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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[_] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: October 31, 1998,
or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________to___________________
Commission file number: 0-13063
AUTOTOTE CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 81-0422894
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
750 Lexington Avenue, 25th Floor
New York, New York 10022
(Address of principal executive offices)
Registrant's telephone number: (212) 754-2233
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Class A Common Stock, $.01 par value American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No__
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. _ _
As of January 22, 1999, the aggregate market value of voting stock held by
non-affiliates of the registrant was approximately $76,555,494.
Common shares outstanding as of January 22, 1999 were 36,026,115.
DOCUMENTS INCORPORATED BY REFERENCE
The following document is incorporated herein by reference:
Document Parts Into Which Incorporated
Proxy Statement for the Company's 1999 Annual Part III
Meeting of Stockholders
EXHIBIT INDEX APPEARS ON PAGE 71
================================================================================
PART I
When used herein, the words "believe," "anticipate," "think," "intend,"
"will be" and similar expressions identify forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. Such statements
are not guarantees of future performance and involve certain risks and
uncertainties discussed herein, which could cause actual results to differ
materially from those in the forward-looking statements. Readers are cautioned
not to place undue reliance on the forward-looking statements which speak only
as of the date hereof. Readers are also urged to carefully review and consider
the various disclosures made by the Company which attempt to advise interested
parties of the factors which affect the Company's business, including the
disclosures made under the caption "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
All references to a fiscal year are to the Company's fiscal year, which
ends October 31. References to "Autotote" or the "Company" include Autotote
Corporation and its subsidiaries.
ITEM 1. BUSINESS
Overview
Autotote Corporation is a leading technology supplier and operator of
wagering systems, related equipment and gaming venues in North America and
worldwide. The Company provides technology, services and operations management
primarily to two major segments of the industry: i) pari-mutuel wagering
(whereby wagers are placed in a pool and winnings are calculated and paid as a
percentage of that pool), consisting primarily of wagering conducted on horse
racing, greyhound racing and jai-alai and ii) government sponsored or licensed
lotteries.
Autotote is the leading provider of computerized pari-mutuel wagering
systems to the North American Racing Industry and is also a leading provider of
computerized pari-mutuel systems worldwide, with systems in racetracks and OTBs
in Europe, Central and South America, and the Asia-Pacific region. The Company
is the exclusive licensed operator of substantially all off-track betting
("OTB") in the State of Connecticut and is the exclusive licensed operator of
all pari-mutuel wagering in The Netherlands. In addition, the Company is the
leading provider of Racing Industry simulcasting services in the United States
through its broadcasting of live racing events via satellite to other racetracks
and OTBs and also provides these services in Europe. The Company designs, sells
and services video gaming machines ("VGMs") for use at racetracks and in lottery
operations in North America. Also in 1998, the Company designed, implemented and
began providing a national voice/data network, known as the North American
Simulcast Racing Information Network ("NASRIN(TM)").
Autotote is also a major provider of lottery systems, equipment and
services to government-sponsored and privately operated lotteries. The Company
currently supports such lotteries in North America, Latin America and Europe.
The Company's proprietary pari-mutuel wagering systems process the sale and
cashing of wagers through ticket-issuing terminals, accumulate wagering data,
calculate pari-mutuel odds, distribute information to display systems and
provide management information and marketing services for its customers. The
wagering systems utilize high-volume, real-time transaction and data processing
networks, managed by central computers, communications equipment, special
purpose microcomputer-based terminals, peripheral and display equipment, and
operations and applications software. The Company generally receives revenues
based on a percentage of the gross monies wagered ("Handle"), a daily or monthly
fee or through outright product sales.
The growth in OTB, telephone and inter-track wagering, together with the
Company's extensive penetration of the North American pari-mutuel wagering
market, have enabled the Company to generate increased revenues. The Company has
achieved this because it (i) is the leading provider of pari-mutuel wagering
systems to the leading racetracks whose live racing events are in the greatest
demand for off-track wagering, (ii) is a leading provider of computerized
pari-mutuel wagering systems and automated telephone betting equipment to OTBs
and racetracks accepting wagers on simulcasted racing events, (iii) is the
leading simulcaster of live horse and greyhound racing and jai alai events to
racing facilities, OTBs and casinos in North America, and (iv) owns the
Connecticut OTB
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system. The Company believes that it will realize additional benefits to the
extent that states and foreign jurisdictions enact further legislation that
facilitates growth in simulcasting and OTB, inter-track, telephone and other
remote wagering.
The Company's lottery operations utilize proprietary technology that is
similar to that used for pari-mutuel wagering, but specialized for lottery
operations. The Company (i) provides wagering equipment and services to operate
the Connecticut State Lottery, a nationwide lottery in Barbados and a nationwide
lottery in the Dominican Republic, (ii) provides support and maintenance
services for other on-line lotteries, and (iii) sells lottery equipment to
various markets, including Italy. On December 15, 1997, the Company signed an
agreement with the Connecticut Lottery Corporation to service the Connecticut
State Lottery through May 2003, and provides the lottery five one-year options
to extend the contract through May 2008. Under the terms of the agreement, in
the third quarter of fiscal 1998, the Company manufactured and installed
approximately 3,200 new PROBE(*)L lottery terminals. The Company partially
financed its obligations under this agreement by entering into a term loan
arrangement in May 1998 (see Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations-Liquidity and Capital Resources).
In fiscal 1998, the Company also signed a seven-year contract with the Montana
State Lottery for an on-line lottery system to be installed in 1999.
Additionally, in 1998, the Company began shipping to an Italian distributor the
first of up to 20,000 Extrema(TM) lottery terminals for use in Italy in the
SISAL Sport Italia SpA lottery operations.
For information concerning the Company's business and geographic segments,
see Note 18 to Consolidated Financial Statements.
Pari-Mutuel Operations
Pari-mutuel Operations accounted for 89%, 85% and 73% of the Company's
total revenues for the fiscal years 1998, 1997 and 1996, respectively.
Pari-mutuel wagering is currently authorized in 43 states in the United States,
all provinces in Canada, and approximately 100 other countries around the world.
North American Wagering Systems
Autotote is the leading supplier of pari-mutuel wagering systems to the
North American market. The Company believes its pari-mutuel wagering systems
processed approximately 65% of the estimated $20 billion of gross monies wagered
("Handle") in North America. The Company owns and operates over 22,000
pari-mutuel wagering terminals in use throughout North America. The Company's
wagering systems and/or related equipment process wagers at approximately 100
racetracks in North America, including 10 of the top 15 largest thoroughbred
racetracks and at over 800 OTB facilities.
In North America, the Company typically enters into long-term (five-years
or longer) service contracts with its customers pursuant to which the Company
provides the pari-mutuel wagering system, as well as the operations, maintenance
and supervisory personnel necessary to operate the pari-mutuel wagering system.
The Company maintains ownership of the pari-mutuel wagering systems, which
enables it to employ such equipment in more than one racetrack at different
times during the year.
The pari-mutuel wagering systems provided by the Company in North America
typically include the terminals that issue the wagering tickets, the central
processing unit which calculates the betting odds of a particular event and
tabulates and accounts for the Handle, the display board which indicates the
betting odds of a particular event and the communication equipment necessary for
additional wagering from sources outside the wagering facility. The systems
utilize high volume, real-time transaction and data processing networks managed
by central computers, communications equipment, special purpose
microcomputer-based terminals, peripheral and display equipment and operations
and applications software. The type of central processing unit and the number of
ticket issuing terminals used in a system are generally determined by the amount
of wagering at, and physical layout of, the facility. The Company generally does
not, however, employ the clerks who issue wagering tickets using the Company's
teller-operated terminals. The Company also provides additional software and
other support functions.
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The Company typically receives revenue for its services in North America as
a percentage of Handle, which generally ranges up to approximately 0.55% of the
Handle on a particular event (with a weighted average of approximately 0.35% of
the Handle), subject, in many instances, to minimum fees which are usually
exceeded under normal operating conditions. Minimum fees under the Company's
service contracts are generally based on the number of days the facility
operates, as well as other factors, including the type of system and number of
terminals installed at the facility.
In addition to payments received for wagering which takes place at a
location where the Company operates a wagering system, the Company also
typically receives an "Interface Fee" of 0.125% for wagers that are made from
remote sites. This Interface Fee is charged and typically collected from the
remote site where the wager is placed whether or not such site is a customer of
the Company. As inter-track and off-track wagering has increased, the percentage
of total North American Racing Industry Handle on which Interface Fees are
charged has grown.
In recent years, the Company has focused on the creation of regional
networks of large and medium sized racetracks and OTB networks, rather than
single facilities at smaller racetracks. These networks allow the Company to
achieve economies of scale by centralizing its service operations and more
efficiently utilizing its installed base of computer hardware. Additionally,
when linked to the Company's other regional and national pari-mutuel wagering
networks, these networks provide the Company's customers with access to new
markets and revenue sources by increasing the number and variety of wagering
opportunities that customers can offer to their patrons. The Company believes
its established wagering networks will give the Company a competitive advantage
in renewing existing contracts and winning new contracts in regions where such
networks exist because of the Company's ability to offer customers greater
services more efficiently than its competitors. The Company currently operates
its regional pari-mutuel wagering networks in California, Connecticut, Florida,
Illinois, Louisiana, Michigan, New York, Oregon, Pennsylvania, Washington,
Puerto Rico, Alberta, British Columbia and Ontario.
An additional outlet for the Company's pari-mutuel wagering systems is the
casino market. The Company operates pari-mutuel wagering systems for all of the
casinos in Atlantic City that offer wagering on racing events and provides
wagering systems for use at the Mohegan Sun Casino in Connecticut. Services
provided to these casinos are similar to those provided directly to OTBs.
In its service contracts, the Company makes certain warranties regarding
the operation, performance, implementation and reliability of its wagering
systems relating to, among other things, data accuracy, repairs and validation
procedures. The Company's warranties in its wagering systems contracts are
negotiated and, accordingly, vary on a case-by-case basis.
Connecticut OTB
In 1993, the Company purchased from the State of Connecticut the exclusive
right to operate substantially all off-track betting within that state. Since
the Company commenced operating the Connecticut OTB, it has implemented several
important product and service enhancements, including expanded simulcasting from
over 60 thoroughbred, harness and greyhound racetracks and jai alai frontons
across the country, common-pool wagering, seven day per week operations at nine
locations and expanded telephone betting. These improvements have helped
increase the Connecticut OTB Handle from approximately $133 million in fiscal
1993, the last year that the State operated the Connecticut OTB, to
approximately $210 million in fiscal 1998. The Company believes its expertise
developed in operating the Connecticut OTB provides it with a competitive
advantage in obtaining future OTB operations through privatization, a strategy
which recently resulted in the Company's acquisition of all pari-mutuel wagering
operations in the Netherlands. The Company currently operates thirteen OTB
locations statewide, including two simulcasting teletheaters in New Haven and
Windsor Locks, three simulcasting race view centers as well as a telephone
account betting operation in New Haven. The Company's approximately 39,000
square feet Bradley Teletheater in Windsor Locks and approximately 55,000 square
feet facility in New Haven, Sports Haven(R), feature pari-mutuel wagering on
thoroughbred, harness, greyhound and jai alai events shown live on large screens
and televisions throughout the facility. Since the opening of the Sports
Haven(R), facility in 1995, wagering in New Haven has increased from
approximately $35.0 million to $55.0 million annually.
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The exclusive right to operate the Connecticut OTB is subject to state
regulations with respect to such matters as the location of OTBs, hours of
operation and certain financial and operational standards. The Company must pay
liquidated damages to the state if these standards are not met. The Company is
also subject to a pari-mutuel tax of 3.5% of all monies wagered. The percentage
of the total Handle which the Company may receive as the operating revenues from
the Connecticut OTB is determined by the track where the event is held and
ranges from 15% to 25%, depending on the racetrack and type of wagers.
The Company believes operation of the Connecticut OTB further strengthens
its competitive position in attracting certain new racetrack customers to the
extent that the Connecticut OTB does not already accept wagers for such
racetrack's racing events. The Company can enhance a proposal for its services
by offering the racetrack the opportunity to have its racing events wagered upon
at the Connecticut OTB. In return, racetracks generally receive a fee from
Connecticut OTB, of between 3% and 6% of the pari-mutuel wagers made at the
Connecticut OTB.
In 1996, the Company received legislative approval to expand its operations
to seven days a week subject to local approval. Currently nine Connecticut OTB
locations operate seven days a week. In June 1997, the State of Connecticut
passed legislation authorizing the Company to simulcast live racing events in up
to six locations. The Company currently simulcasts at five locations: its
Bradley Teletheater and Sports Haven(R) locations as well as at its race view
centers in New Britain, Bristol and Hartford, and is pursuing development of an
additional teletheater location in western Connecticut. Such legislation also
authorized racetracks and jai alai frontons within Connecticut to retain a
larger portion of the Handle from pari-mutuel pools. The Connecticut OTB
typically retains the same amount as the racetrack or fronton where the event is
held. Due to the legislation, the amount the Connecticut jai alai fronton and
racetracks retained increased during fiscal 1998, and as a result, the Company's
gross profit improved by $0.9 million on the approximately $56 million wagered
at the Connecticut OTB on events which took place within Connecticut.
In fiscal 1998, the Company entered into a seven year agreement with the
Mohegan Tribal Gaming Authority to provide wagering and simulcasting services
for a new Race Book to be located at the Mohegan Sun Casino located in
Uncasville, CT. The Race Book, which commenced operations on September 3, 1998,
is a state-of-the-art facility which incorporates the latest wagering technology
and the most advanced audio and video signals for simulcasting from over 60
thoroughbred, harness and greyhound racetracks and jai alai frontons throughout
North America.
Simulcasting Systems & Communication Services
The Company is the leading simulcast provider of live horse and greyhound
racing and jai alai events to racing facilities, OTBs and casinos in North
America. The Company simulcasts racing events from over 60 racetracks and jai
alai frontons to over 150 racetracks and over 750 OTBs throughout North America.
Simulcasting is the process of transmitting the audio and video signal of a
live racing event from a live facility for reception by wagering facilities in
other locations, usually by satellite. Simulcasting provides racetracks the
opportunity to increase revenues by sending their signals to as many wagering
locations as possible, such as other racetracks, OTBs and casinos. Sending live
audio and video broadcasts of remote racing events generates increased revenues
for the Company and its customers by (i) increasing the consumer base for the
remote events and (ii) maximizing the number of events available to a patron for
wagering by utilizing idle time between races at racetracks to broadcast remote
events.
In its simulcasting operations, the Company leases satellite transponders
and uses digital compression technology to increase the number of events that
may be simulcasted at one time. The Company owns mobile earth stations which
uplink the video and audio signals of racetrack and jai alai events to Company
controlled satellite transponders and owns integrated receiver/decoders which
are used by racetracks and OTBs to receive and decode the transmission signals.
In general, the Company receives fees for simulcasting as follows: (i) a
daily fee charged to racetracks for the broadcast transmission services,
including the earth station, operator and the use of satellite time controlled
by the Company; and (ii) a fee charged to receiving sites for the use of the
Company's decoders to unscramble the
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transmission. In addition, the Company often sells excess satellite transponder
capacity to other users of satellite communications outside the Racing Industry.
From time to time, the Company has sold such excess capacity under long-term
contracts.
The Company, in partnership with AT&T, the Company's primary service
provider, was selected by the Thoroughbred Racing Association to implement and
manage NASRIN(TM). This system is designed to link all racing and simulcasting
locations in North America and to be a platform for future technology
developments. Built around AT&T's international frame relay network, NASRIN(TM)
securely transmits betting data at a fraction of the cost previously paid by the
racetracks and other facilities. In December 1998, the Company and Churchill
Downs Incorporated ("Churchill Downs") announced the signing of a letter of
intent to merge Autotote's NASRIN(TM) and Churchill Downs' Tracknet
telecommunications business units. The new company, which will continue to be
called NASRIN(TM), will be owned 70% by the Company and 30% by Churchill Downs
and will provide the equipment and management to administer and maintain the
nationwide network, and handle all subscriber billings.
International Pari-Mutuel Operations
In Europe, the Company owns the license to and operates all pari-mutuel
wagering in the Netherlands and provides and operates pari-mutuel wagering
systems at racetracks in France, Germany and Austria. The Company also provides
simulcast services to customers in Germany and the Netherlands and sells
pari-mutuel wagering equipment to customers in other countries in Europe. In
other foreign jurisdictions, the Company generally sells systems and equipment.
The Company maintains a significant presence in Europe. In July 1998, the
Company acquired the rights and began operating all pari-mutuel wagering in the
Netherlands. In Germany, the Company is operating under a 10-year contract to
provide comprehensive wagering services to the majority of the racetracks in the
country. Also in Germany, the Company has the right to develop a limited number
of OTB locations and phone wagering and is pursuing these opportunities. In
France and Austria, the Company provides and operates wagering systems pursuant
to long-term contracts. In fiscal 1998, the Company also signed a 10-year
contract, which is to begin in April 1999, to sell a pari-mutuel wagering system
and to provide ongoing maintenance and operating services to Tote Ireland Ltd.,
a wholly-owned subsidiary of the Irish Horseracing Authority.
In fiscal 1998, the Company derived approximately $9.9 million in service
and sales revenues from its French pari-mutuel wagering operations and $4.0
million in service and sales revenues from its German and Austrian pari-mutuel
wagering operations. During the four months following acquisition of the
Netherlands business, the Company recognized $4.8 million in service revenues
from its operations in the Netherlands.
In its other international markets, the Company generally sells, delivers
and installs pari-mutuel wagering systems in racetracks and OTBs rather than
operating them pursuant to service contracts. The Company generally designs a
customized system to meet the needs of each customer, including game designs,
language preferences, network communication standards and other key elements.
The sale of a pari-mutuel wagering system includes a license for use of the
Company's proprietary system software, as well as technical assistance, support,
accessories and spare parts. The Company's personnel participate in the system
installation and then the training of customer's personnel. The Company has sold
its systems in approximately 25 countries.
Video Gaming Machines ('VGMs')
The Company has developed a proprietary line of VGMs, which combine full
gaming functionality, such as video poker, blackjack, simulated spinning reels
and keno, with full race betting functionality and picture-in-picture
capabilities, providing multiple opportunities for revenue generation at
racetracks where VGM wagering is permitted. The Company's latest VGM terminal,
the PROBE(R) XLC, allows patrons to play card games, wager on horse races and
watch simulcasted races or other televised programs on a picture-in-picture
video window, while continuing to wager on the selected video game. The Company
has contracts to supply terminals to all the pari-mutuel operators in West
Virginia with the Company's progressive terminals added in Mountaineer and soon
to be installed in Charlestown. Currently the Company has installed
approximately 1,300 PROBE(R) XLC terminals, for
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which it receives a percentage of income generated by the terminals. The Company
believes its penetration of the pari-mutuel wagering business positions it to
become a significant provider of VGMs if video gaming is approved in more
racetracks across the country. The Company has also sold VGMs to the Manitoba
Lottery Commission.
Casino/Race and Sports Wagering
In October 1996, the Company sold the casino/race and sports wagering
service business ("CBS") which provided sports wagering systems to 107 of the
113 casinos in Nevada and to the leading operator of sports wagering facilities
in Mexico. Through a distributor affiliated with the purchaser of CBS, the
Company expects to continue to provide pari-mutuel wagering terminals and parts
to the casinos and sports wagering facilities that generally use systems
manufactured by the Company.
In connection with the sale of CBS, the Company entered into an agreement
not to compete anywhere in the world with respect to the purchaser's race and
sports book business for a minimum of five years. In addition, the contract for
the sale of CBS provides that the Company and CBS will offer each other certain
rights of first refusal with respect to business opportunities in the race and
sports book business internationally. At October 31, 1998, the Company and the
purchaser of CBS have a proposed agreement to settle litigation resulting from
the sale of CBS. This proposed agreement, in part, is expected to substantially
reduce the scope of, or eliminate in their entirety, the non-compete and first
right of refusal provisions described above. The Company does not believe that
the original agreements or the proposed agreement will have a material impact on
its ability to conduct its business.
Lottery Operations
Lottery Operations accounted for 11%, 15%, and 27% of the Company's total
revenues for the fiscal years 1998, 1997 and 1996, respectively.
The Company designs, installs, operates and maintains on-line
computer-based lottery systems and provides equipment for lottery systems both
in the United States and internationally. Lottery systems are required to
process very large transaction volumes. Such high performance requirements
dictate the need for sophisticated software applications that necessitate
expertise in software engineering and development. In the United States, the
Company operates the Connecticut Lottery and has a contract to install and
operate a lottery system and terminals for the Montana State Lottery.
Internationally, the Company has provided central processing systems and/or
terminals which are currently being used in lotteries operating in Barbados, the
Dominican Republic and Italy. In the fourth quarter of 1998, the Company also
began shipping terminals to SISAL Sport Italia SpA. pursuant to a contract to
deliver up to 20,000 of the Company's Extrema(TM) terminals.
In connection with the Connecticut State Lottery, the Company provides all
equipment, personnel and services necessary to operate the lottery network of
approximately 3,200 terminals while retaining title to the equipment. On
December 15, 1997, the Company signed an agreement with the Connecticut Lottery
Corporation to service the Connecticut State Lottery through May 2003, with five
one-year options to extend the contract through May 2008. Under the terms of the
agreement, the Company manufactured and installed approximately 3,200 new
PROBE(*)L lottery terminals. Revenues received by the Company from its operation
of the Connecticut State Lottery are based on a percentage of amounts wagered in
the lottery.
The Company's lottery products consist primarily of central processing
systems, including data communication networks, and on-line and on-line/off-line
computer-based lottery terminals. The lottery management system portion of the
product includes a lottery administration client-server network and relational
database. Lottery terminals are generally on-line to the central system via
telephone lines connected to the system's communication front-end processors.
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Sale of European Lottery Business
On April 15, 1997, the Company completed the sale of its European lottery
business for cash consideration of approximately $26.6 million, including
contingent consideration of approximately $1.6 million based upon a balance
sheet of the European lottery business, prepared as of such date. At closing,
the Company provided the purchaser with a letter of credit to secure certain
obligations under the sales agreement. The letter of credit, which had an
outstanding balance of $1.5 million at October 31, 1997, expired in October
1998. The Company recorded additional gains on the sale of its European lottery
business in the amount of approximately $1.2 million in fiscal 1998 and
approximately $1.8 in fiscal 1997.
Under the terms of the sale, the purchaser has the right to license and
purchase certain of the Company's terminals for use in lottery applications.
Currently neither the European lottery business nor the purchaser manufactures
on-line lottery wagering terminals. Also under the agreement, the purchaser has
a right of first refusal to purchase the Company's remaining lottery business
until April 1999. The Company, however, currently has no plans to sell this
business and remains committed to serving the North American lottery market and
its existing customers worldwide.
In connection with the sale of the European lottery business, the Company
agreed not to compete for three years in the on-line lottery business outside of
the United States and Canada except with respect to (a) existing customers not
served by the European lottery business and (b) certain identified proposed
customers and jurisdictions. The non-competition covenants do not apply to the
Company's right to sell certain terminals for lottery applications anywhere,
except to existing customers of the European lottery business.
