incorporated by reference to the Company's Registration Statement on Form S-2 (Registration Statement No. 33-57930) which became effective on April 1, 1993. (9) Incorporated by reference to the Company's Form 8-K dated June 22, 1993. (10) Incorporated by reference to the Company's Form 8-K dated July 1, 1993. (11) Incorporated by reference to the Company's Form 8-K dated September 8, 1993. (12) Incorporated by reference to the Company's Form 10-Q for the quarter ended April 30, 1994, dated June 14, 1994. (13) Incorporated by reference to the Company's Form 10-K for the fiscal year ended October 31, 1994. (14) Incorporated by reference to the Company's Form 8-K dated September 15, 1995. (15) Incorporated by reference to the Company's Form 10-Q for the quarter ended July 31, 1995, dated September 14, 1995. (B) Reports on Form 8-K The Registrant filed a current report on Form 8-K, dated September 15, 1995 disclosing an Item 5 thereof relating to waivers and amendment to the Senior Bank Credit Facility. 70 SIGNATURES PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED. Autotote Corporation Dated: January 29, 1996 By /s/ A. Lorne Weil ---------------------------------- A. Lorne Weil Chairman of the Board 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 , 1996.
SIGNATURE TITLE DATE --------- ----- ---- /s/ A. Lorne Weil Chairman of the Board & January 29, 1996 - ------------------------------------ Chief Executive Officer, and A. Lorne Weil Director (principal executive officer) /s/ Thomas C. DeFazio President and Chief January 29, 1996 - ------------------------------------ Operating Officer (principal Thomas C. DeFazio financial officer) /s/ Philip G. Taggart Corporate Controller January 29, 1996 - ------------------------------------ (principal accounting Philip G. Taggart officer) /s/ Sir Brian Wolfson Director January 29, 1996 - ------------------------------------ Sir Brian Wolfson /s/ Larry J. Lawrence Director January 29, 1996 - ------------------------------------ Larry J. Lawrence /s/ Thomas H. Lee Director January 29, 1996 - ------------------------------------ Thomas H. Lee /s/ Marshall Bartlett Director January 29, 1996 - ------------------------------------ Marshall Bartlett /s/ Alan J. Zakon Director January 29, 1996 - ------------------------------------ Alan J. Zakon
71 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION PAGE ----------- ----------- ---- 10.29 1995 Equity Incentive Plan 10.35 1992 Equity Incentive Plan, as amended and restated 10.36 Registration Rights Agreement 10.37 Interest Agreement 10.38 Employment Agreement, dated April 17, 1995, between the Registrant and Thomas C. DeFazio* 10.39 Employment Agreement, dated April 24, 1995, between the Registrant and Michael D. Harris* 10.40 Letter Agreement, dated January 3, 1995, between the Registrant and Martin E. Schloss* 21 List of Subsidiaries 23 Consent of KPMG Peat Marwick LLP
72
BOARD OF DIRECTORS OFFICERS TRANSFER AGENT A. Lorne Weil A. Lorne Weil American Stock Transfer & Trust Company Chairman and Chief Chairman of the Board 40 Wall Street Executive and Chief Executive New York, NY 10005 Officer of Autotote Officer Corporation Sir Brian Wolfson Sir Brian Wolfson Vice Chairman of the Vice Chairman of Board Deputy Autotote Corporation Chairman of Wembley plc Alan J. Zakon Alan J. Zakon STOCK INFORMATION Vice Chairman of the Vice Chairman of Board Autotote Corporation At the close of business on January 25, 1996, a total of 30,942,295 shares of Class A Common Stock were outstanding. There were 579 holders of record on such date. Larry J. Lawrence Thomas C. DeFazio Managing General Partner President and Chief of Lawrence, Tyrrell, Operating Officer Ortale & Smith Marshall Bartlett Michael D. Harris AUDITORS Former Executive Vice Vice President President President of Autotote KPMG Peat Marwick LLP and COO of Bourns, Inc. Systems Group New York, New York Thomas H. Lee Gerald Lawrence President of Thomas H. Vice President Lee Company President of Autotote Gaming Group Martin E. Schloss Vice President General Counsel and Secretary
AUTOTOTE CORPORATION 750 LEXINGTON AVENUE, 25TH FLOOR NEW YORK, NEW YORK 10022 212-754-2233 [LOGO OF AUTOTOTE APPEARS HERE] EX-10.29 2 1995 EQUITY INCENTIVE PLAN EXHIBIT 10.29 AUTOTOTE CORPORATION - -------------------------------------------------------------------------------- 1995 EQUITY INCENTIVE PLAN - -------------------------------------------------------------------------------- AUTOTOTE CORPORATION - -------------------------------------------------------------------------------- 1995 EQUITY INCENTIVE PLAN - --------------------------------------------------------------------------------
PAGE ---- 1. Purpose................................................................ 1 2. Administration......................................................... 1 3. Effective Date and Term of Plan........................................ 2 4. Shares Subject to the Plan............................................. 2 5. Eligibility and Participation.......................................... 2 6. Types of Awards........................................................ 2 7. Events Affecting Outstanding Awards.................................... 7 8. General Provisions..................................................... 9 9. Effect, Discontinuance, Cancellation, Amendment and Termination........ 11
2 AUTOTOTE CORPORATION 1995 EQUITY INCENTIVE PLAN 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 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. 3 4. SHARES SUBJECT TO THE PLAN 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 2 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 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 other persons or entities who, in the opinion of the Board, are 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 (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 4 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 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 in Exhibit A hereto, 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. (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: (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. 5 (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. (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 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 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 fully 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 7 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 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 irrevocable entitled prior to the Status Change will be forfeted 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 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 8 "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. 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 9 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 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. 10 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. 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. 11 EX-10.35 3 1992 EQUITY INCENTIVE PLAN EXHIBIT 10.35 AUTOTOTE CORPORATION - -------------------------------------------------------------------------------- 1992 EQUITY INCENTIVE PLAN AS AMENDED AND RESTATED - -------------------------------------------------------------------------------- AUTOTOTE CORPORATION - -------------------------------------------------------------------------------- 1992 EQUITY INCENTIVE PLAN AS AMENDED AND RESTATED - --------------------------------------------------------------------------------
PAGE ---- 1. Purpose................................................................ 1 2. Administration......................................................... 1 3. Effective Date and Term of Plan........................................ 2 4. Shares Subject to the Plan............................................. 2 5. Eligibility and Participation.......................................... 2 6. Types of Awards........................................................ 3 7. Events Affecting Certain Outstanding Awards............................ 7 8. General Provisions..................................................... 12 9. Effect, Discontinuance, Cancellation, Amendment and Termination........ 14
2 AUTOTOTE CORPORATION 1992 EQUITY INCENTIVE PLAN, AS AMENDED AND RESTATED 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 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. 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 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 Determinations 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 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 of meeting of the Committee by a writing signed by a majority of the Committee members. At any time the Stock is registered under the Securities Exchange Act of 1934 (the "1934 Act"), the Board shall delegate the power to select directors and officers to receive Awards under the Plan and the timing, pricing and amount of such Awards to a committee, all members of which shall be disinterested persons within the meaning of Rule 16b-3 under the 1934 Act. 3. EFFECTIVE DATE AND TERM OF PLAN The Plan will become effective on the date on which it is approved by the stockholders of the Company. Grants of Awards under the Plan may be made prior to that date, subject to such approval of the Plan. 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. 3 4. SHARES SUBJECT TO THE PLAN 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 300,000. 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. 5. ELIGIBILITY AND PARTICIPATION Those eligible to receive Awards under the Plan ("Participants") will be persons in the employ of the Company or any of its subsidiaries ("Employees"), and other persons or entities (including without limitation directors of the Company or a subsidiary of the Company who are not Employees), if such persons are 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: (1) The exercise price of an ISO shall not be less than 100% (110% in the case of an ISO granted to a ten-percent shareholder) of the fair market value of the Stock subject to the Option, determined as of the time the Option is granted. A "ten-percent shareholder" is any person who at the time of grant owns, directly or indirectly, or is deemed to own by reason of the attribution rules of section 424(d) of the Code, stock possessing more than 10% of the total combined voting power of all classes of stock of the Company or of any of its subsidiaries. (2) 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. (3) 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. 4 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 (or in the case of such an Option which is not an ISO, by the Board at or after grant of such 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 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. 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. 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 in Exhibit A hereto that 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. (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: (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. 5 (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. (5) 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, shares of Stock subject to the restrictions described in paragraph (d) below ("Restricted Stock"). (b) Acceptance of Award. A Participant who is granted a Restricted Stock Award will have no rights with respect to such Award unless the Participant accepts the Award by written instrument delivered or mailed to the Company accompanied by payment in full of the specified purchase price, if any, of the shares covered by the Award. Payment may be by certified or bank check or other instrument acceptable to the Board. (c) Rights as a Stockholder. A Participant who receives Restricted Stock will have all the rights of a stockholder with respect to the Stock, including voting and dividend rights, subject to the restrictions described in paragraph (d) below and any other conditions imposed by the Board at the time of grant. Unless the Board otherwise determines, certificates evidencing shares of Restricted Stock will remain in the possession of the Company until such shares are free of all restrictions under the Plan. (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, 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 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 of the Stock. 6 6.4. Deferred Stock. A Deferred Stock Award entitles the recipient to receive shares of Stock to be delivered in the future. 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. 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. 6.6. 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, 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 CERTAIN 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, 7 at any time within the one year period ending with the first anniversary of the Participant's death (or such shorter or longer period as the Board may determine), and shall thereupon terminate. In no event, however, shall an Option or Stock Appreciation Right remain exercisable beyond the latest date on which it could have been exercised without regard to this Section 7. Except as otherwise determined by the Board, all Options and Stock Appreciation Rights held by a Participant immediately prior to death that are not then exercisable shall terminate at death. (b) Except as otherwise determined by the Board, all Restricted Stock held by the Participant must be transferred to the Company (and, in the event the certificates representing such Restricted Stock are held by the Company, such Restricted Stock will be so transferred without any further action by the Participant) in accordance with Section 6.3 above. (c) Any payment or benefit under a Deferred Stock Award, 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 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 termination in the event of a Status Change or unless the Status Change results from a discharge for cause which in the opinion of the Board casts such discredit on the Participant as to justify immediate termination of the Award. In no event, however, shall an Option or Stock Appreciation Right remain exercisable beyond the latest date on which it could have been exercised without regard to this Section 7. For purposes of this paragraph, in the case of a Participant who is an Employee, a Status Change shall not be deemed to have resulted by reason of (i) a sick leave or other bona fide leave of absence approved for purposes of the Plan by the Board, so long as the Employee's right to reemployment is guaranteed either by statute or by contract, or (ii) a transfer of employment between the Company and a subsidiary or between subsidiaries, or to the employment of a corporation (or a parent or subsidiary corporation of such corporation) issuing or assuming an option in a transaction to which section 424(a) of the Code applies. (b) Except as otherwise determined by the Board, all Restricted Stock held by the Participant at the time of the Status Change must be transferred to the Company (and, in the event the certificates representing such Restricted Stock are held by the Company, such Restricted Stock will be so transferred without any further action by the Participant) in accordance with Section 6.3 above. (c) Any payment or benefit under a 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 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, in the event of a consolidated 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 8 "acquisition transaction"), all outstanding Awards will terminate as of the effective date of the acquisition transaction, and the following will apply: (a) Each outstanding Option and Stock Appreciation Right will become exercisable in full 10 days prior to the anticipated effective date of the proposed acquisition transaction unless otherwise expressly provided at the time of grant. (b) Each outstanding share of Restricted Stock will become free of all restrictions and conditions 10 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 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 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. 