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: APRIL 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition from _______________________ to ____________________________
Commission File number: 0-13063
AUTOTOTE CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 81-0422894
--------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
750 Lexington Avenue, 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 June 10, 1998:
Class A Common Stock: 35,936,949
Class B Common Stock: None
Page 1 of 19
AUTOTOTE CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND OTHER INFORMATION
QUARTER ENDED APRIL 30, 1998
Page
-------
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements:
Balance Sheets as of April 30, 1998
and October 31, 1997 3
Statements of Operations for the Three Months Ended
April 30, 1998 and 1997 4
Statements of Operations for the Six Months Ended
April 30, 1998 and 1997 5
Statements of Cash Flows for the Six Months Ended
April 30, 1998 and 1997 6
Notes to Consolidated Financial Statements 7-13
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14-17
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Stockholders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
2
AUTOTOTE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
APRIL 30, October 31,
1998 1997
----------------- -----------------
ASSETS (UNAUDITED)
Current assets:
Cash and cash equivalents........................................................... $ 11,590 18,207
Restricted cash..................................................................... 588 512
Accounts receivable, net............................................................ 11,497 13,560
Inventories......................................................................... 7,727 6,653
Prepaid expenses, deposits and other current assets................................. 1,800 2,276
--------------------- -----------------
Total current assets............................................................. 33,202 41,208
--------------------- -----------------
Property and equipment, at cost....................................................... 190,372 180,170
Less accumulated depreciation....................................................... 110,793 103,781
--------------------- -----------------
Net property and equipment....................................................... 79,579 76,389
--------------------- -----------------
Goodwill, net of amortization......................................................... 5,093 5,916
Operating right, net of amortization.................................................. 15,348 15,848
Other assets and investments.......................................................... 16,471 14,180
--------------------- -----------------
$ 149,693 153,541
===================== =================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current installments of long-term debt.............................................. $ 1,790 2,609
Accounts payable.................................................................... 12,500 8,698
Accrued liabilities................................................................. 26,511 24,411
--------------------- -----------------
Total current liabilities........................................................ 40,801 35,718
--------------------- -----------------
Deferred income taxes................................................................. 2,206 2,551
Other long-term liabilities........................................................... 992 1,264
Long-term debt, excluding current installments........................................ 110,964 112,248
Long-term debt, convertible subordinated debentures................................... 35,000 35,000
--------------------- -----------------
Total liabilities................................................................ 189,963 186,781
--------------------- -----------------
Stockholders' equity (deficit):
Preferred stock, par value $1.00 per share, 2,000 shares authorized, none
outstanding...................................................................... -- --
Class A common stock, par value $0.01 per share, 99,300 shares authorized,
35,844 and 35,335 shares outstanding at April 30, 1998 and October 31,
1997, respectively............................................................... 356 354
Class B non-voting common stock, par value $0.01 per share, 700 shares
authorized, none outstanding...................................................... -- --
Additional paid-in capital.......................................................... 148,640 148,238
Accumulated losses.................................................................. (188,611) (181,351)
Treasury stock, at cost............................................................. (102) (102)
Currency translation adjustment..................................................... (553) (379)
--------------------- -----------------
Total stockholders' equity (deficit)............................................. (40,270) (33,240)
--------------------- -----------------
$ 149,693 153,541
===================== =================
See accompanying notes to consolidated financial statements.
3
AUTOTOTE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended April 30, 1998 and 1997
(Unaudited, in thousands, except per share amounts)
1998 1997
----------------- -----------------
Operating revenues:
Services............................................................................ $ 32,925 34,969
Sales............................................................................... 3,290 6,952
--------------------- -----------------
36,215 41,921
--------------------- -----------------
Operating expenses (exclusive of depreciation and amortization shown below):
Services............................................................................ 20,297 20,865
Sales............................................................................... 1,972 4,620
--------------------- -----------------
22,269 25,485
--------------------- -----------------
Total gross profit............................................................... 13,946 16,436
Selling, general and administrative expenses.......................................... 5,686 7,389
Gain on sale of business.............................................................. (684) (257)
Depreciation and amortization......................................................... 7,230 10,143
--------------------- -----------------
Operating income (loss).......................................................... 1,714 (839)
Other deductions:
Interest expense.................................................................... 3,825 3,680
Other (income) expense.............................................................. (214) 25
--------------------- -----------------
3,611 3,705
--------------------- -----------------
Loss before income tax expense...................................................... (1,897) (4,544)
Income tax expense.................................................................... 169 147
--------------------- -----------------
Net loss.............................................................................. $ (2,066) (4,691)
===================== =================
Net loss per basic share and diluted share............................................ $ (0.06) (0.14)
===================== =================
Number of shares used in per share calculation........................................ 35,504 34,498
===================== =================
See accompanying notes to consolidated financial statements.
4
AUTOTOTE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Six Months Ended April 30, 1998 and 1997
(Unaudited, in thousands, except per share amounts)
1998 1997
----------------- -----------------
Operating revenues:
Services............................................................................ $ 64,252 66,389
Sales............................................................................... 6,394 11,047
--------------------- -----------------
70,646 77,436
--------------------- -----------------
Operating expenses (exclusive of depreciation and amortization shown below):
Services............................................................................ 40,005 39,838
Sales............................................................................... 3,762 7,433
--------------------- -----------------
43,767 47,271
--------------------- -----------------
Total gross profit............................................................... 26,879 30,165
Selling, general and administrative expenses.......................................... 12,845 14,696
Gain on sale of business.............................................................. (684) (257)
Depreciation and amortization......................................................... 14,615 19,852
--------------------- -----------------
Operating income (loss).......................................................... 103 (4,126)
Other deductions:
Interest expense.................................................................... 7,654 7,314
Other (income) expense.............................................................. (585) 132
--------------------- -----------------
7,069 7,446
--------------------- -----------------
Loss before income tax expense...................................................... (6,966) (11,572)
Income tax expense.................................................................... 294 542
--------------------- -----------------
Net loss.............................................................................. $ (7,260) (12,114)
===================== =================
Net loss per basic share and diluted share............................................ $ (0.20) (0.36)
===================== =================
Number of shares used in per share calculation........................................ 35,447 33,616
===================== =================
See accompanying notes to consolidated financial statements.