Contract Procurement
Contract awards by horse and greyhound racetracks, OTBs and casino/sports
wagering facilities and from state and foreign governments often involve a
lengthy competitive bid process, spanning from specification development to
contract negotiation and award. Contracts have a high dollar value and are
technically and commercially complex and may require substantial initial cash
outlays. Start up costs associated with contract awards typically involve
expenditures for items such as software development/customization, assembly of
wagering systems, and installation costs including electrical and carpentry
work, transportation and placement of equipment, and system implementation. Such
costs are primarily comprised of labor related expenses due to the relative
magnitude of software development and customization in the start up phase. In
the United States, lottery authorities generally commence the contract award
process by issuing a request for proposals inviting bids and proposals from
various lottery vendors. Internationally, lottery authorities do not typically
utilize such a formal bidding process, but rather negotiate proposals with one
or more potential vendors.
The Company's contracts for the provision of pari-mutuel services are
typically for terms of five years. Contracts representing 5%, 9%, 15% and 10% of
the Company's annual North American pari-mutuel service revenues are scheduled
to expire in fiscal years 1999, 2000, 2001 and 2002, respectively. The Company's
contract to operate the Connecticut State Lottery was renewed in December 1997
for five years and provides the lottery five one-year renewal options. The
Company historically has been successful in renewing its largest contracts as
they have come due for renewal. However, there can be no assurance that the
Company will continue to be able to renew pari-mutuel systems operating
contracts with its largest customers or to further renew the lottery contract
with the State of Connecticut, and, if it is unable to do so, there would be a
material adverse effect on the Company.
Service and Support
The Company employs approximately 595 persons, including regional and
national managers and trained maintenance and field service personnel, to
support the operation of the Company's systems and communications networks. The
Company's personnel support its systems by performing routine system maintenance
and repairs of systems and equipment when needed.
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Research and Product Development
The Company believes that its ability to attract new wagering system
customers and retain existing customers depends in part on its ability to
continue to incorporate technological advances into, and to improve, its product
lines. The Company maintains a development program directed toward systems
development as well as toward the improvement and refinement of its present
products and the expansion of their uses and applications. The Company employs
approximately 50 people in connection with software, engineering and product
development.
Intellectual Property
The Company maintains patent protection on certain of its pari-mutuel
wagering and lottery products and has a number of registered trademarks and
other common law trademark rights for certain of its products. The software and
control systems for the Company's wagering systems are also protected by
copyright and/or trade secret laws.
Production Processes; Sources and Availability of Components
Production of the Company's wagering systems and component products
primarily involves the assembly of electronic components into more complex
systems and products. The Company primarily produces its terminal products at
the Company's manufacturing facility in Ballymahon, Ireland. In 1997, the
Company began limited terminal assembly at its Newark, Delaware administration
and development facility. Other manufacturing is contracted out to third party
vendors, as needed.
The Company normally has sufficient lead time between reaching an agreement
to serve a wagering facility and commencing actual operations at such facility.
In the event the current suppliers of central processing units were no longer
available, the Company believes that it would be able to adapt its application
software to hardware available from other sources within a time frame sufficient
to allow it to meet new contractual obligations, although the price
competitiveness of the Company's products might diminish. The lead-time for
obtaining most of the electronic components used by the Company is approximately
90 days. The Company believes that this is consistent with its competitors' lead
times and is also consistent with the needs of its customers.
Backlog
The backlog of the Company's orders for sales of its products was
approximately $31 million as of October 31, 1998. The majority of the backlog is
associated with the agreement with SISAL Sport Italia SpA to manufacture and
deliver Extrema(TM) terminals to upgrade SISAL's network of terminals used in
their Italian lottery operations. Approximately 73% of the backlog as of October
31, 1998 is expected to be filled in fiscal 1999. Backlog as of October 31, 1998
does not include revenues attributable to multi-year wagering systems contracts,
multi-year lottery service contracts, revenue attributable to the operation of
the Connecticut OTB, or maintenance contracts.
Competition
A significant portion of the Company's revenue is generated from providing
pari-mutuel wagering systems to racetracks and OTBs. The market for pari-mutuel
wagering systems is competitive, and certain of the Company's competitors may
have substantially greater financial and other resources than the Company. The
Company competes primarily on the basis of design, performance, reliability and
pricing of its products as well as customer service. To effectively compete, the
Company expects to make continued investments in product development and/or
acquisitions of technology.
As a major portion of the Company's revenue is based on a percentage of
wagering Handle, including its Connecticut OTB revenues, the Company's revenue
may be affected by competition for the wagering dollar. Any new non-racing
wagering products in a given market may result in increased competition for
wagering dollars. Competition for wagers comes from casinos, lotteries and other
forms of legal and illegal gambling.
9
The Company's two principal competitors in the North American pari-mutuel
wagering systems business are AmTote International, Inc and Powerhouse
Technologies Inc. ("Powerhouse"), which operates its pari-mutuel wagering
systems business through its subsidiary United Tote. Video Gaming industry
terminal suppliers include Powerhouse, International Game Technology, WMS
Industries Inc., Alliance Gaming, Inc. and several smaller companies. The
Company's competition outside of North America is more fragmented, with
competition being provided by several international and regional companies. No
single company maintains the leading market position internationally, although
certain companies possess regional strengths.
Competition in the simulcasting business in North America currently is
fragmented. Other than the Company, only Roberts Television International, Inc.
has achieved a significant share of the market.
The on-line lottery business is also highly competitive. State and foreign
governments normally award contracts based on competitive bidding procedures.
Significant factors which influence the award of lottery contracts include
price, the ability to optimize lottery revenues through marketing capability and
applications knowledge, the quality, dependability and upgrade capability of the
network, the experience, financial condition and reputation of the vendor, and
the satisfaction of other requirements and qualifications which the lottery
authority may impose. The Company's principal competitors in the on-line lottery
business are Gtech Holdings Corp. and Powerhouse, through its subsidiary
Automated Wagering, Inc.
The market for the Company's products is affected by changing technology,
new legislation and evolving industry standards. The Company's ability to
anticipate such changes and to develop and introduce new and enhanced products
on a timely basis will be a significant factor in the Company's ability to
expand, remain competitive, attract new customers and retain existing contracts.
There can be no assurance that the Company will have the financial or other
resources to respond to such changes or to develop and introduce new products on
a timely basis.
In connection with the sales of CBS and the European lottery business, the
Company entered into certain agreements not to compete , which the Company
believes will not have a material impact on the Company's ability to conduct its
business.
Regulation
General
Pari-mutuel wagering, sports wagering, video gaming and on-line lotteries
may be conducted in jurisdictions that have enacted enabling legislation. In
jurisdictions that currently permit various wagering activities, regulation is
extensive and evolving. Regulators in such jurisdictions review many facets of
an applicant/holder of a license including, among other items, financial
stability, integrity and business experience. The Company believes that it is
currently in substantial compliance with all regulatory requirements in the
jurisdictions where it operates. Any failure to receive a material license or
the loss of a material license that the Company currently holds could have a
material adverse effect on the overall operations and financial condition of the
Company.
In 1996, the United States Congress passed legislation authorizing a
comprehensive study of gaming, including segments of the gaming industry served
by the Company. The Company is unable to predict whether this study will result
in legislation that would impose regulations on gaming industry operators,
including the Company, or whether such legislation, if any, would have a
material adverse effect on the Company.
The Company has developed and implemented an extensive internal compliance
program in an effort to assure the Company's compliance with legal requirements
imposed in connection with its wagering-related activities, as well as legal
requirements generally applicable to all publicly traded corporations. The
compliance program is run on a day-to-day basis by a full-time compliance
officer, and is overseen by the Compliance Committee of the Company's Board of
Directors. While the Company is firmly committed to full compliance with all
applicable laws, there can be no assurance that such steps will prevent the
violation of one or more laws or regulations, or that a
10
violation by the Company or an employee of the Company will not result in the
imposition of a monetary fine or suspension or revocation of one or more of the
Company's licenses.
Pari-Mutuel Wagering
Forty-three states, Puerto Rico, all of the Canadian provinces, Mexico and
many other foreign countries have authorized pari-mutuel wagering on horse races
and 19 states and many foreign countries, including Mexico, have authorized
pari-mutuel wagering on dog races. In addition, Connecticut, Rhode Island,
Nevada, Florida and Mexico also allow pari-mutuel betting on jai alai matches.
Companies that manufacture, distribute and operate pari-mutuel wagering
systems in these jurisdictions are subject to the regulations of the applicable
regulatory authorities there. These authorities generally require the Company,
as well as its directors, officers, certain employees and holders of 5% or more
of the Company's common stock, to obtain various licenses, permits and
approvals. Regulatory authorities may also conduct background investigations of
the Company and its key personnel and stockholders in order to insure the
integrity of the wagering system. These authorities have the power to refuse,
revoke or restrict a license for any cause they deem reasonable. The loss of a
license in one jurisdiction may cause the Company's licensing status to come
under review in other jurisdictions as well.
A subsidiary of the Company that provides pari-mutuel wagering equipment
and/or services to certain casinos located in Atlantic City, New Jersey is
licensed by the New Jersey Casino Control Commission ("New Jersey Commission")
as a gaming related casino service industry in accordance with the New Jersey
Casino Control Act ("Casino Control Act") for an initial period of two years and
then for renewable periods of four years thereafter. An applicant for a gaming
related casino service industry license is required to establish, by clear and
convincing evidence, financial stability, integrity and responsibility; good
character, honesty and integrity; and sufficient business ability and experience
to conduct a successful operation. The Company must also qualify under the
standards of the Casino Control Act. The Company and its licensed subsidiary may
also be required to produce such information, documentation and assurances as
required by the regulators to establish the integrity of all financial backers,
who may be required to seek qualification or waiver of qualification. For casino
holding companies, the New Jersey Commission traditionally has granted informal
waivers at the staff level for non institutional investors holding less than 15%
of a debt issue and for institutional investors holding less than 50% of a debt
issue and less than 20% of the issuer's overall debt.
The New Jersey Commission has broad discretion in licensing matters and may
at any time condition a license or suspend or revoke a license or impose fines
upon a finding of disqualification or non-compliance. The New Jersey Commission
may require that persons holding five percent or more of the Class A Common
Stock of the Company qualify under the Casino Control Act. Under the Casino
Control Act, a security holder is rebuttably presumed to control a
publicly-traded corporation if the holder owns at least five percent of such
corporation's equity securities; however, for passive institutional investors,
qualification is generally not required for a position of less than 10%, and
upon a showing of good cause, qualification may be excused for a position of 10%
or more. Failure to qualify could jeopardize the Company's license. In addition,
the New Jersey Racing Commission also licenses this subsidiary and retains
concurrent regulatory oversight over this subsidiary with the New Jersey
Commission.
The Company's rights to operate the Connecticut OTB system shall continue
as long as the Company holds all licenses required for the operation of the
system. In addition, the officers and directors and certain other employees of
the Company must be licensed. Licensees are generally required to submit to
background investigations and provide required disclosures. The Division of
Special Revenue of the State of Connecticut (the "Division") may revoke the
license to operate the system under certain circumstances, including a false
statement in the licensing disclosure materials, a transfer of ownership of the
licensed entity without Division approval and failure to meet financial
obligations. The approval of the Connecticut regulatory authorities is required
before any off-track betting facility is closed or relocated or any new branch
or simulcast facility is established.
While in the past and at present the Company has been the subject of
enforcement proceedings instituted by one or more regulatory bodies, the Company
has been able to consensually resolve any such proceedings upon its
11
implementation of remedial measures and/or the payment of settlements or
monetary fines to such bodies. The Company does not believe that any of these
proceedings, past or pending, will have a materially adverse effect on the
Company. However, there can be no assurance that similar proceedings in the
future will be similarly resolved, or that such proceedings will not have a
material adverse impact on the Company's ability to retain and renew existing
licenses or to obtain new licenses in other jurisdictions.
Video Gaming
Coin or voucher operated gambling devices offering electronic, video
versions of spinning reels, poker, blackjack and similar games are known as VGMs
or video lottery terminals ("VLTs"), depending on the jurisdiction. These
devices represent a growing area in the wagering industry. The Company or its
subsidiaries manufacture and supply terminals and wagering systems designed for
use as VGMs or VLTs.
Twenty-four states and Puerto Rico authorize wagering on VGMs or VLTs at
casinos, riverboats, racetracks and/or other licensed facilities. Although some
states, such as Rhode Island and West Virginia, currently restrict VGMs or VLTs
to already existing wagering facilities, others permit these devices to be
placed at bars and restaurants as well. Several Indian tribes throughout the
United States are also authorized to operate these devices on reservation lands.
In addition, several Canadian provinces and various foreign countries have
authorized their use.
Government officials in other states are considering proposals to legalize
or expand video gaming, or video lottery in their states. Legislators have been
enthusiastic about the potential of video gaming to raise significant additional
revenues. Some officials, however, are reluctant to expand gaming industry
opportunities or have expressed a desire to limit video gaming to established
wagering facilities if video gaming is authorized in their jurisdiction at all.
Companies that manufacture, sell or distribute VGMs or VLTs are subject to
various provincial, state, county and municipal laws and regulations. The
primary purposes of these rules are (i) to insure the responsibility, financial
stability and character of equipment manufacturers and their key personnel and
stockholders through licensing requirements, (ii) to insure the integrity and
randomness of the machines, and (iii) to prohibit the use of VGMs or VLTs at
unauthorized locations or for the benefit of undesirable individuals or
entities. The regulations governing VGMs and VLTs generally resemble the
pari-mutuel and sports wagering regulations in all the basic elements described
above.
However, every jurisdiction has differing terminal design and operational
requirements, and terminals generally must be certified by local regulatory
authorities before being distributed in any particular jurisdiction. These
requirements may require the Company or its subsidiaries to modify its terminals
to some degree in order to achieve certification in particular locales. In
addition, the intrastate movement of such devices in a jurisdiction where they
will be used by the general public is usually allowed only upon prior
notification and/or approval of the relevant regulatory authorities.
West Virginia has licensed the Company or its subsidiaries to supply VLTs
to authorized locations in that state. The Manitoba Gaming Control Commission of
Manitoba, Canada has granted an interim registration to one of the subsidiaries
of the Company as a gaming related supplier to the Manitoba Lotteries
Corporation. The Company is in compliance with the terms and conditions of the
Interim registration.
The Company may apply for all necessary licenses in other jurisdictions
that may now or in the future authorize video gaming or video lottery
operations. The Company cannot predict the nature of the regulatory schemes or
the terminal requirements that will be adopted in any of these jurisdictions,
nor whether the Company or any subsidiaries can obtain any required licenses and
equipment certifications or will be found suitable.
Federal law also affects the Company's video gaming industry activities.
The Federal Gambling Devices Act of 1962 (the "Devices Act") makes it unlawful
for any person to manufacture, deliver or receive gambling devices, including
VGMs and VLTs, across interstate lines unless that person has first registered
with the Attorney General of the United States, or to transport such devices
into jurisdictions where their possession is not specifically authorized
12
by state law. The Devices Act permits states to exempt themselves from its
prohibition on transportation, and several states that authorize the manufacture
or use of such devices within their jurisdictions have done so. Certain of the
Company's products, such as the PROBE(R) XLC terminal, are gaming devices
subject to the Devices Act and state laws governing such devices. The Devices
Act does not apply to machines designed for pari-mutuel betting at a racetrack,
such as the Company's pari-mutuel wagering terminals. The Company has registered
under the Devices Act, and believes that it is substantially in compliance with
all of the Devices Act's record-keeping and equipment identification
requirements.
Lottery Operations
At the present time, 37 states, the District of Columbia, Puerto Rico, all
the Canadian provinces, Mexico and many other foreign countries authorize
lotteries. Once authorized, the award of lottery contracts and ongoing operation
of lotteries in the United States is highly regulated. Although certain of the
features of a lottery, such as the percentage of gross revenues which must be
paid back to players in prize money, are usually established by legislation, the
lottery authorities generally exercise significant authority, including the
determination of the types of games played, the price of each wager, the manner
in which the lottery is marketed and the selection of the vendors of equipment
and services.
To ensure the integrity of the contract award and wagering process, most
jurisdictions require detailed background disclosure on a continuous basis from,
and conduct background investigations of, the vendor, its subsidiaries and
affiliates and its principal shareholders. Background investigations of the
vendor's employees who will be directly responsible for the operation of the
system are also generally conducted, and most states reserve the right to
require the removal of employees whom they deem to be unsuitable or whose
presence they believe may adversely affect the operational security or integrity
of the lottery. Certain jurisdictions also require extensive personal and
financial disclosure and background checks from persons and entities
beneficially owning a specified percentage (typically five percent or more) of
the Company's securities. The failure of such beneficial owners to submit to
such background checks and provide such disclosure could result in the
imposition of penalties upon such beneficial owners and could jeopardize the
award of a lottery contract to the Company or provide grounds for termination of
an existing lottery contract.
The international jurisdictions in which the Company markets its lottery
systems also usually have legislation and regulations governing lottery
operations. The regulation of lotteries in these international jurisdictions
typically varies from the regulation of lotteries in the United States. In
addition, restrictions are often imposed on foreign corporations seeking to do
business in such jurisdictions. United States and international regulations
affecting lotteries are subject to change. The Company cannot predict with
certainty the impact on its business of changes in regulations.
Simulcasting
The Federal Communications Commission (the "FCC") regulates the use and
transfer of earth station licenses used to operate the Company's simulcasting
operations.
At present, 43 states, Puerto Rico, all of the Canadian provinces, Mexico
and many other foreign countries authorize inter-state and/or intra-state
pari-mutuel wagering, which may involve the simulcasting of such races.
Licensing and other regulatory requirements associated with such simulcasting
activities are similar to those governing pari-mutuel wagering, and are
generally enforced by pari-mutuel regulators. In addition, contracts with host
tracks whose races are simulcast by the Company or its subsidiaries to other
facilities within or outside the jurisdictions in which such races are held may
be subject to approval by regulatory authorities in the jurisdictions from
and/or to which the races are simulcast. The Company believes that it and/or its
subsidiaries are in substantial compliance with applicable regulations and that
the Company, its subsidiaries, and/or the appropriate third parties have entered
into contracts and obtained the necessary regulatory approvals to lawfully
conduct current simulcast operations.
13
Nevada Regulatory Matters
The Company and certain of its wholly owned subsidiaries are applicants or
will be applicants for certain registrations, approvals, findings of suitability
and licenses in the State of Nevada (collectively, the "Applications"). There
can be no assurances that the pending Applications of the Company and the Nevada
Operating Subsidiaries will be approved or that if approved, they will be
approved on a timely basis or without conditions or limitations.
The manufacture, sale and distribution of gaming devices for use or play in
Nevada or for distribution outside of Nevada, the manufacture and distribution
of associated equipment for use in Nevada, the operation of an off-track
pari-mutuel wagering system in Nevada, the operation an off-track pari-mutuel
sports wagering system in Nevada and the operation of slot machine routes in
Nevada are subject to: (i) The Nevada Gaming Control Act and the regulations
promulgated thereunder (collectively, "Nevada Act"); and (ii) various local
ordinances and regulations. Such activities are subject to the licensing and
regulatory control of the Nevada Gaming Commission ("Nevada Commission"), the
Nevada State Gaming Control Board ("Nevada Board"), and various local, city and
county regulatory agencies (collectively referred to as the "Nevada Gaming
Authorities").
The laws, regulations and supervisory procedures of the Nevada Gaming
Authorities are based upon declarations of public policy which are concerned
with, among other things: (i) the prevention of unsavory or unsuitable persons
from having a direct or indirect involvement with gaming, or manufacturing or
distribution of gaming devices at any time or in any capacity; (ii) the strict
regulation of all persons, locations, practices, associations and activities
related to the operation of licensed gaming establishments and the manufacture
or distribution of gaming devices and equipment; (iii) the establishment and
maintenance of responsible accounting practices and procedures; (iv) the
maintenance of effective controls over the financial practices of licensees,
including the establishment of minimum procedures for internal fiscal affairs
and the safeguarding of assets and revenues, providing reliable record keeping
and requiring the filing of periodic reports with the Nevada Gaming Authorities;
(v) the prevention of cheating and fraudulent practices; and (vi) to provide a
source of state and local revenues through taxation and licensing fees. Changes
in such laws, regulations and procedures could have an adverse effect on the
Company's various Applications in the event they are granted. No assurances can
be given that the Applications will be granted by the Nevada Gaming Authorities.
The grant or denial of the Applications is within the discretion of the Nevada
Gaming Authorities.
The Company is an applicant for registration by the Nevada Commission as a
publicly traded corporation (a "Registered Corporation") and is or will be an
applicant to be found suitable to own the stock, both directly and indirectly of
various wholly owned subsidiaries which are or will be applicants for approvals
and licensing as a manufacturer, distributor an operator of a slot machine
route, an operator of an off-track pari-mutuel wagering system and an operator
of an off-track pari-mutuel sports wagering system (the "Nevada Operating
Subsidiaries"). As a Registered Corporation, the Company will be required
periodically to submit detailed financial and operating reports to the Nevada
Commission and furnish any other information that the Nevada Commission may
require. No person may become a stockholder of, or receive any percentage of
profits from, the Nevada Operating Subsidiaries without first obtaining licenses
and approvals from the Nevada Gaming Authorities. The Company and the Nevada
Operating Subsidiaries have or will apply to the Nevada Gaming Authorities for
the various registrations, approvals, permits, findings of suitability and
licenses (collectively "Gaming Licenses") in order to engage in manufacturing,
distribution, slot route activities, and off-track pari-mutuel wagering systems
operations in Nevada. The following regulatory requirements will apply to the
Company and its Nevada Operating Subsidiaries if they are approved and licensed.
All gaming devices and cashless wagering systems that are manufactured, sold or
distributed for use or play in Nevada, or for distribution outside of Nevada,
must be manufactured by licensed manufacturers and distributed or sold by
licensed distributors. All gaming devices manufactured for use or play in Nevada
must be approved by the Nevada Commission before distribution or exposure for
play. The approval process for gaming devices includes rigorous testing by the
Nevada Board, a field trial and a determination as to whether the gaming device
meets strict technical standards that are set forth in the regulations of the
Nevada Commission. Associated equipment must be administratively approved by the
Chairman of the Nevada Board before it is distributed for use in Nevada.
14
The Nevada Gaming Authorities may investigate any individual who has a
material relationship to, or material involvement with, the Company or the
Nevada Operating Subsidiaries in order to determine whether such individual is
suitable or should be licensed as a business associate of a gaming licensee.
Officers, directors and certain key employees of the Nevada Operating
Subsidiaries are required to file applications with the Nevada Gaming
Authorities and may be required to be licensed or found suitable by the Nevada
Gaming Authorities. Officers, directors and key employees of the Company who are
actively and directly involved in the licensed activities of the Nevada
Operating Subsidiaries may be required to be licensed or found suitable by the
Nevada Gaming Authorities. The Nevada Gaming Authorities may deny an application
for licensing for any cause that they deem reasonable. A finding of suitability
is comparable to licensing, and both require submission of detailed personal and
financial information followed by a thorough investigation. The applicant for
licensing or a finding of suitability must pay all the costs of the
investigation. Changes in licensed positions must be reported to the Nevada
Gaming Authorities and in addition to their authority to deny an application for
a finding of suitability or licensure, the Nevada Gaming Authorities have
jurisdiction to disapprove a change in a corporate position.