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 9 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 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 would 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. 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 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). 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 that may be delivered under the Plan under Section 4 above. 10 (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. 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 be issued to Employees. 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 EX-10.36 4 REGISTRATION RIGHTS AGREEMENT Exhibit 10.36 REGISTRATION RIGHTS AGREEMENT REGISTRATION RIGHTS AGREEMENT dated as of November 6, 1995 between AUTOTOTE CORPORATION, a Delaware corporation (the "Company"), and HARTFORD STOCK FUND and HARTFORD ADVISERS FUND (together, the "Funds"). Concurrently with the execution and delivery hereof, the parties have entered into an Agreement dated as of the date hereof (the "PIK Agreement"), pursuant to which the Company has agreed to pay the interest due on each of August 15, 1995 and February 15, 1996 on the Company's outstanding 5-1/2% Convertible Subordinated Debentures due 2001 (the "Debentures") by issuing shares of its Class A Common Stock, $.01 par value ("Class A Stock"), in lieu of cash, all upon the terms and subject to the conditions provided therein. To induce the Funds to enter into the PIK Agreement, the Company has agreed to provide the registration rights set forth in this Agreement. NOW, THEREFORE, the parties hereto hereby agree as follows: 1. Definitions. ----------- As used in this Agreement, the following capitalized terms shall have the following meanings: BT Shares: Shares of common stock of the Company issued or issuable --------- pursuant to the warrants heretofore issued to Bankers Trust Company and others pursuant to a Warrant Agreement dated as of September 14, 1995. Business Day: Each day that is not a Saturday or Sunday or a day on ------------ which banks located in the City of New York are authorized or required to be closed. Commission: The Securities and Exchange Commission. ---------- Exchange Act: The Securities Exchange Act of 1934, as amended. ------------ Holders: The Funds (so long as they continue to hold Registrable ------- Securities) and any subsequent transferee of Registrable Securities to which the registration rights granted hereunder are assigned in accordance with Section 3(c). Interest Shares: (i) Shares of Class A Stock issued by the Company --------------- to the Funds in satisfaction of interest due on August 15, 1995 or February 15, 1996 on the Debentures, and (ii) any securities issued by the Company with respect to any of the securities referred to in clause (i) above or this clause (ii) by way of stock dividend or stock split or in connection with a combination of shares, recapitalization, merger, consolidation or other reorganization or otherwise. Person: An individual, partnership, corporation, joint venture, ------ trust, estate, unincorporated organization, or a government or agency or political subdivision thereof. Prospectus: The prospectus included in a Registration Statement, as ---------- amended or supplemented by any prospectus supplement and by all other amendments thereto, including post-effective amendments, and all material incorporated by reference into such prospectus. Registrable Securities: Any Interest Shares until (i) one or more ---------------------- registration statements covering such Interest Shares have become effective under the Securities Act and such Interest Shares have been disposed of pursuant to such effective registration statement, (ii) such Interest Shares have been sold under circumstances in which all of the applicable conditions of Rule 144 (or any similar provisions then in force) under the Securities Act are met or under which such Interest Shares may be sold pursuant to Rule 144(k), (iii) such Interest Shares may be sold pursuant to Rule 144(k), or (iv) the Company has delivered a new certificate or other evidence of ownership for such Interest Shares not bearing any legend relating to restrictions on transfer and such Interest Shares may be resold without subsequent registration under the Securities Act, or (v) such Interest Shares shall have ceased to be outstanding. Registration Expenses: See Section 2(e). --------------------- Registration Statement: Any registration statement of the Company ---------------------- relating to the registration for resale of Registrable Securities pursuant to the registration statement, which is filed pursuant to the provisions of this Agreement, including the Prospectus included therein, all amendments and supplements thereto. Securities Act: The Securities Act of 1933, as amended. -------------- Suspension Period: See Section 2(a)(v). ----------------- 2. Registration Rights. ------------------- (a) Demand Registration Rights. (i) At any time prior to December -------------------------- 31, 1998, the Holders of more than 40% of all of the Interest Shares then outstanding may make a written request to the Company for registration of Registrable Securities under the Securities Act with the Commission (or any successor entity) for a public offering of Registrable Securities (a "Demand Registration"). The Holders shall have the right, in the aggregate, to one Demand Registration of all or any part of their Registrable Securities (which Demand Registration may be on Form S-2 or S-3 or other short-forms if the Company then qualifies for such short form registration); provided, however, -------- ------- that the Company shall not be required to effect a registration pursuant to this Section 2(a)(i) with respect to any Registrable Securities unless the request for registration covers Registrable Securities representing at least 40% of all Registrable Securities then outstanding and held by the Holders. Whenever the Company shall receive a request for a Demand Registration, the Company will promptly give notice of such registration to all Holders and shall as expeditiously as is reasonable, use its best efforts to effect the registration under the Securities Act of the Registrable Securities with respect to which the Company has received written requests for inclusion therein within 15 days after such notice is given. All requests made pursuant to this Section 2(a)(i) will specify the number of shares of Registrable Securities to be registered and will also specify the intended methods of disposition thereof. 2 (ii) A registration initiated as a Demand Registration shall not be deemed a Demand Registration (i) until a registration statement with respect thereto has become effective and has remained effective for the period of time in which the Company is required to keep such registration statement effective under this Agreement (without giving effect to any Suspension Period), provided, -------- however, that a registration that does not become effective after the Company - ------- has filed a registration statement with respect thereto solely by reason of the refusal to proceed of the Holders shall be deemed to have been effected by the Company, (ii) if after such registration statement has become effective, such registration statement is interfered with by any stop order, injunction or other order or requirement of the Commission or other governmental agency or court for any reason and, as a result thereof, the offering of Registrable Securities is terminated prior to the sale thereof, unless prior thereto the Holders had a period of 30 consecutive days during which they were permitted to sell their Registrable Securities pursuant to such registration statement, or (iii) if after such registration statement has become effective, the Company exercises any of its rights under Section 2(a)(v), unless after giving effect to any termination of a Suspension Period the Holders had a period of 30 consecutive days during which they were permitted to sell their Registrable Securities pursuant to such registration statement. (iii) If the Holders so elect, the offering of such Registrable Securities pursuant to such Demand Registration shall be in the form of an underwritten offering. In any such underwritten offering, the investment banker or investment bankers and manager or managers that will administer the offering will be selected by the Holders of a majority of the Registrable Securities included in such offering; provided, that such investment bankers and managers -------- must be reasonably acceptable to the Company. (iv) The Company may delay the filing of a registration statement for up to 120 days if, at the time of a request for registration under Section 2(a)(i), (A) the Company is a party to a transaction involving the purchase, sale, conversion or issuance of securities of the Company (other than a transaction which is specifically not prohibited in Rule 10b-6 promulgated by the Commission under the Exchange Act), (B) in the good faith judgment of the Company's Board of Directors, there is material undisclosed information concerning the Company or any subsidiary of the Company which has not been disclosed to the general public for bona fide business reasons, or (C) financial ---- ---- statements required to be included or incorporated in the registration statement have not been prepared or are otherwise not available. In addition, the Company shall not be obligated to honor any such request for registration under Section 2(a)(i) at any time starting with the date 30 days prior to the Company's good faith estimate of the date of filing of, and ending on the date 120 days following the effective date of, a registration statement in connection with a bona fide public offering. The Company shall promptly notify the Holders of any delay in such filing, the reasons for such delay and proposed length of such delay. (v) The Company may suspend the effectiveness of any registration statement or, without suspending such effectiveness, instruct the Holders that no sales of Registrable Securities included in such registration statement may be made (and the Holders shall forthwith discontinue disposition of any such Registrable Securities) if, in the Company's good faith judgment, the Company would be required to disclose any actions taken or proposed to be taken by the Company, which disclosure would have a material adverse effect on the Company or on 3 such actions (a "Suspension Period") by providing the Holders with notice of such Suspension Period and the reasons therefor. The Company shall use its best efforts to provide such notice a reasonable number of days prior to the commencement of a Suspension Period, provided that in any event the Company shall provide such notice no later than the commencement of such Suspension Period. The Suspension Period shall not exceed 120 days in any consecutive 365- day period, provided that no more than one Suspension Period may be commenced in any such 365-day period. The Company shall give prompt notice to the Holders of the termination of any Suspension Period. (b) Piggy-Back Registration. If, at any time or from time to time ----------------------- prior to December 31, 1998 while any Registrable Securities are outstanding, the Company proposes to register any of its equity securities or debt securities convertible into its equity securities (whether for its own or others' account) to be offered for cash or cash equivalents in a public offering under the Securities Act (other than by a registration statement on Form S-8 or any other form that does not include substantially the same information as would be required in a form for the general registration of securities or that would not be available for registration of Registrable Securities), the Company shall, as expeditiously as is reasonably possible (but in no event later than 30 days prior to any such registration), give notice to the Holders of the Company's intention to effect such registration. If, within 15 days after receipt of such notice, any Holder submits a written request to the Company specifying the Registrable Securities such Holder proposes to sell or otherwise dispose of (a "Piggy-Back Registration"), the Company shall include the number of shares of Registrable Securities specified in such Holder's request in such registration statement and the Company shall use its best efforts to effect the registration under the Securities Act of such Registrable Securities to the extent requisite to permit the proposed sale or other disposition thereof, provided, however, -------- ------- that if, at any time after giving notice of its intention to register any securities and prior to the effective date of the registration statement filed in connection with such registration, the Company shall determine not to register or to delay registration of such securities, the Company shall give notice of such determination to the Holders and, thereupon, (i) in the case of a determination not to register any securities, the Company shall be relieved of its obligation to register any Registrable Securities in connection with such registration (but not from any obligation of the Company to pay the Registration Expenses in connection therewith), and (ii) in the case of a determination to delay registering any securities, the Company shall be permitted to delay registering any Registrable Securities, for the same period as the delay in registering such other securities; and, provided, further, that if, after any -------- ------- such registration statement has been