-----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, S0xwp1T/DKPAmHCyABhFYa1vKvaWneb2fBlHFqwK4utd+KjIHT3wm6c2HiLlYdlQ UK5N12FvD8MifuyL2u2c7w== 0001005477-01-003323.txt : 20010516 0001005477-01-003323.hdr.sgml : 20010516 ACCESSION NUMBER: 0001005477-01-003323 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20010331 FILED AS OF DATE: 20010515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SCIENTIFIC GAMES CORP CENTRAL INDEX KEY: 0000750004 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER INTEGRATED SYSTEMS DESIGN [7373] IRS NUMBER: 810422894 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-11693 FILM NUMBER: 1638627 BUSINESS ADDRESS: STREET 1: 750 LEXINGTON AVE CITY: NEW YORK STATE: NY ZIP: 10022 BUSINESS PHONE: 3027374300 MAIL ADDRESS: STREET 1: 750 LEXINGTON AVE CITY: NEW YORK STATE: NY ZIP: 10022 FORMER COMPANY: FORMER CONFORMED NAME: AUTOTOTE CORP DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: UNITED TOTE INC DATE OF NAME CHANGE: 19920317 10-Q 1 0001.txt FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 Form 10-Q {Mark One} |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2001 OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File number: 0-13063 SCIENTIFIC GAMES CORPORATION (FORMERLY 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, New York, New York 10022 ---------------------------------------------- (Address of principal executive offices) (Zip Code) (212) 754-2233 -------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock as of May 11, 2001: Class A Common Stock: 40,195,814 Class B Common Stock: None Page 1 of 24 SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND OTHER INFORMATION THREE MONTHS ENDED MARCH 31, 2001 Page ---- PART I. FINANCIAL INFORMATION Item 1. Consolidated Financial Statements: Balance Sheets as of December 31, 2000 and March 31, 2001 3 Statements of Operations for the Three Months Ended March 31, 2000 and 2001 4 Statements of Cash Flows for the Three Months Ended March 31, 2000 and 2001 5 Notes to Consolidated Financial Statements 6-16 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 17-22 PART II. OTHER INFORMATION Item 1. Legal Proceedings 23 Item 2. Changes in Securities and Use of Proceeds 23 Item 6. Exhibits and Reports on Form 8-K 23 2 SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Unaudited, in thousands)
December 31, March 31, 2000 2001 ------------ --------- ASSETS Current assets: Cash and cash equivalents ................................................. $ 6,488 10,354 Restricted cash ........................................................... 670 691 Accounts receivable, net of allowance for doubtful accounts ............... 56,819 52,154 Inventories ............................................................... 27,608 25,262 Prepaid expenses, deposits and other current assets ....................... 15,911 15,955 --------- --------- Total current assets ................................................. 107,496 104,416 --------- --------- Property and equipment, at cost ................................................ 323,732 329,469 Less accumulated depreciation ............................................. 139,121 145,712 --------- --------- Net property and equipment ........................................... 184,611 183,757 --------- --------- Goodwill, net .................................................................. 157,591 155,448 Operating right, net ........................................................... 12,681 12,431 Other intangible assets, net ................................................... 118,598 116,750 Other assets and investments ................................................... 53,964 57,229 --------- --------- Total assets ...................................................... $ 634,941 630,031 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current installments of long-term debt .................................... $ 6,636 7,238 Accounts payable .......................................................... 27,176 26,074 Accrued liabilities ....................................................... 59,142 58,053 Interest payable .......................................................... 11,112 6,403 --------- --------- Total current liabilities ............................................ 104,066 97,768 --------- --------- Deferred income taxes .......................................................... 59,093 58,647 Other long-term liabilities .................................................... 9,585 12,696 Long-term debt, excluding current installments ................................. 434,044 438,801 --------- --------- Total liabilities .................................................... 606,788 607,912 --------- --------- Stockholders' equity: Convertible preferred stock, par value $1.00 per share, 2,000 shares authorized, 1,149 and 1,166 shares outstanding at December 31, 2000 and March 31, 2001, respectively .......................................... 1,149 1,166 Class A common stock, par value $0.01 per share, 99,300 shares authorized, 40,156 and 40,163 shares outstanding at December 31, 2000 and March 31, 2001, respectively .......................................... 373 374 Class B non-voting common stock, par value $0.01 per share, 700 shares authorized, none outstanding ........................................... -- -- Additional paid-in capital ................................................ 266,917 268,715 Accumulated losses ........................................................ (234,910) (239,046) Treasury stock, at cost ................................................... (102) (105) Accumulated other comprehensive loss ...................................... (5,274) (8,985) --------- --------- Total stockholders' equity ........................................... 28,153 22,119 --------- --------- Total liabilities and stockholders' equity ........................... $ 634,941 630,031 ========= =========
See accompanying notes to consolidated financial statements. 3 SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS Three Months Ended March 31, 2000 and 2001 (Unaudited, in thousands, except per share amounts)
2000 2001 --------- --------- Operating revenues: Services .............................................................. $ 37,659 88,040 Sales ................................................................. 7,953 24,068 --------- --------- 45,612 112,108 --------- --------- Operating expenses (exclusive of depreciation and amortization shown below): Services .............................................................. 24,493 58,113 Sales ................................................................. 3,893 14,707 --------- --------- 28,386 72,820 --------- --------- Total gross profit ............................................... 17,226 39,288 Selling, general and administrative expenses ............................... 6,731 14,625 Depreciation and amortization .............................................. 5,370 13,608 --------- --------- Operating income ................................................. 5,125 11,055 --------- --------- Other deductions: Interest expense ...................................................... 4,253 13,580 Other (income) expense ................................................ (78) 244 --------- --------- 4,175 13,824 --------- --------- Income (loss) before income tax expense (benefit) ..................... 950 (2,769) Income tax expense (benefit) ............................................... 116 (332) --------- --------- Net income (loss) ..................................................... 834 (2,437) Convertible preferred stock dividend ....................................... -- 1,699 --------- --------- Net income (loss) available to common stockholders ......................... $ 834 (4,136) ========= ========= Basic and diluted net income (loss) per share: Net income (loss) ..................................................... $ 0.02 (0.06) ========= ========= Net income (loss) available to common stockholders .................... $ 0.02 (0.10) ========= ========= Weighted average number of shares used in per share calculations: Basic shares .......................................................... 36,544 40,163 ========= ========= Diluted shares ........................................................ 41,888 40,163 ========= =========
See accompanying notes to consolidated financial statements. 4 SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Three Months Ended March 31, 2000 and 2001 (Unaudited, in thousands)
2000 2001 ------- ------- Cash flows from operating activities: Net income (loss) .................................................. $ 834 (2,437) ------- ------- Adjustments to reconcile net income (loss) to cash provided by (used in) operating activities: Depreciation and amortization ................................. 5,370 13,608 Changes in operating assets and liabilities ................... (7,349) (1,338) Other ......................................................... 576 421 ------- ------- Total adjustments ........................................ (1,403) 12,691 ------- ------- Net cash provided by (used in) operating activities ..................... (569) 10,254 ------- ------- Cash flows from investing activities: Capital expenditures ............................................... (1,715) (1,034) Wagering systems expenditures ...................................... (5,961) (8,316) Increase in other assets and investment ............................ (2,301) (1,592) ------- ------- Net cash used in investing activities ................................... (9,977) (10,942) ------- ------- Cash flows from financing activities: Net borrowings under lines of credit ............................... 8,070 7,000 Proceeds from issuance of long-term debt ........................... 952 -- Payments on long-term debt ......................................... (740) (1,509) Proceeds from the issuance of common stock ......................... 625 37 ------- ------- Net cash provided by financing activities ............................... 8,907 5,528 ------- ------- Effect of exchange rate changes on cash ................................. (206) (974) ------- ------- Increase (decrease) in cash and cash equivalents ........................ (1,845) 3,866 Cash and cash equivalents, beginning of period .......................... 3,662 6,488 ------- ------- Cash and cash equivalents, end of period ................................ $ 1,817 10,354 ======= ======= Supplemental disclosure of cash flow information: Cash paid (recovered) during the period for: Interest paid ...................................................... $ 7,397 17,647 ======= ======= Net income taxes (recovered) paid .................................. $ 267 (999) ======= ======= Non-cash financing activity during the period: Convertible preferred stock paid-in-kind dividends ................. $ -- 1,699 ======= =======
See accompanying notes to consolidated financial statements. 5 SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited, in thousands, except per share amounts) (1) Consolidated Financial Statements Name Change Effective April 27, 2001, the Company changed its corporate name from Autotote Corporation to Scientific Games Corporation and its stock symbol to SGM [AMEX: SGM]. Basis of Presentation On December 20, 2000, the Company determined to change its fiscal year from an October 31 year-end to a calendar year-end, beginning with the year ending December 31, 2001. This report on Form 10-Q covers the first quarter of year 2001, which commenced on January 1, 2001, compared to the three-month period January 1, 2000 to March 31, 2000. The consolidated balance sheets as of December 31, 2000 and March 31, 2001 and the consolidated statements of operations for the three months ended March 31, 2000 and 2001, and the consolidated statements of cash flows for the three months then ended, have been prepared by the Company without audit. In the opinion of management, all adjustments necessary to present fairly the financial position of the Company at December 31, 2000 and March 31, 2001 and the results of its operations for the three months ended March 31, 2000 and 2001 and its cash flows for the three months ended March 31, 2000 and 2001 have been made. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. These consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Company's 2000 Annual Report on Form 10-K. The results of operations for the period ended March 31, 2001 are not necessarily indicative of the operating results for the full year. Certain items in prior period's financial statements have been classified to conform with the current year presentation. Basic and Diluted Net Income (Loss) Per Share The following represents a reconciliation of the numerator and denominator used in computing basic and diluted net income (loss) per share for the three months ended March 31, 2000 and 2001:
Three Months Ended March 31, ---------------------------- 2000 2001 ------- ------- Income (loss) (numerator) Net income (loss) ....................................... $ 834 (2,437) Convertible preferred stock dividend .................... -- 1,699 ======= ======= Net income (loss) available to common stockholders ...... $ 834 (4,136) ======= ======= Shares (denominator) Basic weighted average common shares outstanding ........ 36,544 40,163 Effect of diluted securities-stock options, warrants, convertible preferred shares and deferred shares (1) 5,344 -- ------- ------- Diluted weighted average common shares outstanding ...... 41,888 40,163 ======= ======= Basic and diluted per share amount Net income (loss) ....................................... $ 0.02 (0.06) ======= ======= Net income (loss) available to common stockholders ...... $ 0.02 (0.10) ======= =======
(1) Potential common shares are not included in the calculation of dilutive net loss per share in the three months ended March 31, 2001, since the inclusion would be anti-dilutive. 6 SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Unaudited, in thousands, except per share amounts) (1) Consolidated Financial Statements--(Continued) At March 31, 2001, the Company had outstanding stock options, warrants, convertible preferred shares and deferred shares, which could potentially dilute basic earnings per share in the future. (See Notes 13 and 14 to the Consolidated Financial Statements for the year ended October 31, 2000 in the Company's 2000 Annual Report on Form 10-K.) Interest Rate Agreements Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities ("SFAS 133"), as amended by SFAS 138, establishes accounting and reporting standards for derivative instruments and hedging activities. It requires entities to record all derivative instruments on the balance sheet at fair value. Changes in the fair value of derivatives are recorded in each period in current operations or other comprehensive income (loss), based on whether a derivative is designated as part of a hedge transaction and the type of hedge transaction. The ineffective portion of all hedges is recognized in operations. Pursuant to the terms of the Company's credit facility, the Company is required to maintain interest rate hedges for a notional amount of not less than $140,000 for a period of not less than two years. In satisfaction of this requirement, the Company entered into three interest rate swap agreements in November 2000 which obligate the Company to pay a fixed LIBOR rate and entitle the Company to receive a variable LIBOR rate on an aggregate $140,000 notional amount of debt. The Company has structured these interest rate swap agreements and intends to structure all such future agreements to qualify for hedge accounting pursuant to the provisions of SFAS 133. Accumulated other comprehensive losses resulting from the changes in fair value of the interest rate hedge instruments were $2,395 and $5,201 at December 31, 2000 and March 31, 2001, respectively. For the three months ended March 31, 2001, the Company recorded a $2,806 charge to other comprehensive loss for the change in fair value of the interest rate hedge instruments. (2) Acquisition of Scientific Games Holdings Corp. On September 6, 2000, the Company completed the acquisition of Scientific Games Holdings Corp. ("SGHC"), a world-leading supplier of lottery products, integrated lottery systems and support services, and pre-paid telephone cards. The acquisition was completed through a merger in which SGHC became a wholly-owned subsidiary of the Company, at a cost of approximately $308,000 in aggregate merger consideration to SGHC stockholders, plus related fees and expenses. The acquisition was recorded using the purchase method of accounting. The acquired assets and liabilities were recorded at their estimated fair value at the date of acquisition. The excess of the purchase price over the fair values of the net assets acquired was approximately $156,828 and has been recorded as goodwill, which is being amortized over 20 years. The operating results of SGHC's businesses have been included in the accompanying consolidated statements of operations from the date of the acquisition. (See Notes 9 and 13 to the Consolidated Financial Statements for the year ended October 31, 2000 in the Company's 2000 Annual Report on Form 10-K.) 7 SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Unaudited, in thousands, except per share amounts) (2) Acquisition of Scientific Games Holdings Corp.--(Continued) The following table presents unaudited pro forma results of operations as if the SGHC acquisition and related financing transactions had occurred at the beginning of the period presented after giving effect to certain adjustments, including amortization of goodwill and other identifiable intangible assets, additional depreciation expense, increased interest expense, convertible preferred stock dividends and related income tax effects. These pro forma results have been prepared for comparative purposes and do not purport to be indicative of what would have occurred had the acquisition been made at the beginning of the three months ended March 31, 2000 or the results which may occur in the future. Three Months Ended March 31, 2000 (unaudited) Operating revenues ............................. $ 104,674 Operating income ................................ 9,558 Loss before income tax benefit .................. (3,062) Net loss ........................................ (2,153) Convertible preferred stock dividend ............ 1,691 --------- Net loss available to common stockholders ....... $ (3,844) ========= Basic and diluted loss per share: Net loss ........................................ $ (0.06) ========= Net loss available to common stockholders ....... $ (0.11) ========= 8 SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Unaudited, in thousands, except per share amounts) (3) Business Segments The following tables represent revenues, profits, depreciation and assets by business segments for the three months ended March 31, 2000 and 2001. Corporate expenses are allocated among business segments. Interest expense and other (income) deductions are not allocated to business segments.