5
AUTOTOTE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended April 30, 1998 and 1997
(Unaudited, in thousands)
1998 1997
---------------------- ---------------
Cash flows from operating activities:
Net loss....................................................................... $ (7,260) (12,114)
---------------------- ---------------
Adjustments to reconcile net loss to cash provided by operating activities:
Depreciation and amortization.................................................... 14,615 19,852
Changes in operating assets and liabilities...................................... 7,706 1,837
Other............................................................................ (176) 134
--------------------- -----------------
Total adjustments............................................................. 22,145 21,823
---------------------- ---------------
Net cash provided by operating activities............................................. 14,885 9,709
---------------------- ---------------
Cash flows from investing activities:
Capital expenditures................................................................ (735) (649)
Wagering systems expenditures....................................................... (14,267) (2,773)
Proceeds from sale of business and asset disposals, net of cash transferred......... 45 19,451
Increase in other assets and investments............................................ (4,559) (1,606)
---------------------- ---------------
Net cash used in investing activities................................................. (19,516) 14,423
---------------------- ---------------
Cash flows from financing activities:
Net repayments under revolving credit facilities.................................... -- (4,487)
Payments on long-term debt.......................................................... (2,059) (22,701)
Net proceeds from issuance of common stock.......................................... 146 956
--------------------- -----------------
Net cash used by financing activities................................................. (1,913) (26,232)
---------------------- ---------------
Effect of exchange rate changes on cash............................................... (73) (289)
---------------------- ---------------
Decrease in cash and cash equivalents................................................. (6,617) (2,389)
Cash and cash equivalents, beginning of period........................................ 18,207 5,988
--------------------- -----------------
Cash and cash equivalents, end of period.............................................. $ 11,590 3,599
====================== ===============
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest....................................................................... $ 7,352 6,785
====================== ===============
Income taxes................................................................... $ 475 825
====================== ===============
The Company issued 2,964 shares of Class A Common Stock during the 1997 period in
connection with the settlement of stockholder litigation.
See accompanying notes to consolidated financial statements.
6
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
April 30, 1998
(UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1) CONSOLIDATED FINANCIAL STATEMENTS
The consolidated balance sheet as of April 30, 1998 and the consolidated
statements of operations for the three and six months ended April 30, 1998 and
1997, and the consolidated statements of cash flows for the six months then
ended, have been prepared by the Company without audit. In the opinion of
management, all adjustments necessary to present fairly the financial position
of the Company at April 30, 1998 and the results of its operations for the three
and six months ended April 30, 1998 and 1997 and its cash flows for the six
months ended April 30, 1998 and 1997 have been made. In the second quarter of
fiscal 1998, the Company reversed reserves of $1.3 million in connection with
the collection of receivables previously reserved due to concerns about their
recoverability and cost savings related to the refurbishment of certain
terminals.
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 Annual Report on Form 10-K for the year ended October 31, 1997
(the "1997 Form 10-K"). The results of operations for the period ended April 30,
1998 are not necessarily indicative of the operating results for the full year.
Certain items in the prior year's financial statements have been
reclassified to conform with the current year presentation.
2) FISCAL 1997 SALE OF THE EUROPEAN LOTTERY BUSINESS
On April 15, 1997, the Company completed the sale of its European lottery
business through the sale of its stock ownership of Tele Control Kommunikations
und Computersysteme Aktien Gesellschaft ("Tele Control") for cash consideration
of approximately $26,600, including contingent consideration of approximately
$1,600. At closing, the Company provided the purchaser with a letter of credit
to secure certain obligations under the sales agreement. At October 31, 1997,
$1,500 remained outstanding under the letter of credit, which amount was reduced
to $500 at April 30, 1998. The letter of credit is scheduled to expire on
October 15, 1998. In connection with the reduction of the letter of credit
balance, the Company recorded an additional $684 gain on sale of business in the
second quarter of fiscal 1998.
The following unaudited information shows the revenues, expenses and
operating income of the European lottery business that were included in the
Company's Consolidated Statements of Operations for the three months and six
months ended April 30, 1997. Interest and income tax expenses have not been
included in the table below.
THREE MONTHS SIX MONTHS
ENDED ENDED
APRIL 30, 1997 APRIL 30, 1997
---------------------- ---------------
Operating revenue.............................................................. $ 2,463 6,119
Operating expenses, including selling, general and administrative
expenses, and depreciation and amortization expenses.......................... 2,772 6,181
---------------------- ---------------
Operating loss................................................................. $ (309) (62)
====================== ===============
3) INVENTORIES
Inventories consist of the following: APRIL 30, OCTOBER 31,
1998 1997
--------------------- --------------
Parts and work-in-process...................................................... $ 6,594 5,762
Finished goods................................................................. 319 244
Ticket paper................................................................... 814 647
---------------------- --------------
Total.......................................................................... $ 7,727 6,653
===================== ==============
7
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
APRIL 30, 1998
(UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Work-in-process includes 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.
4) DEBT
At April 30, 1998, the Company had approximately $22,934 available for
borrowing under the Company's revolving Credit Facility (the "Facility"). There
were no borrowings outstanding under the Facility at April 30, 1998, however,
approximately $2,066 in letters of credit were issued under the Facility. See
Note 7 of Notes to the Consolidated Financial Statements for the year ended
October 31, 1997 included in the 1997 Form 10-K.
5) EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS
128"), which the Company adopted in the first quarter of fiscal 1998. Under
SFAS 128, the Company is required to present two earnings per share amounts for
each period presented, and all prior period earnings per share amounts are
required to be restated to conform with the provisions of SFAS 128. Basic net
loss per common share is computed by dividing net loss by the weighted average
number of common shares outstanding during the period. Diluted earnings per
share gives effect to all dilutive potential common shares that were outstanding
during the period. Potential common shares are not included in the calculation
of the dilutive net loss per share in the second quarter and first six months of
fiscal 1998 and the second quarter and first six months of fiscal 1997, since
their inclusion would be anti-dilutive. Basic and diluted net loss per common
share for the second quarter and first six months of fiscal 1998 and the
restated net loss per common share for the second quarter and first six months
of fiscal 1997, therefore, are essentially the same. At April 30, 1998 and
1997, the Company had outstanding stock options, warrants, convertible
subordinated debentures, Performance Accelerated Restricted Stock Units, and
deferred shares which could potentially dilute basic earnings per share in the
future. Quarterly and year-to date computations of per share amounts are made
independently, therefore, the sum of per share amounts for the quarters may not
equal per share amounts for the year.
6) FINANCIAL INFORMATION FOR GUARANTOR SUBSIDIARIES AND NON-GUARANTOR
SUBSIDIARIES
The Company conducts substantially all of its business through its domestic
and foreign subsidiaries. In July 1997, the Company issued $110 million
aggregate principal amount of Senior Notes bearing interest at an annual rate of
10 7/8% (the "Notes"). The Notes are jointly and severally guaranteed by
substantially all of the Company's wholly-owned domestic subsidiaries (the
"Guarantor Subsidiaries").
Presented below is condensed consolidating financial information for
Autotote Corporation (the "Parent Company") which includes the activities of
Autotote Management Corporation, the Guarantor Subsidiaries and the wholly-owned
foreign subsidiaries and the non-wholly owned domestic and foreign subsidiaries
(the "Non-Guarantor Subsidiaries") as of April 30, 1998 (unaudited) and October
31, 1997 (audited) and for the three and six month periods ended April 30, 1998
and 1997 (unaudited). The condensed consolidating financial information has been
presented to show the nature of assets held, results of operations and cash
flows of the Parent Company, Guarantor Subsidiaries and Non-Guarantor
Subsidiaries assuming the guarantee structure of the Notes was in effect at the
beginning of the periods presented. Separate financial statements for the
Guarantor Subsidiaries are not presented based on management's determination
that they would not provide additional information that is material to
investors.
The condensed consolidating financial information reflects the investments
of the Parent Company in the Guarantor and Non-Guarantor Subsidiaries using the
equity method of accounting. In addition, corporate interest and administrative
expenses have not been allocated to the subsidiaries.
8
AUTOTOTE CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
April 30, 1998
(Unaudited, in thousands)
Parent Guarantor Non-Guarantor Eliminating
Company Subsidiaries Subsidiaries Entries Consolidated
--------------- -------------- --------------- ------------- --------------
ASSETS
Cash and cash equivalents........ $ 9,270 (461) 2,781 -- 11,590
Accounts receivable, net......... -- 9,045 2,452 -- 11,497
Other current assets............. 124 11,729 2,754 (4,492) 10,115
Property and equipment, net...... 293 68,902 6,484 3,900 79,579
Investment in subsidiaries....... 59,000 -- -- (59,000) --
Goodwill......................... 207 2,323 2,563 -- 5,093
Other assets..................... 5,602 27,008 712 (1,503) 31,819
--------------- -------------- --------------- ------------- --------------
Total assets.................. $ 74,496 118,546 17,746 (61,095) 149,693
=============== ============== =============== ============= ==============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities.............. $ 11,747 23,768 3,418 78 39,011
Current installments of
long-term debt.................. 1,250 371 184 (15) 1,790
Long-term debt, excluding
current installments............ 145,000 193 771 -- 145,964
Other non-current liabilities.... 952 508 1,738 -- 3,198
Intercompany balances............ (44,183) 47,200 (3,017) -- --
Stockholders' equity (deficit)... (40,270) 46,506 14,652 (61,158) (40,270)
--------------- -------------- --------------- ------------- --------------
Total liabilities and
stockholders' equity
(deficit).................... $ 74,496 118,546 17,746 (61,095) 149,693
=============== ============== =============== ============= ==============
AUTOTOTE CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
October 31, 1997
(Audited, in thousands)
Parent Guarantor Non-Guarantor Eliminating
Company Subsidiaries Subsidiaries Entries Consolidated
--------------- -------------- --------------- ------------- --------------
ASSETS
Cash and cash equivalents........ $ 15,582 328 2,297 -- 18,207
Accounts receivable, net......... -- 10,547 3,013 -- 13,560
Other current assets............. 711 6,223 2,791 (284) 9,441
Property and equipment, net...... 161 67,071 9,302 (145) 76,389
Investment in subsidiaries....... 54,760 -- -- (54,760) --
Goodwill......................... 211 2,635 3,070 -- 5,916
Other assets..................... 5,937 24,895 528 (1,332) 30,028
--------------- -------------- --------------- ------------- --------------
Total assets.................. $ 77,362 111,699 21,001 (56,521) 153,541
=============== ============== =============== ============= ==============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities.............. $ 14,812 14,515 3,921 (139) 33,109
Current installments of
long-term debt.................. 1,250 474 910 (25) 2,609
Long-term debt, excluding
current installments............ 145,000 323 1,925 -- 147,248