declared effective, the Company reasonably determines that it would be required to disclose any actions taken or proposed to be taken by the Company, which disclosure would have a material adverse effect on the Company or on such actions, the Company shall, subject to discontinuance of sales of all other securities covered by the registration statement, be entitled to suspend the effectiveness of such registration statement, or without suspending such effectiveness, to request that each Holder forthwith discontinue the disposition of such Registrable Securities and each such Holder agrees that it will discontinue the disposition of such Registrable Securities pursuant to such registration statement (so long as the disposition of all other such securities is also discontinued) and thereupon the Company shall be relieved of its obligation under this Section 2(b) with respect to such registration (but not from its obligation to pay the Registration Expenses in connection therewith to the extent provided in Section 2(e)). Any Holder participating in an underwritten offering pursuant to this Section 2(b) shall, if required by the managing underwriter or underwriters of 4 such offering, enter into an underwriting agreement in a form customary for underwritten offerings of the same general type as such offering. No Holder shall have the right to include any Registrable Securities in a registration statement initiated as a Piggy-Back Registration under this Section 2(b) unless (i) such securities are of the same class and type as the Registrable Securities being registered, and (ii) if such Piggy-Back Registration is an underwritten offering, the Company or such Person, as applicable, agree in writing to sell their securities on the same terms and conditions as apply to the Registrable Securities being sold. (c) Reduction of Offering. Notwithstanding anything contained --------------------- herein, if, in the opinion of the managing underwriter or underwriters of an offering described in Section 2(a) or (b), the size of the offering that the Holders, the Company or any other Person intends to make or the kind or combination of securities that the Holders, the Company and any other Persons intend to include in such offering are such that the success of the offering would be materially and adversely affected by inclusion of the Registrable Securities requested to be included, including if marketing factors require a limitation of the number of Registrable Securities to be underwritten, then: (i) in the case of a Demand Registration, the amount of any Class A Stock proposed to be offered shall be reduced or excluded from the offering as follows: If shares of common stock of the Company issued or issuable pursuant to the warrants heretofore issued to Lehman Brothers Finances S.A. and Pilgrim Prime Rate Trust (such warrants, the "Lehman Warrants," and such shares, the "Lehman Shares") are proposed to be included in the underwriting as a result of the exercise of incidental registration rights previously granted under the Lehman Warrants, then the number of shares that shall be included in the underwriting shall be allocated as follows: (A) one Lehman Share shall be included for each share held by the Holders and all other holders of common stock of the Company possessing registration rights whose shares are to be included in the underwriting and any shares to be sold for the account of the Company (collectively, the "Non-Lehman Shares") until either the limit is reached or all the Lehman Shares are included in the underwriting (so that an equal number of Lehman Shares and Non-Lehman Shares are included in the underwriting pursuant to this clause (A)), and (B) any excess shares up to such limitation shall be Non-Lehman Shares. In allocating Non-Lehman Shares under clauses (A) and (B) of the immediately preceding sentence, or if no Lehman Shares are proposed to be included in the underwriting, the amount allocated shall be such that each holder of Non-Lehman Shares (including any Holder) may include in the underwriting that portion of the amount to be allocated which the number of shares proposed to be included by such holder bears to the aggregate number of shares proposed to be included by holders of all Non-Lehman Shares. (ii) in the case of a Piggy-Back Registration, the amount of any Class A Stock proposed to be offered shall be reduced or excluded from the offering as follows: 5 (A) If the registration is initiated as a result of the exercise by a holder of Lehman Shares of demand registration rights ("Lehman Demand Rights"), then the number of shares to be included in the underwriting shall be allocated as follows: (1) all Lehman Shares to be sold shall be included and (2) any additional shares to be included shall be allocated pursuant to the last sentence of Section 2(c)(i) and (B) if the registration is not initiated as a result of the exercise of Lehman Demand Rights, then the number of Non-Lehman Shares of holders not initiating the registration which may be included therein shall be allocated as set forth in the last sentence of Section 2(c)(i), subject to Section 2(c)(i)(A) if Lehman Shares are included as a result of the exercise of incidental registration rights relating thereto; provided, that, in the case of clauses (A) and (B) of this paragraph, if BT Shares are proposed to be included in the registration as a result of the exercise of any registration rights previously granted to the holders of BT Shares, all of such BT Shares shall be included in any such registration before any Non-Lehman Shares held by the Holders. (d) Registration Procedures. Whenever the Holders request that any ------------------------ Registrable Securities be registered pursuant to this Section 2, the Company will, subject to the limitations otherwise provided in this Agreement, use its best efforts to effect the registration and the sale of such Registrable Securities in accordance with the intended method of disposition thereof, and in connection with any such request: (i) The Company will prepare and file with the Commission a registration statement on any form for which the Company then qualifies or which counsel for the Company shall deem appropriate and which form shall be available for the sale of the Registrable Securities to be registered thereunder in accordance with the intended method of distribution thereof, and use its best efforts to cause such filed registration statement to become and remain effective for a period of not less than 120 days or, if earlier, until all of such Registrable Securities have been disposed of, subject to any Suspension Period which will suspend any remaining portion of such 120-day period until termination of such Suspension Period. (ii) The Company will, if requested, prior to filing a registration statement or prospectus or any amendment or supplement thereto, furnish to the Holders requesting registration of Registrable Securities and each underwriter, if any, of the Registrable Securities covered by such registration statement copies of such registration statement as proposed to be filed, and thereafter furnish to the Holders requesting registration of Registrable Securities and underwriter, if any, such number of copies of such registration statement, each amendment and supplement thereto (in each case including all exhibits thereto and documents incorporated by reference therein), the prospectus included in such registration statement (including each preliminary prospectus) and such other documents as the Holders requesting registration of Registrable Securities or underwriter may reasonably request in order to facilitate the disposition of the Registrable Securities owned by such Holders. (iii) After the filing of the registration statement, the Company will promptly notify the Holders of any stop order issued or threatened by the Commission and take 6 all reasonable actions required to prevent the entry of such stop order or to remove it if entered. (iv) The Company will use its best efforts to register or qualify the Registrable Securities under such other securities or blue sky laws of such jurisdictions in the United States as the Holders requesting registration of Registrable Securities reasonably (in light of such Holders' intended plan of distribution) request and do any and all other acts or things reasonably necessary or advisable to enable the disposition in such jurisdictions of the Registrable Securities covered by the registration statement; provided that the Company will not be required to (A) qualify -------- generally to do business in any jurisdiction where it would not otherwise be required to qualify but for this paragraph (iv), (B) subject itself to taxation in any such jurisdiction or (C) consent to general service of process in any such jurisdiction. (v) The Company will immediately notify the Holders, at any time when a prospectus relating thereto is required to be delivered under the Securities Act, of the occurrence of an event requiring the preparation of a supplement or amendment to such prospectus so that, as thereafter delivered to the purchasers of such Registrable Securities, such prospectus will not contain an untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading and promptly make available to the Holders any such supplement or amendment. (vi) The Company will enter into customary agreements (including an underwriting agreement in customary form) and take such other actions as are reasonably required in order to expedite or facilitate the disposition of such Registrable Securities. (vii) The Company will make available for inspection by the Holders requesting registration of Registrable Securities, any underwriter participating in any disposition pursuant to such registration statement and any attorney, accountant or other professional retained by such Holders or underwriter (collectively, the "Inspectors"), all financial and other records, pertinent corporate documents and properties of the Company (collectively, the "Records") as shall be reasonably necessary to enable them to exercise their due diligence responsibility, and cause the Company's officers, directors and employees to supply all information reasonably requested by any Inspectors in connection with such registration statement. Records that the Company determines, in good faith, to be confidential and which it notifies the Inspectors are confidential shall not be disclosed by the Inspectors unless (A) the disclosure of such Records is necessary to avoid or correct a misstatement or omission in such registration statement or (B) the release of such Records is ordered pursuant to a subpoena or other order from a court of competent jurisdiction. Each Holder agrees that information obtained by it as a result of such inspections shall be deemed confidential and shall not be used by it as the basis for any market transactions in the securities of the Company or its Affiliates unless and until such is made generally available to the public. (viii) The Company will furnish to the Holders requesting registration of Registrable Securities and to each underwriter, if any, a signed counterpart, addressed 7 to such Holders or underwriter, of (i) an opinion or opinions of counsel to the Company and (ii) a comfort letter or comfort letters from the Company's independent public accountants, each in customary form and covering such matters of the type customarily covered by opinions or comfort letters, as the case may be. (ix) The Company will otherwise use its best efforts to comply with all applicable rules and regulations of the Commission, and make available to the Holders, as soon as reasonably practicable, an earnings statement covering a period of 12 months, beginning within three months after the effective date of the registration statement, which earnings statement shall satisfy the provisions of Section 11(a) of the Securities Act. (x) The Company will (at its own expense) use its best efforts to cause all such Registrable Securities to be listed on each securities exchange or automated inter-dealer quotation system, as the case may be, on which similar securities issued by the Company are then listed, if the listing of such Registrable Securities is then permitted by the rules of such exchange or system. The Company may require the Holders requesting registration of Registrable Securities to promptly furnish in writing to the Company such information regarding the distribution of the Registrable Securities as the Company may from time to time reasonably request and such other information as may be legally required in connection with such registration. The Holders agree that, upon receipt of any notice from the Company of the happening of any event of the kind described in Section 2(d)(iii) or (v), the Holders will forthwith discontinue disposition of any Registrable Securities registered pursuant to this Section 2 pursuant to the registration statement covering such Registrable Securities until any such stop order (if entered) has been removed or the Holders' receipt of the copies of the supplemented or amended prospectus contemplated by Section 2(d)(v), and, if so directed by the Company, the Holders will deliver to the Company all copies, other than permanent file copies then in such Holders' possession, of the most recent prospectus covering such Registrable Securities at the time of receipt of such notice. If the Company shall give such notice, the Company shall extend the period during which such registration statement shall be maintained effective (including the period referred to in Section 2(d)(i)) by the number of days during the period from and including the date of the giving of notice pursuant to Section 2(d)(iii) or (v), as the case may be, to the date when the Company shall have removed any stop order that has been entered or the date that the Company shall make available to the Holder a prospectus supplemented or amended to conform with the requirements of Section 2(d)(v), as the case may be. (e) Registration Expenses. In connection with any registration --------------------- statement required to be filed hereunder, the Company shall pay the following registration expenses incurred in connection with the registration hereunder (the "Registration Expenses"): (i) all registration and filing fees and expenses (including filings made with the National Association of Securities Dealers Inc.), (ii) fees and expenses of compliance with federal securities and state blue sky or securities laws; (iii) expenses of printing; (iv) fees and disbursements of counsel for the Company; (v) all application and filing fees in connection with listing the Registrable Securities on a national securities exchange or automated quotation system pursuant to the requirements 8 hereof; (vi) all fees and disbursements of independent certified public accountants of the Company (including the expenses of any "cold comfort" or "agreed upon procedures" letters required by or incident