Back to GetFilings.com
================================================================================
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: October 31, 1999,
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 25, 2000, the aggregate market value of voting stock held by
non-affiliates of the registrant was approximately $155,070,468.
Common shares outstanding as of January 25, 2000 were 36,487,169.
DOCUMENTS INCORPORATED BY REFERENCE
The following document is incorporated herein by reference:
Document Parts Into Which Incorporated
-------- -----------------------------
Proxy Statement for the Company's 2000 Annual Part III
Meeting of Stockholders
EXHIBIT INDEX APPEARS ON PAGE 73
================================================================================
PART I
FORWARD-LOOKING STATEMENTS
Throughout this Annual Report on Form 10-K we make "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended ("The Securities Act") and Section 21E of the Securities Exchange Act of
1934, as amended (the "Exchange Act"). Forward-looking statements include the
words "may," "will," "estimate," "intend," "continue," "believe," "except" or
"anticipate" and other similar words. The forward-looking statements contained
in this Annual Report are generally located in the material set forth under the
headings "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business," but may be found in other locations as
well. These forward-looking statements generally relate to plans and objectives
for future operations and are based upon management's reasonable estimates of
future results or trends. Although we believe that the plans and objectives
reflected in or suggested by such forward-looking statements are reasonable,
such plans or objectives may not be achieved. Actual results may differ from
projected results due, but not limited, to unforeseen developments, including
developments relating to the following:
o the availability and adequacy of our cash flow to satisfy our
obligations, including payment of our outstanding notes and
debentures and additional funds required to support capital
improvements and development;
o economic, competitive, demographic, business and other conditions in
our local and regional markets;
o changes or developments in the laws, regulations or taxes in the
gaming industry;
o actions taken or omitted to be taken by third parties, including
customers, suppliers, competitors, members and shareholders, as well
as legislative, regulatory, judicial and other governmental
authorities;
o changes in business strategy, capital improvements, development
plans, including those due to environmental remediation concerns, or
changes in personnel or their compensation, including federal, state
and local minimum wage requirements; and
o the loss of any license or permit, including the failure to obtain
an unconditional renewal of a required gaming license on a timely
basis.
Actual future results may be materially different from what we expect. We
will not update forward-looking statements even though our situation may change
in the future.
All references to a fiscal year are to our fiscal year which ends October
31. References to "Autotote", the "Company", "we", "our" and "us" include
Autotote Corporation and its subsidiaries.
ITEM 1. BUSINESS
Overview
We are a leading worldwide supplier of technologically advanced
computerized wagering systems and related equipment, as well as a licensed
international operator of gaming venues. We provide technology, software,
equipment and services for pari-mutuel wagering conducted at thoroughbred,
harness and greyhound racetracks, off-track betting establishments ("OTBs") and
jai alai frontons. We are a leading provider of sophisticated, customized
computer software, equipment and data communication services to
government-sponsored and privately operated lotteries. We also provide
operations management for domestic and international OTBs and gaming venues.
Pari-mutuel wagering is a form of wagering in which wagers ("Handle") are
placed in a pool and winnings are calculated and paid as a percentage of
the pool. Related products and services that we offer racetracks, OTBs and
frontons include:
Wagering systems. We are the largest provider of sophisticated
data-processing networks used to place and redeem wagers, accumulate
wagering data, calculate pari-mutuel odds, and validate and
distribute information to display systems to the North American
Racing Industry. Our
2
systems process wagers at approximately 100 racetracks in North
America, including 10 of the 15 largest thoroughbred racetracks, and
at more than 800 OTBs, including 10 of the 12 largest OTB networks
in North America. As a result, we processed approximately 65% of the
estimated $20 billion of North American Racing Industry Handle. We
also have a significant presence in Europe. We are the exclusive
provider of wagering systems and services to licensed pari-mutuel
operators in Germany, The Netherlands, Ireland, Austria and Turkey.
In France, we provide and operate wagering systems for approximately
30% of the province racetracks. We are also a leading supplier of
wagering systems to racetracks and OTBs worldwide and we design,
sell and service video gaming machines ("VGMs") for use at
racetracks in North America.
Simulcasting and Telecommunications Services. We are one of the
leading providers of simulcasting services in North America,
broadcasting live racing events via satellite to more than 150
racetracks and 750 OTBs. We also provide similar services in Europe,
particularly in The Netherlands and Germany, where we service all
racetracks and more than 250 OTBs. Additionally, we operate a
national voice/data telecommunications network, known as the North
American Simulcast Racing Information Network ("NASRIN(TM)"), that
serves more than 50 racetracks.
Venue management. We are the exclusive licensed operator of substantially
all off-track pari-mutuel wagering in Connecticut, with 12 stand-alone
OTBs state-wide, including two simulcasting teletheaters, three
simulcasting raceview centers, as well as telephone account wagering and
the Mohegan Sun Casino race book. We are also the exclusive licensed
operator for all pari-mutuel wagering in The Netherlands with five
racetracks and 38 OTBs.
Lottery systems and services. We are a leading provider of sophisticated,
customized computer software, equipment and data communication services to
government-sponsored and privately operated lotteries. Our lottery
operations utilize proprietary technology that is similar to that used for
pari-mutuel wagering, but is specialized for lottery operations. Our
systems facilitate high speed processing of on-line wagers, as well as
validation of winning on-line and instant play tickets. We currently
provide systems and services to the Connecticut and Montana state
lotteries and were recently selected to provide such services to the
Vermont state lottery. We also provide such services to nationwide
lotteries in Barbados and the Dominican Republic, and we sell lottery
terminals to various markets, including Italy.
For fiscal 1999, we generated revenues and EBITDA (earnings before
interest, taxes, depreciation and amortization, gains/loss on sale of businesses
and other income/deductions) of $211.1 million and $40.5 million, respectively.
The majority of our revenues were derived from our pari-mutuel systems
operations from which we generally receive revenues based on a percentage of
Handle (an average of approximately 0.35% in North America), a daily or monthly
fee. In addition, we receive event-based and daily or monthly fees from our
racing industry customers for the provision of certain equipment and
simulcasting services. In the venue management business, our revenues are based
on a retained percentage of Handle ranging from 15% to 30%, depending on the
country, the racetrack and the wager. Our lottery service revenues are also
based on a varying percentage of amounts wagered, depending on equipment and
services provided. In addition to our service revenues, our pari-mutuel and
lottery operations also receive revenues from the sale of systems and equipment.
Favorable changes in pari-mutuel wagering and simulcasting laws in various
jurisdictions in North America during the past five years and the resulting
expanded use of simulcasting and telecommunications technology in the North
American racing industry have contributed significantly to the growth in
"remote" wagering, primarily through expanded wagering at OTBs, by telephone and
from "inter-track" wagering (wagering on location at one racetrack on races held
at other racetracks). The dollar volume of remote wagering in North America on
thoroughbred racing has grown from $5.4 billion in 1993 to $10.6 billion in
1998, a compound annual growth rate of nearly 14.4%.
This growth in remote wagering, together with our extensive penetration of
the North American pari-mutuel wagering market, has enabled us to generate
increased pari-mutuel revenues. We attribute our success to our position as:
3
1. the leading provider of pari-mutuel wagering systems to the leading
racetracks whose live racing events are in the greatest demand for
remote wagering;
2. a leading provider of computerized pari-mutuel wagering systems and
automated telephone betting equipment to OTBs and racetracks
accepting wagers on simulcasted racing events; and
3. a leading simulcaster of live horse and greyhound racing and jai
alai events to racing facilities, OTBs and casinos in North America
and Europe.