Other non-current liabilities.... 1,111 538 2,166 -- 3,815
Intercompany balances............ (51,571) 54,467 (3,112) 216 --
Stockholders' equity (deficit)... (33,240) 41,382 15,191 (56,573) (33,240)
--------------- -------------- --------------- ------------- --------------
Total liabilities and
stockholders' equity
(deficit).................... $ 77,362 111,699 21,001 (56,521) 153,541
=============== ============== =============== ============= ==============
9
AUTOTOTE CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED STATEMENT OF OPERATIONS
Three Months Ended April 30, 1998
(Unaudited, in thousands)
Parent Guarantor Non-Guarantor Eliminating
Company Subsidiaries Subsidiaries Entries Consolidated
--------------- -------------- --------------- ------------- --------------
Operating revenues.................. $ -- 33,910 5,005 (2,700) 36,215
Operating expenses.................. -- 21,327 3,424 (2,482) 22,269
--------------- -------------- --------------- ------------- --------------
Gross profit..................... -- 12,583 1,581 (218) 13,946
Selling, general and administrative
expenses........................... 2,082 2,862 832 (90) 5,686
Gain on sale of business............ (684) -- -- -- (684)
Depreciation and amortization....... 29 6,511 773 (83) 7,230
--------------- -------------- --------------- ------------- --------------
Operating income (loss).......... (1,427) 3,210 (24) (45) 1,714
Interest expense.................... 3,766 30 38 (9) 3,825
Other (income) expense.............. (159) (66) 2 9 (214)
--------------- -------------- --------------- ------------- --------------
Income (loss) before equity in
income of subsidiaries,
and income taxes................. (5,034) 3,246 (64) (45) (1,897)
Equity in income of subsidiaries.... 3,057 -- -- (3,057) --
Income tax expense.................. 89 17 63 -- 169
--------------- -------------- --------------- ------------- --------------
Net income (loss)................... $ (2,066) 3,229 (127) (3,102) (2,066)
=============== ============== =============== ============= ==============
AUTOTOTE CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED STATEMENT OF OPERATIONS
Three Months Ended April 30, 1997
(Unaudited, in thousands)
Parent Guarantor Non-Guarantor Eliminating
Company Subsidiaries Subsidiaries Entries Consolidated
--------------- -------------- --------------- ------------- --------------
Operating revenues.................. $ -- 33,941 8,181 (201) 41,921
Operating expenses.................. -- 20,621 5,366 (502) 25,485
--------------- -------------- --------------- ------------- --------------
Gross profit..................... -- 13,320 2,815 301 16,436
Selling, general and administrative
expenses........................... 2,820 3,388 1,181 -- 7,389
Gain on sale of business............ (257) -- -- -- (257)
Depreciation and amortization....... 12 7,266 2,860 5 10,143
--------------- -------------- --------------- ------------- --------------
Operating income (loss).......... (2,575) 2,666 (1,226) 296 (839)
Interest expense.................... 3,754 11 50 (135) 3,680
Other (income) expense.............. (330) (197) 422 130 25
--------------- -------------- --------------- ------------- --------------
Income (loss) before equity in
income of subsidiaries,
and income taxes................. (5,999) 2,852 (1,698) 301 (4,544)
Equity in income of subsidiaries.... 1,308 -- -- (1,308) --
Income tax expense.................. -- 7 75 65 147
--------------- -------------- --------------- ------------- --------------
Net income (loss)................... $ (4,691) 2,845 (1,773) (1,072) (4,691)
=============== ============== =============== ============= ==============
10
AUTOTOTE CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED STATEMENT OF OPERATIONS
Six Months Ended April 30, 1998
(Unaudited, in thousands)
Parent Guarantor Non-Guarantor Eliminating
Company Subsidiaries Subsidiaries Entries Consolidated
--------------- -------------- --------------- ------------- --------------
Operating revenues.................. $ -- 64,164 11,126 (4,644) 70,646
Operating expenses.................. -- 40,567 7,505 (4,305) 43,767
--------------- -------------- --------------- ------------- --------------
Gross profit..................... -- 23,597 3,621 (339) 26,879
Selling, general and administrative
expenses........................... 5,062 5,959 1,824 -- 12,845
Gain on sale of business............ (684) -- -- -- (684)
Depreciation and amortization....... 56 13,008 1,716 (165) 14,615
--------------- -------------- --------------- ------------- --------------
Operating income (loss).......... (4,434) 4,630 81 (174) 103
Interest expense.................... 7,523 47 101 (17) 7,654
Other (income) expense.............. (476) (60) (66) 17 (585)
--------------- -------------- --------------- ------------- --------------
Income (loss) before equity in
income of subsidiaries,
and income taxes................. (11,481) 4,643 46 (174) (6,966)
Equity in income of subsidiaries... 4,373 -- -- (4,373) --
Income tax expense.................. 152 -- 142 -- 294
--------------- -------------- --------------- ------------- --------------
Net income (loss)................... $ (7,260) 4,643 (96) (4,547) (7,260)
=============== ============== =============== ============= ==============
AUTOTOTE CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED STATEMENT OF OPERATIONS
Six Months Ended April 30, 1997
(Unaudited, in thousands)
Parent Guarantor Non-Guarantor Eliminating
Company Subsidiaries Subsidiaries Entries Consolidated
--------------- -------------- --------------- ------------- --------------
Operating revenues.................. $ -- 60,176 18,479 (1,219) 77,436
Operating expenses.................. -- 37,338 11,118 (1,185) 47,271
--------------- -------------- --------------- ------------- --------------
Gross profit..................... -- 22,838 7,361 (34) 30,165
Selling, general and administrative
expenses........................... 5,677 6,327 2,576 116 14,696
Gain on sale of business............ (257) -- -- -- (257)
Depreciation and amortization....... 25 14,039 5,972 (184) 19,852
--------------- -------------- --------------- ------------- --------------