to such performance); and (vii) internal expenses of the Company (including, without limitation, all salaries and expenses of its officers and employees performing legal or accounting duties), the expense of any annual audit, and the fees and expenses of any Person, including special experts, retained by the Company. The Company shall have no obligation to pay any underwriting fees, discounts or commissions attributable to the sale of Registrable Securities, or any out-of-pocket expenses of Holders selling Registrable Securities under this Section 2 (or any of the agents who manage any Holder's account). (f) Indemnification and Contribution. (i) The Company agrees to -------------------------------- indemnify and hold harmless each Holder and each Person, if any, who controls such Holder within the meaning of Section 15 of the Act or Section 20 of the Exchange Act from and against any and all losses, claims, damages, liabilities and expenses (including, without limiting the foregoing but subject to Section 6(c) hereof, the reasonable legal and other expenses incurred in connection with any action, suit or proceeding or any claim asserted) arising out of or based upon any untrue statement or alleged untrue statement of a material fact contained in any Registration Statement or the Prospectus (as amended or supplemented if the Company shall have furnished any amendments or supplements thereto) or any preliminary Prospectus, or arising out of or based upon any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made in the case of the Prospectus, not misleading, except insofar as such losses, claims, damages, liabilities, or expenses arise out of or are based upon any such untrue statement or omission or alleged untrue statement or omission based upon information (i) relating to such Holder, furnished in writing to the Company by or on behalf of such Holder expressly for use therein or (ii) made in any preliminary Prospectus if a copy of the Prospectus (as amended or supplemented) was not sent or given by or on behalf of the Holder to the Person asserting any such loss, claim, damage or liability or obtaining such judgment at or prior to the written confirmation of the sale of the Registrable Securities as required by the Act, and the Prospectus (as so amended or supplemented) would have corrected such untrue statement or omission; provided, however, that the Company shall have furnished -------- ------- copies of such Prospectus (as so amended or supplemented) to the Holder in compliance with Section 2(d)(iii). (ii) As a condition to the inclusion of its Registrable Securities in any Registration Statement pursuant to this Agreement, each Holder thereof will furnish to the Company in writing, promptly after receipt of a request therefor, such information as the Company may reasonably request for use in connection with any Registration Statement, Prospectus or preliminary prospectus and agrees to indemnify and hold harmless, the Company and its directors, its officers who sign such Registration Statement, and any Person controlling the Company within the meaning of Section 15 of the Act or Section 20 of the Exchange Act to the same extent as the indemnity from the Company to each Holder and Persons controlling such Holder, but only with reference to information relating to such Holder furnished in writing by or on behalf of such Holder expressly for use in such Registration Statement or the Prospectus or any preliminary Prospectus included therein. In case any action shall be brought against the Company, any of its directors, any such officer, or any such controlling Person based on the Registration Statement, the Prospectus or any preliminary prospectus and in respect of which indemnity may be sought against one or more of the Holders, such Holders shall have the rights 9 and duties given to the Company (except that if the Company as provided in Section 2(f)(iii) shall have assumed the defense thereof such Holders shall not be required to do so, but may employ separate counsel therein and participate in the defense thereof but the fees and expenses of such counsel shall be at such Holders' expense) and the Company and its directors, any such officers, and any such controlling Person shall have the rights and duties given by Section 2(f)(iii). In no event shall the liability of any selling Holder hereunder be greater than the gross proceeds received by such Holder upon the sale of the Registrable Securities giving rise to such indemnification obligation. (iii) In case any action or proceeding shall be brought against any Holder or any Person controlling such Holder, based upon the Registration Statement, the Prospectus or any preliminary prospectus, or any amendment or supplement thereto, and with respect to which indemnity may be sought against the Company, such Holder or such Person controlling such Holder shall promptly notify the Company in writing and the Company shall assume the defense thereof, including the employment of counsel reasonably satisfactory to such Holder and payment of all reasonable fees and expenses relating thereto. Such Holder and such Persons controlling such Holder shall have the right to employ separate counsel in any such action or proceeding and participate in the defense thereof, but the fees and expenses of such counsel shall be at such Holder's expense unless (i) the employment of such counsel has been specifically authorized in writing by the Company, (ii) the Company has not assumed the defense and employed counsel reasonably satisfactory to such Holder within 15 days after notice of any such action or proceeding, or (iii) the named parties to any such action or proceeding (including any impleaded parties) include both a Holder or any Person controlling such Holder and the Company and such Holder or any Person controlling such Holder shall have been advised by such counsel that there may be one or more legal defenses available to such Holder or Person controlling such Holder that are different from or additional to those available to the Company (in which case the Company shall not have the right to assume the defense of such action or proceeding on behalf of such Holder or controlling Person, it being understood, however, that the Company shall not, in connection with any one such action or separate but substantially similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances, be liable for the reasonable fees and expenses of more than one separate firm of attorneys for all such Holders and controlling Persons, which firm shall be designated in writing by the Holders of a majority of the Registrable Securities. The Company shall not be liable for any settlement of any such action effected without the written consent of the Company, but if settled with the written consent of the Company, which consent shall not be unreasonably withheld, or if there is a final judgment for the plaintiff, the Company agrees to indemnify and hold harmless such Holder and all Persons controlling such Holder from and against any loss or liability by reason of such settlement or judgment. (iv) If the indemnification provided for in this Section 2(f) is unavailable to an indemnified party under Sections 2(f)(i) or (ii) in respect of any losses, claims, damages, liabilities or expenses referred to therein, then each indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages, liabilities and expenses in such proportion as is appropriate to reflect the relative fault of the Company on the one hand and the Holders on the other hand in connection with the statements or omissions which resulted in such losses, claims, damages, liabilities or expenses, as well as any other relevant equitable considerations; provided -------- 10 that no Holder shall be required to contribute an amount greater than the gross proceeds received by such Holder with respect to the sale of Registrable Securities giving rise to the indemnification obligation under this Section 2(f). The relative fault of the Company on the one hand and the Holders on the other hand shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission to state a material fact relates to information supplied by the Company on the one hand or by the Holders on the other hand and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The amount paid or payable by an indemnified party as a result of the losses, claims, damages, liabilities or expenses shall be deemed to include, subject to the limitations set forth above, any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. (v) The Company and the Holders agree that it would not be just and equitable if contribution pursuant to this Section 2(f) were determined by a pro rata allocation or by any other method of allocation that does not take account of the equitable considerations referred to in Section 2(f)(iv). The amount paid or payable by an indemnified party as a result of the losses, claims, damages, liabilities and expenses referred to in Section 2(f)(iv) shall be deemed to include, subject to the limitations set forth above, any legal or other expenses reasonably incurred by such indemnified party in connection with investigating any claim or defending any such action, suit or proceeding. No Person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any Person who was not guilty of such fraudulent misrepresentation. (g) Participation in Underwritten Registrations. Subject to the ------------------------------------------- registration rights granted by the Company prior to the date hereof, no Person may participate in any underwritten registration hereunder unless such Person (i) agrees to sell such Person's securities on the basis provided in any underwriting arrangements approved by the Company and the Holders and (ii) completes and executes all questionnaires, powers of attorney, indemnities, underwriting agreements and other documents reasonably required under the terms of such underwriting arrangements and these registration rights. (h) Holdback Agreement. Each Holder whose Registrable Securities are ------------------ covered by a Registration Statement filed pursuant to this Section 2 agrees, upon the request of the underwriter(s) in any underwritten offering permitted pursuant hereto, not to effect any public sale or distribution of securities of the Company of the same class as the securities or any security convertible into or exchangeable or exercisable for such security, included in such Registration Statement, including a sale pursuant to Rule 144 under the Securities Act (except as part of such registration), during the 30-day period prior to, and during the 90-day period beginning on, the closing date of any such underwritten offering made pursuant to such Registration Statement, to the extent timely notified in writing by the Company or such underwriter(s). 3. Miscellaneous ------------- (a) Amendments and Waivers. The provisions of this Agreement may not ---------------------- be amended, modified or supplemented, and waivers or consents to or departures from the 11 provisions hereof may not be given unless the Company has obtained the consent of Holders of at least 50% of the then outstanding Registrable Securities. (b) Notices. All notices and other communications provided for or ------- permitted hereunder shall be made in writing by hand-delivery, first-class mail (registered or certified, return receipt requested), telecopier, or air courier guaranteeing overnight delivery: (i) if to a Holder, to the most current address of such Holder set forth on the records of the Company; and (ii) if to the Company, to Autotote Corporation, 888 Seventh Avenue, Suite 1808, New York, New York 10106, Attention: Martin E. Schloss, Esq., with copies to Kronish, Lieb, Weiner & Hellman LLP, 1114 Avenue of the Americas, New York, New York 10036, Attention: Steven K. Weinberg, Esq. All such notices and communications shall be deemed to have been duly given: at the time delivered by hand, if personally delivered; five business days after being deposited in the mail, postage prepaid, if mailed; when receipt acknowledged, if telecopied; and on the next business day, if timely delivered to an air courier guaranteeing overnight delivery. (c) Successors and Assigns. The registration rights granted to the ---------------------- Funds pursuant to this Agreement shall not be for the benefit of, or enforceable by, any subsequent holders of the Registrable Securities; provided, however, -------- ------- that the registration rights granted to the Funds pursuant to this Agreement may be assigned to a transferee of Registrable Securities who signs a writing, in form and substance satisfactory to the Company, making such transferee a party to this Agreement. This Agreement shall inure to the benefit of and be binding upon the successors and assigns of the Company. Except as aforesaid, no Person shall acquire or have any right under or by virtue of this Agreement. (d) Counterparts. This Agreement may be executed in any number of ------------ counterparts and by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. (e) Headings. The headings in this Agreement are for convenience of -------- reference only and shall not limit or otherwise affect the meaning hereof. (f) Governing Law. This Agreement shall be governed by and construed ------------- in accordance with the laws of the State of New York, without regard to the conflicts of law principles thereof. (g) Severability. If any one or more of the provisions contained ------------ herein, or the application thereof in any circumstance, is held invalid, illegal or unenforceable, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions contained herein shall not be affected or impaired thereby. 