We have also increased our revenues through our fiscal 1994 acquisition
and subsequent enhancement of the Connecticut OTB business and the fiscal 1998
acquisition and subsequent enhancement of the Netherlands on-track and off-track
wagering business. Through these businesses, we have been able to directly share
in the growth in remote wagering discussed above. In addition, we believe that
we will realize further benefits to the extent that governments enact
legislation that continues to facilitate the growth in OTBs, telephone,
interactive and other forms of remote wagering. In Europe, some existing
restrictions are being lifted, and we are actively pursuing expanded
participation in remote wagering in The Netherlands and Germany.
Our lottery operations continue to benefit from competitive changes in the
government-sponsored lottery markets as those markets continue to mature and
become more self-sufficient. Because of these underlying changes, we have added
the states of Montana and Vermont as customers in the past two years and will
continue to look for competitive bidding opportunities.
For information concerning the Company's business and geographic segments,
see Note 19 to Consolidated Financial Statements.
Pari-Mutuel Operations
Pari-mutuel Operations accounted for 56%, 56% and 47% of our total
revenues for the fiscal years 1997, 1998 and 1999, respectively. Pari-mutuel
wagering is currently authorized in 43 states in the United States, all
provinces in Canada and in approximately 100 other countries around the world.
North American Pari-Mutuel Systems
We are the leading supplier of pari-mutuel wagering systems to the North
American market. We believe our pari-mutuel wagering systems processed
approximately 65% of the estimated $20 billion of gross Handle in North America.
We own and operate more than 22,000 pari-mutuel wagering terminals in use
throughout North America, and our wagering systems and related equipment process
wagers at approximately 100 racetracks in North America, including 10 of the 15
largest thoroughbred racetracks, and at more than 800 OTB facilities.
In North America, we typically enter into five-year, renewable service
contracts with racetracks under which we provide the pari-mutuel wagering
system, as well as the operations, maintenance and supervisory personnel
necessary to operate the pari-mutuel wagering system. We maintain ownership of
the pari-mutuel wagering systems, which enables us to employ such equipment in
more than one racetrack at different times during the year if a customer does
not operate wagering all year long.
The pari-mutuel wagering systems we provide 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. These 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, each facility. We generally do not, however, employ
the clerks who issue wagering tickets using our teller-operated terminals. We
also provide additional software and other support functions.
We typically receive revenue for our services in North America as a
varying percentage of Handle, generally ranging up to approximately 0.55% of the
Handle on a particular event (with a weighted average of approximately
4
0.35% of the Handle), subject, in many instances, to minimum fees which are
usually exceeded under normal operating conditions. Minimum fees under our
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 on-track wagering above, we may also
receive an "interface fee" of 0.125% of handle for combining these wagers into
the "combined pools" of host tracks that Autotote operates. This interface fee
is collected from all tracks and OTBs that bet into host tracks, regardless
whether Autotote or another vendor provides wagering services for on-track
wagering.
In recent years, we have 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 us to achieve economies
of scale by centralizing our computer system operations into hubs. Additionally,
when linked to our other regional and national pari-mutuel wagering networks,
these networks provide our 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. We believe our established wagering
networks will give us a competitive advantage in renewing existing contracts and
winning new contracts in regions where such networks exist because of our
ability to offer customers greater services more efficiently than our
competitors. We currently operate 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 our pari-mutuel wagering systems is the casino
market. We operate pari-mutuel wagering systems for all of the casinos in
Atlantic City that offer wagering on racing events and the Mohegan Sun Casino in
Connecticut. Services provided to these casinos are similar to those provided
directly to OTBs.
In our service contracts, we generally provide certain warranties
regarding the implementation, operation, performance, and reliability of our
wagering systems relating to, among other things, data accuracy, repairs and
validation procedures. Our wagering systems contract warranties are negotiated
and, accordingly, vary on a case-by-case basis.
Simulcasting and Telecommunication Services
We are one of the leading providers of simulcasts of live horse and
greyhound racing and jai alai events to racing facilities, OTBs and casinos in
North America and Europe. We simulcast racing events from over 60 racetracks and
jai alai frontons to more than 150 racetracks and more than 750 OTBs throughout
North America, and from and to 29 racetracks, and to more than 200 OTBs and
bookmaker shops, in The Netherlands and Germany.
Simulcasting is the process of transmitting the audio and video signal of
a live racing event from a 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 additional wagering
locations, such as other racetracks, OTBs and casinos. Sending live audio and
video broadcasts of remote racing events generates increased revenues for us and
our customers by increasing the consumer base for the remote events and by
maximizing the number of events a patron is able to wager upon by eliminating
the idle time between live race events.
In our simulcasting operations, we lease satellite transponders and use
digital signal compression technology to increase the number of events that may
be broadcast on each transponder at one time. We own mobile earth stations which
uplink the video and audio signals of racetrack and jai alai events to our
controlled satellite transponders and we own integrated receiver/decoders which
are used by racetracks and OTBs to receive and decode the simulcast signals.
In general, we receive a daily event fee from the racetracks for uplinking
the video and audio signals and a monthly fee from racetracks and OTBs and
casinos for the use of our decoders which are needed to unscramble the simulcast
transmission. In addition, we often sell any excess satellite transponder
capacity to other users of satellite communications outside the Racing Industry.
Such sales are generally for short-term periods, but, from time to time, we have
sold such excess capacity under long-term contracts.
5
In partnership with AT&T, our primary telecommunications service provider,
we were selected by the Thoroughbred Racing Association to implement NASRIN(TM).
This telecommunication 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, we merged our NASRIN(TM)
business with Churchill Downs Incorporated's ("Churchill Downs") Tracknet
telecommunications business unit. The resulting company, called NASRIN(TM), is
owned 70% by us and 30% by Churchill Downs and provides the equipment and
management to administer and maintain the nationwide network, and handle all
subscriber billings.
International Pari-Mutuel Systems
In Europe, we provide and operate pari-mutuel wagering systems at all of
the racetracks in Germany, Ireland, The Netherlands, Turkey and Austria, as well
as all of the OTBs in The Netherlands and Germany. In France, we provide these
systems and services to approximately 30% of the racetracks in the provinces.
Our high volume, real-time data processing systems are comparable to those
deployed in North America, and include computer software, ticket terminals, a
central processing unit, display boards and communication equipment. Our
European services are provided under long-term contracts of from five to ten
years duration. We generally receive revenue as a percentage of Handle, as an
agreed-upon annual fee or as daily, equipment-based fees, depending on the
volume of wagers processed.
We also provide simulcast services similar to those provided in North
America to our customers in Germany and to our customer's racetracks and our
OTBs in The Netherlands. In Germany, these services are generally provided under
long-term contracts, with revenues based on daily fees for the uplink services
and daily fees for providing decoders to racetracks, OTBs and bookmakers. In The
Netherlands, no fees are charged for simulcast services as we process all wagers
and generally retain 30% of these wagers to cover all of our costs, including
providing simulcast services. We generally enter into long-term contracts with
suppliers to provide both the uplink services and the satellite transponders. We
also sell pari-mutuel wagering equipment to customers in other countries in
Europe.