Three Months Ended March 31, ------------------------ 2000 2001 --------- --------- Service and sales revenue: Lottery Group ......................................... $ 2,969 56,117 Pari-mutuel Group ..................................... 27,489 29,007 Venue Management Group ................................ 15,154 15,504 Telecommunications Group .............................. -- 11,480 --------- --------- $ 45,612 112,108 ========= ========= Gross profit: Lottery Group ......................................... $ 915 18,276 Pari-mutuel Group ..................................... 12,010 11,632 Venue Management Group ................................ 4,301 4,481 Telecommunications Group .............................. -- 4,899 --------- --------- $ 17,226 39,288 ========= ========= Operating income: Lottery Group ......................................... $ (333) 1,305 Pari-mutuel Group ..................................... 3,333 4,319 Venue Management Group ................................ 2,125 2,731 Telecommunications Group .............................. -- 2,700 --------- --------- $ 5,125 11,055 ========= ========= Included in operating income- Depreciation and amortization: Lottery Group ......................................... $ 609 8,583 Pari-mutuel Group ..................................... 4,082 3,847 Venue Management Group ................................ 679 655 Telecommunications Group .............................. -- 523 --------- --------- $ 5,370 13,608 ========= =========
9 SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Unaudited, in thousands, except per share amounts) (3) Business Segments--(Continued)
Three Months Ended March 31, -------------------- 2000 2001 ------- ------- A reconciliation of total segment operating income to consolidated income (loss) before income tax expense (benefit) is as follows: Total reported segments ....................................... $ 5,125 11,055 Interest expense .............................................. 4,253 13,580 Other (income) expense ........................................ (78) 244 ------- ------- $ 950 (2,769) ======= =======
December 31, March 31, 2000 2001 ------------ --------- Assets: Lottery Group ............................................... $330,138 329,104 Pari-mutuel Group ........................................... 232,990 232,992 Venue Management Group ...................................... 34,055 33,827 Telecommunications Group .................................... 37,758 34,108 -------- ------- $634,941 630,031 ======== =======
Three Months Ended March 31, -------------------- 2000 2001 ------- ------- Capital and wagering systems expenditures: Lottery Group ............................................... $ 749 7,469 Pari-mutuel Group ........................................... 6,398 975 Venue Management Group ...................................... 529 363 Telecommunications Group .................................... -- 543 ------- ------- $ 7,676 9,350 ======= =======
10 SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Unaudited, in thousands, except per share amounts) (4) Comprehensive Income (Loss) The following presents a reconciliation of net income (loss) to comprehensive income (loss) for the three months ended March 31, 2000 and 2001:
Three Months Ended March 31, ----------------------------- 2000 2001 ----------- ----------- Net income (loss) ................................. $ 834 (2,437) Other comprehensive loss: Foreign currency translation ................. (389) (1,480) Unrealized gain on investments ............... -- 575 Unrealized loss on interest rate swap contract -- (2,806) ----------- --------- Other comprehensive loss ..................... (389) (3,711) ----------- --------- Comprehensive income (loss) ....................... $ 445 (6,148) =========== =========
(5) Inventories Inventories consist of the following:
December 31, March 31, 2000 2001 ------------ ----------- Parts and work-in-process ......................... $ 16,193 12,992 Finished goods .................................... 11,415 12,270 ----------- --------- $ 27,608 25,262 =========== =========
Parts and work-in-process include costs for equipment expected to be sold. Costs incurred for equipment associated with specific wagering system service contracts not yet placed in service are classified as construction in progress in property and equipment. (6) Debt At March 31, 2001, the Company had approximately $39,305 available for borrowing under the Company's revolving credit facility (the "Facility"). There were approximately $16,000 of borrowings outstanding under the Facility and approximately $9,695 in letters of credit were issued under the Facility at March 31, 2001. At December 31, 2000, Scientific Games's available borrowing capacity under the facility was $46,591. The Company's financing arrangements impose certain limitations on the operations of the Company and its subsidiaries, including the maintenance of certain financial, liquidity and net worth ratios. As a result of both the financial performance of SGHC prior to the Company's acquisition of SGHC, principally reflecting transitional and operational matters occurring through December 31, 2000, and the timing of certain anticipated capital expenditures and associated borrowings in 2001, in the first quarter of 2001, management and our lenders amended certain limitations to be less restrictive. The Facility was modified so that the planned step-downs in fixed charge coverage ratios and leverage ratios were delayed by six months through September 30, 2002. The Company is in compliance with the amended covenants as of March 31, 2001 and expects to remain so during the next twelve months. 11 SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Unaudited, in thousands, except per share amounts) (7) Financial Information for Guarantor Subsidiaries and Non-Guarantor Subsidiaries The Company conducts substantially all of its business through its domestic and foreign subsidiaries. The Facility and the Company's 12 1/2% Series B Senior Subordinated Notes due 2010 (the "Notes") issued in connection with the acquisition of SGHC, are jointly and severally guaranteed by substantially all of the Company's wholly owned domestic subsidiaries (the "Guarantor Subsidiaries"). Presented below is condensed consolidating financial information for (i) Scientific Games Corporation (the "Parent Company"), which includes the activities of Scientific Games Management Corporation, (ii) the Guarantor Subsidiaries and (iii) the wholly owned foreign subsidiaries and the non-wholly owned domestic and foreign subsidiaries (the "Non-Guarantor Subsidiaries") as of December 31, 2000 and March 31, 2001 and for the three months ended March 31, 2000 and 2001. The condensed consolidating financial information has been presented to show the nature of assets held, results of operations and cash flows of the Parent Company, Guarantor Subsidiaries and Non-Guarantor Subsidiaries assuming the guarantee structure of the Notes was in effect at the beginning of the periods presented. Separate financial statements for Guarantor Subsidiaries are not presented based on management's determination that they would not provide additional information that is material to investors. The condensed consolidating financial information reflects the investments of the Parent Company in the Guarantor and Non-Guarantor Subsidiaries using the equity method of accounting. In addition, corporate interest and administrative expenses have not been allocated to the subsidiaries. 12 SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET December 31, 2000 (unaudited, in thousands)
Parent Guarantor Non-Guarantor Eliminating Company Subsidiaries Subsidiaries Entries Consolidated ------- ------------ ------------- ----------- ------------ ASSETS Cash and cash equivalents .................... $ 867 (50) 5,671 -- 6,488 Accounts receivable, net ..................... -- 39,554 20,555 (3,290) 56,819 Inventories .................................. -- 21,602 6,470 (464) 27,608 Other current assets ......................... 186 13,421 2,944 30 16,581 Property and equipment, net .................. 2,002 142,446 40,452 (289) 184,611 Investment in subsidiaries ................... 202,980 -- -- (202,980) -- Goodwill ..................................... 190 154,313 3,088 -- 157,591 Intangible assets ............................ -- 109,232 22,047 -- 131,279 Other assets ................................. 19,832 75,698 1,077 (42,643) 53,964 --------- --------- --------- --------- --------- Total assets ............................. $ 226,057 556,216 102,304 (249,636) 634,941 ========= ========= ========= ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current installments of long-term debt ....... $ 6,012 8 616 -- 6,636 Current liabilities .......................... 25,663 51,811 22,866 (2,910) 97,430 Long-term debt, excluding current installments 433,180 19 5,492 (4,647) 434,044 Other non-current liabilities ................ 5,786 56,851 21,491 (15,450) 68,678 Intercompany balances ........................ (272,737) 245,226 27,809 (298) -- Stockholders' equity ......................... 28,153 202,301 24,030 (226,331) 28,153 --------- --------- --------- --------- --------- Total liabilities and stockholders' equity $ 226,057 556,216 102,304 (249,636) 634,941 ========= ========= ========= ========= =========
SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET March 31, 2001 (unaudited, in thousands)
Parent Guarantor Non-Guarantor Eliminating Company Subsidiaries Subsidiaries Entries Consolidated ------- ------------ ------------- ----------- ------------ ASSETS Cash and cash equivalents .................... $ 3,941 640 5,773 -- 10,354 Accounts receivable, net ..................... -- 33,352 18,802 -- 52,154 Inventories .................................. -- 20,368 5,410 (516) 25,262 Other current assets ......................... 1,492 11,409 3,715 30 16,646 Property and equipment, net .................. 1,977 142,249 39,737 (206) 183,757 Investment in subsidiaries ................... 216,318 -- -- (216,318) -- Goodwill ..................................... 188 152,454 2,806 -- 155,448 Intangible assets ............................ -- 129,181 -- -- 129,181 Other assets ................................. 20,027 57,767 1,104 (21,669) 57,229 --------- --------- --------- --------- --------- Total assets ............................. $ 243,943 547,420 77,347 (238,679) 630,031 ========= ========= ========= ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current installments of long-term debt ....... $ 6,763 8 467 -- 7,238 Current liabilities .......................... 17,940 52,839 19,233 518 90,530 Long-term debt, excluding current installments 438,115 16 670 -- 438,801 Other non-current liabilities ................ 8,971 55,333 4,508 2,531 71,343 Intercompany balances ........................ (249,965) 226,229 24,171 (435) -- Stockholders' equity ......................... 22,119 212,995 28,298 (241,293) 22,119 --------- --------- --------- --------- --------- Total liabilities and stockholders' equity $ 243,943 547,420 77,347 (238,679) 630,031 ========= ========= ========= ========= =========
13 SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES SUPPLEMENTAL CONDENSED STATEMENT OF OPERATIONS Three Months Ended March 31, 2000 (unaudited, in thousands)
Parent Guarantor Non-Guarantor Eliminating Company Subsidiaries Subsidiaries Entries Consolidated ------- ------------ ------------- ----------- ------------ Operating revenues ...................................... $ -- 38,171 10,551 (3,110) 45,612 Operating expenses ...................................... -- 22,580 9,014 (3,208) 28,386 ------- ------- ------- ------- ------- Gross profit ......................................... -- 15,591 1,537 98 17,226 Selling, general and administrative expenses ............ 2,389 3,294 1,052 (4) 6,731 Depreciation and amortization ........................... 72 4,501 822 (25) 5,370 ------- ------- ------- ------- ------- Operating income (loss) .............................. (2,461) 7,796 (337) 127 5,125 Interest expense ........................................ 4,012 188 182 (129) 4,253 Other (income) expense .................................. (116) (78) (13) 129 (78) ------- ------- ------- ------- ------- Income (loss) before equity in income of subsidiaries, and income taxes ..................................... (6,357) 7,686 (506) 127 950 Equity in income of subsidiaries ........................ 7,231 -- -- (7,231) -- Income tax expense (benefit) ............................ 40 106 (30) -- 116 ------- ------- ------- ------- ------- Net income (loss) ....................................... $ 834 7,580 (476) (7,104) 834 ======= ======= ======= ======= =======
SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES SUPPLEMENTAL CONDENSED STATEMENT OF OPERATIONS Three Months Ended March 31, 2001 (unaudited, in thousands)
Parent Guarantor Non-Guarantor Eliminating Company Subsidiaries Subsidiaries Entries Consolidated ------- ------------ ------------- ----------- ------------ Operating revenues ...................................... $ -- 85,262 31,810 (4,964) 112,108 Operating expenses ...................................... -- 54,832 22,908 (4,920) 72,820 ------- ------- ------- ------- ------- Gross profit ......................................... -- 30,430 8,902 (44) 39,288 Selling, general and administrative expenses ............ 2,987 8,476 3,165 (3) 14,625 Depreciation and amortization ........................... 76 12,056 1,511 (35) 13,608 ------- ------- ------- ------- ------- Operating income (loss) .............................. (3,063) 9,898 4,226 (6) 11,055 Interest expense ........................................ 13,556 4 592 (572) 13,580 Other (income) expense .................................. (49) (587) 256 624 244 ------- ------- ------- ------- ------- Income (loss) before equity in income of subsidiaries and income taxes ..................................... (16,570) 10,481 3,378 (58) (2,769) Equity in income of subsidiaries ........................ 13,508 -- -- (13,508) -- Income tax expense (benefit) ............................ (625) (836) 1,129 -- (332) ------- ------- ------- ------- ------- Net income (loss) ....................................... $(2,437) 11,317 2,249 (13,566) (2,437) ======= ======= ======= ======= =======
14 SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES SUPPLEMENTAL CONDENSED STATEMENT OF CASH FLOWS Three Months Ended March 31, 2000 (unaudited, in thousands)
Parent Guarantor Non-Guarantor Eliminating Company Subsidiaries Subsidiaries Entries Consolidated ------- ------------ ------------- ----------- ------------ Net income (loss) .................................. $ 834 7,580 (476) (7,104) 834 Depreciation and amortization ................... 72 4,501 822 (25) 5,370 Equity in income of subsidiaries ................ (7,231) -- -- 7,231 -- Changes in operating assets and liabilities ..... (5,371) 435 (2,413) -- (7,349) Other non-cash adjustments ...................... 284 290 2 -- 576 -------- -------- -------- -------- -------- Net cash provided by (used in) operating activities (11,412) 12,806 (2,065) 102 (569) -------- -------- -------- -------- -------- Cash flows from investing activities: Capital and wagering systems expenditures ....... (14) (5,971) (1,691) -- (7,676) Other assets and investments .................... (86) (1,415) (297) (503) (2,301) -------- -------- -------- -------- -------- Net cash provided by (used in) investing activities (100) (7,386) (1,988) (503) (9,977) -------- -------- -------- -------- -------- Cash flows from financing activities: Net borrowing under lines of credit ............. 8,070 -- -- -- 8,070 Proceeds from issuance of long-term debt ........ -- -- 952 -- 952 Payments on long-term debt ...................... -- (602) (138) -- (740) Net proceeds from stock issue ................... 626 (448) 447 -- 625 Other, principally intercompany balances ........ (2,525) (707) 2,831 401 -- -------- -------- -------- -------- -------- Net cash provided by (used in) financing activities 6,171 (1,757) 4,092 401 8,907 -------- -------- -------- -------- -------- Effect of exchange rate changes on cash ............ -- (70) (136) -- (206) -------- -------- -------- -------- -------- Increase (decrease) in cash and cash equivalents ... (5,341) 3,593 (97) -- (1,845) Cash and cash equivalents, beginning of period ..... 5,284 (4,103) 2,481 -- 3,662 -------- -------- -------- -------- -------- Cash and cash equivalents, end of period ........... $ (57) (510) 2,384 -- 1,817 ======== ======== ======== ======== ========
15 SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES SUPPLEMENTAL CONDENSED STATEMENT OF CASH FLOWS Three Months Ended March 31, 2001 (unaudited, in thousands)