If the Nevada Gaming Authorities were to find an officer, director or key
employee unsuitable for licensing or unsuitable to continue having a
relationship with the Company, the Nevada Operating Subsidiaries, the companies
involved would have to sever all relationships with such person. In addition,
the Nevada Commission may require the Company and the Nevada Operating
Subsidiaries to terminate the employment of any person who refuses to file
appropriate applications. Determination of suitability or of questions
pertaining to licensing are not subject to judicial review in Nevada.
The Company and the Nevada Operating Subsidiaries will be required to
submit detailed financial and operating reports to the Nevada Commission.
Substantially all material loans, leases, sales of securities and similar
financing transactions by the Nevada Operating Subsidiaries will be required to
be reported to or approved by the Nevada Commission. If it were determined that
the Nevada Act was violated by the Company or any of the Nevada Operating
Subsidiaries, the licenses they hold could be limited, conditioned, suspended or
revoked, subject to compliance with certain statutory and regulatory procedures.
In addition, any of the Nevada Operating Subsidiaries, the Company and the
persons involved could be subject to substantial fines for each separate
violation of the Nevada Act at the discretion of the Nevada Commission.
Limitation, conditioning or suspension of the licenses held by the Company and
the Nevada Operating Subsidiaries could (and revocation of any license would)
materially adversely affect the Company's manufacturing, distribution and system
operations in Nevada.
Any beneficial holder of the Company's voting securities, regardless of the
number of shares owned, may be required to file an application, be investigated,
and have his suitability determined as a beneficial holder of the Company's
voting securities if the Nevada Commission has reason to believe that such
ownership would otherwise be inconsistent with the declared policies of the
state of Nevada. The applicant must pay all costs of investigation incurred by
the Nevada Gaming Authorities in conducting any such investigation. The Nevada
Act requires any person who acquires beneficial ownership of more than 5% of a
Registered Corporation's voting securities to report the acquisition to the
Nevada Commission. The Nevada Act requires that beneficial owners of more than
10% of a Registered Corporation's voting securities apply to the Nevada
Commission for a finding of suitability within thirty days after the Chairman of
the Nevada Board mails the written notice requiring such filing. Under certain
circumstances, an "institutional investor," as defined in the Nevada Act, which
acquires more than 10%, but not more than 15%, of the Registered Corporation's
voting securities may apply to the Nevada Commission for a waiver of such
finding of suitability if such institutional investor holds the voting
securities for investment purposes only. An institutional investor shall not be
deemed to hold voting securities for investment purposes unless the voting
securities were acquired and are held in the ordinary course of business as an
institutional investor and not for the purpose of causing, directly or
indirectly, the election of a majority of the members of the board of directors
of the Registered Corporation, any change in the Registered Corporation's
corporate charter, bylaws, management, policies or operations of the Registered
Corporation, or any of its gaming affiliates, or any other action which the
Nevada Commission finds to be inconsistent with holding the Registered
Corporation's voting securities for investment purposes only. Activities which
are not deemed to be inconsistent with holding voting securities for investment
purposes only include: (i) voting on all matters voted on by stockholders; (ii)
making financial and other inquiries of management of the type normally made by
securities analysts for informational purposes and not to cause a change in its
management, policies or operations; and (iii) such other activities as the
Nevada Commission may determine to
15
be consistent with such investment intent. If the beneficial holder of voting
securities who must be found suitable is a corporation, partnership or trust, it
must submit detailed business and financial information including a list of
beneficial owners. The applicant is required to pay all costs of investigation.
Any person who fails or refuses to apply for a finding of suitability or a
license within thirty days after being ordered to do so by the Nevada Commission
or the Chairman of the Nevada Board, may be found unsuitable. The same
restrictions apply to a record owner if the record owner, after request, fails
to identify the beneficial owner. Any stockholder found unsuitable and who
holds, directly or indirectly, any beneficial ownership of the common stock
beyond such period of time as may be prescribed by the Nevada Commission may be
guilty of a criminal offense. The Company will be subject to disciplinary action
if, after it receives notice that a person is unsuitable to be a stockholder or
to have any other relationship with the Company, the Nevada Operating
Subsidiaries or the Company (i) pays that person any dividend or interest upon
voting securities of the Company, (ii) allows that person to exercise, directly
or indirectly, any voting right conferred through securities held by that
person, (iii) pays remuneration in any form to that person for services rendered
or otherwise, or (iv) fails to pursue all lawful efforts to require such
unsuitable person to relinquish his voting securities including, if necessary,
the immediate purchase of said voting securities for cash at fair market value.
The Nevada Commission may, in its discretion, require the holder of any
debt security of a Registered Corporation to file applications, be investigated
and be found suitable to own the debt security of a Registered Corporation if
the Nevada Commission has reason to believe that his acquisition of such debt
security would otherwise be inconsistent with the declared policy of the State
of Nevada. If the Nevada Commission determines that a person is unsuitable to
own such security, then pursuant to the Nevada Act, the Registered Corporation
can be sanctioned, including the loss of its approvals, if without the prior
approval of the Nevada Commission, it: (i) pays to the unsuitable person any
dividend, interest, or any distribution whatsoever; (ii) recognizes any voting
right by such unsuitable person in connection with such securities; (iii) pays
the unsuitable person remuneration in any form; or (iv) makes any payment to the
unsuitable person by way of principal, redemption, conversion, exchange,
liquidation, or similar transaction.
The Company and the Nevada Operating Subsidiaries will be required to
maintain a current stock ledger in Nevada, which may be examined by the Nevada
Gaming Authorities at any time. If any securities are held in trust by an agent
or by a nominee, the record holder may be required to disclose the identity of
the beneficial owner to the Nevada Gaming Authorities. A failure to make such
disclosure may be grounds for finding the record holder unsuitable. The Company
is also required to render maximum assistance in determining the identity of the
beneficial owner. The Nevada Commission has the power to require the stock
certificates of the Company to bear a legend indicating that the securities are
subject to the Nevada Act.
After becoming a Registered Corporation, the Company may not make a public
offering of its securities without the prior approval of the Nevada Commission
if the securities or proceeds therefrom are intended to be used to construct,
acquire or finance gaming facilities in Nevada, or to retire or extend
obligations incurred for such purposes. Such approval, if given, does not
constitute a finding, recommendation or approval by the Nevada Commission or the
Nevada Board as to the accuracy or adequacy of the prospectus or the investment
merits of the securities offered. Any representation to the contrary is
unlawful. Changes in control of a Registered Corporation through merger,
consolidation, stock or asset acquisitions, management or consulting agreements,
or any act or conduct by a person whereby he obtains control, may not occur
without the prior approval of the Nevada Commission. Entities seeking to acquire
control of a Registered Corporation must satisfy the Nevada Board and the Nevada
Commission in a variety of stringent standards prior to assuming control of such
Registered Corporation. The Nevada Commission may also require controlling
stockholders, officers, directors and other persons having a material
relationship or involvement with the entity proposing to acquire control, to be
investigated and licensed as part of the approval process relating to the
transaction.
The Nevada Legislature has declared that some corporate acquisitions
opposed by management, repurchases of voting securities and corporate defense
tactics affecting Nevada corporate gaming licensees, and Registered Corporations
that are affiliated with those operations, may be injurious to stable and
productive corporate gaming. The Nevada Commission has established a regulatory
scheme to ameliorate the potentially adverse effects of these
16
business practices upon Nevada's gaming industry and to further Nevada's policy
to: (i) assure the financial stability of corporate gaming licensees and their
affiliates; (ii) preserve the beneficial aspects of conducting business in the
corporate form; and (iii) promote a neutral environment for the orderly
governance of corporate affairs. Approvals are, in certain circumstances,
required from the Nevada Commission before the Registered Corporation can make
exceptional repurchases of voting securities above the current market price
thereof and before a corporate acquisition opposed by management can be
consummated. The Nevada Act also requires prior approval of a plan of
recapitalization proposed by the Registered Corporation's Board of Directors in
response to a tender offer made directly to the Registered Corporation's
stockholders for the purposes of acquiring control of the Registered
Corporation.
License fees and taxes, computed in various ways depending on the type of
gaming or activity involved, are payable to the State of Nevada and to the
counties and cities in which gaming operations are to be conducted. Depending
upon the particular fee or tax involved, these fees and taxes are payable either
monthly, quarterly or annually and are based upon either: (i) a percentage of
the gross revenues received; or (ii) the number of gaming devices operated.
Annual fees are also payable to the State of Nevada for renewal of licenses as a
manufacturer, distributor, operator of a slot machine route and operator of an
off-track pari-mutuel wagering system.
Any person who is licensed, required to be licensed, registered, required
to be registered, or is under common control with such persons (collectively,
"Licensees"), and who proposes to become involved in a gaming venture outside of
Nevada, is required to deposit with the Nevada Board, and thereafter maintain, a
revolving fund in the amount of $10,000 to pay the expenses of investigation by
the Nevada Board of their participation in such foreign gaming. The revolving
fund is subject to increase or decrease in the discretion of the Nevada
Commission. Thereafter, Licensees are required to comply with certain reporting
requirements imposed by the Nevada Act. Licensees are also subject to
disciplinary action by the Nevada Commission if it knowingly violates any laws
of the foreign jurisdiction pertaining to the foreign gaming operation, fails to
conduct the foreign gaming operation in accordance with the standards of honesty
and integrity required of Nevada gaming operations, engages in activities that
are harmful to the state of Nevada or its ability to collect gaming taxes and
fees, or employs a person in the foreign operation who has been denied a license
or finding of suitability in Nevada on the ground of personal unsuitability.
Application of Additional or Future Regulatory Requirements
In the future, the Company intends to seek the necessary licenses,
approvals and findings of suitability for the Company, its personnel and
products in other jurisdictions throughout the world wherever significant sales
are anticipated to be made. There can be no assurance, however, that such
licenses, approvals or findings of suitability will be obtained or, if obtained,
will not be conditioned, suspended or revoked or that the Company will be able
to obtain the necessary approvals for its future products as they are developed.
If a license, approval or a finding of suitability is required by a regulatory
authority and the Company fails to obtain the necessary license, the Company may
be prohibited from selling its products for use in the respective jurisdiction
or may be required to sell its products through other licensed entities at a
reduced profit to the Company.
Employees
As of October 31, 1998, the Company employed approximately 980 persons. Of
this total, approximately 595 persons were engaged in full-time field
operations, 205 in part-time tellering/cashiering, approximately 50 in
engineering and software product development, approximately 30 in marketing and
approximately 100 in financial, administration and other positions. Most of the
North American pari-mutuel employees of the Company involved in field operations
and repairs are represented by the International Brotherhood of Electrical
Workers under two separate contracts which have been renewed through May 2000
and October 2001. The Company considers its employee relations to be
satisfactory.
17
Executive Officers of the Company
Certain information concerning the executive officers of the Company as of
January 22, 1999 is set forth below:
Name Age Position
A. Lorne Weil...................... 52 Chairman of the Board, President and Chief Executive Officer
DeWayne E. Laird................... 50 Vice President and Chief Financial Officer
Gerald Lawrence.................... 59 Executive Vice President
Martin E. Schloss.................. 52 Vice President, General Counsel and Secretary
Executive Officers of the Company hold office for an indefinite term,
subject to the discretion of the Board of Directors of the Company.
Mr. A. Lorne Weil has been a director of the Company since December 1989,
Chairman of the Board since October 31, 1991, Chief Executive Officer of the
Company since April 1992 and President of the Company since August 1997. Mr.
Weil held various senior management positions with the Company and its
subsidiaries from October 1990 to April 1992 and was a director and consultant
to Autotote Systems, Incorporated from 1982 until it was acquired by the Company
in 1989. Mr. Weil was the President of Lorne Weil, Inc., a firm providing
strategic planning and corporate development services to high technology
industries, from November 1979 to November 1992. Mr. Weil is currently a
director of Fruit of the Loom, Inc. and General Growth Properties, Inc.
Mr. DeWayne E. Laird has been Vice President and Chief Financial Officer of
the Company since November 1998 and Corporate Controller of the Company since
April 1996. From January 1992 to March 1996, Mr. Laird was President of Laird
Associates, PC, a CPA firm providing financial consulting services to the water
utility industry. From April 1984 to December 1991, he held various senior
positions with Philadelphia Suburban Corporation, including Chief Financial
Officer and Treasurer.
Mr. Gerald Lawrence has been Executive Vice President of the Company and
interim President of Autotote Enterprises, Inc., a division of the Company,
since June 1998. Mr. Lawrence served as President of the Company's pari-mutuel
division, Autotote Systems, Inc., from March 1996 to June 1998 and as Vice
President of the Company from November 1994 to June 1998. From January 1991 to
August 1994, he held the position of Executive Vice President of The New York
Racing Association, Inc. From November 1984 through December 1990, he served as
Executive Vice President and Chief Operating Officer of Churchill Downs
Incorporated.
Mr. Martin E. Schloss has been Vice President and General Counsel of the
Company since December 1992 and Secretary since May 1995. Mr. Schloss provided
consulting services to the Company from July 1992 until he became employed by
the Company in September 1992. From 1976 to 1992, Mr. Schloss served in various
positions in the legal department of General Instrument Corporation, with the
exception of a hiatus of approximately one and one-half years.
Mr. William Luke served as Vice President and Chief Financial Officer of
the Company from February 1996 through fiscal 1998, and resigned the aforesaid
positions in November 1998. Mr. DeWayne E. Laid assumed the positions of Vice
President and Chief Financial Officer of the Company coincident with Mr. Luke's
resignation (see above).
18
ITEM 2. PROPERTIES
The Company conducts its business principally from the following leased and
owned facilities:
Leased Facilities:
Location Segment Purpose Square feet
- -------- ------- ------- -----------
New York, NY corporate headquarters 12,000
Ballymahon, Ireland manufacturing 10,000
Newark, DE pari-mutuel administration and R&D 40,000
Gelsenkirchen,
Germany pari-mutuel operations 2,000
Englewood, NJ pari-mutuel operations and warehousing 3,000
various cities, CT pari-mutuel OTB facilities 44,000
New Haven, CT pari-mutuel OTB administration 2,000
Valencia, CA pari-mutuel administration and operations 6,688
Rocky Hill, CT lottery administration and operations 16,000
The Company also leases a total of 28,500 of warehouse space in Newark, DE
and New Haven, CT.
Owned Facilities:
Location Segment Purpose Square feet
- -------- ------- ------- -----------
Cedex, France pari-mutuel administration and operations 10,000
Windsor Locks, CT pari-mutuel OTB wagering facility 39,000
New Haven, CT pari-mutuel OTB administration, operations
and wagering facility 55,000
The Company believes that its present facilities are adequate for its
reasonably foreseeable needs.
ITEM 3. LEGAL PROCEEDINGS
Although the Company is a party to various claims and legal actions arising
in the ordinary course of business, management believes, on the basis of
information presently available to it, that the ultimate disposition of these
matters will not likely have a material adverse effect on the financial position
or results of operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of fiscal 1998.
19
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's Class A Common Stock is traded under the symbol "TTE" on the
American Stock Exchange. The following table sets forth, for the periods
indicated, the range of high and low closing prices of the Company's Class A
Common Stock.
Fiscal 1997 Fiscal 1998
------------------ -----------------
High Low High Low
------------------ -----------------
First Quarter ................. $1.75 1.06 3.00 1.88
Second Quarter ................ 1.50 1.00 2.81 2.25
Third Quarter ................. 2.06 1.06 2.94 2.38
Fourth Quarter ................ 3.13 1.63 2.56 1.25
On January 22, 1999, the last reported sales price for the Class A Common
Stock on the American Stock Exchange was $2.13 per share. The approximate number
of holders of record of the Class A Common Stock as of January 22, 1999 was
2,121.
The Company has never paid any cash dividends on its Class A Common Stock.
The Board presently intends to retain all earnings, if any, for use in the
Company's business. Any future determination as to payment of dividends will
depend upon the financial condition and results of operations of the Company and
such other factors as are deemed relevant by the Board. Further, under the terms
of the Indenture governing the Company's 10 7/8% Senior Notes due 2004, the
Company and its Restricted Subsidiaries are not permitted to pay any cash
dividends or make certain other restricted payments (other than stock dividends)
on its Class A Common Stock.
Recent Sales of Unregistered Securities; Uses of Proceeds From Registered
Securities
During fiscal 1998, warrants to purchase an aggregate of 466,667
unregistered shares (the "Shares") of the Company's Class A Common Stock were
exercised at the aggregate price of $0.6 million. The warrants, which were
scheduled to expire in April 1998, were issued by the Company in January 1996 to
various banks that were party to the Company's prior senior bank credit
facility, in connection with the Company entering into an amendment to such
facility as of January 26, 1996. The Shares were issued by the Company in
reliance upon the exemption from registration provided for under Section 4(2) of
the Securities Act of 1933, as amended.
In addition, in fiscal 1998, the Company repurchased warrants to purchase
an aggregate of 58,338 Shares at a cost of approximately $0.1 million (see Note
11 to Consolidated Financial Statements).
20
ITEM 6. SELECTED FINANCIAL DATA
Selected historical financial data presented below as of and for the five
years ended October 31, 1998 have been derived from the audited consolidated
financial statements of the Company, which financial statements have been
audited by KPMG LLP, independent certified public accountants. The following
financial information reflects the acquisitions and dispositions of certain
businesses during the period 1994 through 1998 and should be read in conjunction
with Item 7, Management's Discussion and Analysis of Financial Condition and
Results of Operations, and the Consolidated Financial Statements of the Company
and the notes thereto, included in Item 8.
FIVE YEAR SUMMARY OF SELECTED
FINANCIAL DATA
(in thousands, except per share amounts)
Year Ended October 31,
-----------------------------------------------------------------
1998 1997 1996 1995 1994
--------- ------- ------- ------- ------
Selected Statement of Operations Data:
Operating Revenues:
Services ................................................ $ 135,790 132,989 137,794 132,260 98,592
Sales ................................................... 23,523 24,343 38,441 20,924 50,458
--------- ------- ------- ------- ------
159,313 157,332 176,235 153,184 149,050
--------- ------- ------- ------- ------
Costs and Expenses:`
Cost of services ........................................ 88,916 80,496 86,674 78,569 61,158
Cost adjustments and strike expenses .................... -- -- -- -- 6,781
Cost of sales ........................................... 15,739 15,396 25,864 15,661 35,753
Selling, general & administrative ....................... 26,205 28,444 31,921 36,540 25,298
Restructuring and write-off of assets ................... -- -- (649) 18,241 8,576
Depreciation and amortization ........................... 29,489 36,728 40,853 35,463 25,418
Interest expense ........................................ 15,521 14,367 14,837 16,362 6,408
Other (income) expense .................................. (1,064) 79 560 (436) (952)
Litigation settlement ................................... -- -- 6,800 -- --
(Gain) loss on sale of businesses ....................... 66 (1,823) 1,127 -- --
--------- ------- ------- ------- ------
Total costs and expenses .................................. 174,872 173,687 207,987 200,400 168,440
--------- ------- ------- ------- ------
Loss before income tax expense
(benefit) and extraordinary item .......................... (15,559) (16,355) (31,752) (47,216) (19,390)
Income tax expense (benefit) ................................. 321 906 2,443 2,673 (1,462)
--------- ------- ------- ------- ------
Loss before extraordinary item ............................... (15,880) (17,261) (34,195) (49,889) (17,928)
Extraordinary item ........................................... -- (426) -- -- (4,222)
--------- ------- ------- ------- ------
Net loss ..................................................... $ (15,880) (17,687) (34,195) (49,889) (22,150)
========= ======= ======= ======= =======
Net loss per basic share and diluted share ................... $ (0.44) (0.51) (1.09) (1.72) (0.79)
========= ======= ======= ======= =======
Selected Balance Sheet Data (End of Period):
Total assets ................................................. $ 156,500 153,541 196,793 241,021 241,597
Total long-term debt, including current installments ......... $ 158,870 149,857 169,024 177,264 143,955
Stockholders' equity (deficit) ............................... $ (48,638) (33,240) (20,196) 11,857 55,721
Weighted average number of shares used in per share
calculation .................................................. 35,696 34,469 31,305 28,965 28,174
21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Background
The Company operates in two business segments, Pari-mutuel Operations and
Lottery Operations. Pari-mutuel Operations include the North American and
international on-track and OTB pari-mutuel operations, simulcasting services,
Connecticut OTB operations, video gaming and CBS (the Company's sports wagering
service business which was sold in October 1996). Lottery Operations include
both domestic and international lottery operations (including Tele Control, the
Company's European lottery business, which was sold in April 1997), as well as
systems and equipment sales.
The Company is the leading provider of computerized pari-mutuel wagering
systems to the North American Racing Industry and is also a leading provider of
such systems worldwide. The Company also owns and operates the Connecticut OTB,
is the exclusive licensed operator of Pari-mutuel wagering in the Netherlands
and is the leading provider of Racing Industry simulcasting services in the
United States. Additionally, the Company provides technologically advanced VGMs
to the North American Racing Industry for use at racetracks. The Company also
provides lottery systems and equipment in the United States and internationally.
Historically, the Company's revenues have been derived from two principal
sources: service revenues and sales revenues. Service revenues are earned
pursuant to multi-year contracts to provide wagering systems and other services,
which are typically based on a percentage of Handle and/or daily or monthly
fees; or are derived from wagering by customers at facilities owned by the
Company. Sales revenues are derived from sales contracts for wagering equipment,
services and software. The first quarter of the fiscal year and a portion of the
second fiscal quarter traditionally comprise the weakest season for wagering
service revenue. Wagering equipment sales revenues usually reflect a limited
number of large transactions which do not recur on an annual basis, but which
historically have given rise to additional terminal and systems software sales
to existing customers. Consequently, revenues and operating results can vary
substantially from period to period as a result of the timing of revenue
recognition for major equipment sales.
The Company's business strategy over the past several years has been to
refocus its activities on its core businesses, which generate recurring revenues
rather than one-time equipment sales, and to reduce its operating expenses.
Consistent with this strategy, the Company (i) in October 1996, sold its
casino/sports wagering business for approximately $3.0 million and (ii) in April
1997, sold its European lottery business for approximately $26.6 million. The
proceeds from the sales of these businesses were used to reduce the Company's
outstanding indebtedness.
The sales of the casino/sports wagering business and the European lottery
business described above, as well as the acquisitions of simulcasting operations
and the French pari-mutuel business in fiscal 1995 and the acquisitions of the
Dutch pari-mutuel business in fiscal 1998, which were accounted for as
purchases, affect the comparability of operations from period to period (see
Note 2 to Consolidated Financial Statements). In addition, one-time equipment
sales that can vary significantly from period to period can also significantly
affect the comparability of operations from year to year.