In Germany, we have been providing pari-mutuel wagering systems and
services to the nine major harness racetracks since 1994, and simulcasting
services since January 1998. In September 1999, we began providing both
pari-mutuel and simulcasting services to the 16 major thoroughbred racetracks,
approximately 50 OTBs and approximately 120 bookmaker shops as a result of our
acquisition of selected pari-mutuel assets of Datasport Toto Dienstleistung GmbH
& Co KG. In addition to these services, we have entered into a joint venture
agreement with Sisal Sport Italia Spa to develop a network of approximately
2,500 additional OTBs throughout Germany over the next four years. Beginning in
April 1999, we sold a pari-mutuel wagering system and began to provide ongoing
maintenance and operating services for the next 10 years to Tote Ireland Ltd., a
wholly-owned subsidiary of the Irish Horseracing Authority. In Turkey, we have
been providing a pari-mutuel system and associated maintenance services since
1995 for five racetracks and approximately 1,250 OTBs. In France, we provided
pari-mutuel wagering systems and services to approximately one-half of the
French on-track market through fiscal 1998. Beginning in the fourth quarter of
fiscal 1998, all of the Paris based racetracks were required to switch to a new
centralized French pari-mutuel system. Since then, we have concentrated on
renewing and expanding our customer base of province racetracks.
In other international markets, we generally sell, deliver and install
pari-mutuel wagering systems in racetracks and OTBs rather than operating them
pursuant to service contracts. We have sold our systems in approximately 25
countries. Each of these systems is customized to meet the unique needs of each
customer, including game designs, language preferences, network communication
standards and other key elements. The sale of a pari-mutuel wagering system
includes a license for use of our proprietary system software, as well as
installation, training, technical assistance, support, accessories and limited
spare parts.
6
Video Gaming Machines
We have developed a proprietary line of progressive Video Gaming Machines
("VGMs"), which combine full gaming functionality, such as video poker,
blackjack, simulated spinning reels and keno, with full race betting
functionality, including picture-in-picture capabilities. As a result, our VGMs
provide multiple opportunities for revenue generation at racetracks where VGM
wagering is permitted. Our latest VGM terminal allows patrons to wager on horse
races and watch simulcasted races or other televised programs on a
picture-in-picture video window, while continuing to wager on selected video
games. We supply approximately 600 VGMs to three pari-mutuel operators in West
Virginia, for which we receive a percentage of income generated by the
terminals. We believe additional revenue opportunities are available if video
gaming is approved in more racetracks across the country.
Venue Management Operations
We operate substantially all off-track wagering in Connecticut
("Connecticut OTB") and all off-track and on-track wagering in The Netherlands.
Venue Management Operations service revenue accounted for 28%, 32%, and 29% of
our total service revenue for fiscal 1997, 1998 and 1999, respectively.
In Connecticut, approximately $214 million was wagered in fiscal 1999 on
more than 60 U.S. based thoroughbred, harness and greyhound racetracks and jai
alai frontons at or through our facilities. We currently operate twelve OTB
locations statewide, including the 39,000 square foot Bradley Teletheater in
Windsor Locks and the 55,000 square foot Sports Haven(R) facility in New Haven,
and three simulcasting raceview centers in New Britain, Bristol and Hartford, as
well as a telephone account betting operation.
Since we commenced operations in 1993, we have implemented several
important product and service enhancements, including expanded simulcasting from
across the country, common-pool wagering, seven day per week operations at nine
locations and expanded telephone betting. In addition, our teletheaters and
raceview centers feature large screen televisions and numerous other televisions
throughout the facility to enhance the customer's entertainment experience. In
September 1998, we began providing an extension of our OTB services, including
pari-mutuel wagering and simulcasting services, to the Mohegan Tribal Gaming
Authority for its new race book located at the Mohegan Sun Casino in Uncasville,
Connecticut under a seven-year agreement. We believe this race book is a
state-of-the-art facility which incorporates the latest wagering technology and
the most advanced audio and video simulcasting signals. Since our license
permits us to add an additional teletheater location to our operations, we
initiated development of such a facility in Brookfield in fiscal 1999. Because
of strong local opposition, we withdrew our application and are currently
exploring other site locations around the state.
Our 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. Our revenues are
based on an allowed percentage of Handle wagered through Connecticut OTB. The
percentage of the total Handle which we may receive is determined by the track
where the event is held and ranges from 15% to 25%, depending on the racetrack
and type of wagers. In June 1997, the State of Connecticut passed legislation
authorizing racetracks and jai alai frontons within Connecticut to retain a
larger portion of the Handle from pari-mutuel pools. Since we typically retain
the same amount as the racetrack or fronton where the event is held, our
retained percentage increased to 22.4%. Our expenses include a state based
pari-mutuel tax of 3.5% of the Handle, a racetrack signal fee of approximately
5% of the racetrack's Handle, as well as telecommunications, facilities and
labor costs.
In July 1998, we acquired the rights and began operating all on-track and
off-track pari-mutuel wagering in The Netherlands under a license, granted by
the Dutch Ministry of Agriculture, which extends through June 30, 2003. We
received additional license approvals to allow us to modernize and expand
pari-mutuel wagering in The Netherlands. These approvals allow us to open up to
10 teletheaters, increase the number of OTBs, expand into arcade shops,
implement interactive account wagering, and expand national and international
simulcasting of racing.
In fiscal 1999, approximately $42 million was wagered in The Netherlands
primarily on racing from The Netherlands, UK, and Germany. This is the first
year since 1991 that Handle in The Netherlands has increased
7
over the previous year. This improvement was possible because, in fiscal 1999,
we provided simulcasting of Dutch racing to all of the OTBs throughout the
entire year, and, in August 1999, we added simulcasting of French racing. We
currently operate 33 OTB locations countrywide, including three sports cafes,
and four on-track OTBs, as well as four on-track wagering systems. We are
planning to add seven additional sports cafes by the end of fiscal 2000 and
private investors are working to open a new racetrack outside Amsterdam by early
in fiscal 2002.
We believe that operation of venues such as the Connecticut OTB and The
Netherlands further strengthens our competitive position in attracting certain
new racetrack customers to the extent that simulcast signals from these venues
are not already displayed at our outlets. We also believe that our expertise in
operating these venues should provide us with a competitive advantage in
obtaining future venue operations through management contracts or full
privatization. We believe this strategy resulted in our acquisition of all
pari-mutuel wagering operations in The Netherlands in July 1998.
Lottery Operations
Lottery Operations accounted for 15%, 11%, and 23% of our total revenues
for the fiscal years 1997, 1998 and 1999, respectively.
We design, install, operate and maintain on-line computer-based lottery
systems and provide equipment for lottery systems both in the United States and
internationally. Lottery systems process very large transaction volumes which
dictate the need for high performance hardware and sophisticated software
applications that necessitate expertise in software engineering and development.
In the United States, we operate the Connecticut state lottery, the Montana
state lottery and we have a contract to install and begin operating the Vermont
state lottery. Internationally, we have provided central processing systems
and/or terminals which are currently being used in lotteries operating in
Barbados, the Dominican Republic and Italy. Beginning in the fourth quarter of
1998 and throughout fiscal 1999, the Company shipped approximately 12,500
terminals to Sisal Sport Italia SpA pursuant to a contract to deliver a total of
20,000 of the Company's Extrema(TM) terminals.