Parent Guarantor Non-Guarantor Eliminating Company Subsidiaries Subsidiaries Entries Consolidated ------- ------------ ------------- ----------- ------------ Net income (loss) .................................. $ (2,437) 11,317 2,249 (13,566) (2,437) Depreciation and amortization ................... 76 12,056 1,511 (35) 13,608 Equity in income of subsidiaries ................ (13,508) -- -- 13,508 -- Changes in operating assets and liabilities ..... (6,004) 4,084 (1,148) 1,730 (1,338) Other non-cash adjustments ...................... 651 (354) 124 -- 421 -------- -------- -------- -------- -------- Net cash provided by (used in) operating activities (21,222) 27,103 2,736 1,637 10,254 -------- -------- -------- -------- -------- Cash flows from investing activities: Capital and wagering systems expenditures ....... (23) (5,970) (3,639) 282 (9,350) Other assets and investments .................... (427) (2,416) 1,450 (199) (1,592) -------- -------- -------- -------- -------- Net cash provided by (used in) investing activities (450) (8,386) (2,189) 83 (10,942) -------- -------- -------- -------- -------- Cash flows from financing activities: Net borrowing under lines of credit ............. 7,000 -- -- -- 7,000 Payments on long-term debt ...................... (1,314) (3) (385) 193 (1,509) Net proceeds from stock issue ................... 37 50 (50) -- 37 Other, principally intercompany balances ........ 19,023 (17,476) 366 (1,913) -- -------- -------- -------- -------- -------- Net cash provided by (used in) financing activities 24,746 (17,429) (69) (1,720) 5,528 -------- -------- -------- -------- -------- Effect of exchange rate changes on cash ............ -- (598) (376) -- (974) -------- -------- -------- -------- -------- Increase in cash and cash equivalents .............. 3,074 690 102 -- 3,866 Cash and cash equivalents, beginning of period ..... 867 (50) 5,671 -- 6,488 -------- -------- -------- -------- -------- Cash and cash equivalents, end of period ........... $ 3,941 640 5,773 -- 10,354 ======== ======== ======== ======== ========
16 SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2001 Background Effective April 27, 2001, the Company changed its corporate name from Autotote Corporation to Scientific Games Corporation and its stock symbol to SGM [AMEX: SGM]. The Company changed its fiscal year from an October 31 year-end to a calendar year-end, beginning with the year ending December 31, 2001. As a result, the Company is filing this report for the first quarter of year 2001, which commenced on January 1, 2001, compared to the three-month period January 1, 2000 to March 31, 2000. The following discussion addresses the financial condition of the Company as of March 31, 2001 and the results of its operations for the three-month period ended March 31, 2001, compared to the same period in the prior year. This discussion should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations for the fiscal year ended October 31, 2000, included in the Company's 2000 Annual Report on Form 10-K. We operate in four business segments: Lottery Group, Pari-mutuel Group, Venue Management Group and Telecommunications Group. Our Lottery Group consists of two product lines: Instant Tickets and Related Services ("ITRS") and Lottery Systems. ITRS includes ticket design and manufacturing as well as value-added services, including game design, sales and marketing support, inventory management and warehousing and fulfillment services. In addition, this division includes promotional instant tickets and pull-tab tickets that we sell to both lottery and non-lottery customers. Lottery Systems includes the supply of transaction processing software for the accounting and validation of both instant ticket and on-line lottery games, point-of-sale terminal hardware sales, central site computers and communication hardware sales, and ongoing support and maintenance services for these products. This product line also includes software and hardware and support service for sports betting and credit card processing systems. Our Pari-mutuel Group is comprised of our North American and international on-track, off-track and inter-track pari-mutuel services, simulcasting and communications services, and video gaming, as well as sales of pari-mutuel systems and equipment. Our Venue Management Group is comprised of the Connecticut off-track betting operations, and the Company's Netherlands on-track and off-track betting operations. Our Telecommunications Group is comprised of the prepaid cellular phone cards business, which was acquired by the Company as part of the SGHC acquisition. In the second quarter of fiscal 2000, the Company completed the sale of its SJC Video business, which had previously been reported as a separate segment. In the three months ended March 31, 2000, our Lottery Group consisted solely of the Lottery Systems product line, exclusive of sports betting and credit card processing services. In addition, the Telecommunications Group was not yet acquired by the Company as part of the SGHC acquisition. The Company's revenues are derived from two principal sources: service revenues and sales revenues. Service revenues are earned pursuant to multi-year contracts to provide ITRS and wagering systems and services; or are derived from wagering by customers at facilities owned or leased by the Company. Sales revenues are derived from sales of prepaid phone cards and from contracts for the sale of wagering systems, equipment, and software licenses. The first calendar quarter and the fourth calendar quarter of the year traditionally comprise the weakest season for the Company's pari-mutuel wagering service revenue. Wagering equipment sales and software license revenues usually reflect a limited number of large transactions that do not recur on an annual basis. Consequently, revenues and operating results can vary substantially from period to period as a result of the timing of revenue recognition for major equipment sales and software license revenue. In addition, instant ticket and prepaid phone card sales may vary depending on the size and timing of contract awards, changes in customer budgets, inventory ticket position, lottery retail sales and general economic conditions. 17 Operating results may also vary significantly from period to period depending on the addition or disposition of business units in each period. The acquisition of SGHC in 2000, which was accounted for as a purchase, affects the comparability of operations from period to period (see Note 3 to the Consolidated Financial Statements for the year ended October 31, 2000 included in the Company's 2000 Annual Report on Form 10-K). The following tables and discussion present actual data for the January 1 to March 31, 2001 and 2000, and pro forma data for the January 1 to March 31, 2000 period, as if the Company had acquired SGHC on January 1, 2000. Results of Operations:
Three Months Ended March 31, ----------------------------------------------- Actual Pro Forma Actual 2000 2000 2001 ------- ---------- ------- Lottery Group (in thousands) Service revenue ............................................. $ 2,969 47,391 53,203 Sales revenue ............................................... -- 3,706 2,914 ------- ------- ------- Total operating revenue ..................................... $ 2,969 51,097 56,117 ======= ======= ======= Gross Profit (excluding depreciation and amortization) ...... $ 915 17,688 18,276 ======= ======= ======= Pari-mutuel Group Service revenue ............................................. $19,536 19,536 19,333 Sales revenue ............................................... 7,953 7,953 9,674 ------- ------- ------- Total operating revenue ..................................... $27,489 27,489 29,007 ======= ======= ======= Gross Profit (excluding depreciation and amortization) ...... $12,010 12,010 11,632 ======= ======= ======= Venue Management Group Service revenue ............................................. $15,154 15,154 15,504 ======= ======= ======= Gross Profit (excluding depreciation and amortization) ...... $ 4,301 4,301 4,481 ======= ======= ======= Telecommunications Group Sales revenue ............................................... $ -- 10,934 11,480 ======= ======= ======= Gross Profit (excluding depreciation and amortization) ...... $ -- 4,884 4,899 ======= ======= ======= Company Total Service revenue ............................................. $37,659 82,081 88,040 Sales revenue ............................................... 7,953 22,593 24,068 ------- ------- ------- Total operating revenue ..................................... $45,612 104,674 112,108 ======= ======= ======= Gross Profit (excluding depreciation and amortization) ...... $17,226 38,883 39,288 ======= ======= =======
Three Months Ended March 31, 2001 compared to Three Months Ended March 31, 2000 Revenue Analysis Lottery Group revenue of $56.1 million in the three months ended March 31, 2001 improved $53.1 million from the same period in 2000 due to the addition of SGHC in September 2000, plus the start-up of the on-line Vermont and New Hampshire lotteries in July 2000. On a pro forma basis, total service revenue in the three months ended March 31, 2001 increased $5.8 million from the same period in 2000 largely due to new on-line lottery and instant ticket cooperative services contracts. On a pro forma basis, total sales revenue declined $0.8 million as a result of non-recurring systems and equipment sales to foreign customers in 2000. Pari-mutuel Group service revenue of $19.3 million in the three months ended March 31, 2001 decreased $0.2 million from the same period in 2000. This decrease is attributable to lower revenues in the French operations and the effect of the lower Euro exchange rate on revenues from the German racing operations, partially offset by revenue improvements in the North America operations, the North American simulcasting operations and the NASRIN(TM) service operations. Sales revenue of $9.7 million in the three months ended March 31, 2001 increased $1.7 million from same period in 2000 due to higher systems and equipment sales to foreign customers. 18 Venue Management Group service revenue of $15.5 million in the three months ended March 31, 2001 was $0.4 million higher than in the same period in 2000, reflecting Handle related revenue increases in the Connecticut OTB operations. Telecommunications Group sales revenue of $11.5 million in the three months ended March 31, 2001 is the result of the acquisition of SGHC in September 2000. On a pro forma basis, revenues in the three months ended March 31, 2001 increased $0.6 million as a result of continued customer and volume growth of this business unit. Gross Profit Analysis The total gross profit earned, exclusive of depreciation and amortization, of $39.3 million in the three months ended March 31, 2001 increased $22.1 million from the same period in 2000 as a result of the acquisition of SGHC in September 2000. On a pro forma basis, the gross profit earned, exclusive of depreciation and amortization, increased $0.4 million primarily because of improved gross margins in the service businesses and the Telecommunications Group, which were partially offset by lower margins on sales revenues reflecting the change in the mix of equipment and systems sold to foreign customers in the two periods. On a pro forma basis, gross profit as a percentage of service revenues decreased to 34% in the three months ended March 31, 2001, compared to 35% in the same period in 2000. This gross profit decrease results primarily from lower margins on European Pari-mutuel service revenue and instant ticket revenues, partially offset by revenue improvements and cost control measures in the North American Pari-mutuel business. On a pro forma basis, gross profit as a percentage of sales revenues was 39% in the three months ended March 31, 2001 compared to 45% in the same period in 2000, reflecting the change in the mix of systems and equipment sold in the two periods. The Lottery Group gross profit of $18.3 million, or 33% of revenues, decreased slightly on a pro-forma basis in the three months ended March 31, 2001 from $17.7 million or 35% of revenues in the same period in 2000. Gross margin improvements were realized as a result of revenue improvements in instant ticket cooperative services and the addition of the Vermont and New Hampshire lottery contracts, which commenced operations in July 2000. These margin improvements were partially offset by non-recurring 2000 systems and equipment sales, and higher cost of ticket paper and other printing supplies. Pari-mutuel Group gross profit of $11.6 million or 40% of revenues in the three months ended March 31, 2001, decreased $0.4 million from $12.0 million or 44% of revenues in the same period in 2000. This decrease is primarily attributable to lower margins on systems and equipment sales to foreign customers, partially offset by continued growth of the North American operations and benefits from on-going cost reduction programs. Venue Management Group gross profit of $4.5 million or 29% of revenues in the three months ended March 31, 2001, improved $0.2 million from $4.3 million or 28% of revenues in the same period in 2000. This improvement primarily reflects higher Handle and reduced operating costs in the Connecticut OTB operation. The Telecommunications Group gross profit of $4.9 million in the three months ended March 31, 2001 was equal on a pro-forma basis to the gross profit in the same period in 2000. Gross profit in the three months ended March 31, 2001 was 43% of revenues as compared on a pro forma basis with 45% of revenues in the same period in 2000 as the effects of cost saving initiatives implemented in fiscal 2000 were offset by increased freight expenses. Expense Analysis Selling, general and administrative expenses, including certain software development costs, of $14.6 million in the three months ended March 31, 2001 were $7.9 million higher than in the same period in 2000 primarily as a result of the acquisition of SGHC in September 2000. On a pro forma basis, selling, general and administrative expenses were $2.9 million lower in the three months ended March 31, 2001 than in the same period in 2000 primarily as a result of cost reduction programs and merger-related synergies. Depreciation and amortization expense of $13.6 million in the three months ended March 31, 2001 increased $8.2 million from $5.4 million in the same period in 2000 as a result of the SGHC acquisition, coupled with the expanded domestic lottery business. On a pro forma basis, depreciation and amortization expenses were $3.7 million higher in the three months ended March 31, 2001 than in the same period in 2000, primarily as a result of SGHC acquisition-related goodwill and intangible amortization. Interest expense of $13.6 million in the three months ended March 31, 2001 increased $9.3 million from $4.3 million in the same period in 2000 as a result of higher debt levels, interest rates and financing costs incurred in connection with the acquisition of SGHC. 19 Income Tax Expense (Benefit) Income tax benefit was $0.3 million in the three months ended March 31, 2001 compared to an expense of $0.1 million in the same period in 2000. The benefit primarily reflects the reversal of deferred taxes provided in connection with the acquisition of SGHC and an anticipated recovery of previously paid federal taxes, partially offset by federal alternative minimum tax, state taxes and foreign taxes. No current tax benefit has been recognized on domestic operating losses in either period. Liquidity, Capital Resources and Working Capital In order to finance the SGHC acquisition and refinance substantially all of the then existing indebtedness of the Company, we conducted a series of financings. As a result, our capital structure changed significantly and, among other things, we are a significantly leveraged company. As a result of the acquisition and debt refinancing, we have total indebtedness outstanding of approximately $446.0 million at March 31, 2001. We have also recorded a substantial increase in goodwill and other intangible assets in connection with the SGHC acquisition and a corresponding increase in amortization expense. At March 31, 2001, the Company's available cash and borrowing capacity totaled $49.7 million compared to $53.1 million at December 31, 2000. Net cash provided by operating activities was $10.3 million for the three months ended March 31, 2001. In this period, we spent $9.4 million for wagering systems and capital expenditures, $1.5 million in software expenditures and repaid $1.5 million on long-term debt. These cash expenditures were funded primarily with net cash provided by operating activities and borrowings under our revolving credit facility. A substantial portion of our cash flows from operations must be used to pay our interest expense and repay our indebtedness, which will reduce the funds that would otherwise be available to us for our operations and capital expenditures. We believe that our cash flow from operations, available cash and available borrowings under our revolving credit facility will be sufficient to meet our liquidity needs, including anticipated capital expenditures, for the foreseeable future; however, we cannot assure you that this will be the case. We also may need to refinance all or part of our indebtedness, including the Notes, on or before their maturity; however, we cannot assure you that we will able to refinance any of our indebtedness, including our Facility and the Notes, on commercially reasonable terms or at all. The Company's financing arrangements impose certain limitations on the operations of the Company and its subsidiaries, including the maintenance of certain financial, liquidity and net worth ratios. As a result of both the financial performance of SGHC prior to the Company's acquisition of SGHC, principally reflecting transitional and operational matters occurring through December 31, 2000, and the timing of certain anticipated capital expenditures and associated borrowings in 2001, in the first quarter of 2001, management and our lenders amended certain limitations to be less restrictive. The Facility was modified so that the planned step-downs in fixed charge coverage ratios and leverage ratios were delayed by six months through September 30, 2002. The Company is in compliance with the amended covenants as of March 31, 2001 and expects to remain so during the next twelve months. Forward-Looking Statements Throughout this Report on Form 10-Q we make "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Forward-looking statements include the words "may," "will," "estimate," "intend," "continue," "believe," "except" or "anticipate" and other similar words. The forward-looking statements contained in this Report on Form 10-Q are generally located in the material set forth under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations" but may be found in other locations as well. These forward-looking statements generally relate to plans and objectives for future operations and are based upon management's reasonable estimates of future results or trends. Although we believe that the plans and objectives reflected in or suggested by such forward-looking statements are reasonable, such plans or objectives may not be achieved. 