12 (h) Entire Agreement. This Agreement, together with the PIK Agreement ---------------- and the Debentures, is intended by the parties as a final expression of their agreement and intended to be a complete and exclusive statement of the agreement and understanding of the parties hereto in respect of the subject matter contained herein. There are no restrictions, promises, warranties or undertakings, other than those set forth or referred to herein with respect to the registration rights granted by the Company with respect to the Registrable Securities. This Agreement, together with the PIK Agreement and the Debentures, supersedes all prior agreements and understandings between the parties with respect to such subject matter (including the letter agreement dated September 28, 1995 between the Company and Wellington Management Company, on behalf of the Funds). IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. AUTOTOTE CORPORATION HARTFORD STOCK FUND HARTFORD ADVISERS FUND By --------------------------- Name: By: WELLINGTON MANAGEMENT COMPANY Title: By --------------------------- Name: Title: 13 EX-10.37 5 INTEREST AGREEMENT Exhibit 10.37 AGREEMENT AGREEMENT dated as of November 6, 1995 between AUTOTOTE CORPORATION, a Delaware corporation (the "Company"), and HARTFORD STOCK FUND and HARTFORD ADVISERS FUND (together, the "Funds"). The Funds are the beneficial and record holders of $40,000,000 principal amount of the Company's 5-1/2% Convertible Subordinated Debentures due 2001 (the "Debentures"). By letters dated August 10, 1995 and September 8, 1995, the Company and Wellington Management Company, on behalf of the Funds and any subsequent holders of the Debentures, agreed that no interest payments on the Debentures would be made by the Company during the period from August 10, 1995 through and including October 5, 1995 (including the interest payment in the amount of $1.1 million due on August 15, 1995). The parties have agreed that the Company will pay the interest due on the Debentures in the amount of $1.1 million on each of August 15, 1995 and (absent prior conversion of the Debentures) February 15, 1996 by issuing shares of its Class A Common Stock, $.01 par value ("Shares"), in lieu of cash, all upon the terms and subject to the conditions hereinafter provided. NOW, THEREFORE, the parties hereto hereby agree as follows: 1. Issuance of Shares in Lieu of Cash Payment of Interest. (a) On ------------------------------------------------------ the basis of the representations, warranties and agreements contained in, and subject to the terms and conditions of, this Agreement, the Funds (being the holders of 100% of the Debentures) hereby purchase and accept from the Company, and the Company hereby issues and sells to the Funds, in lieu of and in full satisfaction of the cash interest payment due on August 15, 1995 on the Debentures, an aggregate of 422,500 Shares (the "August/1995 Shares"), such Shares to be allocated pro rata in accordance with the respective principal --- ---- amount of Debentures held by the Funds (i.e., 40% to Hartford Stock Fund and 60% ---- to Hartford Advisers Fund). The Company shall deliver to each of the Funds certificates representing the August/1995 Shares so purchased by it, duly registered in its name, within 14 business days after the date hereof. Each of the Funds hereby waives any Event of Default (as such term is defined pursuant to the terms of the Debentures) that would otherwise be deemed to arise or have arisen under the terms of the Debentures solely by reason of the Company's failure to make the cash interest payment due on August 15, 1995 on the Debentures, provided the Company issues to the Funds the August/1995 Shares in accordance with the provisions of this Section 1(a). (b) The Funds (in their capacity as the holders of 100% of the Debentures) and the Company hereby agree, pursuant to Section 6(a) of the terms of the Debentures, that the terms thereof are hereby amended as follows: (i) The Company shall pay the interest due on February 15, 1996 on the Debentures then outstanding (aggregating $1.1 million assuming no prior conversion of the Debentures) by issuing to the holders of the Debentures on that date (pro rata in accordance with the respective principal amount of --- ---- Debentures held by such holders), in lieu of cash, such whole number of Shares (the "February/1995 Shares"), rounded up or down to the nearest Share, as shall equal the product of (A) the quotient obtained by dividing (1) the amount of interest due on that date on the Debentures by (2) the Market Price per Share (as hereinafter defined) on that date, times (B) 1.5. The Company shall deliver ----- to each such holder certificates representing the February/1995 Shares to be so issued to it, duly registered in its name, on or prior to March 18, 1996. Notwithstanding anything to the contrary contained in the terms of the Debentures, no Event of Default (as such term is defined pursuant to the terms of the Debentures) shall be deemed to arise or have arisen under the terms of the Debentures solely by reason of the Company's failure to make the cash interest payment that (absent this Section 1(b)(i)) would have been due on February 15, 1996 on the Debentures, provided the Company issues the February/1995 Shares to the holders of the Debentures in accordance with the provisions of this Section 1(b)(i). (ii) As used in this Agreement, "Market Price Per Share" on any date means the average of the daily closing prices for the 20 consecutive trading days immediately preceding such date. For this purpose, the closing price for each day shall be the last reported sale price per Share of the Shares on the NASDAQ National Market System ("NASDAQ-NMS") on that date or, if there shall have been no sale of the Shares on that date, the last reported sale price per Share on the NASDAQ-NMS prior to that date, or, if the Shares shall not at the time be listed on the NASDAQ-NMS, the average of the last bid and asked prices per Share for such Shares on that date on the over-the-counter market, as reported by the National Quotation Bureau, or, if the Shares shall not at the time be listed on the NASDAQ-NMS and quotations for the Shares shall not at the time be reported by the National Quotation Bureau, the fair value per Share of such Shares on that date as determined in good faith by the Board of Directors of the Company (or a duly authorized committee thereof). For the purposes hereof, "trading day" means a day on which the NASDAQ-NMS is open for the transaction of business or, if the Shares are not listed or admitted to trading on the NASDAQ-NMS, any business day. (c) The Funds shall promptly (and in no event later than ten days after the date hereof) deliver to the Company the Debentures so that the Company may place an appropriate notation on the Debentures about the amendment provided for in Section 1(b)(i), whereupon the Debentures shall be returned to the Funds. Such amendment shall be conclusive and binding on the Funds and any future holders of the Debentures (including any Debentures issued upon the registration of transfer thereof or exchange therefor or in lieu thereof), whether or not notation of such amendment is made thereon. 2. Registration Rights Agreement. Concurrently with the execution ----------------------------- and delivery hereof, the parties have entered into a Registration Rights Agreement dated as of the date hereof (the "Registration Rights Agreement"), providing the Funds with certain 2 registration rights with respect to the August/1995 Shares and the February/1995 Shares issued or to be issued to the Funds. 3. Representations and Warranties of the Company. The Company --------------------------------------------- hereby represents and warrants to, and agrees with, the Funds as follows: (a) The Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of the State of Delaware. (b) Neither the execution, delivery and performance by the Company of this Agreement or the Registration Rights Agreement nor the consummation by the Company of any of the transactions contemplated hereby or thereby (including, without limitation, the issuance and sale by the Company of the August/1995 Shares or the February/1996 Shares) will give rise to a right to terminate or accelerate the due date of any payment due under, or conflict with or result in the breach of any term or provision of, or constitute a default (or an event which with notice or lapse of time or both would constitute a default) under, or require any consent or waiver under, or result in the execution or imposition of any lien, charge or encumbrance upon any properties or assets of the Company or any subsidiary thereof pursuant to the terms of, any indenture, mortgage, deed of trust or other agreement or instrument to which the Company or any subsidiary thereof is a party or by which they or any of their properties or business is bound, or any franchise, license, permit, judgment, decree, order, statute, rule or regulation applicable to the Company or any subsidiary thereof or violate any provision of the charter or by-laws of the Company or any subsidiary thereof, except for such consents or waivers that have already been obtained and are in full force and effect, or require any consent, approval, authorization or other order of or registration or filing with, any court, regulatory body, administrative agency or other governmental body, agency or official. (c) The August/1995 Shares and, when issued and delivered in accordance with Section 1(b), the February/1996 Shares will be validly issued, fully paid and nonassessable and free of any preemptive or similar rights. (d) All necessary corporate and shareholder action has been duly and validly taken to authorize the execution, delivery and performance by the Company of this Agreement and the Registration Rights Agreement. Each of this Agreement and the Registration Rights Agreement has been duly and validly authorized, executed and delivered by the Company and constitutes the legal, valid and binding obligation of the Company enforceable against the Company in accordance with its terms, except as the enforceability thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforcement of creditors' rights generally and by general equitable principles. (e) The Company has furnished each of the Funds with copies of its Annual Report on Form 10-K for the fiscal year ended October 31, 1994 (the "1994 Form 10-K") 3 and all documents heretofore filed with the Securities and Exchange Commission (the "Commission") pursuant to the Securities Exchange Act of 1934, as amended (the "Exchange Act"), since the filing of the 1994 Form 10-K (the 1994 Form 10-K and such other documents being referred to collectively as the "Exchange Act Documents"). 4. Representations and Warranties of the Funds. Each of the Funds ------------------------------------------- hereby represents and warrants to, and agrees with, the Company as follows: (a) All necessary corporate and shareholder action has been duly and validly taken to authorize the execution, delivery and performance by such Fund of this Agreement and the Registration Rights Agreement. Each of this Agreement and the Registration Rights Agreement has been duly and validly authorized, executed and delivered by such Fund (Wellington Management Company having full power and authority to execute and deliver each of this Agreement and the Registration Rights Agreement on behalf of such Fund) and constitutes the legal, valid and binding obligation of such Fund enforceable against such Fund in accordance with its terms, except as the enforceability thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforcement of creditors' rights generally and by general equitable principles. (b) Neither the execution, delivery and performance by such Fund of this Agreement or the Registration Rights Agreement nor the consummation of any of the transactions contemplated hereby or thereby will conflict with or result in the breach of any term or provision of, or constitute a default (or an event which with notice or lapse of time or both would constitute a default) under, or require any consent or waiver under, any indenture, mortgage, deed of trust or other agreement or instrument to which such Fund is a party or by which it or any of its properties or business is bound, or any franchise, license, permit, judgment, decree, order, statute, rule or regulation applicable to such Fund or violate any provision of the charter or by-laws of such Fund, except for such consents or waivers that have already been obtained and are in full force and effect, or require any consent, approval, authorization or other order of or registration or filing with, any court, regulatory body, administrative agency or other governmental body, agency or official. (c) Such Fund understands that the August/1995 Shares have not been, and when issued and delivered in accordance herewith the February/1996 Shares will not be, registered under the Securities Act of 1933, as amended (the "Securities Act"), in reliance upon the exemption from registration provided for under Section 4(2) of the Securities Act, and that the reliance of the Company on such exemption is predicated, in part, upon the truth and accuracy of the representations and warranties of such Fund set forth herein. Accordingly, such Fund agrees that, if any of such representations or warranties is no longer accurate, it shall promptly notify the Company. The August/1995 Shares and the February/1996 Shares acquired or to be acquired by such Fund are being acquired for investment for such Fund's own account and not as nominee or agent for any other person and without any view to any distribution of all or any part thereof (and, without limiting the generality of the foregoing, not for offer or sale in any manner that would be in violation of 4 federal securities or state blue sky or securities laws). Such Fund is an "investment company," as such term is defined in the Investment Company Act of 1940, as amended, and an "accredited investor," as such term is defined under Regulation D promulgated pursuant to the Securities Act, and has such knowledge and experience in financial and business matters and in making high risk investments that it is capable of evaluating the merits and risks of an investment in such Shares, it being acknowledged that an investment in such Shares will involve a high degree of risk that can result in substantial or even a total loss of the investment. Such Fund understands that it must bear, and is capable of bearing, the economic risk of its investment in such Shares for an indefinite period of time, as such Shares may not be sold, transferred or otherwise disposed of in the absence of an effective registration statement covering such Shares or an available exemption from registration under the Securities Act (and in a manner consistent with the representations, warranties and agreements of such Fund set forth herein). Such Fund understands that, except as provided for in the Registration Rights Agreement, the Company has no obligation or intention to register the August/1995 Shares or the February/1996 Shares under any federal or state securities laws in the United States. (d) Such Fund understands that the certificates evidencing the August/1995 Shares and the February/1996 Shares shall bear substantially the following legend: "THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY APPLICABLE STATE SECURITIES LAWS, AND MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN APPLICABLE EXEMPTION THEREFROM. ANY SALE OR OTHER TRANSFER OF SUCH SECURITIES WILL BE INVALID UNLESS A REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND ANY APPLICABLE STATE SECURITIES LAWS IS IN EFFECT AS TO SUCH SALE OR TRANSFER OR, IN THE OPINION OF COUNSEL TO THE COMPANY, SUCH REGISTRATION IS UNNECESSARY FOR SUCH SALE OR TRANSFER TO COMPLY WITH THE SECURITIES ACT AND ANY APPLICABLE STATE SECURITIES LAWS." (e) Such Fund acknowledges that it has received copies of the Exchange Act Documents and press releases dated October 16, 1995, October 19, 1995 and October 31, 1995, and that it has been furnished access to the business records of the Company and such additional information and documents as such Fund has requested, and has been afforded the opportunity to ask questions of and receive answers from representatives of the Company concerning the business, operations, market potential, capitalization, financial condition and prospects, and all other matters deemed relevant by such Fund, and that any information received by such Fund pursuant to the aforesaid procedures is not inconsistent with the information contained in the Exchange Act Documents and such press releases. Such Fund 5 further acknowledges that it has neither requested nor received any material, non-public information. In evaluating the suitability of an investment in the Shares, such Fund has not relied on any statement or information (whether oral or written), other than as set forth in the Exchange Act Documents and such press releases. Such Fund is not and will not be acquiring the August/1995 Shares or the February/1996 Shares as a result of any advertisement, article, notice or other communication published in any newspaper, magazine or similar media or broadcast over television or radio, or presented at any seminar or general meeting. (f) Such Fund has not taken any action that would cause the Company to be subject to any claim for brokerage commissions, finders' fees or similar compensation by any broker, finder or other person and such Fund hereby indemnifies the Company against any such claim caused by the actions of such Fund or any of its employees or agents. (g) All of the Debentures are owned (and since their original date of issuance have been owned) by the Funds. 