In connection with the Connecticut state lottery, we provide all
equipment, personnel and services necessary to operate the lottery network of
approximately 3,200 PROBE(R)L lottery terminals while retaining title to the
equipment. In December 1997, we 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. In April 1999, we sold
300 PROBE(R)L terminals and licensed software to the Montana State Lottery
Commission and began providing personnel and telecommunication services
necessary to support the lottery under a seven-year contract through April 2006.
In October 1999, we were awarded a six-year contract with the Vermont Lottery
Commission to provide all equipment, personnel and services necessary to operate
a lottery network of approximately 700 Extrema(TM) terminals for the period from
July 1, 2000 through June 30, 2006, with two, two-year options to extend the
contract through June 2010. Revenues received from the operation of these state
lotteries are based on a percentage of the Handle in each state lottery.
The Company's lottery products consist primarily of central processing
systems, including data communication networks, and on-line and on-line/off-line
computer-based lottery terminals. The lottery management system portion of the
product includes a lottery administration client-server network and relational
database. Lottery terminals are generally on-line to the central system via
telephone lines connected to the system's communication front-end processors.
Sale of European Lottery Business
On April 15, 1997, we completed the sale of our 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. We recorded additional
gains on the sale of this business of approximately $1.2 million in fiscal 1998
and approximately $1.8 million in fiscal 1997.
In connection with this sale, we 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 which
8
expire April 15, 2000 do not apply to our right to sell certain terminals for
lottery applications anywhere, except to existing customers of the European
lottery business.
Contract Procurement
Contract awards by owners of horse and greyhound racetracks, OTBs and
casinos and jai alai frontons, 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 and customization,
assembly of wagering systems, and installation costs including electrical and
carpentry work, transportation and placement of equipment, and system
implementation. These 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 always utilize such a formal bidding process, but rather negotiate proposals
with one or more potential vendors.
Our contracts for the provision of pari-mutuel services in North America
are typically for terms of five years. Contracts representing 9%, 22%, 13% and
12% of our annual North American pari-mutuel service revenues are scheduled to
expire in fiscal years 2000, 2001, 2002 and 2003, respectively. Our contracts
for the provision of pari-mutuel services in Europe expire in the following
years: Ireland - 2009; Germany - 2007; France - 2004; Austria - 2004; Turkey -
2001. Our Connecticut state lottery contract, which was renewed in December
1997, is for an initial term for five years, with five one-year renewal options.
The Montana state lottery contract is for a seven year period ending March 2006
and the Vermont state lottery contract which commences in July 2000, has an
initial term of six years with two, two-year renewal options. Our license to
provide on-track and off-track services in The Netherlands expires in the year
2003. 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 we will continue to be able to renew our pari-mutuel systems contracts with
our largest customers or our lottery contracts. If we are unable to renew these
contracts, there would be a material adverse effect on the Company.
Service and Support
We employ approximately 595 persons, including regional and national
managers and trained maintenance and field service personnel, to support the
operation of our systems and communications networks. These personnel support
our systems by performing routine system maintenance and repairs of systems and
equipment when needed.
Research and Product Development
We believe that our ability to attract new wagering system customers and
retain existing customers depends in part on our ability to continue to
incorporate technological advances into, and to improve, our systems and related
equipment. We maintain a development program directed toward systems development
as well as toward the improvement and refinement of our present products and the
expansion of their uses and applications. We employ approximately 50 people in
connection with software, engineering and product development.
Intellectual Property
We maintain patent protection on certain of our pari-mutuel wagering and
lottery products and have a number of registered trademarks and other common law
trademark rights for certain of our products. The software and control systems
for our wagering systems are also protected by copyright and/or trade secret
laws.
Production Processes; Sources and Availability of Components
Production of our wagering systems and component products primarily
involves the assembly of electronic components into more complex systems and
products. We produce our terminal products primarily at our manufacturing
facility in Ballymahon, Ireland, or on a limited basis at our Newark, Delaware
administration and development facility. Other manufacturing is contracted out
to third party vendors, as needed.
9
We normally have sufficient lead-time between reaching an agreement to
provide a wagering system and the commencement of operations so that we are able
to provide the customer with a fully functioning system, customized to meet
their requirements. In the event that current suppliers of central processing
units were no longer available, we believe we would be able to adapt our
application software to run on the then available hardware in time to allow us
to meet new contractual obligations, although the price competitiveness of our
products might diminish. The lead-time for obtaining most of the electronic
components we use is approximately 90 days. We believe that this is consistent
with our competitors' lead-times and is also consistent with the needs of our
customers.
Backlog
Our backlog of orders for sales of our products was approximately $29
million as of October 31, 1999. The majority of the backlog is associated with
the agreement with Sisal to manufacture and deliver Extrema(TM) terminals to
upgrade Sisal's network of terminals used in their Italian lottery operations.
Approximately 66% of the Sisal order has been completed through October 31,
1999, with the balance of the order to be completed in fiscal 2000. Backlog as
of October 31, 1999 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 the Netherlands
operations, or maintenance contracts.
Competition
A significant portion of our 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 our competitors may have greater
financial resources than we have. We compete primarily on the basis of design,
performance, reliability and pricing of our products as well as customer
service. To effectively compete, we expect to make continued investments in
product development and/or acquisitions of technology.
As a major portion of our revenue is based on a percentage of Handle,
including our Connecticut OTB and The Netherlands revenues, our revenues may be
adversely 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.
Our two principal competitors in the North American pari-mutuel wagering
systems business are AmTote International, Inc. and Anchor Gaming, Inc., which
operates its pari-mutuel wagering systems business through its subsidiary United
Tote. Video Gaming industry terminal suppliers include International Game
Technology, WMS Industries Inc., Alliance Gaming, Inc., Anchor Gaming, Inc. and
several smaller companies. Our 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 and Europe is
fragmented with ourselves and Roberts Communications Network, LLC having
achieved the most significant market shares.
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., Anchor Gaming, Inc., through its subsidiary
Automated Wagering, Inc., and Scientific Games Inc.
The market for our products is affected by changing technology, new
legislation and evolving industry standards. Our ability to anticipate such
changes and to develop and introduce new and enhanced products on a timely basis
will be a significant factor in our ability to expand, remain competitive,
attract new customers and retain existing contracts. There can be no assurance
that we will have the financial or other resources to respond to such changes or
to develop and introduce new products on a timely basis.
10
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 those jurisdictions review many facets of
an applicant or holder of a license including, among other items, financial
stability, integrity and business experience. We believe that we are currently
in substantial compliance with all regulatory requirements in the jurisdictions
where we operate. Any failure to receive a material license or the loss of a
material license that we currently hold could have a material adverse effect on
our overall operations and financial condition.
In 1996, the United States Congress passed legislation authorizing a
comprehensive study of gaming, including segments of the gaming industry served
by the Company. That study was completed and released in 1999. In part, as a
result of this study, legislation further regulating wagering on the internet
and telephone wagering on pari-mutuel events is pending in the United States
Congress. 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.
We have developed and implemented an extensive internal compliance program
in an effort to assure that we comply with legal requirements imposed in
connection with our 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 our Board of Directors. While we are firmly
committed to full compliance with all applicable laws, there can be no assurance
that such steps will prevent the violation of one or more laws or regulations,
or that a violation by the Company or an employee of the Company will not result
in the imposition of a monetary fine or suspension or revocation of one or more
of our 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 a 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 ensure 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 ours 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. We must also qualify under the standards of
the Casino Control Act. We and our 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.
11
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 our Class A
Common Stock 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 the 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 our license. In addition, the New Jersey Racing
Commission also licenses our subsidiary and retains concurrent regulatory
oversight over this subsidiary with the New Jersey Commission.