22
Results of Operations:
Years ended October 31,
----------------------------------------------
1998 1997 1996
-------- -------- --------
(in thousands)
Pari-mutuel Operations
Operating Revenues:
Service revenue ....................................................... $126,573 119,360 118,267
Sales revenue ......................................................... 14,693 14,866 10,172
-------- -------- --------
Total Revenue ...................................................... $141,266 134,226 128,439
======== ======== ========
Gross Profit (excluding depreciation and amortization) ................... $ 49,345 51,709 48,688
======== ======== ========
Lottery Operations
Operating Revenues:
Service revenue ....................................................... $ 9,217 13,629 19,527
Sales revenue ......................................................... 8,830 9,477 28,269
-------- -------- --------
Total Revenue ...................................................... $ 18,047 23,106 47,796
======== ======== ========
Gross Profit (excluding depreciation and amortization) ................... $ 5,313 9,731 15,009
======== ======== ========
Company Total
Operating Revenues:
Service revenue ....................................................... $135,790 132,989 137,794
Sales revenue ......................................................... 23,523 24,343 38,441
-------- -------- --------
Total Revenue ...................................................... $159,313 157,332 176,235
======== ======== ========
Gross Profit (excluding depreciation and amortization) ................... $ 54,658 61,440 63,697
======== ======== ========
Fiscal 1998 Compared to Fiscal 1997
Revenue Analysis
Revenues increased 1.3% or $2.0 million to $159.3 million in the fiscal
year ended October 31, 1998 ("fiscal 1998") from $157.3 million in the fiscal
year ended October 31, 1997 ("fiscal 1997").
Pari-mutuel Operations service revenues of $126.6 million for fiscal 1998
improved $7.2 million or 6.0% from $119.4 million in the prior year. This
improvement includes $4.8 million from the Company's Netherlands operations,
which were acquired in July 1998, and revenue increases of $3.8 million as a
result of growth in Handle in the Company's North American pari-mutuel and
Connecticut OTB operations and the start-up of the NASRIN(TM) business in
October 1998. The growth in Handle during fiscal 1998 compared to fiscal 1997 is
attributable to the addition of six new North American racetracks and OTB sites,
full card simulcasting at three North American racetrack customers, the increase
in the number of VGM machines, the expansion of OTB operations in Connecticut to
seven days a week in the first quarter of fiscal 1998, and the addition of the
new German simulcasting business. These increases were partially offset by lower
revenues in the North American simulcasting operations due to lower ad hoc sales
of satellite time following the reduction in number and realignment of leased
transponders due to the failure of the Galaxy IV satellite, and by the loss of a
service contract in the Company's French operations. Sales revenue, primarily
consisting of export sales, were $14.7 million in fiscal 1998, a decrease of
$0.2 million from $14.9 million in the prior year.
Lottery Operations service revenues decreased $4.4 million from $13.6
million in fiscal 1997 to $9.2 million in fiscal 1998, primarily because of the
sale of the European lottery business in April 1997. Sales revenues decreased
$0.7 million from $9.5 million in fiscal 1997 to $8.8 million in fiscal 1998.
This decrease is primarily attributable to the non-recurring sale of terminals
to the Israel lottery in fiscal 1997, partially offset by the sale in fiscal
1998 of terminals for use in Italy in the SISAL Sport Italia SpA lottery
operations.
23
Gross Profit Analysis
Total gross profits earned by the Company, exclusive of depreciation and
amortization, decreased $6.7 million, or 11%, to $54.7 million in fiscal 1998
from $61.4 million in fiscal 1997.
Gross profits earned by the Pari-mutuel Operations of $49.3 million in
fiscal 1998 decreased $2.4 million from $51.7 million in fiscal 1997,
principally due lower profit on the Company's French pari-mutuel operations,
primarily as a result of the loss of a operations service contract and the
resulting costs arising from the termination of 14 employees and the resizing of
the business to better serve the reduced French market. Also contributing was
the lost profits on sales of excess transponder time as a result of the decrease
in leased and available transponders following the failure of the Galaxy IV
satellite in May 1998. These decreases were partially offset by the improved
profitability at the North American pari-mutuel and OTB business units.
Gross profits earned by the Lottery Operations totaled $5.3 million for
fiscal 1998, a decrease of $4.4 million from $9.7 million in fiscal 1997. This
decline is attributable to a $3.3 million decline in European lottery gross
profits due to the sale of the business unit in April 1997, coupled with lower
domestic lottery margins as the result of the installation of the new
Connecticut lottery terminals and lower margins on equipment sales, reflecting a
change in the mix of products sold in each period.
Total gross profits on equipment sales were 33% for fiscal 1998, compared
to gross profits on such sales of 37% in fiscal 1997. The decrease is due to the
sale of the European lottery business in 1997, coupled with the lower margins on
fiscal 1998 equipment sales reflecting the change in mix of products sold in
each period. Gross profits on services were approximately 35% for fiscal 1998,
or 4% below margins earned in fiscal 1997, reflecting lower margins on the
recently acquired business in the Netherlands, higher transponder lease costs in
simulcasting, lower margins in the European pari-mutuel operations as a result
of efforts to start-up and expand business opportunities, extra costs incurred
in connection with the Connecticut lottery installation, and start-up costs for
the NASRIN(TM) business.
Expense Analysis
Selling, general and administrative expenses decreased $2.2 million or 8%
to $26.2 million in fiscal 1998 from $28.4 million in fiscal 1997, partially
reflecting the absence of expenses for businesses sold in fiscal 1997. Excluding
businesses sold, selling, general and administrative expenses decreased 6% or
$1.8 million as a result of lower bad debt and legal expenses arising from the
collection of receivables previously reserved as doubtful due to concerns about
their recoverability, and cost savings programs in Europe. Partially offsetting
these decreases are the added expenses of the recently acquired Netherlands
operations and the expense of completing the test phase and initial rollout of
the NASRIN(TM) communication network.
Depreciation and amortization expenses decreased $7.2 million or 20% to
$29.5 million in fiscal 1998 compared to $36.7 million in fiscal 1997.
Approximately $3.0 million of the decrease is attributable to the absence of
expenses related to the businesses sold in fiscal 1997. Excluding businesses
sold, depreciation and amortization expenses decreased $4.2 million or 11% as a
result of the full amortization of certain intangible assets and lower
depreciation on North American pari-mutuel assets and lottery assets in fiscal
1998. These decreases were partially offset by the accelerated amortization of
deferred transponder costs as a result of the Galaxy satellite failure and
accelerated amortization of goodwill in the French operations resulting from the
loss of a major service contract. Due to the large number of service contract
renewals in fiscal 1998 and the realized durability of the equipment, the
Company is lengthening the depreciable lives of its pari-mutuel terminals from
seven to ten years in future reporting periods. Additionally, in fiscal 1998,
the Company completed the installation of new lottery terminals for the
Connecticut State Lottery under a contract with an initial five-year term plus
five one-year options to extend the contract through May 2008. Based on industry
practice of lottery contracts and the Company's historical relationship with the
Connecticut State Lottery for the past ten years, the Company expects to
depreciate the terminals and installation costs on a straight-line method over
their estimated useful lives of 10 years.
24
Interest expense was $15.5 million in fiscal 1998, compared to $14.4
million in fiscal 1997. The $1.1 million increase reflects higher borrowing
levels to finance the installation of the new Connecticut lottery terminals and
higher interest rates.
Income Taxes
Income tax expense was $0.3 million in fisca1 1998 compared to $0.9 million
in fiscal 1997. Income tax expense principally reflects foreign tax expense,
since no U.S. Federal tax benefit has been recognized on domestic operating
losses. The decrease in income tax expense principally reflects the sale of the
European lottery business.
Fiscal 1997 Compared to Fiscal 1996
Revenue Analysis
Revenues decreased 10.7% or $18.9 million to $157.3 million in fiscal 1997
from $176.2 million in the fiscal year ended October 31, 1996 ("fiscal 1996").
Pari-mutuel Operations service revenues of $119.4 million for fiscal 1997
improved $1.1 million or 1% from $118.3 million in the prior year. This
improvement reflects revenue increases of $4.6 million as a result of growth in
Handle in the Company's North American pari-mutuel and Connecticut OTB
operations, and the addition of new customers in the simulcasting business.
These increases were partially offset by the absence of $2.4 million in revenue
provided in fiscal 1996 by the casino/sports wagering business which was sold in
October 1996 and a loss of $1.5 million in sales of excess transponder time due
to the unanticipated shutdown of one of the satellites leased by the Company.
The growth in Handle during fiscal 1997 compared to fiscal 1996 is attributable
to the addition of six new North American racetrack and OTB sites, full card
simulcasting at three North American racetrack customers, the increase in the
number of VGM machines, and the expansion of OTB operations in Connecticut to
seven days a week in the first quarter of fiscal 1997. Sales revenue in fiscal
1997 of $14.9 million increased $4.7 million from $10.2 million in the prior
year, due to a $5.5 million export sale of a totalisator system to the Jockey
Club of Peru.
Lottery Operations service revenues decreased $5.9 million to $13.6 million
in fiscal 1997 from $19.5 million in fiscal 1996 primarily because of the sale
of the European lottery business in April 1997. Sales revenues decreased
significantly in fiscal 1997 to $9.5 million from $28.3 million in fiscal 1996.
This decrease is primarily attributable to the absence of fiscal 1996 sales of
systems by the European lottery business to several German lottery contract
sites and the absence of sales of terminals and parts for use in the SISAL Sport
Italia SpA lottery operations, partially offset by the fiscal 1997 sales of
approximately 450 terminals to the Israel lottery.
Gross Profit Analysis
Gross profits earned by the Pari-mutuel Operations of $51.7 million in
fiscal 1997 increased $3.0 million from $48.7 million in fiscal 1996,
principally due to increased North American pari-mutuel revenues and improved
simulcasting margins resulting from lower equipment costs. These increases were
partially offset by $0.4 million lower margins from the loss of sales of excess
transponder time, the absence of margin provided in the prior year by the
casino/sports wagering business which was sold in October 1996, and lower profit
on the Company's European pari-mutuel operations as the result of the
strengthening of the U.S. dollar early in the year.
Gross profits earned by the Lottery Operations totaled $9.7 million for
fiscal 1997, a decrease of $5.3 million from the fiscal 1996 level of $15.0
million. This decline is attributable to the non-recurring delivery of computer
systems to the German Lottery in fiscal 1996, coupled with lower European
lottery service revenues due to the sale of the business unit in April 1997 and
a decrease in the number of terminals delivered to Italy's TOTIP pari-mutuel
lottery. Partly offsetting these declines were margins earned on equipment
delivered to the Company's customer in Israel.
Total gross profits on equipment sales were 37% for fiscal 1997, compared
to gross profits on such sales of 33% in fiscal 1996 as a result of a change in
product mix. Gross profits on services were approximately 40% for
25
fiscal 1997, a 2% improvement over margins earned in fiscal 1996, reflecting
higher revenues and improved operating efficiencies in the North American
pari-mutuel, OTB and simulcasting operations.
Expense Analysis
Selling, general and administrative expenses decreased $3.5 million or 11%
to $28.4 million in fiscal 1997 from $31.9 million in fiscal 1996, primarily
reflecting the absence of expenses for businesses sold in fiscal years 1996 and
1997. Excluding businesses sold, selling general and administrative expenses
increased $0.3 million, reflecting higher compensation costs, partially offset
by lower litigation expenses.
Depreciation and amortization expenses decreased $4.1 million or 10% to
$36.7 million in fiscal 1997 from $40.9 million in fiscal 1996. The decrease
resulted primarily from the absence of expenses related to the businesses sold
in fiscal 1996 and fiscal 1997. Excluding businesses sold, depreciation and
amortization expenses decreased $1.3 million or 4% as a result of the
non-recurring effect of depreciation on certain assets in fiscal 1996, partially
offset by higher depreciation on fiscal 1996 and fiscal 1997 capital additions
for North America's pari-mutuel and video gaming operations.
Interest expense was $14.4 million in fiscal 1997, compared to $14.8
million in fiscal 1996. The $0.4 million decrease reflects lower borrowing
levels as a result of asset sales, partially offset by higher interest rates.
Income Taxes
Income tax expense was $0.9 million in fisca1 1997 compared to $2.4 million
in fiscal 1996. Income tax expense principally reflects foreign tax expense,
since no U.S. Federal tax benefit has been recognized on domestic operating
losses. The decrease in income tax expense principally reflects the sale of the
European lottery business.
Liquidity and Capital Resources
On May 22, 1998, Company and Autotote Lottery Corporation entered into a
$12.0 million, three-year term loan arrangement (the "Term Loan") to finance the
development and installation of the lottery system for the Connecticut State
Lottery, including the manufacture of approximately three thousand new lottery
terminals. The Term Loan bears interest at a fixed rate of 8.87% payable
quarterly and at maturity on February 15, 2001, with principal payments of $0.6
million due quarterly through January 31, 2001 with a final principal payment of
$6.0 million due at maturity. In addition to scheduled principal payments, the
Term Loan requires mandatory principal prepayments upon the occurrence of
certain events, including asset sales, the incurrence of certain indebtedness,
Recovery Events (as defined), and Autotote Lottery Corporation Excess Cash Flow
(as defined), in each case, in excess of specified thresholds. The Term Loan was
extended in conjunction with the July 28, 1997 revolving credit facility (the
"Facility") and is subject to certain restrictive and financial covenants
contained in the Facility. Obligations under the Facility and Term Loan are
jointly and severally guaranteed by substantially all of the Company's U.S.
subsidiaries and are secured by (i) first priority security interests in
substantially all tangible and intangible assets of the Company and its U.S.
subsidiaries, and (ii) a first priority lien on all of the capital stock of the
Company's U.S. subsidiaries and on 65% of the capital stock of the Company's
non-U.S. subsidiaries. In addition, the Term Loan is secured by a first priority
security interest in substantially all of the Company's Connecticut lottery
assets now owned or hereafter acquired. Also, under the terms of the Request for
Proposal for the development and installation of the lottery system for the
Connecticut State Lottery, the Company provided a Performance Bond in the
initial amount $8 million, which was automatically increased to $10 million upon
the effective date of the agreement, May 9, 1998.
On July 28, 1997, the Company issued $110 million of 10 7/8% Senior Notes
due August 1, 2004 (see Note 7 to Consolidated Financial Statements), which were
exchanged for $110 million of 10 7/8% Series B Notes due 2004 (the "Notes") in
connection with the Company's exchange offer in October 1997. The Notes bear
interest at a rate of 10 7/8% per annum payable semi-annually on each February 1
and August 1. The Notes are senior, unsecured obligations of the Company,
ranking senior in right and priority of payment to all indebtedness of the
Company that by its terms is expressly subordinated to the Notes. The Notes are
jointly and severally guaranteed by substantially
26
all of the Company's wholly owned U.S. subsidiaries. The Notes will be
redeemable, in whole or in part, at the option of the Company, at any time on or
after August 1, 2001, at redemption prices of 105.438% in fiscal year 2001,
102.719% in fiscal year 2002, and 100.000% in fiscal year 2003 and thereafter,
plus accrued and unpaid interest, if any, to the date of redemption. In
addition, at any time prior to August 1, 2000, the Company may, at its option,
redeem up to 35% of the aggregate principal amount of the Notes originally
issued with the net cash proceeds of one or more public equity offerings, as
defined, at a redemption price equal to 110.875% of the principal amount to be
redeemed plus accrued and unpaid interest to the date of redemption, if any,
provided, however, that at least 65% of the original aggregate principal amount
of the Notes remains outstanding immediately after any such redemption. The
indenture governing the Notes contains certain covenants that, among other
things, limit the ability of the Company and its restricted subsidiaries, as
defined, to incur additional indebtedness, create certain liens, pay dividends,
consummate certain asset sales, enter into certain transactions with affiliates
and merge or consolidate with any other person or sell, assign, transfer, lease,
convey or otherwise dispose of all or substantially all of the assets of the
Company. The net proceeds from the offering, after deducting fees and expenses
of approximately $4.9 million, were approximately $105.1 million, of which
approximately $93.6 million was used to repay $91.4 million of indebtedness and
$2.2 million of accrued interest under the Company's previously existing senior
bank credit facility (the "Senior Facility"). In addition, approximately $4.1
million of the net proceeds was used to repurchase, at a discount, Subordinated
Debentures totaling $5.0 million plus accrued interest and fees (see Note 7 to
the Consolidated Financial Statements). The balance of the net proceeds was used
for general corporate purposes.
In connection with the issuance of the Notes, the Company also entered into
a new revolving credit facility (the "Facility") with certain lenders which
matures in February 2001. The Facility provides for borrowings of up to $25
million, with a $15 million sublimit for letters of credit, subject to
compliance with certain covenants. The Facility requires mandatory commitment
reductions upon the occurrence of certain events, including asset sales and the
incurrence of certain indebtedness, in each case, in excess of specified
thresholds. In addition, the Company may make optional prepayments and
commitment reductions. Borrowings under the Facility are available for working
capital and general corporate purposes and will bear interest at the Base Rate
(as defined) plus a margin ranging from 1.00% to 1.75% per annum, or the
Eurodollar Rate (as defined) plus a margin ranging from 2.00% to 2.75% per
annum, in each case depending on the Company's performance as measured by the
ratio of net debt (as defined) to EBITDA (as defined). Fees will be payable on
outstanding letters of credit equal to the applicable Eurodollar Rate margin
(2.75% as of October 31, 1998), plus a facing fee of 1/8% per annum. A
commitment fee of 1/2% per annum is payable on the unused amount of the
Facility. Obligations under the Facility are jointly and severally guaranteed by
substantially all of the Company's U.S. subsidiaries. In addition, the Facility
is secured by (i) first priority security interests in substantially all
tangible and intangible assets of the Company and its U.S. subsidiaries, and
(ii) a first priority lien on all of the capital stock of the Company's U.S.
subsidiaries and on 65% of the capital stock of the Company's non-U.S.
subsidiaries. The Facility contains certain covenants which limit the ability of
the Company to incur additional indebtedness; create liens; make restricted
payments, including dividends; engage in mergers, consolidations and asset
sales; make acquisitions, investments and capital expenditures; and engage in
certain transactions with certain subsidiaries and affiliates, in each case
beyond certain thresholds. The Facility also requires compliance with certain
financial covenants, including maintenance of minimum EBITDA and interest
coverage levels, and a maximum net debt to EBITDA ratio. In December 1998, the
Company and its lenders amended certain covenants contained in the Notes and the
Facility agreements to permit the Company to incur additional debt and to
utilize working capital in order to complete business expansions in Europe.
Although there were no borrowings outstanding under the Facility at October 31,
1998, approximately $1.9 million of letters of credit were guaranteed under the
Facility. As of October 31, 1998, the Company had approximately $23.1 million
available for borrowing under the Facility.
At October 31, 1998, the Company's available cash and borrowing capacity
totaled $29.9 million compared to $41.3 million at October 31, 1997. Net cash
provided by operating activities was $8.2 million for the year ended October 31,
1998. Utilizing the $8.2 million of cash provided by operating activities,
available cash of $11.4 million, $2.2 million of cash acquired in a business
acquisition and $12.0 million of borrowings under the Term Loan, the Company
invested principally in contract expenditures and software systems development
and $3.0 million was used to reduce borrowings on other long-term loans.
27
At October 31, 1998, the Company's current liabilities exceeded current
assets by $2.9 million, principally as a result of the fiscal 1998 investment of
$24.1 million in contract expenditures, which included $12.0 million for the
manufacture and installation of the lottery system for the Connecticut state
lottery. These investments were financed in part with available cash resources
which were not replenished by long-term borrowings as of October 31, 1998. The
Company anticipates a significantly lower level of investment in contract
expenditures in fiscal 1999.
As described above, the Company had $23.1 million of cash borrowing
availability under the Facility at October 31, 1998. The Company believes that,
although it expects to incur a net loss in fiscal 1999, its cash resources,
anticipated cash flows from operations and borrowing availability under the
Facility should provide sufficient liquidity to meet scheduled interest payments
and anticipated capital expenditures during the next twelve months. The Company
believes that additional financing will be required to enable it to meet its
debt service obligations, including scheduled principal payments under the
Notes, the Subordinated Debentures, the Term Loan and the Facility, beginning in
fiscal 2001.
Extraordinary Items
In connection with the issuance of the Notes in the third quarter of fiscal
1997, and the subsequent repayment of all amounts outstanding under the Senior
Facility (see Notes 7 and 8 to the Consolidated Financial Statements), the
Company wrote-off $1.4 million of deferred financing fees associated with the
Senior Facility. The Company also used a portion of the net proceeds from the
offering of the Notes to repurchase $5.0 million of its Subordinated Debentures
for $4.1 million, resulting in a $0.9 million gain on the early retirement of
this debt. There were no tax benefits recognized on the net extraordinary loss
because the Company is currently in a tax loss carryforward position.
Recent Accounting Pronouncements
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS
133 standardizes the accounting for derivative instruments, including certain
derivative instruments embedded in other contracts. Under the standard, entities
are required to carry all derivative instruments in the statement of financial
position at fair value. SFAS 133 is effective beginning in the first quarter of
the Company's fiscal year ending October 31, 2000. The Company has not
determined the impact that SFAS 133 will have on its financial statements and
believes that such determination will not be meaningful until closer to the date
of initial adoption.
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 fiscal year ending October 31, 1999. Adoption of this standard is
expected to result in modification of and/or additional disclosures, but will
not have an effect on the Company's financial position or results of operations.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" ("SFAS 130") and Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131").
SFAS 130 establishes standards for the reporting and display of
comprehensive income in the financial statements. Comprehensive income is the
total of net income and all other non-owner changes in equity. SFAS 131 requires
that companies disclose segment data based on how management makes decisions
about allocating resources to segments and measuring their performance. SFAS 130
and 131 are effective for Company's fiscal year ending October 31, 1999.
Adoption of these standards is expected to result in additional disclosures, but
will not have an effect on the Company's consolidated financial position or
results of operations.
28
Year 2000
The Company is dedicated to providing uninterrupted, high quality
performance from its computer software systems, products and satellite
communication network before, during and after year 2000. Since fiscal 1997, the
Company has been assessing the impact that the Year 2000 will have on its
computer software systems, products and satellite communication network.
Computer programs that do not properly interpret two-digit date information
could generate erroneous data or cause a complete system failure. The Company is
in the process of testing its critical systems, surveying its principal
suppliers and developing solutions for those systems that have been found to
have date-related deficiencies. The Company believes that its solutions will be
implemented and tested prior to any anticipated year 2000 impact on the
Company's systems.
Remediation efforts for the Company's computer systems are not expected to
be substantial. When testing is completed by mid year 1999, the Company will
upgrade its active systems throughout the remainder of fiscal 1999. The Company
is also relying on Year 2000 compliance representations and warranties that its
vendors, suppliers and other service providers are making with respect to their
products and services. The total estimated cost of software modifications and
conversions, upgrades and equipment replacements, if any, is not expected to
exceed $3 million. Equipment replacement will be capitalized in accordance with
Company policy. Similar Year 2000 readiness programs are in place in the
Company's foreign operations. Costs to address these operations' Year 2000
issues not are expected to be material. The Company intends to monitor these
processes, and has evaluated alternative solutions, which will be implemented,
if necessary.