5. Covenants of the Company. For a period of five years after the ------------------------ date of this Agreement, the Company shall furnish to the Funds, in addition to copies of such financial statements and other periodic and special reports as the Company may from time to time distribute generally to the holders of the Shares, a copy of each annual or other report filed by the Company with the Commission. 6. Miscellaneous. (a) The respective agreements, representations ------------- and warranties of the Company and of the Funds set forth in or made pursuant to this Agreement shall remain in full force and effect, regardless of any investigation made by or on behalf of any Fund or the Company, and shall survive delivery of the August/1995 Shares and the February/1996 Shares. (b) This Agreement, together with the Registration Rights Agreement and the Debentures, is intended by the parties as a final expression of their agreement and intended to be a complete and exclusive statement of the agreement and understanding of the parties hereto in respect of the subject matter contained herein. This Agreement, together with the Registration Rights Agreement and the Debentures, supersedes all prior agreements and understandings between the parties with respect to such subject matter (including the letter agreement dated September 28, 1995 between the Company and Wellington Management Company, on behalf of the Funds). (c) This Agreement has been and is made for the benefit of the Funds and their respective successors and assigns, and the Company and directors and officers of the Company and their respective successors and assigns, and no other person shall acquire or have any right under or by virtue of this Agreement. The term "successors and assigns" shall not include (except as otherwise provided herein) any purchaser of Debentures from any Fund merely because of such purchase. 6 (d) For the purposes of this Agreement, (i) the term "business day" means any day that is not a Saturday or Sunday or a day on which banks located in the City of New York are authorized or required to be closed; and (ii) the term "person" means an individual, partnership, corporation, joint venture, trust, estate, unincorporated organization, or a government or agency or political subdivision thereof. (e) All notices and communications hereunder shall be in writing and mailed or delivered or by facsimile if subsequently confirmed in writing, (a) if to the Funds, c/o Wellington Management Company, 75 State Street, Boston, MA 02109, Attn: Legal Department, facsimile no. 617-951-5760, and (b) if to the Company, to Autotote Corporation, 888 Seventh Avenue, Suite 1808, New York, New York 10106, Attention: Martin E. Schloss, Esq., with copies to Kronish, Lieb, Weiner & Hellman LLP, 1114 Avenue of the Americas, New York, New York 10036, Attention: Steven K. Weinberg, Esq. (f) This Agreement shall be governed by and construed in accordance with the laws of the State of New York without regard to conflicts of laws principles thereof. (g) This Agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. AUTOTOTE CORPORATION HARTFORD STOCK FUND HARTFORD ADVISERS FUND By --------------------------- Name: By: WELLINGTON MANAGEMENT COMPANY Title: By --------------------------- Name: Title: 7 EX-10.38 6 EMPLOYMENT AGREEMENT DEFAZIO Exhibit 10.38 AUTOTOTE CORPORATION 888 SEVENTH AVENUE SUITE 1808 NEW YORK, NEW YORK 10106 April 17, 1995 Mr. Thomas C. DeFazio 3l1 Codfish Lane Weston, Connecticut 06883 Dear Mr. DeFazio: Autotote Corporation (the "Company") wishes to retain your services upon the following terms and conditions: 1. Employment and Offices. You will serve the Company as its Executive Vice President and Chief Financial Officer, and as such you will have direct reporting responsibility for all financial and administrative functions of the Company. Additionally, as the Company's second-ranking senior officer, you will work with the Company's Chief Executive Officer to oversee and implement the Company's strategy and operations on a world-wide basis. 2. Term. The term of this Agreement shall commence on the date you join the Company, which shall be no later than April 17, 1995 (the "Effective Date") and shall end three (3) years thereafter (the "Initial Term"); provided, however, that the term of this Agreement shall be automatically extended for successive, additional terms of twelve months each (each, an "Additional Term") at the end of the Initial Term and each Additional Term, unless either you or the Company shall have given written notice to the other at least twelve months prior thereto that the term of this Agreement shall not be so extended. 3. Services. You agree to accept employment on a full time basis and to perform, to the best of your ability, the duties, undertake the responsibilities and exercise the authority customarily performed, undertaken and exercised by a chief financial officer of a publicly-held corporation, without commitment to other business endeavors, except that you may serve as a director of businesses and charities with the approval of the Board of Directors of the Company. 4. Compensation. (a) Base Salary. As base salary for your services as described in Section 3 above, and for the covenants set forth in Section 7 hereof, the Company will pay you a base salary of $275,000 per year ("Base Salary"), payable according to the Company's regular pay practices. (b) Performance Bonus. In addition to the amount payable as provided in Section 4(a) hereof, you shall be eligible to receive an annual performance bonus of up to 45% of Base Salary (the "Bonus") as follows: (i) 50% of the Bonus shall be based on the formula applicable to Group A executives as set forth in the Company's executive incentive compensation plan as in effect from time to time; and (ii) 50% of the Bonus shall be based on the achievement of objectives to be established by the Chief Executive Officer of the Company and the Board of Directors in their sole discretion, it being understood that no performance bonus is required by this Section 4(b)(ii). (c) You will be granted a five-year option (the "Option") to purchase 200,000 shares of the Company's Class A Common Stock, $.01 par value per share (the "Common Stock"), which shall become exercisable in three equal installments, on each of the first, second and third anniversaries of the date of grant. The exercise price of the Option shall be the closing price of the Common Stock on the NASDAQ National Market System on the Effective Date. Following the first anniversary of the Effective Date, the Chief Executive Officer and the Compensation Committee of the Board of Directors will review your stock option position as part of your overall first year performance review. (d) The Company will reimburse you for all reasonable costs of interim housing incurred by you for housing in New York, New York beginning on the Effective Date for a period not to exceed six months. The Company also agrees to pay you on the Effective Date a relocation allowance of $110,000; provided, however, that if you terminate this Agreement or the Company terminates this Agreement for Cause at any time before the second anniversary of the Effective Date, you will promptly repay to the Company an amount equal to the product of (i) $110,000 and (ii) a fraction, the numerator of which is the number of full months between the date of termination of the Agreement and the second anniversary of the Effective Date and the denominator of which is twenty-four (24) or, at your discretion, a number of shares of the Company's Class A Common Stock equal to the product of (x) 20,000 and (y) the fraction described in clause (ii) above. 5. Termination of Employment. (a) Notice. You may terminate this Agreement upon thirty (30) days' prior written notice to the Company. The Company may terminate this Agreement upon twelve (12) months' prior written notice to you; provided, however, that if the Company terminates this Agreement prior to the third anniversary of the date hereof, the Company shall promptly pay to you the greater of (i) an amount equal to one year's base salary at the then current rate or (ii) an amount equal to the product of (i) your then current monthly salary and (ii) the number of months, or fraction thereof remaining under the initial three-year term, except that the Company may terminate your employment hereunder for Cause, as defined in Section 5(d), at any time upon notice to you. (b) Termination Otherwise than for Cause Upon a Change in Control. If during the Initial Term or any Additional Term a Change of Control, as defined in Section 5(d), occurs and the Company terminates your employment other than for Cause within twelve (12) months following such Change of Control, you shall be entitled: (i) to collect from the Company a lump-sum payment equal to Base Salary for the remainder of the Initial Term, or any Additional Term then in effect, as the case may be; and (ii) the Option shall be accelerated to become fully vested and exercisable in full 10 days prior to the anticipated effective date of the Change in Control and will terminate as of the effective date of the Change in Control. For purposes of this Section 5(b), a termination nominally at your initiative but in fact induced without Cause by the Company shall be deemed a termination by the Company without Cause, rather than a voluntary termination, and in that event the Company shall make the payments to you provided in this Section 5(b). (c) Voluntary Termination or Termination by the Company. If during the Initial Term or any Additional Term your employment should terminate by reason of your voluntary act, or if the Company shall terminate your employment, you shall not be entitled to any compensation after such termination, except as otherwise provided in Section 5(b). (d) Definitions. For purposes of this Agreement, (i) "Cause" shall mean (A) conviction of fraud, crimes of moral turpitude or other conduct which reflects on the Company in a material and adverse manner; (B) a willful failure to carry out a directive of the Board of Directors or the Chief Executive Officer; (C) disloyalty, bad faith or embezzlement of funds of the Company; or (D) gross negligence or willful misconduct that is materially harmful to the Company. Cause shall be established by the good faith determination of the Board of Directors; and (ii) "Change of Control" means 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 the sale or transfer of substantially all the Company's assets. 2 (e) Death. Upon your death this Agreement shall terminate. The Company shall be obligated to make all Base Salary payments to you or your legal representative accrued up to the date of death. (f) Disability. In the event of your disability (whether total or partial, and whether temporary or permanent) which prevents your performing your duties hereunder, you shall be entitled to receive your Base Salary hereunder pursuant to Section 5(a) for the period of disability; provided, however, that if at any time after six months of disability your disability is total and permanent, or you are, as a result thereof, incapable of performing your duties under this Agreement, the obligation of the Company to make payments to you pursuant to this paragraph shall terminate from and after such date and this Agreement shall terminate. Disability shall be determined by a physician selected by mutual agreement of you and the Company. (g) Limitations. Notwithstanding anything in this Agreement to the contrary, the maximum amount of cash and other benefits payable (whether on a current or deferred basis and whether or not includible in income for income tax purposes) under this Agreement (the "Contract Benefits") shall be limited to the extent necessary to avoid causing any portion of such Contract Benefits, or any other payment in the nature of compensation to you, to be treated as a "parachute payment" within the meaning of Section 280G(b)(2) of the Internal Revenue Code of 1986, as amended. Any adjustment required to satisfy the limitation described in the preceding sentence shall be accomplished first by reducing any cash payments that would otherwise be made to you and then, if further reductions are necessary, by adjusting other benefits as determined by the Company. 6. Insurance for the Benefit of the Company. You agree that the Company may at any time or times and for the Company's own benefit (or for a lender to the Company) apply for and take out life, health, accident and other insurance covering you, either independently or together with others, in any amount which the Company may deem to be in its best interests. The Company shall own all rights in such insurance and proceeds thereof and you shall not have any right, title or interest therein. You agree to assist the Company at the Company's expense in obtaining any such insurance by, among other things, submitting to the customary examinations and correctly preparing, signing and delivering such applications and other documents as reasonably may be required. 