20 Actual results may differ from projected results due, but not limited, to unforeseen developments, including developments relating to the following: o the availability and adequacy of our cash flow to satisfy our obligations, including our debt service obligations and our need for additional funds required to support capital improvements and development; o economic, competitive, demographic, business and other conditions in our local and regional markets; o changes or developments in the laws, regulations or taxes in the gaming and lottery industries; o actions taken or omitted to be taken by third parties, including customers, suppliers, competitors, members and shareholders, as well as legislative, regulatory, judicial and other governmental authorities; o changes in business strategy, capital improvements, development plans, including those due to environmental remediation concerns, or changes in personnel or their compensation, including federal, state and local minimum wage requirements; and o the loss of any license or permit, including the failure to obtain an unconditional renewal of a required gaming license on a timely basis. Actual future results may be materially different from what we expect. We will not update forward-looking statements even though our situation may change in the future. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Our products and services are sold to a diverse group of customers throughout the world. As such, we are subject to certain risks and uncertainties as a result of changes in general economic conditions, sources of supply, competition, foreign exchange rates, tax reform, litigation and regulatory developments. The diversity and breadth of our products and geographic operations mitigate the risk that adverse changes in any event would materially affect our financial position. Additionally, as a result of the diversity of our customer base, we do not consider ourselves exposed to concentration of credit risks. These risks are further minimized by setting credit limits, ongoing monitoring of customer account balances, and assessment of the customers' financial strengths. Inflation has not had an abnormal or unanticipated effect on our operations. Inflationary pressures would be significant to our business if raw materials used for instant lottery ticket production, prepaid phone card production or terminal manufacturing are significantly affected. Available supply from the paper and electronics industries tends to fluctuate and prices may be affected by supply. For fiscal 2000, inflation was not a significant factor in our results of operations, and we were not impacted by significant pricing changes in our costs, except for personnel related expenditures. We are unable to forecast the prices or supply of substrate, component parts or other raw materials for the balance of 2001, but we currently do not anticipate any substantial changes that will materially affect our operating results. In certain limited cases, our lottery contracts with our customers contain provisions to adjust for inflation on an annual basis, but we cannot be assured that this adjustment would cover raw material price increases or other costs of services. While we have long-term and generally satisfactory relationships with most of our suppliers, we also believe alternative sources to meet our raw material and production needs are available. In the normal course of business, the Company is exposed to fluctuations in interest rates and equity market risks as the Company seeks debt and equity capital to sustain its operations. At March 31, 2001, approximately one-third of the Company's debt was in fixed rate instruments. We consider the fair value of all financial instruments to be not materially different from their carrying value at year-end. The following table provides information about the Company's financial instruments that are sensitive to changes in interest rates. The table presents principal cash flows and related weighted-average interest rates by expected maturity dates. Principal Amount by Expected Maturity - Average Interest Rate March 31, 2001 Expected Maturity Date (dollars in $000)
There- 2001 2002 2003 2004 2005 after Total Fair value ------------ ---------- ----------- --------- --------- ---------- ---------- ----------- Long-term debt: Fixed interest rate debt $ 150,000 150,000 139,500 Interest rate 12.5% Variable interest rate debt $ 4,650 8,950 11,950 14,950 17,200 236,250 293,950 293,950 Average interest rate 10.12% 10.00% 9.93% 9.89% 9.87% 10.70% 10.55%
21 In November 2000, to reduce the risks associated with fluctuations in market interest rates and in response to requirements in the Facility (see Note 9 to the Consolidated Financial Statements for the year ended October 31, 2000 in the Company's 2000 Annual Report on Form 10-K) the Company entered into three interest rate swap contracts for an aggregate notional amount of $140,000. The following table provides information about the Company's derivative financial instruments. The table presents notional amounts and weighted-average swap rates by contractual maturity dates. The Company does not hold any market risk instruments for trading purposes. Notional Amount by Expected Maturity - Average Swap Rate Expected Maturity Date (dollars in $000)
There- 2001 2002 2003 2004 2005 after Total Fair value ---------- --------- ---------- --------- ---------- ---------- --------- ---------- Interest rate swaps: Fixed to variable $ -- -- 140,000 -- -- -- 140,000 134,799 Receive fixed-3-month LIBOR -- -- 6.52% -- -- -- 6.52%
The Company is also exposed to fluctuations in foreign currency exchange rates as the financial results of its foreign subsidiaries are translated into U.S. dollars in consolidation. Assets and liabilities outside the United States are primarily located in the United Kingdom, Germany, Netherlands, France and Austria. The Company's investment in foreign subsidiaries with a functional currency other than the U.S. dollar are generally considered long-term investments. Accordingly, the Company does not hedge these net investments. Translation gains and losses historically have not been material. We manage our foreign currency exchange risks on a global basis by one or more of the following: (i) securing payment from our customers in U.S. dollars, when possible, (ii) utilizing borrowings denominated in foreign currency, and (iii) entering into foreign currency exchange contracts. In addition, a significant portion of the cost attributable to our foreign operations is incurred in the local currencies. We believe that a 10% adverse change in currency exchange rates would not have a significant adverse effect on the net earnings or cash flows of the Company. We may, from time to time, enter into foreign currency exchange or other contracts to hedge the risk associated with certain firm sales commitments, anticipated revenue streams and certain assets and liabilities denominated in foreign currencies. We do not engage in currency speculation. Our cash and cash equivalents and investments are in high-quality securities placed with a wide array of financial institutions with high credit ratings. This investment policy limits our exposure to concentration of credit risks. 22 SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES Three Months Ended March 31, 2001 PART II. Other Information Item 1. Legal Proceedings No significant changes have occurred with respect to legal proceedings as disclosed in Part I, Item 3, of the Company's 2000 Annual Report on Form 10-K. Item 2. Changes in Securities and Use of Proceeds None. Item 3. Defaults Upon Senior Securities None. Item 4. Submission of Matters to a Vote of Stockholders None. Item 5. Other Information None. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 10.29 Warrant To Purchase Class A Common Stock dated as of October 2, 2000, issued by the Company to Ramius Securities, LLC 10.30 Warrant Registration Rights Agreement dated as of October 2, 2000 by and between the Company and Ramius Securities, LLC Reports on Form 8-K No current reports on Form 8-K were filed during the three months ended March 31, 2001. A current report on Form 8-K was filed on April 30, 2001, regarding the change in the Company's name, effective April 27, 2001, from Autotote Corporation to Scientific Games Corporation and the change in its stock exchange symbol to SGM [AMEX:SGM]. A current report on Form 8-K was filed on April 16, 2001, regarding the first amendment dated as of March 30, 2001, to the Company's Amended and Restated Credit Agreement. 23 SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES Three Months Ended March 31, 2001 SIGNATURES Pursuant to the requirements 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. SCIENTIFIC GAMES CORPORATION (Registrant) By: /s/ DeWayne E. Laird -------------------------------------------- Name: DeWayne E. Laird Title: Vice President & Chief Financial Officer (principal financial and accounting officer) Dated: May 15, 2001 24 EX-10.29 2 0002.txt WARRANT TO PURCHASE CLASS A COMMON STOCK Exhibit 10.29 WARRANT TO PURCHASE CLASS A COMMON STOCK THIS WARRANT AND THE SECURITIES ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE NOT BEEN REGISTERED FOR RESALE UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR ANY STATE SECURITIES LAWS AND MAY NOT BE OFFERED, SOLD, TRANSFERRED, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO SUCH SECURITIES AND SUCH DISPOSITION FILED UNDER THE ACT, OR AN EXEMPTION FROM REGISTRATION, AND COMPLIANCE WITH APPLICABLE STATE SECURITIES LAWS. THE ISSUER MAY REQUIRE AN OPINION OF COUNSEL SATISFACTORY TO THE ISSUER HEREOF THAT SUCH REGISTRATION IS NOT REQUIRED AND THAT SUCH LAWS ARE COMPLIED WITH. Void After 5:00 p.m., Eastern Time, on October 1, 2004 No. 1 Warrant to Purchase 250,000 shares of Class A Common Stock, par value $.01 per share of AUTOTOTE CORPORATION This is to Certify That, FOR VALUE RECEIVED, the receipt and sufficiency of which is hereby acknowledged, Ramius Securities, LLC (the "Holder") is entitled to purchase, subject to the provisions of this Warrant, from Autotote Corporation ("Company"), a Delaware corporation, at any time prior to 5:00 p.m., Eastern Time, on October 1, 2004, a total of TWO HUNDRED AND FIFTY THOUSAND shares of Class A Common Stock, par value $.01 per share, of the Company ("Securities") at an initial purchase price of $3.58 per share. The number of Securities to be received upon the exercise of this Warrant and the price to be paid for the Securities may be adjusted from time to time as hereinafter set forth. The number of Securities to be received upon the exercise of this Warrant in effect at any time and as adjusted from time to time is hereinafter sometimes referred to as the "Exercise Rate" and the purchase price per Security in effect at any time and as adjusted from time to time, and subject to the minimum purchase price set forth in Section 7(l), is hereinafter sometimes referred to as the "Exercise Price" per Security. The Securities, as adjusted from time to time, together with any other Securities issuable upon exercise of this Warrant are hereinafter sometimes referred to as "Warrant Securities". Certain capitalized terms used in this Warrant are defined in Section 15 hereof. (i) Exercise of Warrant. Subject to the provisions of Section 8 hereof, this Warrant may be exercised at the option of the Holder in whole or in part at any time or from time to time prior to 5:00 p.m., Eastern Time on October 1, 2004, or if October 1, 2004 is a Saturday, Sunday or a day on which banking 1 institutions in New York, New York are authorized by law to close, then on the next succeeding day (a "Business Day") which shall not be such a day, by presentation and surrender hereof to the Company or at the office of its stock transfer agent, if any, with the Purchase Form annexed hereto duly executed, and accompanied by payment of the Exercise Price (other than in the case of the exercise of the Cashless Exercise Option set forth in Section 8 hereof), for the number of Securities specified in such Purchase Form, together with all federal and state taxes applicable upon such exercise. Upon exercise of this Warrant, the Holder shall be deemed to have represented and warranted to the Company that such Holder (x) is a "qualified institutional buyer" as defined in Rule 144A under the Act or an "accredited investor" as defined in Rule 501 under the Act, in either case with such knowledge and experience in financial and business matters as is necessary to evaluate the merits and risks of an investment in the Warrant Securities, and (y) such Holder is not acquiring the Warrant Securities with a view to any distribution thereof or with any intention of offering or selling any Warrant Securities in a transaction that would violate the Act or the securities laws of any state of the United States. If this Warrant should be exercised in part only, the Company shall, upon surrender of this Warrant for cancellation, execute and deliver a new Warrant evidencing the right of the Holder to purchase the balance of the Securities purchasable hereunder. Upon receipt by the Company of this Warrant at the office of the Company or at the office of the Company's stock transfer agent, in proper form for exercise and accompanied by the Exercise Price, if and as applicable, the Holder shall be deemed to be the holder of record of the Securities issuable upon such exercise, notwithstanding that the stock transfer books of the Company shall then be closed or that certificates representing such Securities shall not then be actually delivered to the Holder. (ii) Reservation of Securities. The Company hereby agrees that at all times there shall be reserved for issuance and/or delivery upon exercise of this Warrant such number of shares of Securities as shall be required for issuance or delivery upon exercise of this Warrant. The Company covenants and agrees that, upon exercise of this Warrant and payment of the Exercise Price therefor, if and as applicable, all Securities and other securities issuable upon such exercise shall be duly and validly issued, fully paid, non-assessable and not subject to the preemptive rights of any stockholder. As long as this Warrant shall be outstanding, the Company shall use its best efforts to cause all Securities issuable upon the exercise of this Warrant to be listed (subject to official notice of issuance) on all securities exchanges or quotation systems on which its Class A Common Stock issued may then be listed and/or quoted. (iii) Fractional Shares. No fractional shares or scrip representing fractional shares shall be issued upon the exercise of this Warrant. With respect to any fraction of a share called for upon any exercise hereof, the Company shall pay to the Holder an amount in cash equal to such fraction multiplied by the Prior Day Market Value of such fractional share. 