Operating income (loss).......... (5,445) 2,472 (1,187) 34 (4,126)
Interest expense.................... 7,402 15 111 (214) 7,314
Other (income) expense.............. (330) (406) 659 209 132
--------------- -------------- --------------- ------------- --------------
Income (loss) before equity in
income of subsidiaries,
and income taxes................. (12,517) 2,863 (1,957) 39 (11,572)
Equity in income of subsidiaries.... 403 -- -- (403) --
Income tax expense.................. -- 7 535 -- 542
--------------- -------------- --------------- ------------- --------------
Net income (loss)................... $ (12,114) 2,856 (2,492) (364) (12,114)
=============== ============== =============== ============= ==============
11
AUTOTOTE CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED STATEMENT OF CASH FLOWS
Six Months Ended April 30, 1998
(Unaudited, in thousands)
Parent Guarantor Non-Guarantor Eliminating
Company Subsidiaries Subsidiaries Entries Consolidated
---------------- -------------- --------------- ------------- --------------
Net income (loss)................... $ (7,260) 4,643 (96) (4,547) (7,260)
Depreciation and amortization.... 56 13,008 1,716 (165) 14,615
Equity in income of subsidiaries. (4,373) -- -- 4,373 --
Other non-cash adjustments....... 5 (130) (51) -- (176)
Changes in working capital....... (2,008) 5,822 (181) 4,073 7,706
--------------- -------------- --------------- ------------- --------------
Net cash provided by (used in )
operating activities............... (13,580) 23,343 1,388 3,734 14,885
--------------- -------------- --------------- ------------- --------------
Cash flows from investing
activities:
Capital and wagering systems
expenditures.................... (162) (10,091) (869) (3,880) (15,002)
Other assets and investments..... (118) (4,626) 59 171 (4,514)
--------------- -------------- --------------- ------------- --------------
Net cash provided by (used in)
investing activities............... (280) (14,717) (810) (3,709) (19,516)
--------------- -------------- --------------- ------------- --------------
Cash flows from financing
activities:
Payments on long-term debt....... -- (1,907) (162) 10 (2,059)
Other, principally intercompany
balances........................ 7,542 (7,509) 168 (55) 146
--------------- -------------- --------------- ------------- --------------
Net cash provided by (used in)
financing activities............... 7,542 (9,416) 6 (45) (1,913)
--------------- -------------- --------------- ------------- --------------
Effect of exchange rate changes on
cash............................... 6 1 (100) 20 (73)
--------------- -------------- --------------- ------------- --------------
Increase/(decrease) in cash and
cash equivalents................... (6,312) (789) 484 -- (6,617)
Cash and cash equivalents,
beginning of year.................. 15,582 328 2,297 -- 18,207
--------------- -------------- --------------- ------------- --------------
Cash and cash equivalents, end of
period............................. $ 9,270 (461) 2,781 -- 11,590
=============== ============== =============== ============= ==============
12
AUTOTOTE CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED STATEMENT OF CASH FLOWS
Six Months Ended April 30, 1997
(Unaudited, in thousands)
Parent Guarantor Non-Guarantor Eliminating
Company Subsidiaries Subsidiaries Entries Consolidated
--------------- -------------- --------------- ------------- --------------
Net income (loss)................... $ (12,114) 2,856 (2,492) (364) (12,114)
Depreciation and amortization.... 25 14,039 5,972 (184) 19,852
Equity in income of subsidiaries. (403) -- -- 403 --
Other non-cash adjustments....... 674 37 (577) -- 134
Changes in working capital....... 1,440 (3,351) 3,679 69 1,837
--------------- -------------- --------------- ------------- --------------
Net cash provided by (used in )
operating activities............... (10,378) 13,581 6,582 (76) 9,709
--------------- -------------- --------------- ------------- --------------
Cash flows from investing
activities:
Capital and wagering systems
expenditures.................... (31) (2,831) (570) 10 (3,422)
Proceeds from sale of business
and asset disposals............. 21,650 246 (2,445) -- 19,451
Other assets and investments..... (183) (379) (945) (99) (1,606)
--------------- -------------- --------------- ------------- --------------
Net cash provided by (used in)
investing activities............... 21,436 (2,964) (3,960) (89) 14,423
--------------- -------------- --------------- ------------- --------------
Cash flows from financing
activities:
Net repayments under revolving
credit facilities............... -- (4,500) 13 -- (4,487)
Payments on long-term debt....... -- (22,256) (455) 10 (22,701)
Other, principally intercompany
balances........................ (12,447) 16,081 (2,837) 159 956
--------------- -------------- --------------- ------------- --------------
Net cash provided by (used in)
financing activities............... (12,447) (10,675) (3,279) 169 (26,232)
--------------- -------------- --------------- ------------- --------------
Effect of exchange rate changes on
cash............................... 25 -- (310) (4) (289)
--------------- -------------- --------------- ------------- --------------
Increase/(decrease) in cash and
cash equivalents................... (1,364) (58) (967) -- (2,389)
Cash and cash equivalents,
beginning of year.................. 3,376 261 2,351 -- 5,988
--------------- -------------- --------------- ------------- --------------
Cash and cash equivalents, end of
period............................. $ 2,012 203 1,384 -- 3,599
=============== ============== =============== ============= ==============
13
AUTOTOTE CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion addresses the financial condition of the Company as
of April 30, 1998 and the results of its operations for the three and six month
periods ended April 30, 1998, compared to the same periods last year. This
discussion should be read in conjunction with the Management's Discussion and
Analysis of Financial Condition and Results of Operations for the fiscal year
ended October 31, 1997 ("fiscal 1997") included in the Company's Annual Report
on Form 10-K for fiscal 1997.