7. Restrictive Covenants. (a) You agree that you will not, during your employment with the Company and for a period of twenty-four (24) months after termination thereof, engage (whether for compensation or without compensation) in any business activity, either as principal, proprietor, consultant, partner, officer, director, employee, agent or in any other capacity, which competes with any business then being conducted or planned (at the time of such termination) by the Company, its subsidiaries or affiliates in any geographic area in which the Company, its subsidiaries or affiliates are then engaged in such business. For purposes of this Section 7(a), the term "business activity" shall mean any activity whether conducted for profit or not for profit by an individual, partnership, firm, corporation, government or any other entity which competes with the Company. For purposes of this section 7(a), "Planned" shall refer to any business which has been actively discussed as a potential new business for the company during the twelve months prior to such termination. (b) You agree that, except as required in the performance of your duties hereunder, you will not at any time disclose to any person or entity any trade secrets, secret processes or any other confidential information belonging or relating to the Company, its business practices, personnel or those of its subsidiaries or affiliates; provided, however, this prohibition shall not apply to any such secret or confidential data which becomes generally publicly known or is publicly disclosed through or by persons other than you. This Section 7(b) shall survive the termination of this Agreement. (c) During your employment with the Company and for a period of twenty- four (24) months after termination of your employment with the Company, you will not, directly or indirectly, recruit or otherwise solicit employees of the Company, its subsidiaries or affiliates or otherwise induce such employees to leave 3 the Company, its subsidiaries or affiliates and to join or otherwise become employed by or associated with you or any company or organization with which you may then be employed or associated. (d) Upon the termination of this Agreement, all documents, records, notebooks, computer programs, data systems and similar repositories containing trade secrets or other confidential information, whether prepared by you or others, will be left with the Company. (e) You agree that any violation of the covenants in this Section 7 will cause the Company irreparable injury and agree that the Company may enforce said covenants by seeking injunctive or other equitable relief (in addition to any other remedies the Company may have at law for damages or otherwise) from a court of competent jurisdiction. In the event such court declares these covenants to be too broad to be specifically enforced, the covenants shall be enforced to the largest extent for the Company's protection as may be allowed by such court. You agree that no breach by the Company of, or other failure by the Company to perform, any of the covenants and obligations of the Company under this Agreement shall relieve you of any of your obligations under this Section 7, and that in the event of any such breach or failure of performance, you will seek no remedy other than damages at law. 8. Other Benefits. You shall be eligible for four weeks of paid vacation for each year of service under this Agreement. The Company will also provide you with all fringe benefits routinely furnished to senior executives of the Company. 9. Representation by Employee. You represent and warrant that your execution, delivery and performance of this Agreement will not violate, result in a breach of or constitute a default under any agreement, understanding or instrument to which you are a party or by which you are bound. 10. Miscellaneous. (a) This Agreement shall be binding on and inure to the benefit of the parties hereto and their respective heirs, legal representatives, successors and assigns. You may not assign this Agreement to any person or entity. In the event that the Company consolidates with or merges into another corporation and the Company is not the surviving corporation, or substantially all of the assets of the Company are sold to another corporation, this Agreement and the obligations of the parties shall survive such consolidation, merger or sale and shall bind the company and/or successor in interest of the Company. This Agreement may be modified or amended only by a written agreement signed by the parties hereto. (b) Each party hereby consents and submits to the jurisdiction of the federal and state courts in and of the State of Delaware and will accept service of process by registered or certified mail or the equivalent directed to the addresses set forth herein or such other addresses as shall have been furnished for this purpose by the parties or by whatever other means are permitted by such court. (c) This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware (other than internal conflict of law rules). (d) The waiver of any breach of any term or condition of this Agreement shall not be deemed to constitute a waiver of any other term or condition hereof. If any term or provision of this Agreement or the application thereof to any person or circumstance shall to any extent be invalid or unenforceable, the remainder of this Agreement or the application of such term or provision to persons or circumstances other than those as to which it is held invalid or unenforceable shall not be affected thereby, and each term and provision of this Agreement shall be valid and enforceable to the fullest extent permitted by law. (e) All notices pursuant to this Agreement shall be in writing and shall be given by depositing said notices in the United States, registered or certified mails, return receipt requested, addressed to the parties hereto at the addresses set forth below, or to such other addresses as may hereafter be specified by notice in writing given in the same manner by any party. 4 Notice to the Company: Autotote Corporation 888 Seventh Avenue Suite 1808 New York, New York 10106 Attention: Chief Executive Officer Notice to Employee: Thomas C. DeFazio 31 Codfish Lane Weston, CT 06883 (f) This Agreement constitutes the entire Agreement between the parties and supersedes all prior communications, agreements and understandings, written or oral, with respect to the terms of your employment with the Company. If you accept and agree to the foregoing, please so signify by signing and returning a counterpart of this letter, whereupon this letter will become a binding agreement between you and the Company as of the date first written above. Very truly yours, Autotote Corporation /s/ Larry J. Lawrence By: _________________________________ Larry J. Lawrence Chairman, Executive Committee of the Board of Directors Accepted and Agreed to: /s/ Thomas C. DeFazio _____________________________________ Thomas C. DeFazio 5 EX-10.39 7 EMPLOYMENT AGREEMENT HARRIS Exhibit 10.39 AUTOTOTE CORPORATION 888 Seventh Avenue Suite 1808 New York, New York 10106 As of April 24, 1995 Mr. Michael D. Harris 4120 Paran Pointe Drive Atlanta, GA 30327-3127 Dear Mr. Harris: Autotote Corporation (the "Company") wishes to retain your services upon the following terms and conditions: 1. Employment and Offices. You will serve as a Vice President of the ---------------------- Company and as the President of its principal operating subsidiary, Autotote Systems, Inc. You will have direct reporting responsibility for all North American operations of the Company providing technology based wagering products, systems and services to institutional customers, including state and national lotteries and parimutuel networks in North America, South America and Asia and will report to the Company's Chief Executive Officer. 2. Term. The term of this Agreement shall commence on April 24, 1995 ---- (the "Effective Date") and shall end eighteen (18) months thereafter (the "Initial Term"); provided however, that the term of this Agreement shall be -------- ------- automatically extended thereafter from time to time so that twelve months shall remain until the end of the term (the "Additional Term"). 3. Services. You agree to accept employment on a full time basis and to -------- perform, to the best of your ability, the duties, undertake the responsibilities and exercise the authority contemplated by the positions set forth in Section 1 hereof, without commitment to other business endeavors. Mr. Michael D. Harris -2- As of April 24, 1995 4. Compensation ------------ (a) Base Salary. As base salary for your services as described in ----------- Section 3 above, and for the covenants set forth in Section 7 hereof, the Company will pay you a base salary of $250,000 per year ("Base Salary"), payable according to the Company's regular pay practices, subject to increase based upon annual written appraisals of your performance hereunder. (b) Performance Bonus. In addition to the amount payable as provided ----------------- in Section 4(a) hereof, you shall be eligible to receive, in respect of the fiscal year ending October 31, 1996 and each subsequent fiscal year during the term of this Agreement, an annual performance bonus of up to 45% of Base Salary (the "Bonus") based on the formula applicable to Group A operating executives as set forth in the Company's executive incentive compensation plan as in effect from time to time. (c) Guaranteed Bonus. You will receive bonus payments of $50,000 on ---------------- October 31, 1995 and of $50,000 on May 31, 1996. The May 31, 1996 payment shall be credited against any Bonus payable under Section 4(b) in respect of the fiscal year ended October 31, 1996. (d) You will be granted a ten-year option (the "Option") to purchase 150,000 shares of the Company's Class A Common Stock, $.01 par value per share (the "Common Stock"), which shall become exercisable in three equal installments, on each of the first, second and third anniversaries of the Effective Date. The exercise price of the Option shall be the lower of the closing price of the Common Stock on the NASDAQ National Market System on (x) the trading day immediately preceding the Effective Date, or (y) the date of the announcement by the Company of your employment. (e) For the period beginning on the Effective Date and ending on the date of your permanent relocation to the area where you perform your duties hereunder (the "Interim Period"), the Company will reimburse you for all reasonable costs of interim housing, including meals, rental and other related expenses, incurred by you. In addition, during the Interim Period, the Company agrees to pay for round-trip air travel between the location where you perform your duties hereunder and Atlanta, Georgia, for either you or your wife once each week. (f) The Company agrees to promptly reimburse you for all moving expenses and transaction costs associated with the sale of your current home in Atlanta, Georgia (the "Atlanta Home") and the purchase of your new home in the location where you Mr. Micheal D. Harris -3- As of April 24, 1995 perform your duties hereunder, including the excess, if and, of (x) $313,500 over (y) the gross sale price of the Atlanta Home (collectively, "Relocation Expenses"). All expense reimbursements for Relocation Expenses shall be tax-effected such that the amount of reimbursement received by you net of any taxes and withholdings (including such amounts in respect of payments pursuant to this sentence) equals the expense incurred. (g) The Company agrees to pay you a signing bonus of $25,000 within 30 days of the Effective Date. 5. Termination of Employment. ------------------------- (a) Notice: Termination Without Cause. Either the Company or you may --------------------------------- terminate this Agreement upon thirty (30) days' prior written notice to the other; provided, however, that if the Company terminates this Agreement during the Initial Term or the Additional Term other than for Cause (as defined in Section 5(d)), you shall be entitled to collect from the Company a lump-sum payment equal to (x) your Base Salary for the remainder of the Initial Term or the Additional Term then in effect, as the case may be, plus (y) any Bonus ---- payable under Section 4(b) hereof in respect of periods prior to termination, and your health and medical benefits shall continue until the conclusion of the Initial Term or the Additional Term or until you obtain new employment, whichever is sooner. The Company may terminate your employment hereunder for Cause, as defined in Section 5(d), at any time upon notice to you. Additionally, if the Company terminates this Agreement other than for Cause prior to the first anniversary of the Effective Date, options for 50,000 shares of Common Stock under the Option shall be immediately exercisable. No payments or benefits shall be due under this Section 5(a) if a payment is due under Section 5(b) hereof. (b) Payments Due and Vesting of Options Upon a Change of Control. If ------------------------------------------------------------ during the Initial Term or the Additional Term a Change of Control, as defined in Section 5(e) occurs, you shall be entitled: (i) to collect from the Company a lump-sum payment equal to Base Salary plus the full amount of all Bonuses potentially payable under Section 4(b) hereof for the remainder of the Initial Term, or the Additional Term, as the case may be; (ii) to the continuation of your health and medical benefits until the conclusion of the Initial Term or the Additional Term or until you obtain new employment, whichever is sooner, and Mr. Michael D. Harris -4- As of April 24, 1995 (iii) the Option shall be accelerated to become fully vested and exercisable in full 10 days prior to the anticipated effective date of the Change of Control and will terminate as of the effective date of the Change of Control. (c) Constructive Termination. A termination nominally at your initiative ------------------------- but in fact induced without Cause by the Company shall be deemed a "Constructive Termination" by the Company. Without limiting generality of the foregoing sentence, a Constructive Termination shall include (i) a material diminution in your employment responsibilities or authority, as the same may be increased from time to time; (ii) the assignment to you of duties inconsistent with your status as the Vice President of the Company and the President of its principal operating subsidiary; (iii) a material diminution in your job description, title or reporting responsibilities; (iv) any reduction in your Base Salary as in effect on the date hereof or as the same may be increased from time to time; (v) any reduction in the practical bonus potential to less than 45% of your Base Salary as in effect on the date hereof or as the same may be increased from time to time; (vi) any failure by the Company to pay any amounts payable to you hereunder when due; (vii) the assignment to you of, or any requirement that you perform, any duties that are illegal or that you determine, in good faith, are immoral or unethical; or (viii) any material breach by the Company of this Agreement. In the event of a Constructive Termination by the Company, you shall be entitled to the same