Our rights to operate the Connecticut OTB system are conditioned on our
continuing to hold all licenses required for the operation of the system. In
addition, our officers and directors and certain other employees 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. The Company's telephone wagering operations, based in
Connecticut, are subject to the Division's regulation. Pending legislation in
the United States Congress may, if enacted, also subject these operations to
regulation by states in which patrons reside. The Company is unable to predict
whether such legislation will be enacted or the effect on the Company's
telephone wagering operations.
While in the past and at present we have been the subject of enforcement
proceedings instituted by one or more regulatory bodies, we have been able to
consensually resolve any such proceedings upon the implementation of remedial
measures and/or the payment of settlements or monetary fines to such bodies. We
do not believe that any of these proceedings, past or pending, will have a
material adverse effect on us. 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 our 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. We or our
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, all of the 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. Many 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 ensure the responsibility, financial
stability and character of equipment manufacturers and their key personnel and
stockholders through licensing requirements, (ii) to ensure 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
12
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 us or our subsidiaries to modify our 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 us or our subsidiaries to supply VLTs to
authorized locations in that state. In Canada, one of the subsidiaries of the
Company has been granted registration as a casino gaming related supplier by the
Alcohol and Gaming Commission of Ontario in accordance with the Gaming Control
Act, 1992 of Ontario. Another subsidiary of the Company has been granted interim
registration as a gaming related supplier to the Manitoba Lottery Commission by
the Manitoba Gaming Control Commission. The gaming laws of both Ontario and
Manitoba primarily deal with the responsibility, honesty, integrity and
financial stability of gaming equipment manufacturers, distributors and
operators as well as persons financially interested or involved in gaming
operations. To ensure the integrity of manufacturers and suppliers of gaming
supplies, gaming regulators in Ontario and Manitoba have the authority to
conduct thorough background investigations of the Company, its officers,
directors, key personnel and significant stockholders who are required to file
applications detailing their personal and financial information. The gaming
regulators may at any time revoke, suspend, condition or restrict a registration
for an appropriate cause as determined under the applicable gaming legislation.
We believe that we are in compliance with the terms and conditions of its
registrations in both Ontario and Manitoba.
We may apply for all necessary licenses in other jurisdictions that may
now or in the future authorize video gaming or video lottery operations. We
cannot predict the nature of the regulatory schemes or the terminal requirements
that will be adopted in any of these jurisdictions, nor whether we or any of our
subsidiaries can obtain any required licenses and equipment certifications or
will be found suitable.
Federal law also affects our 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 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 our 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 our pari-mutuel
wagering terminals. We have registered under the Devices Act, and believe that
we are 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
13
a specified percentage (typically five percent or more) of a company's
securities. The failure of beneficial owners of our Class A Common Stock to
submit to background checks and provide such disclosure could result in the
imposition of penalties upon these beneficial owners and could jeopardize the
award of a lottery contract to us or provide grounds for termination of an
existing lottery contract.
The international jurisdictions in which we market our lottery systems,
also 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 these
jurisdictions. United States and international regulations affecting lotteries
are subject to change. We cannot predict with certainty the impact on our
business of changes in regulations.
Simulcasting
The Federal Communications Commission (the "FCC") regulates the use and
transfer of earth station licenses used to operate our domestic 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 the races in
question. 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 us 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. We believe that we are in substantial compliance with
applicable regulations and that we, and/or the appropriate third parties, have
entered into contracts and obtained the necessary regulatory approvals to
lawfully conduct current simulcast operations.
Nevada Regulatory Matters
We and certain of our 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 by us and our 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 our
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.
14
We are an applicant for registration by the Nevada Commission as a
publicly traded corporation (a "Registered Corporation") and are 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 (our "Nevada Operating
Subsidiaries"). As a Registered Corporation, we 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, our
Nevada Operating Subsidiaries without first obtaining licenses and approvals
from the Nevada Gaming Authorities. We and our 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 us and
our 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.
The Nevada Gaming Authorities may investigate any individual who has a
material relationship to, or material involvement with, us or our 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 our 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. Our
officers, directors and key employees who are actively and directly involved in
the licensed activities of our 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 us, our Nevada Operating Subsidiaries, the companies involved
would have to sever all relationships with such person. In addition, the Nevada
Commission may require us and our 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.
We and our 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 our 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 us or any of our Nevada Operating Subsidiaries, the
licenses we or they hold could be limited, conditioned, suspended or revoked,
subject to compliance with certain statutory and regulatory procedures. In
addition, any of our Nevada Operating Subsidiaries, us 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 us and our Nevada Operating Subsidiaries
could (and revocation of any license would) materially adversely affect our
manufacturing, distribution and system operations in Nevada.
Any beneficial holder of our 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 our 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
15
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 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. We will be subject to disciplinary action if,
after we receive notice that a person is unsuitable to be a stockholder or to
have any other relationship with us, our Nevada Operating Subsidiaries or we (i)
pay that person any dividend or interest upon our voting securities, (ii) allow
that person to exercise, directly or indirectly, any voting right conferred
through securities held by that person, (iii) pay remuneration in any form to
that person for services rendered or otherwise, or (iv) fail 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.
We and our 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. We are also
required to render maximum assistance in determining the identity of the
beneficial owner. The Nevada Commission has the power to require our stock
certificates to bear a legend indicating that the securities are subject to the
Nevada Act.
After becoming a Registered Corporation, we may not make a public offering
of our securities without the prior approval of the Nevada Commission if the
securities or proceeds from that sale are intended to be used to construct,
acquire or finance gaming facilities in Nevada, or to retire or extend
obligations incurred for such
16
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 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, we intend to seek the necessary licenses, approvals and
findings of suitability for us, our 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 we will be able to obtain the
necessary approvals for any future products as they are developed. If a license,
approval or a finding of suitability is required by a regulatory authority and
we fail to obtain the necessary license, we may be prohibited from selling our
products for use in the respective jurisdiction or may be required to sell our
products through other licensed entities at a reduced profit.
17
Employees
As of October 31, 1999, we employed approximately 935 persons. Of this
total, approximately 595 persons were engaged in full-time field operations, 145
in part-time tellering/cashiering, approximately 50 in engineering and software
product development, approximately 30 in marketing and approximately 115 in
financial, administration and other positions. Most of our the North American
pari-mutuel employees 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. We consider
our employee relations to be satisfactory.
Executive Officers of the Company
Certain information concerning our executive officers as of January 22,
2000 is set forth below:
Name Age Position
- ---- --- --------
A. Lorne Weil.............. 53 Chairman of the Board, President and Chief
Executive Officer
Martin E. Schloss.......... 53 Vice President, General Counsel and Secretary
DeWayne E. Laird........... 52 Vice President and Chief Financial Officer
Gerald Lawrence............ 60 Executive Vice President
Our Executive Officers hold office for an indefinite term, subject to the
discretion of our Board of Directors.
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 us and our 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 is currently a director of Fruit of the Loom, Inc. and General Growth
Properties, Inc.
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. 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 public
companies and governmental agencies. 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
President of Autotote Enterprises, Inc., a subsidiary of the Company, since June
1998. Mr. Lawrence served as President of the Company's pari-mutuel subsidiary,
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.