2 (iv) Exchange, Assignment or Loss of Warrant. This Warrant is exchangeable, without expense, at the option of the Holder, upon presentation and surrender hereof to the Company or at the office of its stock transfer agent, if any, for other Warrants of different denominations entitling the Holder thereof to purchase (under the same terms and conditions as provided by this Warrant) in the aggregate the same number of Securities purchasable hereunder. Subject to compliance with the provisions of Section 10 hereof, this Warrant may be divided or combined with other Warrants of the same series upon presentation hereof at the office of the Company or at the office of its stock transfer agent, if any, issued together with a written notice specifying the names and denominations in which new Warrants are to be issued and signed by the Holder hereof. The term "Warrants" as used in this paragraph includes any Warrants issued in substitution for or replacement of this Warrant, or into which this Warrant may be divided or exchanged. Upon receipt by the Company of evidence satisfactory to it of the loss, theft, destruction or mutilation of this Warrant, and (in the case of loss, theft or destruction) of reasonably satisfactory indemnification, and upon surrender and cancellation of this Warrant, if mutilated, the Company will execute and deliver a new Warrant of like tenor and date. Any such new Warrant executed and delivered shall constitute an additional contractual obligation on the part of the Company, whether or not the Warrant so lost, stolen, destroyed, or mutilated shall be at any time enforceable by anyone. (v) Rights of the Holder. The Holder shall not, by virtue hereof, be entitled to any rights of a stockholder in the Company, either at law or equity, and the rights of the Holder are limited to those expressed in this Warrant and the registration rights agreement referenced in Section 16 hereof. (vi) Certain Notices to Warrant Holders. The Company shall give prompt written notice to the Holder of any determination to make a distribution to the holders of its Class A Common Stock of any cash dividends, assets, debt securities, preferred stock, or any rights or warrants to purchase debt securities, preferred stock, assets or other securities (other than Class A Common Stock, or rights, options, or warrants to purchase Class A Common Stock) of the Company, which notice shall state the nature and amount of such planned dividend or distribution and the record date therefor, and shall be received by the Holder or sent to the Holder by reputable overnight courier, in either case to its address as provided in Section 9, at least 10 days prior to such record date therefor. The Company shall provide notice to the Holder that any tender offer is being made for securities of the same class as any Warrant Securities no later than the first Business Day after the day the Company becomes aware of any such tender offer. Notwithstanding any notice provided to the Holder pursuant to this Section 6, the Holder shall be entitled to any and all applicable adjustments to the Exercise Rate and the Exercise Price per Security as provided in Section 7 arising out of any event requiring notice to the Holder in this Section 6. 3 (vii) Adjustment of Exercise Rate and Exercise Price. The Exercise Rate and the Exercise Price are subject to adjustment from time to time upon the occurrence of the events enumerated in this Section 7. The Exercise Rate shall initially be the number of Securities for which this Warrant is initially exercisable as set forth in the introductory paragraph to this Warrant. In the event that this Warrant is transferred or exercised in part, the initial Exercise Rate of the portion not exercised or transferred shall be adjusted proportionately as shall the initial Exercise Rate of any partial transfer of this Warrant. For the purposes of Sections 7(a) and 7(b), (i) shares of Class A Common Stock issuable upon the exercise of this Warrant and all other warrants of the same series as this Warrant shall be deemed to be outstanding and (ii) all shares of Class A Common Stock that would be deemed to be outstanding as of the date of determination in respect of Convertible Securities, as determined in accordance with GAAP, shall be deemed to be outstanding. Adjustment for Change in Capital Stock. If, after the Issue Date, the Company: pays a dividend or makes a distribution on shares of its Class A Common Stock payable in shares of its Class A Common Stock (except to the extent any such dividend results in the grant, issuance, sale or making of Distribution Rights or Distributions (each as defined in Section 7(c)) to the Holder pursuant to Section 7(c)); subdivides or splits its outstanding shares of Class A Common Stock into a greater number of shares; or combines its outstanding shares of Class A Common Stock into a smaller number of shares; then (1) the Exercise Rate in effect immediately prior to such action for this Warrant shall be adjusted by multiplying the Exercise Rate in effect immediately prior to such action by a fraction (A) the numerator of which shall be the number of shares of Class A Common Stock outstanding immediately after such action and (B) the denominator of which shall be the number of shares of Class A Common Stock outstanding immediately prior to such action or the record date applicable to such action, if any and (2) the Exercise Price per Security in effect immediately prior to such action shall be adjusted by multiplying the Exercise Price per Security in effect immediately prior to such action by a fraction (A) the numerator of which is one and (B) the denominator of which shall be the fraction calculated in clause (1) of the above formula. The adjustments shall become effective immediately after the record date in the case of a dividend or distribution and immediately after the effective date in the case of a subdivision or combination. In the event that such dividend or distribution is not so paid or made or such subdivision, combination or reclassification is not effected, the Exercise Rate and the Exercise Price per Security shall again be adjusted to be the Exercise Rate and the Exercise Price per Security which would then be in effect if such record date or effective date had not been so fixed. Adjustment for Certain Sales of Class A Common Stock Below Current Market Value. If, after the Issue Date, the Company (i) grants or sells to any Affiliate of the Company (other than a wholly owned subsidiary of the Company) or (ii) grants, sells or offers to grant or sell to all holders of Class A Common Stock, any shares of Class A Common Stock or Convertible Securities (other than, in the case of each of clauses (i) and (ii), (1) pursuant to any Convertible Security outstanding as of the Issue Date, or (2) upon 4 the conversion, exchange or exercise of any Convertible Security as to which upon the issuance thereof an adjustment pursuant to this Section 7 has been made), at a price below the then Current Market Value, the Exercise Rate and the Exercise Price per Security for this Warrant shall be adjusted in accordance with the formulae: E^1 = E x (O+N) $^1 = $ x (O + N x P/M) -------------- ---------------- (O + (N x P/M)) (O + N) where: E^1 = the adjusted Exercise Rate for this Warrant; E = the then current Exercise Rate for this Warrant; $^1 = the adjusted Exercise Price per Security for this Warrant; $ = the then current Exercise Price per Security for this Warrant; O = the number of shares of Class A Common Stock outstanding immediately prior to the sale of such Class A Common Stock or issuance of Convertible Securities; N = the number of shares of Class A Common Stock so sold or the maximum stated number of shares of Class A Common Stock issuable upon the conversion, exchange or exercise of any such Convertible Securities; P = the proceeds per share of Class A Common Stock received by the Company, which (i) in the case of shares of Class A Common Stock is the amount received by the Company in consideration for the sale and issuance of such shares; and (ii) in the case of Convertible Securities is the amount received by the Company in consideration for the sale and issuance of such Convertible Securities, plus the minimum aggregate amount of additional consideration, other than the surrender of such Convertible Securities, payable to the Company upon exercise, conversion or exchange thereof; and M = the Current Market Value as of the Time of Determination or at the time of sale, as the case may be, of a share of Class A Common Stock. The adjustments shall become effective immediately after the record date for the determination of shareholders entitled to receive the rights, warrants or options to which this paragraph (b) applies or upon consummation of the sale of Class A Common Stock, as the case may be. To the extent that shares of Class A Common Stock are not delivered after the expiration of such rights, warrants or options or exercise, conversion or exchange rights in respect to such Convertible Securities, the Exercise Rate and the Exercise Price per Security for this Warrant shall be readjusted to the Exercise Rate and the Exercise Price per Security which would otherwise be in effect had the adjustment made upon the issuance of such rights, warrants or options or Convertible Securities been made on the basis of delivery of only the number of shares of Class A Common Stock 5 actually delivered. In the event that such rights or warrants are not so issued, the Exercise Rate and the Exercise Price per Security for this Warrant shall again be adjusted to be the Exercise Rate and the Exercise Price per Security which would then be in effect if such date fixed for determination of shareholders entitled to receive such rights, warrants or options had not been so fixed. No adjustments shall be made under this paragraph (b) if the application of the formula stated above in this paragraph (b) would result in a value of E^1 that is lower than the value of E. No adjustments shall be made under this paragraph (b) for any adjustments which are the subject of paragraphs (a), (c) or (e) of this Section 7. Anything in this Warrant to the contrary notwithstanding, an event which would otherwise give rise to adjustments pursuant to this Section 7(b) shall not give rise to such adjustments if the Company grants, sells or offers to sell shares of Class A Common Stock or Convertible Securities, in each case on the same terms as the underlying event, to the Holder on a pro rata basis, assuming for the purpose of this Section 7(b) that all warrants of the same series as this Warrant had been exercised. Notwithstanding the foregoing, no adjustment in the Exercise Rate or the Exercise Price per Security will be required in respect of: (a) the grant of any stock option or other stock incentive award pursuant to any stock option or stock incentive plan or arrangement as disclosed in the Company's Proxy Statement dated February 22, 2000 or pursuant to any other customary compensatory stock option or stock incentive plan for employees, officers and/or directors, (b) the grant of any stock option or stock incentive award at an exercise price at least equal to the then Prior Day Market Value, (c) the exercise of any stock option or stock incentive or award or (d) any issuance or conversion of any shares of the Company's Series A Convertible Preferred Stock. Adjustment upon Certain Distributions. If at any time after the Issue Date the Company grants, issues or sells options, any Convertible Security, or rights to purchase capital stock or other securities (other than Class A Common Stock) pro rata to the record holders or series of Class A Common Stock ("Distribution Rights") or, without duplication, makes any distribution (other than a distribution pursuant to a plan of liquidation) other than a Permitted Cash Dividend (a "Distribution") on shares of Class A Common Stock (whether in cash, property, evidences of indebtedness, or otherwise), then the Exercise Rate and the Exercise Price per Security shall be adjusted in accordance with the formulae: E^1 = E x (M/(M-F)) $^1 = $ x ((M-F)/M) where: 6 E^1 = the adjusted Exercise Rate; E = the current Exercise Rate for this Warrant; $^1 = the adjusted Exercise Price per Security for this Warrant; $ = the current Exercise Price per Security for this Warrant; M = the Current Market Value per share of Class A Common Stock at the Time of Determination; F = the fair market value at the Time of Determination of such portion of the options, Convertible Securities, capital stock or other securities, cash, property or assets distributable pursuant to such Distribution Rights or Distribution per share of outstanding Class A Common Stock. The adjustments shall become effective immediately after the Time of Determination with respect to the shareholders entitled to receive the options, Convertible Securities, warrants, cash, property, evidences of indebtedness or other securities or assets to which this paragraph (c)(i) applies. No adjustments shall be made under this paragraph (c) if the application of the formula stated above in this paragraph (c)(i) would result in a value of E1 that is lower than the value of E. This paragraph (c)(i) does not apply to any securities which result in adjustments pursuant to paragraphs (a) or (b) of this Section 7. Anything in this Warrant to the contrary notwithstanding, an event which would otherwise give rise to adjustments pursuant to Section 7(c)(i) shall not give rise to such adjustments (or to adjustments pursuant to any other provision of this Section 7) if the Company grants, issues or sells Distribution Rights to the Holder or includes the Holder in such Distribution, in each case on a pro rata basis, assuming for the purpose of this Section 7(c)(ii) that all warrants of the same series as this Warrant had been exercised. Notwithstanding anything to the contrary set forth in this Section 7(c), if, at any time, the Company makes any distribution pursuant to any plan of liquidation (a "Liquidating Distribution") on shares of Class A Common Stock (whether in cash, property, evidences of indebtedness or otherwise), then, subject to applicable law, the Company shall make to the Holder the aggregate Liquidating Distribution which the Holder would have acquired if the Holder had held the maximum number of shares of Class A Common Stock acquirable upon the complete exercise of this Warrant immediately before the Time of Determination of shareholders entitled to receive Liquidating Distributions. 7 Notice of Adjustments. Whenever the Exercise Rate and Exercise Price per Security are adjusted, the Company shall promptly mail to the Holder a notice of the adjustments. The Company shall also provide the Holder with a certificate from the Company's independent public accountants briefly stating the facts requiring the adjustments and the manner of computing it. The certificate shall be conclusive evidence that the adjustments are correct, absent manifest error. Reorganization of Company; Fundamental Transaction. If (x) the Company shall reclassify its Class A Common Stock (other than a change in par value, or from par value to no par value, or a subdivision or combination thereof), or (y) the Company, in a single transaction or through a series of related transactions, consolidates with or merges with or into any other person or sells, assigns, transfers, leases, conveys or otherwise disposes of all or substantially all of its properties and assets to another person or group of affiliated persons or is a party to a merger or binding share exchange which, in the case of any of the transactions referred to in this clause (y), reclassifies or changes its outstanding Class A Common Stock (each of (x) and (y) above being referred to as a "Fundamental Transaction"), as a condition to consummating any such Fundamental Transaction, the Company, in the case of any such reclassification referred to in clause (x), or the person formed by or surviving any such consolidation or merger if other than the Company or the person to whom such transfer has been made in the case of clause (y) above (the "Surviving Person"), shall enter into a supplemental warrant agreement. The supplemental warrant agreement shall provide (a) that the Holder may exercise this Warrant for the kind and amount of securities, cash or other assets which the Holder would have received immediately after the Fundamental Transaction if the Holder had exercised this Warrant immediately before the effective date of the transaction (without giving effect to the Cashless Exercise Option), assuming (to the extent applicable) that the Holder (i) was not a constituent person or an affiliate of a constituent person to any transaction described in clause (y) above, (ii) made no election with respect to any transaction described in clause (y) above, and (b) in the case of any transaction described in clause (y) above, that the Surviving Person shall succeed to and be substituted to every right and obligation of the Company in respect of this Warrant. The supplemental warrant agreement shall provide for 8 adjustments which shall be as nearly equivalent as may be practicable to the adjustments provided for in this Section 7. The Surviving Person or the Company, as applicable, shall mail to the Holder a notice briefly describing the supplemental warrant agreement. If the issuer of securities deliverable upon exercise of this Warrant is an affiliate of a Surviving Person, that issuer shall join in the supplemental warrant agreement. Notwithstanding the foregoing, if a Fundamental Transaction shall occur and, upon consummation of such Fundamental Transaction, consideration is payable to holders of shares of Class A Common Stock which consideration consists solely of cash, assuming (to the extent applicable) that the Holder (i) was not a constituent person or an affiliate of a constituent person to a transaction described in Section 7(e)(i)(y) above and (ii) made no election with respect thereto, then the Holder shall be entitled to receive distributions upon consummation of such Fundamental Transaction on an equal basis with holders of Class A Common Stock as if this Warrant had been exercised immediately prior to such event, less the aggregate Exercise Price therefor; provided that the Company or the Surviving Person, as the case may be, may require the surrender of this Warrant to such person prior to making any such distribution to the Holder. Upon receipt of such payment, if any, the rights of the Holder shall terminate and cease and this Warrant shall expire. If this paragraph (f) applies, it shall supersede the application of paragraph (a), (b) or (c) of this Section 7. 