Based on preliminary analyses, the Company expects that its critical
systems and applications will be compliant by October 31, 1999, and the Year
2000 issue will not pose significant operational problems for the Company. There
can be no assurance, however, that there will not be a delay in, or increased
cost associated with, the implementation of such corrective action, and the
Company's inability to implement such corrective action could have a material
adverse effect on its financial condition or results of operations. The
Company's belief and expectations are based on certain assumptions and
expectations that may ultimately prove to be inaccurate.
Euro Conversion
In connection with the January 1, 1999 conversion by eleven member states
of the European Union to a common currency, the "euro," the Company has
evaluated the implications of the conversion and expects that it will not have a
material impact on its consolidated financial statements.
Financial Instruments and Risks and Uncertainties
The Company considers the fair value of all financial instruments to be not
materially different from their carrying value at year-end. See Note 10 to the
Consolidated Financial Statements for information regarding fair value of
financial instruments.
The Company's 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 the Company's exposure to concentration
of credit risks.
The Company's products and services are sold to a diverse group of
customers throughout the world. As such, the Company is 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 the Company's products and
geographic operations mitigate the risk that adverse changes in any event would
materially affect the Company's financial position. Additionally, as a result of
the diversity of its customer base, the Company does not consider itself exposed
to concentration of credit risks. These risks are further minimized by placing
credit limits, ongoing monitoring of customers' account balances, and assessment
of the customers' financial strengths.
29
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULE
AUTOTOTE CORPORATION AND SUBSIDIARIES
Form 10-K
(Page)
---------
Independent Auditors' Report........................................................................... 31
Consolidated Financial Statements:
Balance Sheets as of October 31, 1998 and 1997.................................................... 32
Statements of Operations for the years ended October 31, 1998, 1997 and 1996...................... 33
Statements of Stockholders' Equity (Deficit) for the years ended October 31, 1998, 1997 and 1996.. 34
Statements of Cash Flows for the years ended October 31, 1998, 1997 and 1996...................... 35
Notes to Consolidated Financial Statements............................................................. 37
Schedule:
II. Valuation and Qualifying Accounts.................................................................. 64
All other schedules are omitted as the required information is inapplicable
or the information is presented in the consolidated financial statements or
related notes.
30
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Autotote Corporation:
We have audited the consolidated financial statements of Autotote
Corporation and subsidiaries as listed in the accompanying index. In connection
with our audits of the consolidated financial statements, we have also audited
the financial statement schedule as listed in the accompanying index. These
consolidated financial statements and the financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Autotote
Corporation and subsidiaries as of October 31, 1998 and 1997, and the results of
their operations and their cash flows for each of the years in the three-year
period ended October 31, 1998, in conformity with generally accepted accounting
principles. Also in our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.
KPMG LLP
Short Hills, New Jersey
December 11, 1998
31
AUTOTOTE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
October 31, 1998 and 1997
(in thousands, except per share amounts)
1998 1997
--------- --------
ASSETS
Current assets:
Cash and cash equivalents ..................................................................... $ 6,809 18,207
Restricted cash ............................................................................... 638 512
Accounts receivable, net of allowance for doubtful accounts of $1,811 and $1,976 in
1998 and 1997, respectively ................................................................ 21,752 13,560
Inventories ................................................................................... 11,295 6,653
Prepaid expenses, deposits and other current assets ........................................... 1,932 2,276
--------- -------
Total current assets ..................................................................... 42,426 41,208
--------- -------
Property and equipment, at cost .................................................................... 196,748 180,170
Less accumulated depreciation ................................................................. 118,315 103,781
--------- -------
Net property and equipment ............................................................... 78,433 76,389
--------- -------
Goodwill, net of amortization ...................................................................... 3,614 5,916
Operating right, net of amortization ............................................................... 14,848 15,848
Other assets and investments ....................................................................... 17,179 14,180
--------- -------
$ 156,500 153,541
========= =======
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current installments of long-term debt ........................................................ $ 2,992 2,609
Accounts payable .............................................................................. 13,610 8,698
Accrued liabilities ........................................................................... 24,996 20,652
Interest payable .............................................................................. 3,706 3,759
--------- -------
Total current liabilities ................................................................ 45,304 35,718
--------- -------
Deferred income taxes .............................................................................. 1,832 2,551
Other long-term liabilities ........................................................................ 2,124 1,264
Long-term debt, excluding current installments ..................................................... 120,878 112,248
Long-term debt, convertible subordinated debentures ................................................ 35,000 35,000
--------- -------
Total liabilities ........................................................................ 205,138 186,781
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, 35,943
and 35,335 shares outstanding at October 31, 1998 and 1997, respectively ................... 360 354
Class B non-voting common stock, par value $0.01 per share, 700 shares
authorized, none outstanding ............................................................... -- --
Additional paid-in capital .................................................................... 149,119 148,238
Accumulated losses ............................................................................ (197,231) (181,351)
Treasury stock, at cost ....................................................................... (102) (102)
Minimum pension liability ..................................................................... (495) --
Currency translation adjustment ............................................................... (289) (379)
--------- -------
Total stockholders' equity (deficit) ..................................................... (48,638) (33,240)
--------- -------
Commitments and contingencies (Notes 7, 9, 12 and 13) .............................................. $ 156,500 153,541
========= =======
See accompanying notes to consolidated financial statements.
32
AUTOTOTE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended October 31, 1998, 1997 and 1996
(in thousands, except per share amounts)
1998 1997 1996
--------- --------- ---------
Operating revenues:
Services ...................................................................... $ 135,790 132,989 137,794
Sales ......................................................................... 23,523 24,343 38,441
--------- --------- ---------
159,313 157,332 176,235
--------- --------- ---------
Operating expenses (exclusive of depreciation and amortization shown below):
Services ...................................................................... 88,916 80,496 86,674
Sales ......................................................................... 15,739 15,396 25,864
--------- --------- ---------
104,655 95,892 112,538
--------- --------- ---------
Total gross profit ....................................................... 54,658 61,440 63,697
Selling, general and administrative expenses ....................................... 26,205 28,444 31,921
(Gain) loss on sale of businesses .................................................. 66 (1,823) --
Restructuring and write-off of assets .............................................. -- -- (649)
Depreciation and amortization ...................................................... 29,489 36,728 40,853
--------- --------- ---------
Operating loss ........................................................... (1,102) (1,909) (8,428)
Other deductions:
Interest expense .............................................................. 15,521 14,367 14,837
Litigation settlement ......................................................... -- -- 6,800
Other (income) expense ........................................................ (1,064) 79 1,687
--------- --------- ---------
14,457 14,446 23,324
--------- --------- ---------
Loss before income tax expense and extraordinary item ......................... (15,559) (16,355) (31,752)
Income tax expense ................................................................. 321 906 2,443
--------- --------- ---------
Loss before extraordinary item ................................................ (15,880) (17,261) (34,195)
Extraordinary item--write-off of deferred financing fees and expenses,
net of gain on early retirement of subordinated debt ............................. -- (426) --
--------- --------- ---------
Net loss ...................................................................... $ (15,880) (17,687) (34,195)
========= ========= =========
Net loss per common share:
Net loss per basic share and diluted share before extraordinary item .......... $ (0.44) (0.50) (1.09)
Extraordinary loss per basic share and diluted share .......................... -- (0.01) --
--------- --------- ---------
Net loss per basic share and diluted share .................................... $ (0.44) (0.51) (1.09)
========= ========= =========
Weighted average number of shares used in per share calculations ................... 35,696 34,469 31,305
========= ========= =========
See accompanying notes to consolidated financial statements.
33
AUTOTOTE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
Years Ended October 31, 1998, 1997 and 1996
(in thousands)
1998 1997 1996
--------- --------- ---------
Common stock:
Beginning balance ..................................................................... $ 354 315 306
Issuance of Class A common stock, net of issuance expenses ....................... 6 9 9
Issuance of 2,964 shares of Class A common stock in litigation settlement ........ -- 30 --
--------- --------- ---------
Ending balance ........................................................................ 360 354 315
--------- --------- ---------
Additional paid-in capital:
Beginning balance ..................................................................... 148,238 143,369 140,050
Issuance of Class A common stock, net of issuance expenses ....................... 511 952 1,961
Issuance of Class A common stock in litigation settlement ........................ -- 3,470 --
Issuance of warrants in lieu of cash ............................................. -- -- 1,012
Deferred compensation ............................................................ 370 447 346
--------- --------- ---------
Ending balance ........................................................................ 149,119 148,238 143,369
--------- --------- ---------
Accumulated losses:
Beginning balance ..................................................................... (181,351) (163,664) (129,469)
Net loss ......................................................................... (15,880) (17,687) (34,195)
--------- --------- ---------
Ending balance ........................................................................ (197,231) (181,351) (163,664)
--------- --------- ---------
Treasury stock:
Beginning balance ..................................................................... (102) (102) (295)
Issuance of Class A common stock, net of issuance expenses ....................... -- -- 193
--------- --------- ---------
Ending balance ........................................................................ (102) (102) (102)
--------- --------- ---------
Minimum pension liability: ............................................................ (495) -- --
--------- --------- ---------
Currency translation adjustment:
Beginning balance ..................................................................... (379) (114) 1,265
Currency translation adjustment .................................................. 90 (265) (1,379)
--------- --------- ---------
Ending balance ........................................................................ (289) (379) (114)
--------- --------- ---------
Total stockholders' equity (deficit) .................................................. $ (48,638) (33,240) (20,196)
========= ========= =========
See accompanying notes to consolidated financial statements.
34
AUTOTOTE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended October 31, 1998, 1997 and 1996
(in thousands)
1998 1997 1996
-------- -------- --------
Cash flows from operating activities:
Net loss .................................................................. $(15,880) (17,687) (34,195)
-------- -------- --------
Adjustments to reconcile net loss to cash provided by operating activities:
Depreciation and amortization ........................................ 29,489 36,728 40,853
Restructuring charges and asset write-offs, net of cash payments ..... -- -- (649)
Change in deferred income taxes, net of effects of businesses sold ... (592) (784) 1,868
Litigation settlement, net of cash payments .......................... -- -- 4,250
(Gain) loss on sales of assets ....................................... 66 (1,823) 1,401
Non-cash interest charges ............................................ -- -- 636
Non-cash extraordinary items ......................................... -- 426 --
Changes in operating assets and liabilities, net of effects of
acquisitions/dispositions of subsidiaries:
Restricted cash ................................................. 57 99 671
Accounts receivable ............................................. (7,841) 1,339 1,977
Inventories ..................................................... (4,600) (1,585) 5,920
Unbilled receivables ............................................ -- 2,553 (3,182)
Accounts payable ................................................ 2,909 (3,314) (1,834)
Accrued liabilities ............................................. 2,762 5,125 (3,110)
Other ................................................................ 1,790 2,641 262
-------- -------- --------
Total adjustments ............................................... 24,040 41,405 49,063
-------- -------- --------
Net cash provided by operating activities ...................................... 8,160 23,718 14,868
-------- -------- --------
Cash flows from investing activities:
Capital expenditures ...................................................... (2,773) (2,262) (2,103)
Wagering systems expenditures ............................................. (21,287) (5,226) (7,138)
Increase in other assets and investments .................................. (7,277) (2,336) (3,007)
Cash acquired in business acquisition ..................................... 2,177 -- --
Proceeds from sale of business and assets, net of cash transferred ........ -- 21,056 4,684
Other ..................................................................... (63) (351) (325)
-------- -------- --------
Net cash provided by (used in) investing activities ............................ (29,223) 10,881 (7,889)
-------- -------- --------
Cash flows from financing activities:
Net borrowings (repayments) under revolving credit facility ............... -- (71,890) 2,610
Proceeds from issuance of long-term debt, net of financing fees ........... 12,059 106,334 2,550
Payments on long-term debt ................................................ (3,072) (57,395) (10,829)
Net proceeds from issuance of common stock ................................ 516 961 --
-------- -------- --------
Net cash provided (used) by financing activities .............................. 9,503 (21,990) (5,669)
-------- -------- --------
Effect of exchange rate changes on cash ........................................ 162 (390) (313)
-------- -------- --------
Increase (decrease) in cash and cash equivalents ............................... (11,398) 12,219 997
Cash and cash equivalents, beginning of year ................................... 18,207 5,988 4,991
-------- -------- --------
Cash and cash equivalents, end of year ......................................... $ 6,809 18,207 5,988
======== ======== ========
(Continued)
35
AUTOTOTE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS--(Continued)
Years Ended October 31, 1998, 1997 and 1996
(in thousands)
Non-cash investing and financing activities
1998, 1997 and 1996
See Notes 7 and 9 for a description of the write-off of deferred financing
fees, and capital lease transactions; and also in 1997 see Notes 8 and 11 for a
description of the gain on early retirement of subordinated debt and the
issuance of common stock in settlement of a stockholder litigation; and also in
1996 see Notes 11 and 12 for a description of the issuance of shares of common
stock in lieu of cash for interest payments.
Supplemental cash flow information
Cash paid during the year for:
October 31,
---------------------------------------
1998 1997 1996
------- ------- -------
Interest ....................... $14,786 10,199 14,318
Income taxes ................... $ 630 938 2,291
See accompanying notes to consolidated financial statements.
36
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
October 31, 1998 and 1997
(in thousands, except per share amounts)
(1) Description of the Business and Summary of Significant Accounting Policies
(a) Description of the Business
Autotote Corporation (the "Company") is the leading provider of
computerized pari-mutuel wagering systems to the North American Racing
Industry and is the exclusive licensed operator of substantially all
OTBs in the State of Connecticut. The Company is also a leading
provider of computerized pari-mutuel systems worldwide, with systems
in racetracks and OTBs in Europe, Central and South America, and
Asia-Pacific. In addition, the Company is the leading provider of
Racing Industry simulcasting services in the United States through its
broadcasting of live racing events via satellite to other racetracks
and OTBs. The Company also provides technologically advanced VGMs to
the North American Racing Industry for use at racetracks, as well as
lottery systems and equipment both in the United States and
internationally.
(b) Principles of Consolidation
The accompanying consolidated financial statements include the
accounts of the Company and subsidiaries in which the Company's
ownership is greater than 50%. Investments in other entities where the
Company has the ability to exercise significant influence over the
investee are accounted for principally on the equity basis. Under the
equity method, investments are stated at cost plus the Company's
equity in undistributed earnings after acquisition. All significant
inter-company balances and transactions have been eliminated in
consolidation.
(c) Cash and Cash Equivalents
The Company considers all highly liquid debt instruments with an
original maturity at the date of purchase of three months or less to
be cash equivalents.
(d) Restricted Cash
Restricted cash represents amounts on deposit by customers for TeleBet
wagering. State regulations require the Company to maintain such
balances until deposited amounts are wagered or returned to the
customer.
(e) Inventories
Inventories are stated at the lower of cost or market. Cost is determined
as follows:
Item Cost method
---- -----------
Parts.................................. First-in, first-out or weighted moving average.
Work-in-process & finished goods....... Specific identification or weighted moving average
for direct material and labor; other fixed and
variable production costs are allocated as a
percentage of direct labor cost.
Ticket paper........................... First-in, first-out
The Company adjusts inventory accounts on a periodic basis to reflect the
impact of potential obsolescence.
37
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except per share amounts)
(1) Description of the Business and Summary of Significant Accounting
Policies--(Continued)
(f) Property and Equipment
Property and equipment are stated at cost. Depreciation of property
and equipment is calculated using the straight-line method over the
estimated useful lives of the assets as follows:
Estimated Life
Item in Years
---------------
Machinery and equipment.................. 3-10
Buildings................................ 15-40
Transportation........................... 3-7
Furniture and fixtures................... 5-10
Building and leasehold improvements...... 5-30
Depreciation expense includes the amortization of capital leased
assets. Due to the large number of service contract renewals in fiscal
1998 and the realized durability of the equipment, the Company is
lengthening the depreciable lives of its pari-mutuel terminals from
seven to ten years commencing November 1, 1998. Additionally, in
fiscal 1998, the Company completed the installation of new lottery
terminals for the Connecticut State Lottery under a contract with an
initial five-year term plus five one-year options to extend the
contract through May 2008. Based on industry practice of lottery
contracts and the Company's historical relationship with the
Connecticut State Lottery for the past ten years, the Company is
depreciating the terminals and installation costs on a straight-line
method over their estimated useful lives of ten years.
(g) Deferred Installation Costs
Certain installation costs consisting of installation materials,
customer contracted software and installation labor associated with
leased systems are deferred and amortized over the lives of the leases
unless such costs are reimbursed by the lessee, in which case such
amounts are included in revenue and cost of sales. Deferred
installation costs, net of accumulated depreciation, included in
property and equipment were approximately $5,517 and $4,904 at October
31, 1998 and 1997, respectively.
(h) Goodwill
Goodwill represents the excess of the purchase price over the fair
value of the net assets of acquired companies. The excess of costs
over net assets acquired arising from the Company's acquisition of
primarily its North American lottery business, and simulcasting
business is being amortized on a straight-line basis over five years.
The excess of costs over net assets acquired for its German
pari-mutuel wagering business is being amortized on a straight-line
basis over 10 years. The excess of costs over net assets acquired for
its French pari-mutuel wagering business was fully amortized in fiscal
1998 due to the loss of a major service contract. Total goodwill
amounted to $3,614 and $5,916 net of accumulated amortization of
$10,648 and $7,904 as of October 31, 1998 and 1997, respectively.
The Company assesses the recoverability of this intangible asset by
determining whether the amortization of the goodwill balance over its
remaining life can be recovered through undiscounted future cash flows
of the acquired operation and other considerations. The amount of
impairment of goodwill, if any, is measured based on projected
discounted future cash flows.
38
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except per share amounts)
Description of the Business and Summary of Significant Accounting
Policies--(Continued)
(i) Operating Right
On July 1, 1993, the Company acquired the exclusive right to operate
the Connecticut off-track betting system. This operating asset is
being amortized on a straight-line basis over twenty years and
amounted to $14,848 and $15,848 net of accumulated amortization of
$5,357 and $4,357 at October 31, 1998 and 1997, respectively.
(j) Other Assets and Investments
The Company capitalizes costs associated with internally developed
and/or purchased software systems for new products and enhancements to
existing products that meet technological feasibility and
recoverability tests. The Company also capitalizes costs associated
with the procurement of long-term financing, and costs attributable to
transponder leases, patents, trademarks, marketing rights, and
non-competition and employment agreements arising primarily from
business acquisitions. These capitalized costs are amortized on the
straight-line basis over their useful lives.
(k) Revenue Recognition
Revenues from wagering system, simulcast and lottery service contracts
are recognized over the contract period pursuant to the terms of the
contracts. Costs of providing operating services under contracts are
charged to operations in the period incurred. Revenue from the
operation of off-track betting concerns is recognized based on a
percentage of amounts wagered.
Revenues from major contracts for the sale of wagering systems and
revenues for contracted software development are recognized on the
percentage of completion method of accounting based on the ratio of
costs incurred to the total estimated costs. Any anticipated losses on
fixed price contracts are charged to operations when such losses can
be estimated. The Company recognizes revenue from software licenses
upon shipment if post-delivery obligations are insignificant and if
the terms of the agreement are such that the payment obligation is
non-cancelable and non-refundable. Revenue arising from the sale of
component equipment and supplies is recognized when shipped.
(l) Income Taxes
Income taxes are calculated using the asset and liability method under
Statement of Financial Accounting Standard (SFAS) No. 109. Under this
method, deferred income taxes are calculated by applying enacted
statutory tax rates to cumulative temporary differences between
financial statement carrying amounts and the tax basis of existing
assets and liabilities. Under SFAS 109, the effect on deferred taxes
of a change in tax rates is recognized in income in the period that
includes the enactment date.
39
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except per share amounts)
Description of the Business and Summary of Significant Accounting
Policies--(Continued)
(m) Basic Net Loss Per Common Share and Diluted Net Loss Per Common 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 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 years presented,
since their inclusion would be anti-dilutive. Basic and diluted net
loss per common share for the years presented, therefore, are the
same. At October 31, 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.
(n) Foreign Currency Translation
Assets and liabilities of foreign operations are translated at
year-end rates of exchange and operations are translated at the
average rates of exchange for the year. Gains or losses resulting from
translating the foreign currency financial statements are accumulated
as a separate component of stockholders' equity (deficit). Gains or
losses resulting from foreign currency transactions are included in
other income (deductions) in the consolidated statements of
operations.
(o ) Stock-Based Compensation
Stock-based compensation is recognized using the intrinsic value
method. For disclosure purposes (see note 12), pro forma net loss and
loss per share data are provided in accordance with Financial
Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" as if the fair value method had been applied.
(p) Financial Statement Preparation
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Some of the more significant
estimates being made involve percentage of completion for contracted
software development projects, capitalization of software development
costs, evaluation of the recoverability of assets and assessment of
litigation and contingencies, including income and other taxes. Actual
results could differ from those estimates.
(q) Reclassification
Certain reclassifications have been made to the prior years
consolidated financial statements to conform to the current
presentation.
40
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except per share amounts)
(2) Acquisitions and Dispositions
Acquisition of Netherlands Subsidiary
On July 1, 1998, the Company completed the purchase of Hippo Toto B. V.,
which was renamed Autotote Nederland B.V. This wholly owned subsidiary holds an
exclusive five-year license to operate all on-track and off-track pari-mutuel
wagering in the Netherlands. The initial license, granted by the Dutch Ministry
of Agriculture, extends through June 30, 2003. The purchase was for nominal
consideration and the acquisition was recorded using the purchase method of
accounting, and accordingly, the assets and liabilities of the acquired entities
have been recorded at their estimated fair value at the date of acquisition. The
operating results of Autotote Nederland B.V. have been included in the
consolidated statements of operations since the date of acquisition.
Intent to Merge NASRIN(TM)
On December 1, 1998, the Company and Churchill Downs Incorporated announced
the signing of a letter of intent to merge their NASRIN(TM) and Tracknet
telecommunications business units. The completion of the merger is subject to
due diligence, the execution of a definitive agreements, and the approval of the
respective boards of directors for the companies involved, and there can be no
assurance that the merger will be consummated.
Disposition of Businesses
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. The letter of credit,
which had an outstanding balance of $1,500 at October 31, 1997, expired in
October 1998. The Company recorded gains on the sale of its European lottery
business in the amount of $1,184 in fiscal 1998 and $1,823 in fiscal 1997.
Under the terms of the sale, the purchaser has the right to license and
purchase the Company's terminals for use in lottery applications. Also under the
agreement, the purchaser has the right of first refusal, through April 1999, to
purchase the Company's remaining lottery business. The Company, however, has no
plans to sell this business at the present time and remains committed to serving
the North American lottery market and its existing customers.
The following unaudited information shows the revenues, expenses and
operating income of the European lottery business that were included in the
Company's consolidated statements of operations for the fiscal years ended
October 31, 1997 and 1996. Interest and income tax expenses have not been
included in the table below.
1997 1996
------- -------
Operating revenue ............................................... $ 6,119 27,126
Operating expenses, including selling, general and administrative
expenses, and depreciation and amortization expenses ........ 6,181 25,877
------- -------
Operating (loss) income ......................................... $ (62) 1,249
======= =======
In fiscal 1996, the Company sold Autotote CBS, Inc ("CBS"), the
casino/sports wagering service business for approximately $3,000. In fiscal
1998, the Company recorded an additional loss of $1,250 on a proposed settlement
of litigation related to the fiscal 1996 sale of CBS.