18
ITEM 2. PROPERTIES
We conduct our business principally from the following leased and owned
facilities:
Leased Facilities:
Location Segment Purpose Square feet
- -------- ------- ------- -----------
New York, NY corporate headquarter 12,000
Ballymahon, Ireland various 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 venue mgt OTB facilities 44,000
New Haven, CT venue mgt OTB administration 2,000
Valencia, CA pari-mutuel administration and operations 6,688
Rocky Hill, CT lottery administration and operations 17,000
Helena, MT lottery administration and operations 4,000
The Hague, Netherlands venue mgt administration and operations 16,000
various cities,
The Netherlands venue mgt OTB facilities 44,000
We also lease 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 venue mgt OTB wagering facility 39,000
New Haven, CT venue mgt OTB administration, operations
and wagering facility 55,000
We believe that our present facilities are adequate for our reasonably
foreseeable needs.
ITEM 3. LEGAL PROCEEDINGS
Although we are 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 our financial position or results
of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of our security holders during the
fourth quarter of fiscal 1999.
19
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATE STOCKHOLDER MATTERS
Our 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 our Class A Common Stock.
Fiscal 1998 Fiscal 1999
------------------- ----------------
High Low High Low
------------------- ----------------
First Quarter ................. $ 3.00 1.88 2.38 1.69
Second Quarter ................ 2.81 2.25 2.06 1.50
Third Quarter ................. 2.94 2.38 3.38 1.75
Fourth Quarter ................ 2.56 1.25 3.63 2.50
On January 25, 2000, the last reported sales price for our Class A Common
Stock on the American Stock Exchange was $4.25 per share. The approximate number
of holders of record of our Class A Common Stock as of January 25, 2000 was
1,921.
We have never paid any cash dividends on our Class A Common Stock. The
Board presently intends to retain all earnings, if any, for use in the business.
Any future determination as to payment of dividends will depend upon our
financial condition and results of operations and such other factors as are
deemed relevant by the Board. Further, under the terms of the Indenture
governing our Senior Notes, we and our Restricted Subsidiaries (as defined) are
not permitted to pay any cash dividends or make certain other restricted
payments (other than stock dividends) on our Class A Common Stock.
Recent Sales of Unregistered Securities; Uses of Proceeds From Registered
Securities
Warrants to purchase an aggregate of 2,297,588 shares of Class A Common
Stock, which were originally issued as of October 31, 1991 to holders of certain
of our subordinated debentures outstanding on that date, were amended as of
November 2, 1998 (as amended, the "1998 Warrants"). The amendment extended the
expiration date of the Warrants from October 31, 1999 to October 31, 2002, in
consideration for (i) a provision precluding exercise thereof prior to November
1, 1999, except in the event of a change in control, and (ii) an increase of the
exercise price from $1.6357 per share to $1.6875 per share. The 1998 Warrants
are held by members of management and several employees (see Note 12 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, 1999 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 1995 through 1999 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 of this Annual Report.
FIVE YEAR SUMMARY OF SELECTED FINANCIAL DATA
(in thousands, except per share amounts)
Years Ended October 31,
-------------------------------------------------------------
1995 1996 1997 1998 1999
--------- ------- ------- ------- -------
Selected Statement of Operations Data:
Operating Revenues:
Services .................................... $ 132,260 137,794 132,989 135,790 148,660
Sales ....................................... 20,924 38,441 24,343 23,523 62,488
--------- ------- ------- ------- -------
153,184 176,235 157,332 159,313 211,148
--------- ------- ------- ------- -------
Costs and Expenses:
Cost of services ............................ 78,569 86,674 80,496 88,916 99,496
Cost of sales ............................... 15,661 25,864 15,396 15,739 43,937
Selling, general and administrative ......... 36,540 31,921 28,444 26,205 27,178
Restructuring and write-off of assets ....... 18,241 (649) -- -- --
Depreciation and amortization ............... 35,463 40,853 36,728 29,489 22,189
Interest expense ............................ 16,362 14,837 14,367 15,521 15,941
Other (income) expense ...................... (436) 560 79 (1,064) 251
Litigation settlement ....................... -- 6,800 -- -- --
(Gain) loss on sale of businesses ........... -- 1,127 (1,823) 66 1,600
--------- ------- ------- ------- -------
Total costs and expenses ....................... 200,400 207,987 173,687 174,872 210,592
--------- ------- ------- ------- -------
Income (loss) before income tax
expense and extraordinary item ................. (47,216) (31,752) (16,355) (15,559) 556
Income tax expense ................................ 2,673 2,443 906 321 177
--------- ------- ------- ------- -------
Income (loss) before extraordinary item ........... (49,889) (34,195) (17,261) (15,880) 379
Extraordinary item ................................ -- -- (426) -- --
--------- ------- ------- ------- -------
Net income (loss) ................................. $ (49,889) (34,195) (17,687) (15,880) 379
========= ======= ======= ======= =======
Net income (loss) per basic share
and diluted share ................................ $ (1.72) (1.09) (0.51) (0.44) 0.01
========= ======= ======= ======= =======
Selected Balance Sheet Data (End of Period):
Total assets ...................................... $ 241,021 196,793 153,541 156,500 165,559
Total long-term debt, including
current installments ............................. $ 177,264 169,024 149,857 158,870 157,144
Stockholders' equity (deficit) .................... $ 11,857 (20,196) (33,240) (48,638) (48,219)
Weighted average number of shares used in per share
calculation:
Basic shares ................................ 28,965 31,305 34,469 35,696 36,118
Diluted shares .............................. 28,965 31,305 34,469 35,696 38,343
========= ======= ======= ======= =======
21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Background
We operate primarily in three business segments, Pari-mutuel Operations,
Venue Management and Lottery Operations. Pari-mutuel Operations include all
aspects of our pari-mutuel service business, which encompass our North American
and international on-track, off-track and inter-track pari-mutuel services,
simulcasting and communications services, video gaming, and sales of pari-mutuel
systems and equipment. Venue Management includes the Connecticut off-track
betting operations and our Netherlands on-track and off-track betting
operations. Lottery Operations include both domestic and international lottery
service operations (which includes Tele Control, our European on-line lottery
business which was sold in April 1997), as well as sales of lottery systems and
equipment. During fiscal 1999, the Company commenced negotiations to sell its
SJC Video business.
We are the leading provider of computerized pari-mutuel wagering systems
to the North American Racing Industry and are also a leading provider of such
systems worldwide. We also own and operate the Connecticut OTB, are the
exclusive licensed operator of all pari-mutuel wagering in The Netherlands and
are one of the leading providers of simulcasting services to the racing industry
in the United States and Europe. Additionally, we provide technologically
advanced VGMs to the North American Racing Industry for use at racetracks. We
also provide lottery systems and services to three states in the United States
and Latin America and we provide lottery equipment internationally.
Historically, our 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 or leased by us. Sales
revenues are derived from sales contracts for wagering equipment, services and
software. The first quarter of our fiscal year and a portion of our second
fiscal quarter traditionally comprise the weakest season for pari-mutuel
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.
In addition, our operating results may vary significantly from period to
period depending on the addition or disposition of business units in each
period. The acquisition the German pari-mutuel service business in fiscal 1999,
and the Netherlands pari-mutuel venue management business in fiscal 1998, which
were accounted for as purchases, and the sale of the European lottery business
in fiscal 1997, all affect the comparability of operations from period to period
(see Note 3 to Consolidated Financial Statements).