9 Other Events If any event occurs as to which the provisions of this Section 7 are not strictly applicable or, if strictly applicable, would not, in the good faith judgment of the board of directors of the Company, fairly and adequately protect the rights of the Holder in accordance with the essential intent and principles of such provisions, then such board of directors shall make such adjustments in the application of such provisions, in accordance with such essential intent and principles, as shall be reasonably necessary, in the good faith opinion of such board of directors, to protect such rights as aforesaid, but in no event shall any such adjustment have the effect of decreasing the Exercise Rate or decreasing the number of Securities issuable upon exercise of this Warrant or increasing the Exercise Price per Security. Company Determination Final. Any determination that the Company or the board of directors of the Company must make pursuant to this Section 7 shall be conclusive, absent manifest error. Specificity of Adjustments. Regardless of any adjustments in the number or kind of shares purchasable upon the exercise of this Warrant or the Exercise Price per Security, this Warrant may continue to express the same number and kind of Securities initially issuable pursuant to this Warrant and the initial Exercise Price per Security as set forth in the first paragraph hereof. Voluntary Adjustment. The Company from time to time may increase the Exercise Rate and correspondingly decrease the Exercise Price per Security by any number and for any period of time; provided, however, that such period is not less than 20 Business Days. Whenever the Exercise Rate is so increased and the Exercise Price per Security is so decreased, the Company shall mail to the Holder a notice thereof. The Company shall give the notice at least 10 days before the date the increased Exercise Rate and decreased Exercise Price per Security takes effect. The notice shall state the increased Exercise Rate and decreased Exercise Price per Security and the period it will be in effect. A voluntary increase in the Exercise Rate and decrease in the Exercise Price per Security shall not change or adjust the Exercise Rate or Exercise Price per Security otherwise in effect as determined by this Section 7. Multiple Adjustments. After an adjustment to the Exercise Rate and Exercise Price per Security for this Warrant under this Section 7, any subsequent event requiring an adjustment under this Section 7 shall cause an adjustment to the Exercise Rate and Exercise Price per Security for this Warrant as so adjusted. 10 When De Minimis Adjustment May Be Deferred. No adjustment in the Exercise Rate or Exercise Price per Security shall be required unless such adjustment would require an increase or decrease of at least 1% in the Exercise Rate; provided, however, that any adjustments which by reason of the foregoing are not required to be made shall be carried forward and taken into account in any subsequent adjustment. All calculations of the Exercise Rate shall be rounded to the nearest whole number. All calculations of the Exercise Price per Security shall be rounded to the nearest ten thousandth of one cent. No adjustments need be made for a change in the par value of the Class A Common Stock and no adjustments shall be deferred beyond the date on which this Warrant is exercised. Notwithstanding any adjustment to the Exercise Price called for by this Section 7, in no event will the Exercise Price per share of Class A Common Stock be adjusted to an amount that is less than the par value per share of the Class A Common Stock at the time of such adjustment, and if, but for the provisions of this Section 7(l), an adjustment to the Exercise Price would be required under this Section 7 that would result in an Exercise Price per share of Class A Common Stock that is less than the par value per share of the Class A Common Stock, then the Exercise Price shall be adjusted such that the Exercise Price per share of Class A Common Stock equals the par value of the Class A Common Stock. Amendments of the Certificate of Incorporation. The Company shall not amend its Certificate of Incorporation to increase the par value of any Warrant Security such that such par value would exceed the Exercise Price per share of such Warrant Security. (viii) Cashless Exercise. In lieu of exercising this Warrant for cash, the Holder shall have the right to exercise this Warrant or any portion thereof (the "Cashless Exercise Option") into Class A Common Stock as provided in this Section 8 at any time or from time to time during the period specified on page one of this Warrant by the surrender of this Warrant to the Company with a duly executed and completed Exercise Form marked to reflect cashless exercise. Upon exercise of the Cashless Exercise Option with respect to a particular number of shares subject to this Warrant and noted on the Exercise Form (the "Cashless Exercise Securities"), the Company shall deliver to the Holder (without payment by the Holder of any Exercise Price or any cash or other consideration) that number of shares of fully paid and nonassessable shares of Class A Common Stock equal to the quotient obtained by dividing (X) the value of this Warrant (or the specified portion hereof) on the Cashless Exercise Date, which value shall be determined by subtracting (A) the aggregate Exercise Price of the Cashless Exercise Securities immediately prior to the exercise of the Cashless Exercise Option from (B) the aggregate Prior Day Market Value of the Cashless Exercise 11 Securities issuable upon exercise of this Warrant (or the specified portion hereof) on the Cashless Exercise Date (as herein defined) by (Y) the Prior Day Market Value of one share of Class A Common Stock on the Cashless Exercise Date (as herein defined). Expressed as a formula as shown below, such net issuance exercise shall be computed as follows: X = B-A --- Y where: X = the number of shares of Class A Common Stock that may be issued to the Holder Y = the Prior Day Market Value of one share of Class A Common Stock as of the Cashless Exercise Date A = the aggregate Exercise Price (i.e. the product determined by multiplying the Cashless Exercise Securities by the Exercise Price per Security) B = the aggregate Prior Day Market Value (i.e. the product determined by multiplying the Prior Day Market Value by the Cashless Exercise Securities). (ix) Notices. Any notices or certificates by the Company to the Holder and by the Holder to the Company shall be deemed delivered if in writing and delivered personally or sent by certified mail or reputable overnight courier, to the Holder, addressed as set forth in the Instructions for Registration of Warrant delivered to the Company, which may be superseded from time to time upon notice to the Company, and, if to the Company, addressed to Autotote Corporation, 750 Lexington Avenue, 25th Floor, New York, New York 10022, Attention: General Counsel. The Company may change its address for notice by written notice to the Holder. (x) Limitations on Transferability. This Warrant may be divided or combined, upon request to the Company by the Holder, into a certificate or certificates evidencing the same aggregate number of Warrants. This Warrant may not be offered, sold, transferred, pledged or hypothecated in the absence of an effective registration statement as to this Warrant and such transaction filed under the Act, or an exception from the requirement of such registration, and compliance with the applicable federal and state securities laws. The Company may require an opinion of counsel satisfactory to the Company that such registration is not required and that such laws are complied with. The Company may treat the registered holder of this Warrant as he or it appears on the Company's books at any time as the Holder for all purposes. The Company shall permit the Holder or his duly authorized attorney, upon written request during ordinary business hours, to inspect and copy or make extracts from its books showing the registered holders of Warrants. 12 (xi) Transfer to Comply With the Securities Act of 1933. The Company may cause the following legend, or one similar thereto, to be set forth on this Warrant and on each certificate representing Warrant Securities, or any other security issued or issuable upon exercise of this Warrant, unless (a) the Company has received an opinion of counsel satisfactory to the Company as to any such certificate that such legend, or one similar thereto, is unnecessary or (b) a registration statement with respect to this Warrant and the Warrant Securities has become effective under the Act. "THIS SECURITY HAS NOT BEEN REGISTERED FOR RESALE UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR ANY STATE SECURITIES LAWS AND MAY NOT BE OFFERED, SOLD, TRANSFERRED, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO SUCH SECURITY AND SUCH DISPOSITION FILED UNDER THE ACT, OR AN EXEMPTION FROM REGISTRATION, AND COMPLIANCE WITH APPLICABLE STATE SECURITIES LAWS. THE ISSUER MAY REQUIRE AN OPINION OF COUNSEL SATISFACTORY TO THE ISSUER HEREOF THAT SUCH REGISTRATION IS NOT REQUIRED AND THAT SUCH LAWS ARE COMPLIED WITH." (xii) Applicable Law. This Warrant shall be governed by, and construed in accordance with, the laws of the State of New York, without giving effect to conflict of law principles. (xiii) Amendments. This Warrant may not be amended except in a writing signed by the Holder and the Company. (xiv) Severability. If any provisions of this Warrant shall be held to be invalid or unenforceable, such invalidity or enforceability shall not affect any other provision of this Warrant. (xv) Certain Definitions. In addition to the capitalized terms defined elsewhere in this Warrant, the following capitalized terms shall have the meanings set forth below. "Act" shall mean the Securities Act of 1933, as amended, together with the rules and regulations promulgated thereunder. "Affiliate" of a person shall mean a person who directly or indirectly through one or more intermediaries controls, or is controlled by, or is under common control with, such person. The term "control" means the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, by contract or otherwise. "Convertible Security" shall mean any security convertible into or exchangeable or exercisable for Class A Common Stock, including but not limited to, rights, options or warrants entitling the holder thereof to acquire Class A Common Stock or any security convertible into or exchangeable for Class A Common Stock. 13 "Current Market Value" per share of Class A Common Stock of the Company at any date shall mean: if Class A Common Stock is not then registered under the Exchange Act and traded on a national securities exchange or on the Nasdaq National Market System, (a) the value of such Class A Common Stock, determined in good faith by the board of directors of the Company and certified in a board resolution, taking into account the most recently completed arms-length transaction between the Company and a person other than an Affiliate of the Company and the closing of which occurs on such date or shall have occurred within the six-month period preceding such date, or (b) if no such transaction shall have occurred on such date or within such six-month period, the fair market value of the security as determined by a nationally recognized investment bank; provided, however, that, in the case of the calculation of Current Market Value for determining the cash value of fractional shares, no such determination by an investment bank shall be required and the good faith judgment of the board of directors as to such value shall be conclusive, or (a) if Class A Common Stock is then registered under the Exchange Act and traded on a national securities exchange or on the Nasdaq National Market System, the average of the daily closing sales prices of such Class A Common Stock for the 20 consecutive trading days immediately preceding such date, or (b) if Class A Common Stock has been registered under the Exchange Act and traded on a national securities exchange or on the Nasdaq National Market System for less than 20 consecutive trading days before such date, then the average of the daily closing sales prices for all of the trading days before such date for which closing sales prices are available, in the case of each of (2)(a) and (2)(b), as certified by the Chief Executive Officer, the President, any Executive Vice President or the Chief Financial Officer or Treasurer of the Company. The closing sales price of each such trading day shall be the closing sales price, regular way, on such day or, if no sale takes place on such day, the average of the closing bid and asked prices on such day. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended, together with the rules and regulations promulgated thereunder. "GAAP" shall mean generally accepted accounting principles in the United States as in effect on October 2, 2000. 14 "Issue Date" shall mean October 2, 2000. "Permitted Cash Dividend" shall mean any regular cash dividend in respect of Class A Common Stock declared after October 2, 2005 that, together with all such dividends (other than dividends with respect to which an adjustment has been made pursuant to Section 7(c)(i) or a dividend which was also paid on a pro rata basis to the Holder as contemplated by Section 7(c)(ii)) declared in respect of Class A Common Stock during the previous twelve months, on a per share basis, does not exceed 5% of the average closing sales prices per share of the Class A Common Stock for each trading day during such twelve month period; provided that no dividend shall be a Permitted Cash Dividend if the Class A Common Stock is not at the time such dividend is declared registered under the Exchange Act and traded on a national securities exchange or on the Nasdaq National Market System. "Prior Day Market Value" per share of Class A Common Stock of the Company at any date shall mean: (1) if Class A Common Stock is not then registered under the Exchange Act and traded on a national securities exchange or on the Nasdaq National Market System, the Current Market Value per share of Class A Common Stock, or (2) if Class A Common Stock is then registered under the Exchange Act and traded on a national securities exchange or on the Nasdaq National Market System, the closing sales price of Class A Common Stock for the trading day ending immediately prior to the event causing the Prior Day Market Value to be determined. "Time of Determination" shall mean (i) in the case of any distribution of securities or other property to existing shareholders to which Section 7(b) or (c) applies, the time and date of the determination of shareholders entitled to receive such securities or property or (ii) in the case of any other issuance and sale to which Section 7(b) or 7(c) applies, the time and date of such issuance or sale. 15 (xvi) Warrant Registration Rights Agreement. The Holder shall be entitled to the benefits of the Warrant Registration Rights Agreement, dated as of the Issue Date, by and among the Company and Ramius Securities, LLC. AUTOTOTE CORPORATION By:_________________________________________ Name: Martin E. Schloss Title: Vice President and General Counsel Dated: As of October 2, 2000 Attest: 16 PURCHASE FORM Dated ____________, 20__ The undersigned hereby irrevocably elects to exercise this Warrant to the extent of shares of Class A Common Stock (without giving effect to the Cashless Exercise Option). The undersigned |_| has concurrently herewith made payment of $ in payment of the aggregate Exercise Price. |_| elects to use the Cashless Exercise Option provided for in this Warrant (the number of Securities delivered will be net of the number applied to the aggregate Exercise Price). If the issuance of the Warrant Securities is not registered under the Securities Act of 1933, as amended, the undersigned makes the representation and warranty set forth in Section 1 of this Warrant. INSTRUCTIONS FOR REGISTRATION OF SECURITIES Name ___________________________________________________________________________ (please typewrite or print in block letters) Address ________________________________________________________________________ Signature ______________________________________________________________________ ASSIGNMENT FORM FOR VALUE RECEIVED,_____________________________________________________________ hereby sells, assigns and transfers unto Name ___________________________________________________________________________ (please typewrite or print in block letters) Address ________________________________________________________________________ the right to purchase shares of Class A Common Stock as represented by this Warrant to the extent of shares of Class A Common Stock as to which such right is exercisable and does hereby irrevocably constitute and appoint,______________ attorney, to transfer the same on the books of the Company with full power of substitution in the premises. Signature ______________________________________________________________________ Dated: _______________ 20____ 17 INSTRUCTIONS FOR REGISTRATION OF WARRANT Name ___________________________________________________________________________ (please typewrite or print in block letters) Address ________________________________________________________________________ Signature ______________________________________________________________________ 18 EX-10.30 3 0003.txt WARRANT REGISTRATION RIGHTS AGREEMENT Exhibit 10.30 WARRANT REGISTRATION RIGHTS AGREEMENT AUTOTOTE CORPORATION Warrants to Purchase 250,000 Shares of Class A Common Stock Dated as of October 2, 2000 RAMIUS SECURITIES, LLC 1 WARRANT REGISTRATION RIGHTS AGREEMENT This WARRANT REGISTRATION RIGHTS AGREEMENT (this "Agreement") is made and entered into as of October 2, 2000, by and between AUTOTOTE CORPORATION, a Delaware corporation (the "Company"), and the undersigned (the "Securityholder"). The Securityholder is the beneficial owner of certain Registrable Securities (as defined below) issued by the Company. The Company and the Securityholder deem it to be in their respective best interests to set forth the rights of the Securityholder in connection with public offerings and sales of the Registrable Securities. NOW, THEREFORE, in consideration of the premises and mutual covenants and obligations hereinafter set forth, the Company and the Securityholder, intending legally to be bound, hereby agree as follows. Section 2. Definitions. As used in this Agreement, the following terms shall have the following meanings: "Affiliate" of any person means any other person who either directly or indirectly is in control of, is controlled by, or is under common control with such person. "Business Day" shall mean any Monday, Tuesday, Wednesday, Thursday or Friday that is not a day on which banking institutions in The City of New York are authorized by law, regulation or executive order to close. "Common Stock" shall mean the Class A common stock, par value $.01, of the Company. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended (or any similar successor federal statute), and the rules and regulations thereunder, as the same are in effect from time to time. "Holder" shall mean any Person that beneficially owns Registrable Securities, including such successors and assigns as acquire Registrable Securities, directly or indirectly, from such Person. For purposes of this Agreement, the Company may deem the registered holder of a Registrable Security as the Holder thereof. "Person" shall mean an individual, partnership, corporation, limited liability company, joint venture trust or unincorporated organization, a government or agency or political subdivision thereof or any other entity. "Prospectus" shall mean the prospectus included in any Registration Statement, as amended or supplemented by a prospectus supplement with respect to the terms of the offering of any portion of the Registrable Securities covered by such Registration Statement and by all other amendments and supplements to the prospectus, including post-effective amendments and all material incorporated by reference in such prospectus. 2 "Registrable Securities" shall mean (i) the 250,000 shares of Common Stock issuable upon the exercise of the Warrant (ii) any other securities issued or issuable as a result of, or in connection with, any stock dividend, stock split or reverse stock split, combination, recapitalization, reclassification, merger or consolidation, exchange or distribution in respect of the Common Stock referred to in clause (i) above. "Registration Statement" shall mean any registration statement which covers any of the Registrable Securities pursuant to the provisions of this Agreement, including the Prospectus included therein, all amendments and supplements to such Registration Statement, including post-effective amendments, all exhibits and all material incorporated by reference in such Registration Statement. "Restricted Securities" shall have the meaning set forth in Section 2 hereof. "Rule 144" shall mean Rule 144 promulgated under the Securities Act, as amended from time to time, or any similar successor rule thereto that may be promulgated by the SEC. "Rule 415" shall mean Rule 415 promulgated under the Securities Act, as amended from time to time, or any similar successor rule thereto that may be promulgated by the SEC. "Rule 903" shall mean Rule 903 promulgated under the Securities Act, as amended from time to time, or any similar successor rule thereto that may be promulgated by the SEC. "Rule 904" shall mean Rule 904 promulgated under the Securities Act, as amended from time to time, or any similar successor rule thereto that may be promulgated by the SEC. "SEC" shall mean the Securities and Exchange Commission, or any other federal agency at the time administering the Securities Act. "Securities Act" shall mean the Securities Act of 1933, as amended (or any similar successor federal statute), and the rules and regulations thereunder, as the same are in effect from time to time. "Underwritten Offering" shall mean a registered offering in which securities of the Company are sold to an underwriter for reoffering to the public. "Warrant" shall mean the warrant, of even date herewith, issued to the Securityholder initially to acquire 250,000 shares of Common Stock. Section 3. Securities Subject to this Agreement. The securities entitled to the benefits of this Agreement are the Registrable Securities but, with respect to any particular Registrable Security, only so long as such security continues to be a Restricted Security. A Registrable Security that has ceased to be a Registrable Security cannot 3 thereafter become a Registrable Security. As used herein, a Restricted Security is a Registrable Security which has not been effectively registered under the Securities Act and distributed in accordance with an effective Registration Statement and which has not been distributed by the Holder pursuant to Rule 144, Rule 903 or Rule 904, unless, in the case of a Registrable Security distributed pursuant to Rule 903 or 904, any applicable restricted period has not expired or the SEC or its staff has taken the position in a published release, ruling or no-action letter that securities distributed under Rule 903 or 904 are ineligible for resale in the United States under Section 4(1) of the Securities Act notwithstanding expiration of the applicable restricted period. Section 4. Piggyback Registration. (a) If the Company at any time proposes to file a registration statement with respect to any class of equity securities for its own account (other than in connection with the Registration Statement on Form S-4 or S-8 (or any successor or substantially similar form), or of (i) an employee stock option, stock purchase or compensation plan or of securities issued or issuable pursuant to any such plan, or (ii) a dividend reinvestment plan), other than for the registration of securities for sale on a continuous or delayed basis pursuant to Rule 415, or for the account of any other holder exercising registration rights, then the Company shall in each case give written notice of such proposed filing to the Holder of Registrable Securities at least fifteen (15) days before the anticipated filing date of any such registration statement by the Company, and such notice shall offer to the Holder the opportunity to have any or all of the Registrable Securities held by the Holder included in such registration statement. The Holder of Registrable Securities desiring to have its Registrable Securities registered under this Section 3 shall so advise the Company in writing within ten (10) days after the date such notice is given (which request shall set forth the amount of Registrable Securities for which registration is requested), and the Company shall use its best reasonable efforts to include in such Registration Statement all such Registrable Securities so requested to be included therein. (b) Notwithstanding the foregoing, if the managing underwriter or underwriters of any such proposed public offering advise the Company that the total amount or kind of securities which the Holder of Registrable Securities, the Company and any other persons or entities intended to be included in such proposed public offering is sufficiently large to adversely affect the success of such proposed public offering, then the amount or kind of securities to be offered for the account of the Holder of Registrable Securities shall be allocated first to the Company and any holder of securities including securities in such Registration Statement pursuant to the exercise of demand registration rights (a "Requesting Securityholder"), then reduced pro rata, together with the amount or kind of securities to be offered for the accounts of any other persons requesting registration of securities pursuant to rights similar to the rights of the Holder under this Section 3, to the extent necessary to reduce the total amount or kind of securities to be included in such proposed public offering to the amount or kind recommended by such managing underwriter or underwriters before the securities offered by the Company or any Requesting Securityholder are so reduced. Anything to the contrary in this Agreement notwithstanding, the Company may withdraw or postpone a Registration Statement referred to herein at any time before it becomes effective or withdraw, 4 postpone or terminate the offering after it becomes effective without obligation to the Securityholder or any Holder of the Registrable Securities. (c) In connection with its obligation under this Section 3, the Company will (i) furnish to the selling Holder of Registrable Securities without charge, at least one copy of any effective Registration Statement and any post-effective amendments thereto, including financial statements and schedules, and, if the Holder so requests in writing, all documents incorporated therein by reference and all exhibits (including those incorporated by reference) in the form filed with the SEC; and (ii) deliver to the selling Holder of Registrable Securities and the underwriters, if any, without charge, as many copies of the then effective Prospectus (including each prospectus subject to completion) and any amendments or supplements thereto as such Persons may reasonably request. (d) As a condition to the inclusion of its Registrable Securities, Holder shall furnish to the Company such information regarding such Holder and the distribution proposed by such Holder as the Company may request in writing or as shall be required in connection with any registration, qualification or compliance referred to in this Agreement. (e) Holder of Registrable Securities agrees by acquisition of such Registrable Securities that, upon receipt of any notice from the Company of the happening of any event that, in the good faith judgment of the Company's Board of Directors, requires the suspension of the Holder's rights under this Section 3, such Holder will forthwith discontinue disposition of Registrable Securities pursuant to the then current Prospectus until such Holder is advised in writing by the Company that the use of the Prospectus may be resumed. If the Company shall have given any such notice during a period when a Registration Statement is in effect, the Company shall extend the period during which such registration statement shall be maintained effective pursuant to this Agreement by the number of days during which any such disposition of Registrable Securities is discontinued pursuant to this Subsection 3(e). If so directed by the Company, on the happening of such event, the Holder will deliver to the Company (at the Company's expense) all copies, other than permanent file copies then in such Holder's possession, of the prospectus covering such Registrable Securities current at the time of receipt of such notice. (f) Holder hereby covenants with the Company (i) not to make any sale of the Registrable Securities without effectively causing the prospectus delivery requirements under the Securities Act to be satisfied, and (ii) if such Registrable Securities are to be sold by any method or in any transaction other than on a national securities exchange, the Nasdaq National Market, Nasdaq SmallCap Market or in the over-the-counter market, in privately negotiated transactions, or in a combination of such methods, to notify the Company at least five (5) business days prior to the date on which the Holder first offers to sell any such Registrable Securities. (g) Holder acknowledges and agrees that the Registrable Securities sold pursuant to the Registration Statement described in this Agreement are not 5 transferable on the books of the Company unless the stock certificate submitted to the transfer agent evidencing such Registrable Securities is accompanied by a certificate reasonably satisfactory to the Company to the effect that (i) the Registrable Securities have been sold in accordance with such Registration Statement and (ii) the requirement of delivering a current Prospectus has been satisfied. (h) Holder shall not take any action with respect to any distribution deemed to be made pursuant to such Registration Statement, which would constitute a violation of Regulation M under the Exchange Act, or any other applicable rule, regulation or law. (i) Upon the expiration of the effectiveness of any Registration Statement, the Holder of Registrable Securities included in the Registration Statement shall discontinue sales of shares pursuant to such Registration Statement upon receipt of notice from the Company of its intention to remove from registration the shares covered by such Registration Statement which remain unsold, and such Holders shall notify the Company of the number of shares registered which remain unsold immediately upon receipt of such notice from the Company. (j) In the case of the registration of any underwritten primary offering initiated by the Company (other than any registration by the Company on Form S-4 or Form S-8 (or any successor or substantially similar form), or of (i) an employee stock option, stock purchase or compensation plan or of securities issued or issuable pursuant to any such plan, or (ii) a dividend reinvestment plan) or any underwritten secondary offering initiated at the request of a holder of securities of the Company pursuant to registration rights granted by the Company, Holder agrees not to effect any public sale or distribution of securities of the Company, except as part of such underwritten registration, during the period beginning fifteen (15) days prior to the closing date of such underwritten offering and during the period ending ninety (90) days after such closing date (or such longer period as may be reasonably requested by the Company or by the managing underwriter or underwriters). (k) Anything to the contrary contained in this Agreement notwithstanding, when, in the opinion of counsel for the Company, registration of the Registrable Securities is not required by the Securities Act, in connection with a proposed sale of such Registrable Securities, the Holder shall have no rights pursuant to this Section 3. In furtherance and not in limitation of the foregoing, Holder shall have no rights pursuant to this Section 3 at such time as all of Holder's Registrable Securities may be sold in a three-month period pursuant to Rule 144. Section 5. Registration Expenses. All expenses incident to the Company's performance of or compliance with this Agreement will be borne by the Company, regardless of whether a Registration Statement becomes effective, including, without limitation: (i) all registration and filing fees; (ii) all reasonable fees and expenses of compliance with federal securities and state Blue Sky or securities laws; (iii) all reasonable expenses of printing (including printing Prospectuses), messenger and delivery services and telephone; (iv) all reasonable fees and disbursements of counsel for 6 the Company; (v) all applications and filing fees in connection with listing the Registrable Securities on a national securities exchange or automated quotation system pursuant to the requirements hereof; and (vi) all reasonable fees and disbursements of independent certified public accountants of the Company (including the expenses of any special audit and comfort letters required by or incident to such performance). Notwithstanding anything in this Section 4 to the contrary, the Company shall not be required to pay any underwriting discounts, commissions or transfer taxes, if any, relating to the sale of disposition of any Holder's