THREE MONTHS ENDED APRIL 30, 1998 COMPARED TO THREE MONTHS ENDED APRIL 30, 1997
Second Quarter Fiscal 1998 Second Quarter Fiscal 1997
----------------------------------------------------- ----------------------------------------------------
Pari- Pari-
Mutuel Lottery Mutuel Lottery
Operations Operations Total Operations Operations Total
------------------ -------------- ------------ -------------- -------------- -------------
REVENUES:
Services $ 30,911 2,014 32,925 30,302 4,667 34,969
Sales 3,035 255 3,290 1,949 5,003 6,952
------------------ -------------- ------------ -------------- -------------- -------------
Total Revenues $ 33,946 2,269 36,215 32,251 9,670 41,921
================== ============== ============ ============== ============== =============
GROSS PROFIT
(excluding
depreciation $ 13,173 773 13,946 12,898 3,538 16,436
and amortization) ================== ============== ============ ============== ============== =============
SECOND QUARTER REVENUE ANALYSIS
Revenues decreased 14% or $5.7 million to $36.2 million in the second
quarter of the fiscal year ending October 31, 1998 ("fiscal 1998") from $41.9
million in the second quarter of the fiscal year ended October 31, 1997.
Pari-mutuel Operations services revenues of $30.9 million for the second
quarter of fiscal 1998 improved $0.6 million or 2% compared to the second
quarter of the prior year. This improvement reflects revenue increases
resulting from the growth in handle in the Company's North American pari-mutuel
operations, as well as increases in the Company's simulcasting and German
operations. The growth in handle during the second quarter of fiscal 1998
compared to the second quarter of fiscal 1997 is attributable to the addition of
four new racetracks and OTB sites, the addition of full card simulcasting at one
North American racetrack customer, an increase in interface fees, the addition
of three new simulcasting customers, the growth in video gaming, and the
increase in simulcasting in Germany. Pari-mutuel Operations equipment sales
revenues in the second quarter of fiscal 1998 of $3.0 million increased $1.1
million or 56% compared to the second quarter of the prior year due primarily to
$2.3 million in sales of terminals and equipment to a former international
customer for which the Company received a long-term note receivable.
Lottery Operations services revenues decreased $2.7 million in the second
quarter of fiscal 1998 to $2.0 million primarily because of the absence of $2.5
million in revenues provided in the prior year period by the Company's European
lottery business which was sold in April 1997. Lottery Operations equipment
sales revenues decreased significantly in the second quarter of fiscal 1998 to
$0.3 million from $5.0 million in the same period in fiscal 1997. This decrease
is primarily attributable to the absence in fiscal 1998 of prior period sales of
$1.5 million of terminals to an Italian distributor and $3.3 million of
terminals to the Israel lottery, partially offset by fiscal 1998 sales of $0.3
million.
GROSS PROFIT ANALYSIS
The total gross profit of $13.9 million in the second quarter of fiscal 1998
decreased by $2.5 million, or 15%, compared to the second quarter of fiscal
1997. Lower margins due to the absence of the Company's European lottery
services revenues of $1.0 million, higher transponder costs in the simulcasting
business, and higher track fees in the OTB business, were partially offset by an
increase in margins earned on higher handle in the pari-mutuel operations
services business. Gross profit as a percent of revenues in the Company's
continuing services businesses was 39% in both second quarter periods, and equal
to the gross profit in full fiscal 1997. Gross profit earned on equipment sales
of $1.3 million in the second quarter of fiscal 1998 decreased by $1.0 million,
or 43%, compared to the second quarter of fiscal 1997 due primarily to the
absence of lottery sales in the second quarter of fiscal 1998. Gross profit as a
percent of equipment sales was 40% in the second quarter of fiscal 1998, an
increase from gross profit of 34% in the second quarter of fiscal 1997 as a
result of a change in the mix of equipment and systems sold.
14
AUTOTOTE CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS(Continued)
EXPENSE ANALYSIS
Selling, general and administrative expenses include marketing, sales,
administrative, engineering and software development, finance, legal and other
expenses. Selling, general and administrative expenses decreased $1.7 million
or 23% to $5.7 million in the second quarter of fiscal 1998 from $7.4 million in
the second quarter of fiscal 1997. The decrease is primarily the result of the
collection of receivables previously reserved due to concerns about their
recoverability and cost reduction programs in Europe.
Depreciation and amortization expenses decreased 29% to $7.2 million in
the second quarter of fiscal 1998 compared to $10.1 million in the second
quarter of fiscal 1997. The decrease results from the sale of the Company's
European lottery business in April 1997, full amortization of certain intangible
assets and lower depreciation on lottery assets in fiscal 1998.
Interest expense of $3.8 million in the second quarter of fiscal 1998
increased $0.1 million from the second quarter of fiscal 1997, primarily
reflecting higher interest rates, partially offset by lower borrowing levels.
INCOME TAXES
Income tax expense was $0.2 million in the second quarter of fiscal
1998 compared to $0.1 million in the fiscal 1997 second quarter. Income tax
expense principally reflects foreign taxes, since no tax benefit has been
recognized on domestic operating losses.