Results of Operations:
Years Ended October 31,
-------------------------------
1997 1998 1999
------- ------ ------
Pari-mutuel Operations (in thousands)
Operating Revenues:
Service revenue .................................. $73,524 74,171 75,788
Sales revenue .................................... 14,866 14,693 23,386
------- ------ ------
Total Revenue ................................. $88,390 88,864 99,174
======= ======= =======
Gross Profit (excluding depreciation and amortization) $37,823 35,317 39,612
======= ======= =======
Venue Management Operations
Operating Revenues:
Service revenue .................................. $43,732 50,525 61,562
======= ======= =======
Gross Profit (excluding depreciation and amortization) $12,903 13,569 15,121
======= ======= =======
22
Years Ended October 31,
----------------------------------
1997 1998 1999
-------- -------- --------
Lottery Operations
Operating Revenues:
Service revenue .................................. $ 13,629 9,217 10,238
Sales revenue .................................... 9,477 8,830 39,102
-------- -------- --------
Total Revenue ................................. $ 23,106 18,047 49,340
======== ======== ========
Gross Profit (excluding depreciation and amortization) $ 9,731 5,313 12,672
======== ======== ========
SJC Video
Operating Revenues:
Service revenue .................................. $ 2,104 1,877 1,072
======== ======== ========
Gross Profit (excluding depreciation and amortization) $ 983 459 310
======== ======== ========
Company Total
Operating Revenues:
Service revenue .................................. $132,989 135,790 148,660
Sales revenue .................................... 24,343 23,523 62,488
-------- -------- --------
Total Revenue ................................. $157,332 159,313 211,148
======== ======== ========
Gross Profit (excluding depreciation and amortization) $ 61,440 54,658 67,715
======== ======== ========
Fiscal 1999 Compared to Fiscal 1998
Revenue Analysis
Revenues increased 32.5% or $51.8 million to $211.1 million in fiscal 1999
from $159.3 million in fiscal 1998.
Pari-mutuel Operations services revenues of $75.8 million in fiscal 1999
improved $1.6 million or 2.2% from the prior year. This improvement primarily
reflects revenues from the new NASRIN(TM) operation and improved simulcasting
revenues in Germany. These improvements were partially offset by the loss of a
French pari-mutuel service contract and fewer sales of excess transponder time
in the domestic simulcasting operations. Pari-mutuel equipment sales revenues of
$23.4 million in fiscal 1999 increased $8.7 million or 59.2% from the prior
year, primarily due to sales of a system to the Irish Horseracing Association,
Extrema(TM) terminals to the UK Tote and Max 3000 terminals to other
international customers.
Venue Management Operations service revenues of $61.6 million in fiscal
1999 improved $11.0 million or 21.8% from the prior year. This improvement
primarily reflects revenues from the Netherlands operations that were acquired
in July 1998, higher Connecticut OTB revenues attributable to increased Handle
and the September 1998 opening of the race book at the Mohegan Sun Casino.
Lottery Operations service revenues increased $1.0 million in fiscal 1999
to $10.2 million primarily due to the April 1999 launch of the Montana lottery.
Lottery equipment sales revenues increased to $39.1 million in fiscal 1999 from
$8.8 million in fiscal 1998. This increase is primarily attributable to the
fiscal 1999 sales of approximately 10,600 Extrema(TM) terminals for use in the
Sisal Sport Italia SpA lottery operations, and the March 1999 delivery of a
central system, terminals and communications equipment to the Montana Lottery.
SJC Video service revenues decreased $0.8 million in fiscal 1999 to $1.1
million due to changes in customer preference from video production to film.
Gross Profit Analysis
The total gross profit earned, exclusive of depreciation and amortization,
of $67.7 million in fiscal 1999 increased by $13.1 million, or 23.9%, from
fiscal 1998.
23
Gross profits earned by the Pari-mutuel Operations of $39.6 million in
fiscal 1999 increased $4.3 million from $35.3 million in fiscal 1998,
principally due higher profits in North American pari-mutuel service operations,
sales of Extrema(TM) terminals to the UK Tote operations, sales of Max 3000
terminals to other international customers, and a full year of operation of the
NASRIN(TM) business. These gross profit increases were partially offset by lower
profit in the French pari-mutuel operations due to the loss of a service
contract in fiscal 1998.
Gross profits earned by the Venue Management Operations of $15.1 million
in fiscal 1999 increased $1.5 million from $13.6 million in fiscal 1998,
principally due to the growth in Handle in the Connecticut OTB operations.
Gross profits earned by the Lottery Operations of $12.7 million for fiscal
1999 increased $7.4 million from $5.3 million in fiscal 1998, primarily due to
sales of Extrema(TM) terminals for use in the Sisal Sport Italia SpA lottery
operations and the March 1999 delivery of a central system, terminals and
communications equipment to the Montana Lottery.
Gross profit as a percent of revenues in our services businesses was 33%
in fiscal 1999 compared to 35% in fiscal 1998, reflecting, primarily, lower
margins on the Netherlands operations that were acquired in July of fiscal 1998,
partially offset by improved earnings in OTB operations and a full year of
operations of the NASRIN(TM) business. Gross profit as a percent of equipment
sales was 30% in fiscal 1999, a decrease from the gross profit percent of 33% in
fiscal 1998 as a result of a change in the mix of equipment and systems sold.
Expense Analysis
Selling, general and administrative expenses include marketing, sales,
administrative, engineering and software development, finance, legal and other
expenses. Selling, general and administrative expenses increased $1.0 million or
4% to $27.2 million in fiscal 1999 from $26.2 million in fiscal 1998. The
increase is primarily the result of the inclusion of the Netherlands operations
acquired in July 1998 and lower expenses reported in fiscal 1998 resulting from
the collection of receivables previously reserved due to concerns about their
recoverability.
Depreciation and amortization expenses decreased $7.3 million or 25% to
$22.2 million in fiscal 1999 from $29.5 million in fiscal 1998. Depreciation
decreased by $5.2 million primarily due to the lengthening of depreciable lives
of pari-mutuel terminals from seven to ten years effective November 1, 1998, as
the result of the renewal of a number of service contracts and realized
equipment durability. Additionally, in fiscal 1998, we 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
our historical relationship with the Connecticut State Lottery for the past ten
years, we are depreciating the terminals and installation costs on a
straight-line method over their estimated useful lives of 10 years. Amortization
expenses decreased by $2.1 million primarily as a result of the full
amortization of certain intangible assets in fiscal 1998.
Interest expense of $15.9 million in fiscal 1999 increased $0.4 million
from fiscal 1998 as a result of borrowings in connection with the fiscal 1998
installation of the Connecticut lottery terminals.
Other expense of $0.3 million in fiscal 1999 consisted primarily of
currency translation expenses, and other income of $1.1 million in fiscal 1998
consisted primarily of interest on invested excess cash.
Loss on Disposition of Business
A charge of $1.6 million was recorded to reflect the expected loss on
disposition by sale of the SJC Video production business as compared to a net
loss on disposition of businesses of $0.1 million in fiscal 1998. In fiscal
1999, the SJC Video production business incurred an operating loss of $2.5
million.
24
Income Taxes
Income tax expense was $0.2 million in fiscal 1999 compared to $0.3
million in fiscal 1998. Income tax expense principally reflects state taxes on
Connecticut OTB operations and foreign taxes in fiscal 1999, and foreign taxes
in fiscal 1998, since no tax benefit has been recognized on domestic operating
losses.
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 from $157.3 million in the fiscal year ended October
31, 1997.