Restricted Securities. The Company will, in any event, bear its internal expenses (including, without limitation, all salaries and expenses of its officers and employees performing legal or accounting duties), the expenses of any annual audit and the fees and expenses of any person, including special experts, retained by the Company. Section 6. Indemnification. (a) The Company agrees to indemnify and hold harmless each Holder, its directors, officers, partners, employees, representatives and agents and each person, if any, who controls such Holder (within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act), from and against any and all losses, claims, damages, liabilities, judgments (including, without limitation, any legal or other expenses incurred in connection with investigating or defending any matter, including any action that could give rise to any such losses, claims, damages, liabilities or judgments) directly or indirectly caused by, related to, based upon, arising out of or in connection to any untrue statement or alleged untrue statement of a material fact contained in any Registration Statement, preliminary prospectus or Prospectus (or any amendment or supplement thereto) provided by the Company to any Holder or any prospective purchaser of Restricted Securities, or any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as such losses, claims, damages, liabilities or judgments are caused by an untrue statement or omission or alleged untrue statement or omission that is made in reliance upon and in conformity with information relating to any Holder furnished in writing to the Company by any such Holder. (b) Each Holder of Restricted Securities agrees, severally and not jointly, to indemnify and hold harmless the Company, its directors and officers, and each person, if any, who controls (within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act) the Company, to the same extent as the foregoing indemnity from the Company set forth in Section 5(a) hereof, but only with reference to information relating to such Holder furnished in writing to the Company by such Holder expressly for use in any Registration Statement. In case any action or proceeding shall be brought against the Company or its directors or officers or any such controlling person in respect of which indemnity may be sought against a Holder of Restricted Securities, such Holder shall have the rights and duties given the Company, and the Company, such directors or officers or such controlling person shall have the rights and duties given to each Holder by the preceding paragraph. In no event shall any Holder, its directors, officers or any person who controls such Holder be liable or responsible for any amount in excess of the amount by which the total amount received by such Holder with respect 7 to its sale of Restricted Securities pursuant to a Registration Statement exceeds (i) the amount paid by such Holder for such Restricted Securities and (ii) the amount of any damages that such Holder, its directors, officers or any person who controls such Holder has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. (c) In case any action shall be commenced involving any person in respect of which indemnity may be sought pursuant to Section 5(a) or 5(b) (the "indemnified party"), the indemnified party shall promptly notify the person against whom such indemnity may be sought (the "indemnifying party") in writing, and the indemnifying party shall assume the defense of such action, including the employment of counsel reasonably satisfactory to the indemnified party and the payment of all fees and expenses of such counsel, as incurred (except that, in the case of any action in respect of which indemnity may be sought pursuant to both Sections 5(a) and 5(b), a Holder shall not be required to assume the defense of such action pursuant to this Section 5(c), but may employ separate counsel and participate in the defense thereof, but the fees and expenses of such counsel, except as provided below, shall be at the expense of the Holder). Any indemnified party shall have the right to employ separate counsel in any such action and participate in the defense thereof, but the fees and expenses of such counsel shall be at the expense of the indemnified party, unless (i) the employment of such counsel shall have been specifically authorized in writing by the indemnifying party, (ii) the indemnifying party shall have failed to assume the defense of such action or employ counsel reasonably satisfactory to the indemnified party or (iii) the named parties to any such action (including any impleaded parties) include both the indemnified party and the indemnifying party, and the indemnified party shall have been advised by such counsel that there may be one or more legal defenses available to it which are different from or additional to those available to the indemnifying party (in which case the indemnifying party shall not have the right to assume the defense of such action on behalf of the indemnified party). In any such case, the indemnifying party shall not, in connection with any one 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 fees and expenses of more than one separate firm of attorneys (in addition to any local counsel) for all indemnified parties and all such fees and expenses shall be reimbursed as they are incurred. Such firm shall be designated in writing by a majority of the Holders, in the case of the parties indemnified pursuant to Section 5(a), and by the Company, in the case of parties indemnified pursuant to Section 5(b). The indemnifying party shall indemnify and hold harmless the indemnified party from and against any and all losses, claims, damages, liabilities and judgments by reason of any settlement of any action (i) effected with its written consent or (ii) effected without the indemnifying party's written consent if the settlement is entered into more than 60 days after the indemnifying party shall have received a request from the indemnified party for reimbursement for the fees and expenses of counsel (in any case where such fees and expenses are at the expense of the indemnifying party) and, prior to the date of such settlement, the indemnifying party shall have failed to comply with such reimbursement request. Except as provided in the preceding sentence, no indemnifying party shall be liable for any settlement effected without its consent. The indemnifying party shall not, without the prior written consent of the indemnified party, effect any settlement or 8 compromise of, or consent to the entry of judgment with respect to, any pending or threatened action in respect of which the indemnified party is or could have been a party and indemnity or contribution may be or could have been sought hereunder by the indemnified party, unless such settlement, compromise or judgment (i) includes an unconditional release of the indemnified party from all liability on claims that are or could have been the subject matter of such action and (ii) does not include a statement as to or an admission of fault, culpability or a failure to act, by or on behalf of the indemnified party. (d) To the extent that the indemnification provided for in this Section 5 is unavailable to an indemnified party under Section 5(a) or Section 5(b) hereof (other than by reason of exceptions provided in those sections) in respect of any losses, claims, damages, liabilities, expenses or judgments 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, expenses or judgments in such proportion as is appropriate to reflect the relative fault of the Company, on the one hand, and of the Holders, on the other hand, in connection with the statements or omissions which resulted in such losses, claims, damages, liabilities, expenses or judgments, as well as any other relevant equitable considerations. The relative fault of the Company, on the one hand, and of 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 or alleged 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 a party as a result of the losses, claims, damages, liabilities, expenses and judgments referred to above shall be deemed to include, subject to the limitations set forth in Section 5(a), any legal or other fees or expenses reasonably incurred by such party in connection with investigating or defending any action or claim. The Company and each Holder agree that it would not be just and equitable if contribution pursuant to this Section 5(d) were determined by pro rata allocation (even if the Holders were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to in the immediately preceding paragraph. The amount paid or payable by an indemnified party as a result of the losses, claims, damages, liabilities, expenses or judgments referred to above 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 matter, including any action that could have given rise to such losses, claims, damages, liabilities, expenses or judgments. Notwithstanding the provisions of this Section 5, no Holder, its directors, its officers or any person, if any, who controls such Holder shall be required to contribute, in the aggregate, any amount in excess of the amount by which the total received by such Holder with respect to the sale of Restricted Securities pursuant to a Registration Statement exceeds the sum of (i) the amount paid by such Holder for such Restricted Securities plus (ii) the amount of any damages which such Holder has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Holders' obligations to contribute pursuant to this Section 5(d) are several in proportion to the respective principal amount of Restricted Securities held by each Holder hereunder and not joint. 9 (e) The Company agrees that the indemnity and contribution provisions of this Section 5 shall apply to the Securityholder to the same extent, on the same conditions, as it applies to Holders. Section 7. Participation in Underwritten Registrations. (a) The determination of whether any offering of Registrable Securities will be an Underwritten Offering shall be made in good faith judgment of the Board of Directors of the Company. In the event that the Board of Directors of the Company determines that such offering shall be an Underwritten Offering, the investment banker or investment bankers and manager or managers that will administer the offering will be selected by the Company. (b) No Person may participate in any Underwritten Offering hereunder unless such Person (i) agrees to sell such Person's Registrable Securities on the basis provided in any underwriting arrangements approved by the Persons entitled hereunder to approve such arrangements and (ii) completes and executes all questionnaires, powers of attorney, indemnities, underwriting agreements and other documents required under the terms of such underwriting arrangements. Nothing in this Section 6 shall be construed to create any additional rights regarding the registration of Registrable Securities in any Person otherwise than as set forth herein. Section 8. Rule 144. The Company agrees with each Holder, for so long as any Restricted Securities remain outstanding and during any period in which the Company (i) is not subject to Section 13 or 15(d) of the Exchange Act, to make available, upon request of any Holder, to such Holder or beneficial owner of Restricted Securities in connection with any sale thereof and any prospective purchaser of such Restricted Securities designated by such Holder or beneficial owner, the information required by Rule 144A(d)(4) under the Securities Act in order to permit resales of such Restricted Securities pursuant to Rule 144A, and (ii) is subject to Section 13 or 15(d) of the Exchange Act, to make all filings required thereby in a timely manner in order to permit resales of such Restricted Securities pursuant to Rule 144. Section 9. Miscellaneous. (a) Remedies. The Company acknowledges and agrees that any failure by the Company to comply in all material respects with its obligations under Section 3 hereof may result in material irreparable injury to the Securityholder or the Holders for which there is no adequate remedy at law, that it will not be possible to measure damages for such injuries precisely and that, in the event of any such failure, the Securityholder or any Holder may obtain such relief as may be required under applicable law to specifically enforce the Company's obligations under Section 3 hereof. (b) No Inconsistent Agreements. The Company will not, on or after the date of this Agreement, enter into any agreement with respect to its securities that is inconsistent with the rights granted to the Holders in this Agreement or otherwise conflicts with the provisions hereof. The rights granted to the Holders hereunder do not 10 in any way conflict with and are not inconsistent with the rights granted to the holders of the Company's securities under any agreement in effect on the date hereof. (c) Amendments and Waivers. The provisions of this Agreement may not be amended, modified or supplemented, and waivers or consents to or departures from the provisions hereof may not be given, unless (i) in the case of this Section 8(c)(i), the Company has obtained the written consent of Holders of all outstanding Restricted Securities, and (ii) in the case of all other provisions hereof, the Company has obtained the written consent of Holders of a majority of the outstanding principal amount of Restricted Securities (excluding Restricted Securities held by the Company or its Affiliates). (d) Third Party Beneficiary. The Holders shall be third party beneficiaries to the agreements made hereunder between the Company, on the one hand, and the Securityholder, on the other hand, and shall have the right to enforce such agreements directly to the extent they may deem such enforcement necessary or advisable to protect its rights or the rights of Holders hereunder. (e) Notices. All notices and other communications provided for or permitted hereunder shall be made in writing by hand-delivery, first-class mail (registered, return receipt requested), telex, telecopier, or air courier guaranteeing overnight delivery: (i) if to a Holder, at the address set forth on the records of the Company; and (ii) if to the Company: Autotote Corporation 750 Lexington Avenue, 25th Floor New York, New York 10022 Facsimile No.: (212) 754-2372 Attention: General Counsel With a copy to: Kramer Levin Naftalis & Frankel LLP 919 Third Avenue New York, New York 10022 Facsimile No.: (212) 715-8000 Attention: Peter Smith, 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. 11 The address or person or entity to whose attention any notice or communication shall be given may be changed in accordance with the provisions of this Section 8(e). Upon the date of filing a Registration Statement, notice shall be delivered to the Securityholder (in the form attached hereto as Exhibit A) at the most current address given by the Securityholder to the Company, in accordance with the provisions of this Section 8(e), which address initially is listed below the Securityholder's name on the signature page hereof. (f) Successors and Assigns. This Agreement shall inure to the benefit of and be binding upon the successors and assigns of each of the parties, including, without limitation, and without the need for an express assignment, subsequent Holders; provided, however, that nothing herein shall be deemed to permit any assignment, transfer or other disposition of Restricted Securities in violation of the terms hereof or of the Warrant. If any transferee of any Holder shall acquire Restricted Securities in any manner, whether by operation of law or otherwise, such Restricted Securities shall be held subject to all of the terms of this Agreement, and by taking and holding such Restricted Securities such person shall be conclusively deemed to have agreed to be bound by and to perform all of the terms and provisions of this Agreement, including the restrictions on resale set forth in this Agreement and such person shall be entitled to receive the benefits hereof. (g) 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. (h) Headings. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. (i) 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 CONFLICT OF LAW RULES THEREOF. (j) Severability. In the event that 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. (k) Entire Agreement. This Agreement 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 12 with respect to the Restricted Securities. This Agreement supersedes all prior agreements and understandings between the parties with respect to such subject matter. SIGNATURE PAGE TO FOLLOW 13 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above. AUTOTOTE CORPORATION By:_________________________________________ _________ Name: Martin E. Schloss Title: Vice President and General Counsel THE SECURITYHOLDER: RAMIUS SECURITIES, LLC By: Ramius Capital Group, LLC Its: Investment Advisor By: C4S & Co., LLC Its: Managing Member By:_________________________________________ _________ Name: Peter A. Cohen Title: Managing Member Address for Notices: Ramius Securities, LLC 666 Third Avenue, 26th Floor New York, NY 10017 Attn: Peter A. Cohen 14 -----END PRIVACY-ENHANCED MESSAGE-----