payments and other rights inuring to your benefit under Section 5(b). (d) Voluntary Termination or Termination by the Company for Cause. If -------------------------------------------------------------- during the Initial Term or the Additional Term your employment should terminate by reason of your voluntary act (other than as provided in Section 5(b)), or if the Company shall terminate your employment for Cause, you shall not be entitled to any compensation after such termination. (e) Definitions. For purposes of this Agreement. ------------ (i) "Cause" shall mean the following: (A) a willful failure to carry out a reasonable, legal directive of the Board of Directors or the Chief Executive Officer; (B) disloyalty, bad faith or embezzlement of funds of the Company; or (C) gross negligence or willful misconduct that is materially harmful to the Company. "Cause" shall also mean conviction of fraud or any other crime Mr. Michael D. Harris -5- As of April 24, 1995 that would materially and adversely affect the Company's reputation or ability to conduct its business. Cause shall be established by the good faith determination of the Board of Directors; and (ii) "Change of Control" means 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 the sale or transfer of substantially all the Company's assets. (f) Death. Upon your death this Agreement shall terminate. The ------ Company shall be obligated to make all Base Salary payments to you or your legal representative accrued up to the date of death. (g) Disability. In the event of your disability (whether total or ----------- partial, and whether temporary or permanent) which prevents your performing your duties hereunder, you shall be entitled to receive your Base Salary hereunder pursuant to Section 5(a) for the period of disability; provided, however, that if at any time after six months of disability your disability is total and permanent, or your are, as a result thereof, incapable of performing your duties under this Agreement, the obligation of the Company to make payments to you pursuant to this paragraph shall terminate from and after such date and this Agreement shall terminate. Disability shall be determined by a physician selected by mutual agreement of you or your personal representative and the Company. (h) Limitations. Notwithstanding anything in this Agreement to the ------------ contrary, the maximum amount of cash and other benefits payable (whether on a current or deferred basis and whether or not includible in income for income tax purposes) under this Agreement (the "Contract Benefits") shall be limited to the extent necessary to avoid causing any portion of such Contract Benefits, or any other payment in the nature of compensation to you, to be treated as a "parachute payment" with the meaning of Section 280G(b)(2) of the Internal Revenue Code of 1986, as amended. Any adjustment required to satisfy the limitation described in the preceding sentence shall be accomplished first by reducing any cash payments that would otherwise be made to you and then, if further reductions are necessary, by adjusting other benefits as determined by the Company. 6. Insurance for the Benefit of the Company. You agree that the Company ----------------------------------------- may at any time or times and for the Company's own benefit (or for a lender to the Company) apply for and take out life, health, accident and other insurance covering you, either independently or together with other, in any amount which the Company may deem to be in its best interests. Mr. Michael D. Harris -6- As of April 24, 1995 The Company shall own all rights in such insurance and proceeds thereof and you shall not have any right, title or interest therein. You agree to assist the Company at the Company's expense in obtaining any such insurance by, among other things, submitting to the customary examinations and correctly preparing, signing and delivering such applications and other documents as reasonably may be required. 7. Restrictive Covenants. --------------------- (a) You agree that you will not, during your employment with the Company and for a period of twelve (12) months after termination thereof, engage (whether for compensation or without compensation) in any business activity, either as principal, proprietor, consultant, partner, officer, director, employee, agent or in any other capacity, which competes with any business then being conducted or planned (at the time of such termination) by the Company, its subsidiaries or affiliates in any geographic area in which the Company, its subsidiaries or affiliates are then engaged in such business. For purposes of this Section 7(a), the term "business activity" shall mean any activity whether conducted for profit or not for profit by an individual, partnership, firm, corporation, government or any other entity which competes with the Company. For purposes of this Section 7(a) "planned" shall refer to any business which has been actively discussed as a potential new business for the Company during the twelve (12) months prior to such termination. (b) You agree that, except as required in the performance of your duties hereunder, you will not at any time disclose to any person or entity any trade secrets, secret processes or any other confidential information belonging or relating to the Company, its business practices, personnel or those of its subsidiaries or affiliates; provided, however, this prohibition shall not apply to any such secret or confidential data which becomes generally publicly known or is publicly disclosed through or by persons other than you or is developed or otherwise lawfully acquired by you prior to the date of this Agreement or without the aid or benefit of any information obtained from the Company or is or later becomes lawfully available from another source on a non-confidential basis. This Section 7(b) shall survive the termination of this Agreement. (c) During your employment with the Company and for a period of twelve (12) months after termination of your employment with the Company, you will not, directly or indirectly, recruit or otherwise solicit employees of the Company, its subsidiaries or affiliates or otherwise induce such employees to leave the Company, its subsidiaries or affiliates and to join or otherwise become employed by or associated with you or any company or organization with which you may then be employed or associated. Mr. Michael D. Harris -7- As of April 24, 1995 (d) Upon the termination of this Agreement, all documents, records, notebooks, computer programs, data systems and similar repositories containing trade secrets or other confidential information, whether prepared by you or others, will be left with the Company. (e) You agree that any violation of the covenants in this Section 7 will cause the Company irreparable injury and agree that the Company may enforce said covenants by seeking injunctive or other equitable relief (in addition to any other remedies the Company may have at law for damages or otherwise) from a court of competent jurisdiction. In the event such court declares these covenants to be too broad to be specifically enforced, the covenants shall be enforced to the largest extent for the Company's protection as may be allowed by such court. You agree that to perform, any of the covenants and obligations of the Company under this Agreement shall relieve you of any of your obligations under this Section 7, and that in the event of any such breach or failure of performance, you will seek no remedy other than damages at law. 8. Other Benefits. You shall be eligible for four weeks of paid vacation -------------- for each year of service under this Agreement. Upon termination of your employment by the Company, you shall receive payment for any unused vacation time. The Company will also provide you with all fringe benefits routinely furnished to senior executives of the company at the date hereof and at any time hereafter. 9. Representation by Employee. You represent and warrant that your -------------------------- execution, delivery and performance of this Agreement will not violate, result in a breach of or constitute a default under any agreement, understanding or instrument to which you are a party or by which you are bound. 10. Miscellaneous. ------------- (a) This Agreement shall be binding on and inure to the benefit of the parties hereto and their respective heirs, legal representatives, successors and assigns. You may not assign this Agreement to any person or entity. In the event that the Company[ consolidates with or merges into another corporation and the Company is not the surviving corporation, or substantially all of the assets of the Company are sold to another corporation, this Agreement and the obligations of the parties shall survive such consolidation, merger or sale and shall bind the Company and/or successor in interest of the Company, This Agreement may be modified or amended only by a written agreement signed by the parties hereto. Mr. Michael D. Harris -8- As of April 24, 1995 (b) Each party hereby consents and submits to the jurisdiction of the federal and state courts in and of the State of Delaware and will accept service of process by registered or certified mail or the equivalent directed to the addresses set forth herein or such other addresses as shall have been furnished for this purpose by the parties or by whatever other means are permitted by such court. (c) This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware (other than internal conflict of law rules). (d) The waiver of any breach of any term or condition of this Agreement shall not be deemed to constitute a waiver of any other term or condition hereof. If any term or provision of this Agreement or the application thereof to any person or circumstance shall to any extent be invalid or unenforceable, the remainder of this Agreement or the application of such term or provision to persons or circumstances other than those as to which it is held invalid or unenforceable shall not be affected thereby, and each term and provision of this Agreement shall be valid and enforceable to the fullest extent permitted by law. (c) All notices pursuant to this Agreement shall be in writing and shall be given by depositing said notices in the United States registered or certified mails, return receipt requested, addressed to the parties hereto at the addresses set froth below, or to such other addresses as may hereafter be specified by notice in writing given in the same manner by any party. Notice shall be deemed to have been given on the fifth (5th) day after deposit in the United States mail as set forth above. Notice to the Company: Autotote Corporation 888Seventh Avenue Suite 1808 New York, New York 10106 Attention: Chief Executive Officer Notice to Employee: Michael D. Harris 4120 Paran Pointe Drive Atlanta, GA 30327-3127 Mr. Michael D. Harris -9- As of April 24, 1995 (f) This Agreement constitutes the entire Agreement between the parties and supersedes all prior communications, agreements and understandings, written or oral, with respect to the terms of your employment with the Company. If you accept and agree to the foregoing, please so signify by signing and returning a counterpart of this letter, whereupon this letter will become a binding agreement between you and the Company as of the date first Written above. Very truly yours, AUTOTOTE CORPORATION By:/s/Larry J. Lawrence ------------------------------- Larry J. Lawrence Chairman, Executive Committee of the Board of Directors Accepted and Agreed to: /s/Michael D. Harris - ----------------------------- Michael D. Harris EX-10.40 8 LETTER AGREEMENT SCHLOSS EXHIBIT 10.40 January 3, 1995 Mr. Martin E. Schloss 869 President Avenue Brooklyn, NY 11215 Dear Marty: This will confirm that in the event Autotote terminates your employment for any reason, you will be entitled to receive severance pay, at the time of such termination, of not less than one (1) year base salary plus all accrued but unpaid bonus installments earned by you. Further, you will be permitted to retain all unexercised Autotote stock options held by you at the time of such termination. Such options will remain exercisable in accordance with their terms. Sincerely, EX-21 9 LIST OF SUBSIDIARIES 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 Europe, Ltd. (Ireland) (100%) Autotote Worldwide, Ltd. (Non-Resident Ireland) (99%, 1% NHI) Autotote Worldwide Services, Ltd. (Ireland) (100%) Autotote International, Ltd. (Ireland) (100%) (Inactive) Autotote Products, Inc. (Delaware) (100%) (Inactive) HTP, Inc. (Pennsylvania) (100%) (Inactive) Autotote Enterprises, Inc. (Connecticut) (100%) Autotote Keno Corporation (Nebraska) (100%) Big Red Keno Ltd. (Nebraska) (40%) Lincoln Big Red Keno Ltd. (Nebraska) (40%) Grefnas Big Red Keno Ltd. (Nebraska) (40%) Autotote Lottery Corporation (Delaware) (100%) Autotote Lottery Canada, Inc. (Quebec) (100%) Autotote Israel Ltd. (Israel) (80%) Autotote UK Limited (UK) (100%) The Enterprise Lottery Company Limited (U.K.) (22.6%) Autotote CBS, Inc. (Nevada) (100%) Megasports, Inc. (Nevada) (50%) ETAG Electronic Totalisator AG (Switzerland) (100%) TEK Tufelektronik GMBH (Germany) (100%) Datek Toto Dienstielstung GMBH (Germany) (50%) ETAG Electronic Totalisator GesMBH (Austria) (100%) Tele Control Kommunikations und Computersysteme GesMBH (Austria) (100%) Autotote Communication Services, Inc., formerly Autotote Simulcast Corporation (Delaware) (100%) Marvin H. Sugarman Productions, Inc. (New York) (100%) SJC Video Corporation (California) (88.67%) Racing Technology, Inc. (New York) (100%) SOFINAX (France) (85%) SEPMO (France) (100%) REALM (France) (78%) (22% held by SOFINAX directly) SASO (France) (100%) Microdyne Flocam (France) (54%) Autotote Mexico Ltd. (Delaware) (100%) Autotote Manufacturing Corporation (Delaware) (100%) EX-23 10 CONSENT KPMG 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, 33-464594 and 33-27737) on Form S-8 of Autotote Corporation of our report dated December 11, 1995, except for Note 10 which is as of January 26, 1996, with respect to the consolidated balance sheets of Autotote Corporation and subsidiaries as of October 31, 1995 and 1994, and the related consolidated statements of operations, stockholders' equity, cash flows, and financial statement schedule for each of the years in the three-year period ended October 31, 1995, which report appears in the Form 10-K of Autotote Corporation for the year ended October 31, 1995. KPMG Peat Marwick LLP New York, New York January 29, 1996 EX-27 11 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF AUTOTOTE CORPORATION AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR OCT-31-1995 NOV-01-1994 OCT-31-1995 4,991 0 23,379 1,679 12,497 47,757 186,005 67,745 241,021 52,881 40,000 0 0 306 11,551 241,021 153,184 153,184 0 94,230 89,808 0 16,362 (47,216) 2,673 (49,889) 0 0 0 (49,889) (1.72) (1.72)
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