41
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except per share amounts)
(3) Inventories
Inventories consist of the following:
October 31,
----------------------
1998 1997
------- -------
Parts and work-in-process .............. $10,082 5,762
Finished goods ......................... 448 244
Ticket paper ........................... 765 647
------- -------
$11,295 6,653
======= =======
Parts and work-in-process includes costs for equipment expected to be sold.
Costs incurred for equipment associated with specific wagering system contracts
not yet placed in service are classified as construction in progress in property
and equipment (see Note 4).
(4) Property and Equipment
Property and equipment, including assets under capital leases, consist of
the following:
October 31,
--------------------
1998 1997
-------- --------
Machinery, equipment and deferred installation costs $167,914 153,852
Land and buildings ................................. 14,455 14,379
Transportation equipment ........................... 509 355
Furniture and fixtures ............................. 3,629 3,083
Leasehold improvements ............................. 4,941 4,523
Construction in progress ........................... 5,300 3,978
-------- --------
$196,748 180,170
======== ========
Depreciation expense for the years ended October 31, 1998, 1997, and 1996
amounted to $19,310, $21,790, and $23,632, respectively.
For financial reporting purposes, at October 31, 1998 and 1997, costs for
equipment associated with specific wagering systems contracts not yet placed in
service are recorded as construction in progress. When the equipment is placed
in service at wagering facilities, the related costs are transferred from
construction in progress to machinery and equipment.
42
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except per share amounts)
(5) Other Assets and Investments
Other assets and investments (net) consist of the following:
October 31,
-----------------
1998 1997
------- -------
Software systems development costs $ 5,978 4,596
Deferred financing costs ......... 4,293 4,823
Deferred transponder costs ....... -- 1,406
Other intangible assets .......... 911 885
Other assets ..................... 5,997 2,470
------- -------
$17,179 14,180
======= =======
In fiscal 1998 and fiscal 1997, excluding costs related to the Company's
European lottery business which was sold in fiscal 1997, the Company capitalized
$3,700 and $1,513, respectively, of software systems development costs related
primarily to video gaming, pari-mutuel wagering and domestic lottery
applications. Capitalized costs are amortized on a straight-line basis over a
period of five years. Amortization of capitalized software systems development
costs was $2,318, $4,962 and $5,417 for the years ended October 31, 1998, 1997
and 1996, respectively.
Deferred financing costs relate to those costs associated with the
procurement of long term financing by the Company. Such costs are amortized over
the life of the financing agreements. In fiscal 1998 and fiscal 1997, the
Company capitalized $363 and $5,411, respectively, in deferred financing fees,
including $4,160 in deferred financing fees and expenses related to the sale of
the Notes in fiscal 1997. In fiscal 1997, the Company also wrote-off, as an
extraordinary charge, $1,376 of previously deferred financing costs in
connection with the Company's repayment of its prior Senior Facility.
Amortization of deferred financing costs amounted to $893, $1,268 and $1,654 for
the fiscal years ended October 31, 1998, 1997 and 1996, respectively.
Other assets in 1998 includes $750 loaned by the Company to Atlantic City
Racing Association ("ARCA"). The loan is secured by a mortgage on certain real
estate owned by ACRA. In consideration for this loan, the Company has the right
to acquire ACRA for an additional $6,250 subject to certain other adjustments.
The Company's decision to acquire ACRA will depend on whether or not several
State of New Jersey legislative and regulatory approvals, and actions by ACRA
have a favorable outcome. The Company expects to recover the loan, however,
under certain conditions, should the Company decide not to purchase ACRA, the
loan will be forgiven.
Deferred transponder costs arose in connection with the acquisition of the
Company's simulcasting business and were being amortized over a four-year
period. In fiscal 1998, as the result of the Galaxy satellite failure, the
remaining balance of deferred transponders was fully amortized. Amortization
expense amounted to $1,406, $1,125 and $1,125, for the years ended October 31,
1998, 1997 and 1996, respectively.
43
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except per share amounts)
(6) Accrued Liabilities
Accrued liabilities consist of the following:
October 31,
----------------------
1998 1997
--------- ---------
Compensation and benefits ......................................... $ 8,825 7,325
Customer advances ................................................. 2,402 266
Taxes, other than income .......................................... 1,861 1,778
Income taxes payable .............................................. 861 319
Other ............................................................. 11,047 10,964
--------- ---------
$ 24,996 20,652
========= =========
(7) Long-Term Debt
Long-term debt consists of the following:
October 31,
----------------------
1998 1997
--------- ---------
10 7/8% Series B Senior Notes Due 2004 ................................. $ 110,000 110,000
5.5% convertible subordinated debentures due August 2001 ............... 35,000 35,000
8.87% Term Loan Due February 2001 ...................................... 11,400 --
Term Loan due in November 1999, interest at 8% ......................... 1,250 1,250
Capital lease obligations, payable monthly through January 2000,
interest from 8.6% to 13.0% ....................................... 362 893
Secured term loans repaid April 1998, interest at 8% ................... -- 1,590
Various loans and bank facilities, interest from 4.3% to 11% ........... 858 1,124
--------- ---------
Total long-term debt ............................................. 158,870 149,857
Less current installments ........................................ 2,992 2,609
--------- ---------
Long-term debt, excluding current installments.................... $ 155,878 147,248
========= =========
On May 22, 1998, the Company and Autotote Lottery Corporation entered into
a $12 million, three-year term loan arrangement (the "Term Loan") to partially
finance the development and installation of a lottery system for the Connecticut
State Lottery, including the manufacture of approximately three thousand new
lottery terminals. The Term Loan bears interest at a fixed rate of 8.87% payable
quarterly and at maturity on February 15, 2001, with principal payments of $600
due quarterly through January 31, 2001 with a final principal payment of $6,000
due at maturity. In addition to scheduled principal payments, the Term Loan
requires mandatory principal prepayments upon the occurrence of certain events,
including asset sales, the incurrence of certain indebtedness, Recovery Events
(as defined), and Autotote Lottery Corporation Excess Cash Flow (as defined), in
each case, in excess of specified thresholds. The Term Loan was extended in
conjunction with the July 28, 1997 revolving credit facility (the "Facility")
and is subject to certain restrictive and financial covenants contained in the
Facility. Obligations under the Facility and Term Loan are jointly and severally
guaranteed by substantially all of the Company's U.S. subsidiaries and are
secured by (i) first priority security interests in substantially all tangible
and intangible assets of the Company and its U.S. subsidiaries, and (ii) a first
priority lien on all of the capital stock of the Company's U.S. subsidiaries and
on 65% of the capital stock of the Company's non-U.S. subsidiaries. In addition,
the Term Loan is secured by a first priority security interest in substantially
all of the Company's Connecticut lottery assets now owned or hereafter acquired.
Also, under the terms of the Request for Proposal for the development and
installation of the lottery system for the Connecticut State Lottery, the
Company provided a Performance Bond in the initial
44
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except per share amounts)
(7) Long-Term Debt--(Continued)
amount of $8 million, which was automatically increased to $10 million upon the
effective date of the agreement, May 9, 1998.
On July 28, 1997, the Company issued $110 million of 10 7/8% Series A
Senior Notes due August 1, 2004, which were exchanged for $110 million of 10
7/8% Series B Notes due August 1, 2004 (the "Notes") in connection with the
Company's exchange offer in October 1997. The Notes bear interest at a rate of
10 7/8% per annum payable semi-annually on each February 1 and August 1. The
Notes are senior, unsecured obligations of the Company, ranking senior in right
and priority of payment to all indebtedness of the Company that by its terms is
expressly subordinated to the Notes. The Notes are jointly and severally
guaranteed by substantially all of the Company's wholly-owned U.S. subsidiaries
(see Note 22). The Notes will be redeemable, in whole or in part, at the option
of the Company, at any time on or after August 1, 2001, at redemption prices of
105.438% in fiscal year 2001, 102.719% in fiscal year 2002, and 100.000% in
fiscal year 2003 and thereafter, plus accrued and unpaid interest, if any, to
the date of redemption. In addition, at any time prior to August 1, 2000, the
Company may, at its option, redeem up to 35% of the aggregate principal amount
of the Notes originally issued with the net cash proceeds of one or more public
equity offerings, as defined, at a redemption price equal to 110.875% of the
principal amount to be redeemed plus accrued and unpaid interest to the date of
redemption, if any, provided, however, that at least 65% of the original
aggregate principal amount of the Notes remains outstanding immediately after
any such redemption. The indenture governing the Notes contains certain
covenants that, among other things, limit the ability of the Company and its
restricted subsidiaries, as defined, to incur additional indebtedness, create
certain liens, pay dividends, consummate certain asset sales, enter into certain
transactions with affiliates and merge or consolidate with any other person or
sell, assign, transfer, lease, convey or otherwise dispose of all or
substantially all of the assets of the Company. The net proceeds from the
offering, after deducting fees and expenses of approximately $4,900 were
approximately $105,100, of which approximately $93,590 was used to repay $91,390
of indebtedness and approximately $2,200 of accrued interest under the Company's
previously existing senior bank credit facility (the "Senior Facility"). In
addition, approximately $4,050 of the net proceeds was used to repurchase, at a
discount, Subordinated Debentures plus accrued interest and fees. The balance of
the net proceeds was used for general corporate purposes.
In connection with the issuance of the Notes, the Company also entered into
a new revolving credit facility (the "Facility") with certain lenders which
matures in February 2001. The Facility provides, subject to certain terms and
conditions, for borrowings of up to $25,000 with a $15,000 sublimit for letters
of credit. The Facility requires mandatory commitment reductions upon the
occurrence of certain events, including asset sales and the incurrence of
certain indebtedness, in each case, in excess of specified thresholds. In
addition, the Company may make optional prepayments and commitment reductions.
Borrowings under the Facility are available for working capital and general
corporate purposes and will bear interest at the Base Rate (as defined) plus a
margin ranging from 1.00% to 1.75% per annum, or the Eurodollar Rate (as
defined) plus a margin ranging from 2.00% to 2.75% per annum, in each case
depending on the Company's performance as measured by the ratio of net debt (as
defined) to EBITDA (as defined). Fees will be payable on outstanding letters of
credit equal to the applicable Eurodollar Rate margin (2.75% as of October 31,
1998), plus a facing fee of 1/8% per annum. A commitment fee of 1/2% per annum
is payable on the unused amount of the Facility. Obligations under the Facility
are jointly and severally guaranteed by substantially all of the Company's U.S.
subsidiaries. In addition, the Facility is secured by (i) first priority
security interests in substantially all tangible and intangible assets of the
Company and its U.S. subsidiaries, and (ii) a first priority lien on all of the
capital stock of the Company's U.S subsidiaries and on 65% of the capital stock
of the Company's non-U.S. subsidiaries.
45
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except per share amounts)
(7) Long-Term Debt--(Continued)
The Facility contains certain covenants which limit the ability of the Company
to incur additional indebtedness; create liens; make restricted payments,
including dividends; engage in mergers, consolidations and asset sales; make
acquisitions, investments and capital expenditures; and engage in certain
transactions with certain subsidiaries and affiliates, in each case beyond
certain thresholds. The Facility also requires compliance with certain financial
covenants, including maintenance of minimum EBITDA and interest coverage levels,
and a maximum net debt to EBITDA ratio. In December 1998, the Company and its
lenders amended certain covenants contained in the Notes and the Facility
agreements to permit the Company to incur additional debt, and to utilize
working capital in order to complete business expansions in Europe. Although
there were no borrowings outstanding under the Facility at October 31, 1998,
approximately $1,900 of letters of credit were guaranteed under the Facility. As
of October 31, 1998, the Company had approximately $23,100 available for
borrowing under the Facility.
The Company's prior senior bank credit facility (the "Senior Facility") at
October 31, 1996, after giving effect to a January 29, 1997 amendment and the
April 15, 1997 sale of the European lottery business, provided for: 1) a $55,000
term loan (the "A Term Loan"), of which $51,000 was outstanding at October 31,
1996, which required principal repayments of $7,000 in fiscal 1997 with the
balance of $44,000 due in fiscal 1998; 2) a $5,000 term loan (the "B Term
Loan"), of which $1,000 was outstanding at October 31, 1996, which matured April
30, 1997, and 3) a $75,000 revolving credit facility (the "Revolver") which was
to mature July 31, 1998. The outstanding balance under the Revolver was $71,890
at October 31, 1996. Interest on borrowings under the Senior Facility was
calculated at the Prime lending rate plus a margin of 0.75%. A commitment fee of
0.5% per year was payable on the unused amount under the Revolver. A letter of
credit fee equal to 2.75% plus a facing fee of 1/8 of 1% per year was payable on
each letter of credit issued. In fiscal 1997, prior to the issuance of the Notes
and entering into the Facility, utilizing the net proceeds from operations and
the April 15, 1997 sale of the European lottery business, the Company made the
required $1,000 payment under the B Term Loan, a $21,000 payment under the A
Term Loan, and net repayments of $10,500 under the Revolver. Upon consummation
of the issuance of the Notes, the Company used a portion of the proceeds to
repurchase $5,000 aggregate principal amount of the Debentures for $4,050 plus
accrued interest, resulting in a $950 gain on early retirement (see Note 8).
The 5.5% convertible subordinated debentures due 2001 (the "Debentures")
are convertible into 1,750 shares of Class A Common Stock at a conversion price
of $20.00 per share.
On November 6, 1995, the Company entered into a Letter Agreement (the "1995
Letter Agreement") with holders of the Debentures whereby the holders agreed to
accept 936 unregistered shares of the Company's Class A Common Stock in lieu of
cash for the August 1995 and February 1996 interest payments totaling $2,200,
plus demand and piggy-back registration rights with respect to the unregistered
shares.
(8) Extraordinary Items
In connection with the fiscal 1997 issuance of the Notes and the subsequent
repayment of all amounts outstanding under the Senior Facility (see Note 7), the
Company wrote-off $1,376 of deferred financing fees associated with the Senior
Facility. Also in fiscal 1997, the Company used a portion of the net proceeds
from the offering of the Notes to repurchase $5,000 of its Subordinated Debt for
$4,050, resulting in a $950 gain on the early retirement of this debt. There
were no tax benefits recognized on the net extraordinary loss because the
Company is currently in a tax loss carryforward position.
46
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except per share amounts)
(9) Leases
At October 31, 1998, the Company was obligated under operating leases
covering office equipment, office space, transponders and transportation
equipment expiring at various dates through 2006. Future minimum lease payments
required under these leasing arrangements at October 31, 1998 are as follows:
1998, $9,109, 1999, $7,817; 2000, $7,923; 2001, $7,328; 2002, $7,225; 2003,
$7,189 and thereafter $8,670. The Company also leases equipment as needed under
various month-to-month lease agreements. Total rental expense under these
operating leases was $9,109, $8,890 and $10,183 in the years ended October 31,
1998, 1997 and 1996, respectively.
The Company acquired $59 of capitalized leases with the acquisition of the
Netherlands operations in the year ended October 31, 1998 and entered into
capital leases obligations of $141 in the year ended October 31, 1997. There
were no new capital leases in fiscal 1996.
(10) Fair Value of Financial Instruments
The fair value of financial instruments is determined by reference to
market data and other valuation techniques as appropriate. The Company believes
the fair value of its financial instruments, principally cash and cash
equivalents, restricted cash, accounts receivable, other current assets,
accounts payable, and accrued liabilities approximates their recorded values.
The Company believes that the fair value of the Notes approximated $106,000
at October 31, 1998 based on reference to dealer markets and quoted market
prices, and the Notes approximated the carrying amount of $110,000 at October
31, 1997 based on their then recent issuance price. The Company was, however,
unable to determine the fair value of the Debentures in fiscal years 1998 and
1997.
(11) Capital Stock
The Company has two classes of common stock consisting of Class A Common
Stock and Class B Non-voting Common Stock (Class B Common Stock). All shares of
Class A Common Stock and Class B Common Stock entitle holders to the same rights
and privileges except that the Class B Common Stock is non-voting. Each share of
Class B Common Stock is convertible into one share of Class A Common Stock.
During fiscal 1998, warrants to purchase an aggregate of 467 unregistered
shares (the "Shares") of the Company's Class A Common Stock were exercised at
the aggregate price of $583. The warrants, which were scheduled to expire in
April 1998, were issued by the Company in January 1996 to various banks that
were party to the Company's prior senior bank credit facility, in connection
with the Company entering into an amendment to such facility as of January 26,
1996. In addition, in fiscal 1998, the Company repurchased warrants to purchase
an aggregate of 58 Shares at a cost of approximately $79.
During fiscal 1997, the Company issued 2,964 shares of Class A Common Stock
in settlement of its stockholder litigation and issued 798 shares of Class A
Common Stock under an employee stock purchase offer. During fiscal 1996, the
Company issued 17 shares of Class A Common Stock in settlement of a PARS
obligation (see Note 12).
In November 1995, the Company entered into an Agreement with holders of its
5.5% Convertible Subordinated Debentures whereby the holders received
unregistered shares of Class A Common Stock in lieu of cash for interest
payments due in August 1995 and February 1996 in the amount of $1,100 each.
Accordingly, the Company issued 936 shares in fiscal 1996 (see Note 7).
47
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except per share amounts)
(11) Capital Stock--(Continued)
Warrants
At October 31, 1998, the Company had the following warrants outstanding,
after giving effect to adjustments made in accordance with certain anti-dilution
provisions:
Exercise
Shares Price Expiration
--------- --------- ---------------
Warrants to purchase Class A Common Stock:
1991 Warrants............................... 2,308 $ 1.64 October 31,1999
1995 Warrants............................... 387 $ 2.98 April 30, 2000
-------
Total Class A Common Stock Warrants......... 2,695
-------
Warrants to purchase Class B Common Stock......... 147 $ 3.83 October 30, 2003
=======
(12) Stock Options
The Company has four stock option plans under which shares of Class A
Common Stock have been authorized and are reserved for issuance to employees,
officers and directors: the 1984 Stock Option Plan (the "1984 Plan")-- 1,350
shares; the 1992 Equity Incentive Plan (the "1992 Plan")--3,000 shares; the 1995
Equity Incentive Plan (the "1995 Plan")-- 4,000 shares, and the 1997 Incentive
Compensation Plan (the "1997 Plan")--1,600 shares.
In May 1995, the Company offered holders of stock options with exercise
prices above market value as of May 26, 1995 the right to cancel such options in
exchange for Performance Accelerated Restricted Stock Units (the "PARS"). The
PARS represent deferred shares of Class A Common Stock which vest in 20%
increments on the sixth, seventh, eighth, ninth and tenth anniversaries of the
date of grant, or, in certain circumstances, on an accelerated basis based on
the Company's stock trading at certain per share prices, or at the discretion of
the Board of Directors. Options to purchase 1,976 shares were exchanged for 504
PARS. Additionally, restricted shares and deferred shares with a three year
vesting schedule were granted to certain non-employee directors under the 1992
Plan as follows: A total of 40 restricted shares at a fair market value of
$2.4375 per share were granted in fiscal 1998, a total of 135 deferred shares at
a fair market value of $1.3125 per share were granted in fiscal 1997, a total of
50 deferred shares at a fair market value of $3.1875 per share were granted in
fiscal 1996 and 110 deferred shares at a fair market value of $4.1250 per share
were granted in fiscal 1995. Accordingly, the Company has recorded compensation
expense of $371, $449 and $346 in fiscal 1998, 1997 and 1996, respectively.
Additional compensation expense aggregating $1,164 will be charged to expense
through fiscal 2001 as the deferred shares become fully vested.
Stock options granted under the Company's equity incentive plans are
exercisable at not less than the fair market value of the stock at the date of
grant, and none may be exercised more than 10 years from the date of grant.
Options are generally exercisable in four equal installments on the first,
second, third and fourth anniversaries of the date of grant. The Board of
Directors may, in its discretion, accelerate the exercisability, the lapsing of
restrictions, or the expiration of deferral or vesting period of any award under
the plans. From time to time, the Company grants additional stock options to
individuals outside of the 1992, 1995 and 1997 Plans in recognition of
contributions made to the Company.
48
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except per share amounts)
(12) Stock Options--(Continued)
Information with respect to the Company's stock options is as follows:
Average
Stock Options Shares Price (1)
------ ---------
Outstanding at October 31, 1995 ............. 2,631 $ 5.32
Granted ................................ 2,319 2.87
Canceled ............................... 1,143 6.20
Exchanged .............................. 89 15.51
----- ---------
Outstanding at October 31, 1996 ............. 3,718 3.60
Granted ................................ 2,508 1.20
Canceled ............................... 457 2.59
----- ---------
Outstanding at October 31, 1997 ............. 5,769 2.63
Granted ................................ 732 2.65
Canceled ............................... 397 1.83
Exercised .............................. 10 1.26
----- ---------
Outstanding at October 31, 1998 ............. 6,094 $ 2.69
===== =========
(1) Weighted average exercise price.
Summarized information about stock options outstanding and exercisable at
October 31, 1998 is as follows:
Outstanding Exercisable
--------------------------------------------- ---------------------
Exercisable Average Average Average
Price Range Shares Life(1) Price(2) Shares Price(2)
------------------- ------ ------- ------- ------ -------
$ 1.00 to 2.00 ..................... 2,152 7.59 $ 1.13 740 $1.24
$ 2.01 to 3.00 ..................... 2,528 7.15 2.70 1,185 2.65
$ 3.01 to 4.00 ..................... 1,049 5.13 3.39 896 3.43
over $4.00 ....................... 365 4.50 9.80 364 9.80
----- -----
6,094 3,185
===== =====
(1) Weighted average contractual life remaining in years.
(2) Weighted average exercise price.
The number of shares and weighted average exercise price per share of
options exercisable at October 31, 1998, 1997, and 1996 were 3,185 shares at
$3.36, 2,301 shares at $3.90, and 1,950 shares at $4.10, respectively. At
October 31, 1998, 1997 and 1996, 3,302 shares, 3,677 shares, and 2,228 shares,
respectively, were available for future grants under the terms of these plans.
Outstanding options expire prior to October 31, 2008, and are exercisable at
prices ranging from $1.06 to $17.00 per share.
Effective November 1, 1996, the Company adopted the provisions of Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). This statement defines a fair value method of
accounting for an employee stock option or similar equity instrument. However,
it allows an entity to continue to measure compensation cost for those
instruments using the intrinsic-value-based method of accounting prescribed by
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" provided it discloses the effect of SFAS 123 in footnotes to the
financial statements. The Company has chosen to continue to account for
stock-based compensation using the intrinsic value method. Accordingly, no stock
option related compensation expense has been recognized for its stock-based
compensation plans.
49
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except per share amounts)
(12) Stock Options--(Continued)
Had the Company, however, elected to recognize compensation cost based on fair
value of the stock options at the date of grant under SFAS 123, such costs would
have been recognized ratably over the vesting period of the underlying
instruments and the Company's net loss and net loss per share would have
increased to the pro forma amounts indicated in the table below.