SIX MONTHS ENDED APRIL 30, 1998 COMPARED TO SIX MONTHS ENDED APRIL 30, 1997
Six Months Fiscal 1998 Six Months Fiscal 1997
----------------------------------------------------- ----------------------------------------------------
Pari- Pari-
Mutuel Lottery Mutuel Lottery
Operations Operations Total Operations Operations Total
------------------ -------------- ------------ -------------- -------------- -------------
REVENUES:
Services $ 60,007 4,245 64,252 56,917 9,472 66,389
Sales 5,428 966 6,394 3,195 7,852 11,047
------------------ -------------- ------------ -------------- -------------- -------------
Total Revenues $ 65,435 5,211 70,646 60,112 17,324 77,436
================== ============== ============ ============== ============== =============
GROSS PROFIT
(excluding
depreciation
and amortization) $ 24,927 1,952 26,879 23,068 7,097 30,165
================== ============== ============ ============== ============== =============
SIX MONTH REVENUE ANALYSIS
Revenues decreased 9% or $6.8 million to $70.6 million in the first six
months of the fiscal year ending October 31, 1998 from $77.4 million in the
first six months of fiscal 1997.
Pari-mutuel Operations services revenues of $60.0 million for the first six
months of fiscal 1998 improved $3.1 million or 5% compared to the first six
months of the prior year. This improvement reflects revenue increases resulting
from the growth in handle in the Company's North American pari-mutuel and
Connecticut OTB operations, as well as increases in the Company's simulcasting
and German operations. The growth in handle during the first six months of
fiscal 1998 compared to the first six months of fiscal 1997 is attributable to
the addition of four new racetracks and OTB sites, the addition of full card
simulcasting at one North American racetrack customer, an increase in interface
fees, the addition of nine new simulcasting customers, the running of the
Breeders' Cup in the first six months of fiscal 1998 and the growth in video
gaming. Pari-mutuel equipment sales revenues in the first six months of fiscal
1998 of $5.4 million increased $2.2 million or 70% compared to the first six
months of the prior year due primarily to $2.3 million in sales of terminals and
equipment to a former international customer for which the Company received a
long-term note receivable.
15
AUTOTOTE CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS(Continued)
Lottery Operations service revenues decreased $5.2 million in the first six
months of fiscal 1998 to $4.2 million primarily because of the absence of $5.2
million in revenue provided in the prior year period by the Company's European
lottery business which was sold in April 1997. Lottery equipment sales revenues
decreased to $1.0 million in the first six months of fiscal 1998 from $7.9
million in the same period in fiscal 1997. This decrease is primarily
attributable to the absence in fiscal 1998 of sales of $2.7 million of terminals
to an Italian distributor, $3.5 million of terminals to the Israel lottery, and
$0.9 million in equipment provided by the Company's European lottery business.
GROSS PROFIT ANALYSIS
The total gross profit of $26.9 million in the first six months of
fiscal 1998 decreased by $3.3 million, or 11%, compared to the first six months
of fiscal 1997. Lower margins due to the absence of the Company's European
lottery service revenue of $2.7 million were partially offset by an increase in
service margins earned on higher handle in the pari-mutuel operaions services
business. Gross profit as a percent of revenues in the Company's continuing
services businesses was 38% in the first six months of fiscal 1998, down
slightly from gross profit of 39% in the first six months of fiscal 1997,
reflecting, primarily, higher operating expenses in the lottery business and
higher track fees in the OTB business. Gross profit earned on equipment sales
was $2.6 million in the first six months of fiscal 1998, as compared to $3.6
million in the first six months of fiscal 1997 due primarily to the absence of
terminal sales to the Israel lottery in fiscal 1998. Gross profit as a percent
of equipment sales was 41% in the first six months of fiscal 1998, an increase
from gross profit of 33% in the first six months of fiscal 1997 as a result of a
change in the mix of equipment and systems sold.
EXPENSE ANALYSIS
Selling, general and administrative expenses include marketing, sales,
administrative, engineering and software development, finance, legal and other
expenses. Selling, general and administrative expenses decreased $1.9 million
or 13% to $12.8 million in the first six months of fiscal 1998 from $14.7
million in the first six months of fiscal 1997. Expense reductions of $0.5
million resulting from the sale of the Company's European lottery business were
complimented by the collection of receivables previously reserved due to
concerns about their recoverability and cost reduction programs in Europe.
Depreciation and amortization expenses decreased 26% to $14.6 million
in the first six months of fiscal 1998 compared to $19.9 million in the first
six months of fiscal 1997. The decrease results from the sale of the Company's
European lottery business in April 1997, full amortization of certain intangible
assets and lower depreciation on lottery assets in fiscal 1998.
Interest expense of $7.7 million in the first six months of fiscal 1998
increased $0.3 million over the first six months of fiscal 1997, primarily
reflecting higher interest rates, partially offset by lower borrowing levels.
INCOME TAXES
Income tax expense was $0.3 million in the first six months of fiscal
1998 compared to $0.5 million in the first six months of fiscal 1997. Income
tax expense principally reflects foreign taxes, since no tax benefit has been
recognized on domestic operating losses.
LIQUIDITY AND CAPITAL RESOURCES
At April 30, 1998, the Company's available cash and borrowing capacity
totaled $34.5 million compared to $41.3 million at October 31, 1997. Net cash
provided by operating activities was $14.9 million for the six months ended
April 30, 1998. Utilizing cash provided by operating activities and available
cash, the Company invested $19.5 million principally in capital and contract
expenditures, including construction to date of approximately 3,200 new PROBE-L
lottery terminals for the Connecticut State Lottery, and in software systems
development. Additionally, $2.0 million of available cash was used to reduce
other long-term loans. The Company entered into a $12 million, long-term
borrowing arrangement during the third quarter of fiscal 1998 to finance the
cost of the Connecticut State Lottery equipment.