Pro forma net loss and loss per common share for the years ended:
October 31,
--------------------------------------
1998 1997 1996
---------- --------- ---------
Net Loss:
As reported ....... $ (15,880) (17,687) (34,195)
Pro forma ......... (17,605) (19,182) (35,133)
Loss per common share:
As reported ....... (0.44) (0.51) (1.09)
Pro forma ......... (0.49) (0.56) (1.12)
Pro forma net loss reflects only options granted in fiscal years 1998, 1997
and 1996. Therefore, the full impact of calculating compensation cost for stock
options under SFAS 123 is not reflected in the pro forma net loss amounts
presented above because compensation cost for options granted prior to November
1, 1995 is not considered.
The fair value of the options granted was estimated using the Black-Scholes
option-pricing model based on the weighted average market price at date of grant
of $2.65 in fiscal 1998, $1.20 in fiscal 1997 and $2.87 in fiscal 1996 and the
following weighted average assumptions: risk-free interest rate of 4.5% for
fiscal 1998, 6.1% for fiscal 1997 and 6.7% for fiscal 1996; expected option life
of 7.0 years for fiscal 1998, 1997 and 1996; volatility of 75% for fiscal 1998
and 81% fiscal 1997 and 1996; and no dividend yield in any year. The average
fair values of options granted during fiscal years 1998, 1997 and 1996 were
$1.93, $0.93 and $2.23, respectively.
(13) Service Contract Arrangements
Service contracts for wagering systems in North America generally cover a
five-year period and provide for substantial related services such as software,
maintenance personnel, computer operators and certain operating supplies. Under
such contracts, the Company retains ownership of all equipment located at the
wagering facilities. The service contracts also provide for certain warranties
covering operation of the equipment, machines, display equipment and central
computing equipment. The breach of such warranties could result in significant
liquidated damages. The equipment is placed at customer facilities under
contracts generally providing for revenue based on the greater of a percentage
of total amounts wagered or, if appropriate, a specified minimum.
Minimum annual payments expected to be received under service contracts in
effect as of October 31, 1998 with specified minimums are as follows: 1999,
$18,783; 2000, $20,001; 2001, $7,704; 2002, $5,850; 2003, $3,786 and thereafter
$2,710.
(14) Export Sales and Major Customers
Sales to foreign customers amounted to $9,717, $14,230 and $11,119 in
fiscal years 1998, 1997 and 1996, respectively. No single customer represented
more than 10% of revenues in any of these periods.
50
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except per share amounts)
(15) Pension Plans
The Company has a defined benefit plan for union employees. Retirement
benefits under the plan are based upon the number of years of credited service
up to a maximum of thirty years for the majority of the employees. The Company's
policy is to fund the minimum contribution permissible by the Internal Revenue
Service.
The following are the components of pension expense related to the defined
benefit plan:
1998 1997 1996
----- ----- -----
Service cost ................................ $ 64 67 62
Interest cost on projected benefit obligation 108 97 89
Actual return on plan assets ................ (108) (85) (19)
Net amortization and deferral ............... 16 (8) (66)
----- ----- -----
$ 80 71 66
===== ===== =====
The assets and obligations of the defined benefit plan at October 31, 1998
and 1997 are as follows:
1998 1997
------- -------
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested benefits of $1,609
and $1,331 at October 31, 1998 and 1997, respectively ................ $ 1,802 1,498
------- -------
Projected benefit obligation for services rendered to date .............. 1,802 1,498
Plan assets at fair value (invested in insurance company general accounts
guaranteed as to principal) .......................................... 1,600 1,419
------- -------
Projected benefit obligation in excess of plan assets ................... 202 79
------- -------
Funded status ........................................................... (202) (79)
Unrecognized net obligation ............................................. 41 46
Unrecognized prior service cost ......................................... 88 73
Unrecognized net loss ................................................... 454 295
------- -------
Prepaid pension cost .................................................... 381 335
Additional minimum liability ............................................ 583 --
------- -------
(Pension liability) prepaid pension cost ................................ $ (202) 335
======= =======
The accumulated benefit obligation represents the actuarial present value
of benefits based upon the benefit multiplied by the participants' historical
years of service.
The accumulated and projected benefit obligation for fiscal 1998 and fiscal
1997 were calculated using the unit credit method and reflect the following
assumptions: discount rate of 6.75% in 1998 and 7.25% in 1997, with a long-term
rate of return on assets of 8% in 1998 and 1997.
As required by Financial Accounting Standards Board Statement No. 87 ("SFAS
87"), "Employers' Accounting for Pensions" for pension plans where the
accumulated benefit obligation exceeds the fair value of plan assets, the
Company has recognized in the October 31, 1998 consolidated balance sheet the
additional minimum liability of the unfunded accumulated benefit obligation of
$583 as a long-term liability, with a partially offsetting intangible asset and
equity adjustment.
In connection with its collective bargaining agreements, the Company
participates with other companies in a defined benefit pension plan covering
union employees. Payments made to the multi-employer plan were approximately
$280, $403 and $204 during the years ended October 31, 1998, 1997 and 1996,
respectively.
51
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except per share amounts)
(15) Pension Plans--(Continued)
The Company has a 401K plan covering all employees who are not covered by a
collective bargaining agreement. Company contributions to the plan are at the
discretion of the Board of Directors. Pension expense for the years ended
October 31, 1998, 1997 and 1996 amounted to approximately $926, $760 and $814,
respectively. The Company has a 401K plan for all union employees which does not
provide for Company contributions.
(16) Management Incentive Compensation
The Company has an incentive compensation plan for key management personnel
based on business unit performance, overall performance of the Company and
individual performance. Management incentive compensation expense amounted to
$1,686, $1,707 and $439 in fiscal years 1998, 1997 and 1996, respectively.
(17) Income Tax Expense (Benefit)
The consolidated loss before income tax expense (benefit) and extraordinary
item, by domestic and foreign source, is as follows:
Year Ended October 31,
--------------------------------
1998 1997 1996
-------- -------- -------
Domestic .................................................................... $(14,371) (14,367) (28,714)
Foreign ..................................................................... (1,188) (1,988) (3,038)
Consolidated loss before income tax expense (benefit) and -------- -------- -------
extraordinary item ........................................................ $(15,559) (16,355) (31,752)
======== ======== =======
Income tax expense (benefit) consists of:
Current Deferred Total
-------- -------- -------
1998 - Foreign ............................................................ $ 1,040 (719) 321
======== ======== =======
1997 - Foreign ............................................................ $ 938 (32) 906
======== ======== =======
1996 - Foreign ............................................................ $ 575 1,868 2,443
======== ======== =======
Temporary differences between the financial statement carrying amounts and
tax basis of assets and liabilities that give rise to significant portions of
the deferred tax liability (asset) relate to the following:
October 31,
--------------------
Net Deferred Tax Liability ................. 1998 1997
------- -------
Accrued downsizing costs .............. $ (761) --
Accrued vacation ...................... (815) (654)
Inventory reserve ..................... (575) (653)
Other accrued liabilities ............. (323) (847)
Reserve for doubtful accounts ......... (569) (533)
------- -------
Current deferred tax asset ....... (3,043) (2,687)
------- -------
52
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except per share amounts)
(17) Income Tax Expense (Benefit)--(Continued)
October 31,
--------------------
Net Deferred Tax Liability--(Continued) ....................... 1998 1997
-------- --------
Intangible assets-difference in amortization periods ..... $ 1,159 1,020
Property and equipment differences in depreciation methods 5,493 7,094
Other, net ............................................... 54 (490)
Interest charge, Domestic International Sales Corp. ...... 5,290 4,989
-------- --------
Noncurrent deferred tax liability, net .............. 11,996 12,613
-------- --------
Net operating loss carryforward .......................... (52,476) (48,193)
Deferred compensation .................................... (615) (466)
Partnership investments .................................. (343) (291)
Alternative minimum tax credits .......................... (184) (184)
Research and experimentation credits ..................... (51) (135)
Foreign tax credit carryforward .......................... -- (279)
-------- --------
Noncurrent deferred tax asset ....................... (53,669) (49,548)
Valuation allowance ...................................... 46,548 42,173
-------- --------
Noncurrent deferred tax asset, net .................. (7,121) (7,375)
-------- --------
Noncurrent deferred tax liability ................... 4,875 5,238
-------- --------
Net deferred tax liability on balance sheet ......... $ 1,832 2,551
======== ========
The aggregate deferred tax assets before valuation allowance at October 31,
1998, and 1997 were $56,712 and $52,725, respectively. The aggregate deferred
tax liabilities at October 31, 1998 and 1997 were $11,996 and $13,103,
respectively.
The actual tax expense differs from the "expected" tax benefit (computed by
applying the U.S. Federal corporate rate of 34% to loss before income taxes
(benefit) and extraordinary item) as follows:
October 31,
-----------------------------
1998 1997 1996
------- ------- -------
Computed "expected" tax benefit .................... $(5,290) (5,561) (10,796)
Increase (reduction) in income taxes resulting from:
Unused net operating loss ..................... 4,788 4,155 9,661
Foreign tax differential ...................... 725 1,782 3,276
Other, net .................................... 98 530 302
------- ------- -------
$ 321 906 2,443
======= ======= =======
The Company has regular tax net operating loss carryforwards of
approximately $1,794 that expire in 2005, $1,222 that expire in 2006, $954 that
expire in 2008, $38,810 that expire in 2009, $40,777 that expire in 2010,
$25,406 that expire in 2011, $11,074 that expire in 2012 and $11,852 that expire
in 2013.
The Company has minimum tax credit carryforwards (which can be carried
forward indefinitely) of approximately $184 and research and experimentation
credit carryforwards of approximately $51. The research and experimentation
credits expire from 1999 to 2003.
53
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except per share amounts)
(17) Income Tax Expense (Benefit)--(Continued)
The net changes in the valuation allowance for deferred tax assets for the
years ended October 31, 1998 and 1997 were increases of $4,375 and $3,992,
respectively.
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
asset will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income,
and tax planning strategies in making this assessment. Because of tax losses in
recent years, no deferred tax assets have been recorded.
Subsequently recognized tax benefits relating to the valuation allowance
for deferred tax assets as of October 31, 1998 will be allocated as follows:
Income tax benefit that would be reported in the consolidated statements of operations...... $ 43,698
Additional capital (benefit from exercise of stock options)................................. 2,850
-------------
$ 46,548
=============
(18) Business and Geographic Segments
The following tables represent revenues, profits, depreciation and assets
by business and geographic segments for the years ended October 31, 1998, 1997
and 1996. Corporate expenses are allocated among industry and geographic
segments.
Year Ended October 31,
-------------------------------------------------
Business Segments ............................................ 1998 1997 1996
--------- --------- ---------
Service revenue and product sales
Pari-mutuel operations .................................. $ 141,266 134,226 128,439
Lottery operations ...................................... 18,047 23,106 47,796
--------- --------- ---------
$ 159,313 157,332 176,235
========= ========= =========
Operating income (loss)
Pari-mutuel operations .................................. $ (2,358) (1,866) (10,293)
Lottery operations ...................................... 1,256 (43) 1,865
--------- --------- ---------
$ (1,102) (1,909) (8,428)
========= ========= =========
Depreciation and amortization
Pari-mutuel operations .................................. $ 27,389 28,413 31,068
Lottery operations ...................................... 2,100 8,315 9,785
--------- --------- ---------
$ 29,489 36,728 40,853
========= ========= =========
Assets
Pari-mutuel operations .................................. $ 138,901 148,154 152,868
Lottery operations ...................................... 17,599 5,387 43,925
--------- --------- ---------
$ 156,500 153,541 196,793
========= ========= =========
Capital and wagering systems expenditures
Pari-mutuel operations .................................. $ 10,748 7,359 8,135
Lottery operations ...................................... 13,312 129 1,106
--------- --------- ---------
$ 24,060 7,488 9,241
========= ========= =========
54
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except per share amounts)
(18) Business and Geographic Segments--(Continued)
Year Ended October 31,
-------------------------------------------------
Geographic Segments ................................. 1998 1997 1996
--------- --------- ---------
Service revenue and product sales
North America .................................. $ 126,726 125,402 120,589
Europe ......................................... 31,607 28,780 49,656
Asia ........................................... 980 3,150 5,990
--------- --------- ---------
$ 159,313 157,332 176,235
========= ========= =========
Operating income (loss)
North America .................................. $ (1,196) (4,744) (6,373)
Europe ......................................... (90) 2,102 (1,573)
Asia ........................................... 184 733 (482)
--------- --------- ---------
$ (1,102) (1,909) (8,428)
========= ========= =========
Depreciation and amortization
North America .................................. $ 26,489 31,180 32,195
Europe ......................................... 2,963 5,468 8,658
Asia ........................................... 37 80 --
--------- --------- ---------
$ 29,489 36,728 40,853
========= ========= =========
Assets
North America .................................. $ 129,152 139,262 146,929
Europe ......................................... 26,437 13,463 49,864
Asia ........................................... 911 816 --
--------- --------- ---------
$ 156,500 153,541 196,793
========= ========= =========
Capital and wagering systems expenditures
North America .................................. $ 22,082 7,199 8,518
Europe ......................................... 1,978 289 723
Asia ........................................... -- -- --
--------- --------- ---------
$ 24,060 7,488 9,241
========= ========= =========
55
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except per share amounts)
(19) Selected Quarterly Financial Data--(Unaudited)
Selected quarterly financial data for the years ended October 31, 1998 and
1997 is as follows:
Year Ended October 31, 1998
--------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- ------- ------- -------
Total operating revenues ................................................ $ 34,431 36,215 38,795 49,872
Gross profit ............................................................ 12,933 13,946 13,170 14,609
Net loss ................................................................ (5,194) (2,066) (4,413) (4,207)
Net loss per basic share and diluted share .............................. $ (0.15) (0.06) (0.12) (0.12)
======== ======== ======== ========
Weighted average number of shares used in per share calculation ......... 35,389 35,504 35,916 35,941
======== ======== ======== ========
Year Ended October 31, 1997
-------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- ------- ------- -------
Total operating revenues ................................................ $ 35,515 41,921 35,818 44,078
Gross profit ............................................................ 13,729 16,436 14,356 16,919
Loss before extraordinary item .......................................... (7,423) (4,691) (1,712) (3,435)
Extraordinary item ...................................................... -- -- (426) --
Net loss ................................................................ (7,423) (4,691) (2,138) (3,435)
Net loss per basic share and diluted share before extraordinary item .... (0.23) (0.14) (0.05) (0.09)
Extraordinary item per basic share and diluted share .................... -- -- (0.01) --
Net loss per basic share and diluted share .............................. $ (0.23) (0.14) (0.06) (0.09)
======== ======== ======== ========
Weighted average number of shares used in per share calculation ......... 32,734 34,498 35,312 35,335
======== ======== ======== ========
Certain reclassifications have been made to the previously reported
quarterly data to conform to the current presentation.
(20) Unusual Items
In fiscal 1998, the Company recognized unusual charges of $1.5 million for
severance and downsizing costs, primarily in the Company's French pari-mutuel
operations, and accelerated the amortization of related goodwill due to the loss
of a major service contract. In addition, in 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 for cost
savings related to the refurbishment of certain terminals.
In the third quarter of fiscal 1996, the Company recorded charges in other
deductions of $647 for costs incurred in connection with the Company's proposed
but uncompleted third quarter 1996 debt offering, and charges in selling,
general and administrative expense of $569 for contractual payments related to
the departure of the President of the Company. Partially offsetting these costs
was the reversal of $649 of fiscal 1995 restructuring cost accruals because of
the Company's decision to continue limited manufacturing of wagering terminals
at its plant in Ireland.
56
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except per share amounts)
(21) Litigation
In addition to routine legal proceedings incidental to the conduct of its
business, the Company and certain of its officers and directors were named as
defendants in a number of lawsuits commenced in February 1995 as class actions
in the United States District Court for the District of Delaware. These lawsuits
were consolidated into one class action in June 1995. The parties entered into a
definitive Stipulation and Agreement of Settlement dated July 19, 1996 (the
"Settlement Agreement") related to these claims.
The Settlement Agreement was finalized on December 24, 1996, at which time
the Company paid $7,500 in cash plus 2,964 shares of Class A Common Stock which
had an aggregate value of $3,500 based on the average price of the Company's
Class A Common Stock for 10 trading days preceding the final hearing in the
District Court. Insurance companies providing directors and officers insurance
contributed approximately $6,500 of the cash portion of the settlement, with
$1,250 of that amount in the form of a loan to the Company, with the payment
terms subject to negotiation. The Company accrued a charge of $6,800 against
operations in fiscal 1996 to reflect the settlement and anticipated legal fees.
(22) Financial Information for Guarantor Subsidiaries and Non-Guarantor
Subsidiaries
The Company conducts substantially all of its business through its domestic
and foreign subsidiaries. On July 28, 1997, the Company issued $110,000
aggregate principal amount of Notes bearing interest at a rate of 10 7/8%. The
proceeds from the issuance of the Notes were used to repay all amounts
outstanding under the Senior Facility (see Note 7). The Notes are jointly and
severally guaranteed by substantially all of the Company's wholly owned domestic
subsidiaries (the "Guarantor Subsidiaries").
Presented below is condensed consolidating financial information for
Autotote Corporation (the "Parent Company") 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 October 31, 1998 and October 31, 1997
and for the fiscal years ended October 31, 1998, 1997 and 1996. The condensed
consolidating financial information has been presented to show the nature of
assets held, results of operations and cash flows of the Parent Company,
Guarantor Subsidiaries and Non-Guarantor Subsidiaries assuming the 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.
57
AUTOTOTE CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
October 31, 1998
(in thousands)
Parent Guarantor Non-Guarantor Eliminating
Company Subsidiaries Subsidiaries Entries Consolidated
---------- ------------ ------------- ----------- ------------
ASSETS
Cash and cash equivalents ................. $ 2,054 260 4,495 -- 6,809
Accounts receivable, net .................. -- 18,559 3,193 -- 21,752
Other current assets ...................... 39 10,245 4,058 (477) 13,865
Property and equipment, net ............... 389 70,897 7,437 (290) 78,433
Investment in subsidiaries ................ 62,826 -- -- (62,826) --
Goodwill .................................. 204 1,686 1,724 -- 3,614
Other assets .............................. 6,090 26,748 692 (1,503) 32,027
--------- --------- --------- -------- -------
Total assets .......................... $ 71,602 128,395 21,599 (65,096) 156,500
========= ========= ========= ======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities ....................... $ 12,463 21,668 8,103 78 42,312
Current installments of long-term debt .... -- 2,679 326 (13) 2,992
Long-term debt, excluding current
installments ............................ 146,250 9,056 572 -- 155,878
Other non-current liabilities ............. 1,535 1,192 1,229 -- 3,956
Intercompany balances ..................... (40,008) 42,900 (2,892) -- --
Stockholders' equity (deficit) ............ (48,638) 50,900 14,261 (65,161) (48,638)
--------- --------- --------- -------- -------
Total liabilities and stockholders'
equity (deficit) ........................ $ 71,602 128,395 21,599 (65,096) 156,500
========= ========= ========= ======== =======
AUTOTOTE CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
October 31, 1997
(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
========= ======= ====== ====== =========
58
AUTOTOTE CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED STATEMENT OF OPERATIONS
Year Ended October 31, 1998
(in thousands)
Parent Guarantor Non-Guarantor Eliminating
Company Subsidiaries Subsidiaries Entries Consolidated
-------- ------------ -------------- ----------- ------------
Operating revenues .............................. $ -- 140,327 30,247 (11,261) 159,313
Operating expenses .............................. -- 92,086 23,191 (10,622) 104,655
-------- -------- -------- -------- --------
Gross profit ................................. -- 48,241 7,056 (639) 54,658
Selling, general and administrative expenses .... 9,179 13,247 3,779 -- 26,205
Loss on sale of businesses ...................... 66 -- -- -- 66
Depreciation and amortization ................... 140 25,674 3,963 (288) 29,489
-------- -------- -------- -------- --------
Operating income (loss) ...................... (9,385) 9,320 (686) (351) (1,102)
Interest expense ................................ 14,985 340 274 (78) 15,521
Other (income) expense .......................... (610) (110) (422) 78 (1,064)
-------- -------- -------- -------- --------
Income (loss) before equity in income of
subsidiaries, and income taxes ................ (23,760) 9,090 (538) (351) (15,559)
Equity in income of subsidiaries ............... 8,055 -- -- (8,055) --
Income tax expense .............................. 175 53 93 -- 321
-------- -------- -------- -------- --------
Net income (loss) ............................... $(15,880) 9,037 (631) (8,406) (15,880)
======== ======== ======== ======== ========
AUTOTOTE CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED STATEMENT OF OPERATIONS
Year Ended October 31, 1997
(in thousands)
Parent Guarantor Non-Guarantor Eliminating
Company Subsidiaries Subsidiaries Entries Consolidated
-------- ------------ ------------- ----------- ------------
Operating revenues .................................. $ -- 129,130 30,614 (2,412) 157,332
Operating expenses .................................. -- 80,303 17,915 (2,326) 95,892
-------- -------- -------- -------- --------
Gross profit ..................................... -- 48,827 12,699 (86) 61,440
-------- -------- -------- -------- --------
Selling, general and administrative expenses ........ 10,963 12,696 4,686 99 28,444
Gain on sale of business ............................ (1,823) -- -- -- (1,823)
Depreciation and amortization ....................... 69 28,423 8,578 (342) 36,728
-------- -------- -------- -------- --------
Operating income (loss) .......................... (9,209) 7,708 (565) 157 (1,909)
Interest expense .................................... 14,269 (228) 497 (171) 14,367
Other (income) expense .............................. (326) (413) 746 72 79
-------- -------- -------- -------- --------
Income (loss) before equity in income of
subsidiaries, income taxes, and
extraordinary items .............................. (23,152) 8,349 (1,808) 256 (16,355)
Equity in income of subsidiaries ................... 4,716 -- -- (4,716) --
Income tax expense .................................. 201 113 592 -- 906
-------- -------- -------- -------- --------
Net income (loss) before extraordinary items ........ (18,637) 8,236 (2,400) (4,460) (17,261)
Extraordinary items:
(Write-off) of deferred financing fees and
expenses, net of gain on early
retirement of debt ............................. 950 (1,376) -- -- (426)
-------- -------- -------- -------- --------
Net income (loss) ................................... $(17,687) 6,860 (2,400) (4,460) (17,687)
======== ======== ======== ======== ========
59
AUTOTOTE CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED STATEMENT OF OPERATIONS
Year Ended October 31, 1996
(in thousands)
Parent Guarantor Non-Guarantor Eliminating
Company Subsidiaries Subsidiaries Entries Consolidated
--------- ------------ ------------- ------------ ------------
Operating revenues ................................ $ -- 121,294 57,197 (2,256) 176,235
Operating expenses ................................ -- 78,466 36,159 (2,087) 112,538
-------- -------- -------- -------- --------
Gross profit ................................... -- 42,828 21,038 (169) 63,697
Selling, general and administrative expenses ...... 9,771 13,443 8,834 (127) 31,921
Restructuring and write-off of assets ............. 233 -- (882) -- (649)
Depreciation and amortization ..................... 40 29,674 11,456 (317) 40,853
-------- -------- -------- -------- --------
Operating income (loss) ........................ (10,044) (289) 1,630 275 (8,428)
Interest expense .................................. 14,499 288 391 (341) 14,837
Other (income) expense ............................ 8,581 (184) (335) 425 8,487
-------- -------- -------- -------- --------
Income (loss) before equity in loss of
subsidiaries and income taxes ................... (33,124) (393) 1,574 191 (31,752)
Equity in loss of subsidiaries .................... (671) -- -- 671 --
Income tax expense ................................ 400 200 1,843 -- 2,443
-------- -------- -------- -------- --------
Net income (loss) ................................. $(34,195) (593) (269) 862 (34,195)
======== ======== ======== ======== ========
60
AUTOTOTE CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED STATEMENT OF CASH FLOWS
Year Ended October 31, 1998
(in thousands)
Parent Guarantor Non-Guarantor Eliminating
Company Subsidiaries Subsidiaries Entries Consolidated
-------- ------------ ------------- ------------ ------------
Net income (loss) ................................. $(15,880) 9,037 (631) (8,406) (15,880)
Depreciation and amortization .................. 140 25,674 3,963 (288) 29,489
Equity in income of subsidiaries ............... (8,055) -- -- 8,055 --
Loss on sale of businesses ..................... 66 -- -- -- 66
Other non-cash adjustments ..................... 1,234 (77) (414) -- 743
Changes in working capital ..................... (1,957) (4,404) (51) 154 (6,258)
-------- -------- -------- -------- --------
Net cash provided by (used in ) operating
activities ..................................... (24,452) 30,230 2,867 (485) 8,160
-------- -------- -------- -------- --------
Cash flows from investing activities:
Capital and wagering systems expenditures ...... (316) (21,620) (2,557) 433 (24,060)
Cash acquired with business acquisition ........ -- -- 2,177 -- 2,177
Other assets and investments ................... (973) (6,059) (479) 171 (7,340)
-------- -------- -------- -------- --------
Net cash provided by (used in) investing
activities ..................................... (1,289) (27,678) (859) 604 (29,223)
-------- -------- -------- -------- --------
Cash flows from financing activities:
Net proceeds from issuance of long
term-debt .................................... -- 12,084 (25) -- 12,059
Payments on long-term debt ..................... -- (2,774) (310) 12 (3,072)
Other, principally intercompany balances ....... 12,208 (11,930) 274 (36) 516
-------- -------- -------- -------- --------
Net cash provided by (used in) financing
activities ..................................... 12,208 (2,620) (61) (24) 9,503
-------- -------- -------- -------- --------
Effect of exchange rate changes on cash ........... 5 1 251 (95) 162
-------- -------- -------- -------- --------
Increase/(decrease) in cash and cash
equivalents .................................... (13,528) (68) 2,198 -- (11,398)
Cash and cash equivalents, beginning of year ...... 15,582 328 2,297 -- 18,207
======== ======== ======== ======== ========
Cash and cash equivalents, end of year ............ $ 2,054 260 4,495 -- 6,809
======== ======== ======== ======== ========
61
AUTOTOTE CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED STATEMENT OF CASH FLOWS
Year Ended October 31, 1997
(in thousands)
Parent Guarantor Non-Guarantor Eliminating
Company Subsidiaries Subsidiaries Entries Consolidated
--------- ------------- -------------- ----------- -------------
Net income (loss) ................................ $ (17,687) 6,860 (2,400) (4,460) (17,687)
Depreciation and amortization ................. 69 28,423 8,578 (342) 36,728
Equity in income of subsidiaries .............. (4,716) -- -- 4,716 --
Gain on sale of business ...................... (1,823) -- -- -- (1,823)
Non-cash extraordinary items .................. (950) 1,376 -- -- 426
Other non-cash adjustments .................... 3,264 40 (658) -- 2,646
Changes in working capital .................... 5,004 (4,531) 2,942 13 3,428
--------- --------- --------- --------- ---------
Net cash provided by (used in ) operating
activities .................................... (16,839) 32,168 8,462 (73) 23,718
--------- --------- --------- --------- ---------
Cash flows from investing activities:
Capital and wagering systems expenditures ..... (49) (5,415) (2,062) 38 (7,488)
Proceeds from sale of business and assets
disposals ................................... 23,216 260 (2,420) -- 21,056
Other assets and investments .................. (442) (1,463) (642) (140) (2,687)
--------- --------- --------- --------- ---------
Net cash provided by (used in) investing
activities .................................... 22,725 (6,618) (5,124) (102) 10,881
--------- --------- --------- --------- ---------
Cash flows from financing activities:
Net repayments under revolving credit
facility .................................... -- (71,890) -- -- (71,890)
Net proceeds from issuance of long
term-debt ................................... 105,100 -- 1,234 -- 106,334
Payments on long-term debt .................... (4,350) (52,224) (846) 25 (57,395)
Other, principally intercompany balances ...... (94,432) 98,631 (3,401) 163 961
--------- --------- --------- --------- ---------
Net cash provided by (used in) financing
activities .................................... 6,318 (25,483) (3,013) 188 (21,990)
--------- --------- --------- --------- ---------
Effect of exchange rate changes on cash .......... 2 -- (379) (13) (390)
--------- --------- --------- --------- ---------
Increase/(decrease) in cash and cash
equivalents .................................... 12,206 67 (54) -- 12,219
Cash and cash equivalents, beginning of year ..... 3,376 261 2,351 -- 5,988
--------- --------- --------- --------- ---------
Cash and cash equivalents, end of year ........... $ 15,582 328 2,297 -- 18,207
========= ========= ========= ========= =========
62
AUTOTOTE CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED STATEMENT OF CASH FLOWS
Year Ended October 31, 1996
(in thousands)
Parent Guarantor Non-Guarantor Eliminating
Company Subsidiaries Subsidiaries Entries Consolidated
-------- ------------ ------------- ----------- ------------
Net income (loss) ................................... $(34,195) (593) (269) 862 (34,195)
Depreciation and amortization .................... 40 29,674 11,456 (317) 40,853
Equity in loss of subsidiaries ................... 671 -- -- (671) --
Other non-cash adjustments ....................... 7,188 441 (13) 152 7,768
Changes in working capital ....................... 373 (2,274) 2,431 (88) 442
-------- -------- -------- -------- --------
Net cash provided by (used in ) operating
activities ....................................... (25,923) 27,248 13,605 (62) 14,868
-------- -------- -------- -------- --------
Cash flows from investing activities:
Capital and wagering systems expenditures ........ (114) (7,863) (1,262) (2) (9,241)
Proceeds from asset sales ........................ 3,000 1,024 660 -- 4,684
Other assets and investments ..................... (1,470) 144 (2,673) 667 (3,332)
-------- -------- -------- -------- --------
Net cash provided by (used in) investing activities.. 1,416 (6,695) (3,275) 665 (7,889)
-------- -------- -------- -------- --------
Cash flows from financing activities:
Net borrowings under lines of credit ............. -- 2,610 -- -- 2,610
Net proceeds from issuance of long
term-debt ...................................... -- 1,626 924 -- 2,550
Payments on long-term debt ....................... -- (8,930) (1,926) 27 (10,829)
Other, principally intercompany balances ......... 24,112 (15,947) (7,391) (774) --
-------- -------- -------- -------- --------
Net cash provided by (used in) financing activities . 24,112 (20,641) (8,393) (747) (5,669)
-------- -------- -------- -------- --------
Effect of exchange rate changes on cash ............. 386 (1) (842) 144 (313)
-------- -------- -------- -------- --------
Increase/(decrease) in cash and cash
equivalents ....................................... (9) (89) 1,095 -- 997
Cash and cash equivalents, beginning of year ........ 3,385 350 1,256 -- 4,991
-------- -------- -------- -------- --------
Cash and cash equivalents, end of year .............. $ 3,376 261 2,351 -- 5,988
======== ======== ======== ======== ========
63
SCHEDULE II
AUTOTOTE CORPORATION AND SUBSIDIARIES
Valuation and Qualifying Accounts
Three years ended October 31, 1998
(in thousands)
Additions
-----------------------
Charged
Balance at to Charged Balance at
beginning costs and to other end of
of period expenses accounts Deductions(1) period
--------- --------- --------- ------------ ----------
Year ended October 31, 1996
Allowance for doubtful accounts................ $ 1,679 1,392 -- 1,018 2,053
Reserve for inventory obsolesce................ $ 2,923 26 (7) 614 2,328
Year ended October 31, 1997
Allowance for doubtful accounts................ $ 2,053 1,070 -- 1,147 1,976
Reserve for inventory obsolesce................ $ 2,328 185 187 462 2,238
Year ended October 31, 1998
Allowance for doubtful accounts................ $ 1,976 888 -- 1,053 1,811
Reserve for inventory obsolesce................ $ 2,238 296 50 247 2,337
(1) Amounts written off or collected.
64
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE MATTERS
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information relating to directors of the Company and information relating
to disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
incorporated herein by reference to the Company's proxy statement in connection
with the 1999 Annual Meeting of Stockholders under the caption "Election of
Directors." Information relating to executive officers of the Company is
included in Part I of this Form 10-K as permitted in General Instruction [G3].
ITEM 11. EXECUTIVE COMPENSATION
Information relating to executive compensation under the caption "Executive
Compensation; Certain Arrangements," in the Company's proxy statement in
connection with the 1999 Annual Meeting of Stockholders is incorporated herein
by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information relating to security ownership of certain beneficial owners and
management under the caption, "Security Ownership" in the Company's proxy
statement in connection with the 1999 Annual Meeting of Stockholders is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information under the caption "Certain Arrangements Between the Company and
its Directors and Officers" in the Company's proxy statement in connection with
the 1999 Annual Meeting of Stockholders is incorporated herein by reference.
65
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements--See Index to Consolidated Financial Statements
attached hereto, page 30.
2. Financial Statements Schedule--See Index to Consolidated Financial
Statements attached hereto, page 30.
3. Exhibits--The following is a list of exhibits:
Exhibit
Number Description
------- -----------
3.1 Certificate of Incorporation of the Company, as amended through June 29, 1995.(1)
3.2 Bylaws of the Company.(2)
4.1 Indenture, dated as of July 28, 1997, among the Company, the
Guarantors and IBJ Schroder Bank & Trust Company, as Trustee.(3)
4.2 Form of 10 7/8% Series A and Series B Senior Notes Due 2004, dated as of July 28, 1997 (incorporated by
reference to Exhibit 4.1).
4.3 Registration Rights Agreement, dated as of July 28, 1997, among
the Company, the Guarantors and Donaldson, Lufkin & Jenrette
Securities Corporation.(4)
4.4 Certificate representing share of Class A Common Stock of the Company.(2)
10.1 Credit Agreement, dated as of July 28, 1997, between the Company,
the financial institutions party thereto and DLJ Capital Funding,
Inc. as agent (the "Credit Agreement").(5)
10.2 1984 Stock Option Plan, as amended.(6)*
10.3 Form of Option dated March 3, 1992 issued to A. Lorne Weil.(7)*
10.4 Form of Option dated December 13, 1991 issued to Marshall Bartlett.(8)*
10.5 Employment Agreement dated November 1, 1992, of A. Lorne Weil and Autotote Corporation.(9)*
10.6 Stock Purchase Agreement dated July 15, 1994 among the Company, Marvin H. Sugarman, Robert
Melican, Racing Technology, Inc. and Marvin H. Sugarman Productions, Inc.(10)
10.7 Asset Purchase Agreement dated January 12, 1995 between Autotote Communication Services, Inc.
and IDB Communications Group Inc.(11)
10.8 Purchase Agreement dated October 14, 1994 between Autotote Corporation, Yves Alexandre, Marie
A. Alexandre and Frederic Alexandre. (English summary attached to French original).(12)
10.9 Purchase Agreement among the Company, Autotote Enterprises, Inc., and the State of Connecticut,
Division of Special Revenue, dated June 30, 1993.(13)
10.10 Stock Purchase Agreement between the Company and General Instrument Corporation dated May 18,
1993.(14)
10.11 Purchase and Sale Agreement between the Company and Sven Eriksson dated May 27, 1993.(15)
66
Exhibit
Number Description
------- -----------
10.12 Agreement among ETAG Electronic Totalisator AG, Gerhard Harwalik, Peter Freudenschuss, Peter
Tinkl and Manfred Harwalik dated July 27, 1993.(16)
10.13 Purchase Agreement among certain purchasers and Autotote Corporation dated August 13, 1993 with respect
to the 5 1/2% Convertible Subordinated Debentures due 2001.(17)
10.14 1992 Equity Incentive Plan, as amended and restated.*(+)
10.15 Registration Rights Agreement, dated as of November 6, 1995,
between the Company and Hartford Stock Fund and Hartford Advisers
Fund (collectively, the "Funds")(18)
10.16 Interest Agreement, dated as of November 6, 1995, between the Company and the Funds.(19)
10.17 Letter Agreement, dated as of January 3, 1995, between the Company and Martin E. Schloss.(20)*
10.18 Agreement of Purchase and Sale, dated January 19, 1996, between Autotote Systems, Inc. and Fusco
Properties, L.P. ("Fusco").(21)
10.19 Lease Agreement, dated as of January 19, 1996, between Fusco and Autotote Systems, Inc.(22)
10.20 Employment Agreement, dated February 22, 1996, between the Company and William Luke.(23)*
10.21 Promissory Note dated May 13, 1996 between the Company and A. Lorne Weil.(24)
10.22 Stock Transfer Agreement among the Company and American Wagering,
Inc., dated October 25, 1996, with respect to all outstanding
stock of Autotote CBS, Inc.(25)
10.23 Stock Purchase Agreement among the Company and Scientific Games Holding Corp., Tele Control
Kommunikations und Computersysteme Aktien Gesellschaft.(26)
10.24 1997 Incentive Compensation Plan.(27)*
10.25 1995 Equity Incentive Plan.*(28)
10.26 Employment Agreement effective November 1, 1997 between A. Lorne Weil and Autotote Corporation (the
"Weil Employment Agreement").(29)*
10.27 Amendment dated September 10, 1998, to the Weil Employment Agreement *(+)
10.28 Form of Change in Control Agreement effective November 1, 1997 between the Company and its executive
officers and certain non-executive officers.(30)*
10.29 Agreement between the Company and Elettronica Ingegneria Sistemi dated February 19, 1998.(31)
10.30 General Agreement between the Company and Sisal Sport Italia SpA dated February 19, 1998.(32)
10.31 Term Loan Agreement dated May 22, 1998 by and among Autotote Corporation, Autotote Lottery
Corporation, various financial institutions and Heller Financial, Inc., as agent.(33)
10.32 Purchase Agreement between Autotote Corporation and Stichting Hippo Toto dated June 29, 1998.(34)
67
Exhibit
Number Description
------- -----------
10.33 1992 Equity Incentive Plan, as amended and restated, effective September 10, 1998. *(+)
10.34 The Autotote Corporation Key Executive Deferred Compensation Plan, and Plan Adoption Agreement *(+)
10.35 First Amendment dated December 31, 1997 to the Credit Agreement, between the Company, the financial
institutions party thereto and Heller Financial, Inc. as successor agent. (+)
10.36 Second Amendment and waiver dated May 22, 1988 to the Credit Agreement, between the Company, the
financial institutions party thereto and Heller Financial, Inc. as agent. (+)
10.37 Waiver and Third Amendment dated December 31, 1998 to the Credit Agreement, between the Company, the
financial institutions party thereto and Heller Financial, Inc. as agent. (+)
21.1 List of Subsidiaries. (+)
23 Consent of KPMG LLP. (+)
99.7 Warrant to Purchase Class B Nonvoting Common Stock of Autotote Corporation dated October 30, 1992
issued to various lenders.(35)
99.8 Warrant Agreement dated as of September 14, 1995 (the "1995 Warrant Agreement").(36)
99.9 Warrant Agreement dated as of January 26, 1996 (the "1996 Warrant Agreement").(37)
99.10 Amendment dated January 29, 1997 amending both the 1995 Warrant Agreement and the 1996 Warrant
Agreement. (38)
99.11 Order and Final Judgment of the United States District Court for
the District of Delaware dated October 22, 1996, Amendment to
Amended Stipulation and Agreement of Settlement, dated November 7,
1996, and Amended Stipulation and Agreement of Settlement dated
July 19, 1996.(39)
(1) Incorporated by reference to Exhibit 3.1 to the Company's Quarterly Report
on Form 10-Q for the quarter ended July 31, 1995.
(2) Incorporated by reference to Exhibit 4.4 to the Company's Registration
Statement on Form S-8 (Registration No. 33-46594) which became effective
March 20, 1992 (the "1992 S-8").
(3) Incorporated by reference to Exhibit 1 to the Company's Current Report on
Form 8-K dated August 11, 1997 (the "1997 8-K")
(4) Incorporated by reference to Exhibit 2 to the Company's 1997 8-K.
(5) Incorporated by reference to Exhibit 3 to the Company's 1997 8-K.
(6) Incorporated by reference to Exhibit 4.1 to the Company's 1992 S-8.
(7) Incorporated by reference to Exhibit 10.45 to the Company's Annual Report
on Form 10-K for the fiscal year ended October 31, 1992 (the "1992 10-K").
(8) Incorporated by reference to Exhibit 10.46 to the Company's 1992 10-K.
(9) Incorporated by reference to Exhibit 10.39 to the Company's 1992 10-K.
(10) Incorporated by reference to Exhibit 10.19 to the Company's Annual Report
on Form 10-K for the fiscal year ended October 31, 1994 (the "1994 10-K").
(11) Incorporated by reference to Exhibit 10.20 to the Company's 1994 10-K.
(12) Incorporated by reference to Exhibit 10.21 to the Company's 1994 10-K.
(13) Incorporated by reference to Exhibit 2.1 to the Company's Current Report on
Form 8-K dated July 1, 1993.
(14) Incorporated by reference to Exhibit 2.1 to the Company's Current Report on
Form 8-K dated June 22, 1993.
68
(15) Incorporated by reference to Exhibit 2.2 to the Company's Current Report on
Form 8-K dated June 22, 1993.
(16) Incorporated by reference to Exhibit 2.1 to the Company's Current Report on
Form 8-K dated September 8, 1993.
(17) Incorporated by reference to Exhibit 10 to the Company's Current Report on
Form 8-K dated September 8, 1993.
(18) Incorporated by reference to Exhibit 10.36 to the Company's Annual Report
on Form 10-K for the fiscal year ended October 31, 1995 (the "1995 10-K").
(19) Incorporated by reference to Exhibit 10.37 to the Company's 1995 10-K.
(20) Incorporated by reference to Exhibit 10.40 to the Company's 1995 10-K.
(21) Incorporated by reference to Exhibit 10.42 to the Company's Annual Report
on Form 10-K/A for the fiscal year ended October 31, 1995, dated February
20, 1996 (the "1995 10-K/A").
(22) Incorporated by reference to Exhibit 10.43 to the Company's 1995 10-K/A.
(23) Incorporated by reference to Exhibit 10.45 to the Company's Quarterly
Report on Form 10-Q for the quarter ended January 31, 1996.
(24) Incorporated by reference to Exhibit 10.47 to the Company's Quarterly
Report on Form 10-Q for the quarter ended April 30, 1996.
(25) Incorporated by reference to Exhibit 10.25 to the Company's Registration
Statement on Form S-4/A (Registration No. 333-34465) which became effective
September 12, 1997 (the "1997 S-4/A").
(26) Incorporated by reference to Exhibit 10.27 to the Company's Current Report
on Form 8-K dated April 15, 1997.
(27) Incorporated by reference to Exhibit 10.1 to the Company's Registration
Statement on Form S-8 (Registration No. 333-44979) which became effective
January 27, 1998.
(28) Incorporated by reference to Exhibit 10.14 to the Company's Annual Report
on Form 10-K for the fiscal year ended October 31, 1997.
(29) Incorporated by reference to Exhibit 10.26 to the Company's Quarterly
Report on Form 10-Q for the quarter ended January 31, 1998.
(30) Incorporated by reference to Exhibit 10.27 to the Company's Quarterly
Report on Form 10-Q for the quarter ended April 30, 1998
(31) Incorporated by reference to Exhibit 10.28 to the Company's Quarterly
Report on Form 10-Q for the quarter ended April 30, 1998.
(32) Incorporated by reference to Exhibit 10.29 to the Company's Quarterly
Report on Form 10-Q for the quarter ended April 30, 1998.
(33) Incorporated by reference to Exhibit 10.30 to the Company's Quarterly
Report on Form 10-Q for the quarter ended July 31, 1998.
(34) Incorporated by reference to Exhibit 10.31 to the Company's Quarterly
Report on Form 10-Q for the quarter ended July 31, 1998.
(35) Incorporated by reference to Exhibit 10.34 to the Company's 1992 10-K.
(36) Incorporated by reference to Exhibit 99.8 to the Company's 1997 S-4/A.
(37) Incorporated by reference to Exhibit 99.9 to the Company's 1997 S-4/A.
(38) Incorporated by reference to Exhibit 99.10 to the Company's 1997 S-4/A.
(39) Incorporated by reference to Exhibit 28.1 to the Company's Annual Report on
Form 10-K for the fiscal year ended October 31, 1996.
- ----------
* Includes management contracts and compensation plans and arrangements.
(+) Filed herewith.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter for which this
report was filed.
69
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
AUTOTOTE CORPORATION
Dated: January 27, 1999
By: /s/A. Lorne Weil
---------------------------------
A. Lorne Weil, Chairman of the Board,
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on January 27, 1999.
Signature Title Date
- ------------------------------ ------------------------------------------ ----------------
/S/ A. LORNE WEIL Chairman of the Board, President and Chief January 27, 1999
------------------------ Executive Officer, and Director
A. Lorne Weil (principal executive officer)
/S/ DEWAYNE E. LAIRD Vice President and Chief January 27, 1999
------------------------ Financial Officer
DeWayne E. Laird (principal financial and accounting
officer)
/S/ LARRY J. LAWRENCE Director January 27, 1999
------------------------
Larry J. Lawrence
/S/ SIR BRIAN G. WOLFSON Director January 27, 1999
------------------------
Sir Brian G. Wolfson
/S/ ALAN J. ZAKON Director January 27, 1999
------------------------
Alan J. Zakon
/S/ MARSHALL BARTLETT Director January 27, 1999
---------------------
Marshall Bartlett
70
EXHIBIT INDEX
Exhibit No. Description Page
- ----------- ----------- ----
21.1 List of Subsidiaries.
23 Consent of KPMG LLP.
10.27 Amendment, dated September 10, 1998, to the Weil Employment Agreement.
10.33 1992 Equity Incentive Plan, as amended and restated, effective
September 10, 1998.
10.34 The Autotote Corporation Key Executive Deferred Compensation Plan, and
Plan Adoption Agreement.
10.35 First Amendment dated December 31, 1997 to the Credit Agreement,
between the Company, the financial institutions party thereto and
Heller Financial, Inc. as successor agent.
10.36 Second Amendment and waiver dated May 22, 1988 to the Credit
Agreement, between the Company, the financial institutions party
thereto and Heller Financial, Inc. as agent.
10.37 Waiver and Third Amendment dated December 31, 1998 to the Credit
Agreement, between the Company, the financial institutions party
thereto and Heller Financial, Inc. as agent.
27 Financial Data Schedule.
71