16
AUTOTOTE CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS(Continued)
As described above in Note 4 to the Consolidated Financial Statements, the
Company had $22.9 million of borrowing availability under its Facility at April
30, 1998. The Company believes that, although it expects to incur a net loss in
fiscal 1998, its cash resources, anticipated cash flows from operations and
borrowing availability under the Facility will provide sufficient liquidity to
meet scheduled interest payments and anticipated capital expenditures during the
next twelve months. The Company believes that additional financing will be
required to enable it to meet its debt service obligations under the Notes, the
Facility and the Subordinated Debentures, and for capital expenditures
thereafter.
The Company has signed an agreement with its Italian distributor,
Elettronica Ingegneria Sistemi, to sell up to 20,000 Extrema terminals, valued
at approximately $64 million, to Sisal Sport Italia SpA for use in Italy's pari-
mutuel lottery pool. The Company expects to manufacture the terminals in its
Irish facility and expects to begin shipping the terminals in the third fiscal
quarter of 1998 and continuing through the fiscal year 2000. The Company
expects to finance the working capital required to manufacture the terminals
with cash advanced under the contract and cash available under the Facility.
NEW ACCOUNTING STANDARD
In February 1998, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 132, "Employer's
Disclosures about Pensions and Other Postretirement Benefits" ("SFAS 132").
SFAS 132 revises employers' disclosures about pension and other postretirement
benefit plans in order to standardize disclosure requirements to the extent
possible and requires additional information on changes in the benefit
obligations and fair values of plan assets that are intended to facilitate
financial analysis. SFAS 132 does not change the measurement or recognition of
those plans and is effective for the Company's 1997 fiscal year. Adoption of
this standard is expected to result in modification of and/or additional
disclosures, but should not have an effect on the Company's financial position
or results of operations.
17
AUTOTOTE CORPORATION AND SUBSIDIARIES
QUARTER ENDED APRIL 30, 1998
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS
The Annual Meeting of the stockholders of the Company was held on April 16,
1998 to elect five directors of the Company and to ratify the appointment of
KPMG Peat Marwick LLP as auditors for the Company's 1998 fiscal year. All
matters put before the stockholders passed as follows:
DIRECTOR NOMINEES/ OTHER MATTERS FOR WITHHELD AGAINST ABSTAIN
--------------------------------------------- ----------- ----------- ----------- ---------
A. Lorne Weil 30,610,569 370,624
Larry Lawrence 30,635,544 345,649
Sir Brian G. Wolfson 30,635,130 346,063
Alan J. Zakon 30,635,624 345,569
Marshall Bartlett 30,635,134 346,059
Ratification of KPMG Peat Marwick LLP 30,750,335 137,816 93,042
ITEM 5. OTHER INFORMATION
Effective November 1, 1997, the Company entered into change in control
agreements (the "Agreements") with each of its executive officers (except for A.
Lorne Weil as described below), and with certain of its non-executive officers
(collectively, the "Officers"). A copy of the Form of such agreements is filed
herewith as Exhibit 10.27. The Agreements provide for a term of three years,
commencing on November 1, 1997 and ending on October 31, 2000, which shall be
automatically extended by one year without further action and on each succeeding
year thereafter, unless either party shall have served written notice upon the
other six months prior to the end of the term. In the event an Officer's
employment is terminated without Cause (as defined in the Agreement) or an
Officer terminates his employment for Good Reason (as defined in the Agreement)
at the time of or within two years following a Change in Control (as defined in
the Agreement), the Company's principal obligations under the Agreement will be
to (i) make a lump sum cash payment in an amount equal to two times the sum of
such Officer's base salary at the rate payable immediately prior to termination
plus the greater of (x) the average bonus paid for the three years preceding the
year of termination or (y) the bonus payable to such Officer upon achievement of
the target level of performance for the year of termination; (ii) accelerate the
exercisability of all stock options held by such Officer at termination, such
that all options will become fully vested and exercisable at the date of
termination; and (iii) provide such Officer with continued participation in all
employee and executive benefit plans for a period not to exceed eighteen months
after termination; provided that if any such plan does not permit continued
participation, the Officer shall receive quarterly cash payments equal, on an
after-tax basis, to the cost to such Officer of obtaining the benefit. In the
event an Officer's employment is terminated without Cause, and such Officer is
not entitled to any payment or benefit, each of the Agreements provides (except
for the Agreements of two of the Officers who have preexisting arrangements with
the Company) that the Company will be obligated to make a lump sum cash payment
equal to such Officer's base salary at the rate payable immediately prior to
termination.
Effective November 1, 1997, the Company entered into an employment
agreement (the "Weil Employment Agreement") with A. Lorne Weil, the Company's
President & CEO, the terms of which include change in control provisions. The
principal terms of the Weil Employment Agreement are described under the caption
"Employee Agreements" in the Company's Proxy Statement which was filed with the
Securities and Exchange Commission on March 2, 1998, and a copy of the Weil
Employment Agreement was filed as Exhibit 10.26 to the Company's Quarterly
Report on Form 10-Q for the quarter ended January 31, 1998; and the description
of the Weil Employment Agreement therein is incorporated herein in its entirety
by reference thereto.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.27 Form of Change of Control Agreements effective November 1,
1997 between the Company and its executive officers and
certain non-executive officers.
10.28 Agreement between the Company and Elettronica Ingegneria
Sistemi dated February 19, 1998.
10.29 General Agreement between the Company and Sisal Sport Italia
SpA dated February 19, 1998.
27 Financial Data Schedule.
No current reports on Form 8-K were filed during the second quarter of fiscal
1998.
18
AUTOTOTE CORPORATION AND SUBSIDIARIES
Quarter Ended April 30, 1998
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
AUTOTOTE CORPORATION
--------------------
(Registrant)
By: /s/ William Luke
----------------
Name: William Luke
Title: Vice President
& Chief Financial Officer
Dated: June 15, 1998
19