Pari-mutuel Operations service revenues of $74.2 million for fiscal 1998
increased $.7 million or 1% from $73.5 million in the prior year. This
improvement primarily reflects growth in Handle in the North American
pari-mutuel operations as a result of the addition of six new North American
racetracks and OTB sites, full card simulcasting at three North American
racetrack customers, an increase in the number of VGM machines, and the addition
of the new German simulcasting business. These increases were mostly 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 our French operations. Sales revenue, primarily
consisting of export sales, were $14.7 million in fiscal 1998, comparable to
sales revenues of $14.9 million in the prior year.
Venue Management Operations service revenues of $50.5 million for fiscal
1998 increased $6.8 million or 15.5% from $43.7 million in the prior year. This
improvement includes $4.8 million from the Netherlands operations, which was
acquired in July 1998, and revenue increases of $3.8 million as a result of
growth in Handle in the Connecticut OTB operations.
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.
SJC Video service revenues decreased $0.2 million reflecting a change in
the mix of video contracts.
Gross Profit Analysis
Total gross profits earned, 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 $35.3 million in
fiscal 1998 decreased $2.5 million from $37.8 million in fiscal 1997,
principally due to lower profit on our 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 to the decline in
gross margin were the lost profits from the sales of excess transponder time as
a result of the decrease in leased and available transponders, coupled with
higher transponder leased costs following the failure of the Galaxy IV satellite
in May 1998, lower margins in the European pari-mutuel operations as a result of
efforts to start-up and expand business opportunities, and start-up costs for
the new NASRIN(TM) business. These decreases were partially offset by the
improved profitability at the North American pari-mutuel operations.
Gross profits earned by the Venue Management Operations of $13.6 million
in fiscal 1998 improved $0.7 million over fiscal 1997 profits of $12.9 million
as a result of the addition of the Netherlands operations in July 1998, and the
growth in Handle in the Connecticut OTB operations.
Gross profits earned by the Lottery Operations of $5.3 million for fiscal
1998, decreased by $4.4 million from $9.7 million in fiscal 1997. This decline
is attributable to a $3.3 million decline in European lottery gross
25
profits due to the sale of this 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.
Gross profits as a percent of revenues in our services businesses 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. Gross profits as a
percent of 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.
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.
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.
Liquidity and Capital Resources
On May 22, 1998, the parent 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 our U.S. subsidiaries and are secured by (i) first priority security
interests in substantially all tangible and intangible assets of ours and our
U.S. subsidiaries, and (ii) a first priority lien on all of the capital
26
stock of our U.S. subsidiaries and on 65% of the capital stock of our non-U.S.
subsidiaries. In addition, the Term Loan is secured by a first priority security
interest in substantially all of our 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, we 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, we issued $110 million of 10 7/8% Senior Notes due
August 1, 2004 (see Note 8 to Consolidated Financial Statements), which were
exchanged for $110 million of 10 7/8% Series B Notes due 2004 (the "Notes") in
connection with our 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 ours, ranking senior in right and
priority of payment to all indebtedness of ours that by its terms is expressly
subordinated to the Notes. The Notes are jointly and severally guaranteed by
substantially all of our wholly owned U.S. subsidiaries. The Notes will be
redeemable, in whole or in part, at our option, 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, we may, at our 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 our ability and
our restricted subsidiaries ability, 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 our assets. 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 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 Notes 8 and 9 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, we 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, we 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 our
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 (2.25% as of October 31, 1999), 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 our U.S. subsidiaries. In addition,
the Facility is secured by (i) first priority security interests in
substantially all tangible and intangible assets of ours and our U.S.
subsidiaries, and (ii) a first priority lien on all of the capital stock of our
U.S. subsidiaries and on 65% of the capital stock of our non-U.S. subsidiaries.
The Facility contains certain covenants which limit our ability 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, our lenders agreed to amend certain
covenants contained in the Notes and the Facility agreements to permit us 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, 1999, approximately $1.0 million of letters of
credit were guaranteed under the Facility (see Note 8 to the Consolidated
Financial Statements).
27
At October 31, 1999, our available cash and borrowing capacity totaled
$29.0 million compared to $29.9 million at October 31, 1998. Net cash provided
by operating activities increased by $18.3 million to $26.5 million in fiscal
1999 from $8.2 million in fiscal 1998. This increase reflects improved earnings,
realization of customer deposits, and the increase in accounts payable incurred
in connection with increased manufacturing activities. Partially offsetting
these increases were payments of liabilities incurred in fiscal 1998 in
connection with the European cost savings efforts and liabilities assumed in
connection with the acquisition of the Netherlands operation, and increases in
accounts receivable and inventories related to higher export sales and
manufacturing activities. In fiscal 1999, we used available cash plus the cash
provided by operating activities to invest in $24.0 million of capital and
contract expenditures and in software development, to invest $2.3 million in
German business acquisitions, and to repay $3.2 million of long-term debt.
At October 31, 1999, current liabilities exceeded current assets by $7.7
million, an increase of $4.8 million from October 31, 1998. This increase is
principally due to the use of available cash and cash provided by operating
activities to fund capital expenditures and repay long-term debt. These cash
resources were not replenished by long-term borrowings as of October 31, 1999.
We anticipate a comparable level of investment in contract expenditures in
fiscal 2000.
At October 31, 1999, we had $5.1 million in cash and $24.0 million of
borrowing availability under the Facility. We believe that our cash resources,
anticipated cash flows from operations and borrowing availability under the
Facility should provide sufficient liquidity to meet working capital
requirements, scheduled interest payments and anticipated capital expenditures
during the next twelve months. We believe that additional financing will be
required to enable us to meet our 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
previously existing bank credit facility ("the Senior Facility") (see Notes 8
and 9 to the Consolidated Financial Statements), we wrote off $1.4 million of
deferred financing fees associated with the Senior Facility. We also used a
portion of the net proceeds from the offering of the Notes to repurchase $5.0
million of our 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 we are 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
our fiscal year ending October 31, 2001. 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.
Year 2000
We are dedicated to providing uninterrupted, high quality performance from
our computer software systems, products and satellite communications network
before, during and after year 2000. Since fiscal 1997, we have tested our
critical systems, surveyed our principal suppliers, identified all internal
systems with date-related deficiencies, developed solutions for those internal
systems that have been found to have date-related deficiencies, and remediated
any deficient systems. As a result of our planning and remediation, we
encountered no significant problems with any of our systems as we entered the
year 2000. We will continue to monitor our systems and take appropriate actions,
when and if necessary. We do not expect to encounter any significant problems
with year 2000 date-related deficiencies, however, our belief and expectations
may ultimately prove to be inaccurate.
28
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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the normal course of business, the Company is exposed to fluctuations
in interest rates and equity market risks as the Company seeks debt and equity
capital to sustain its operations. At October 31, 1999, substantially all of the
Company's debt was in fixed-rate instruments. The Company is also exposed to
fluctuations in foreign currency exchange rates as the financial results of its
foreign subsidiaries are translated into U.S. dollars in consolidation. We
consider the fair value of all financial instruments to be not materially
different from their carrying value at year-end. The Company does not use
derivative instruments or hedging to manage its exposures and does not currently
hold any market risk sensitive instruments for trading purposes.
Our cash and cash equivalents and investments are in high-quality
securities placed with a wide array of financial institutions with high credit
ratings. This investment policy limits our exposure to concentration of credit
risks.
Our products and services are sold to a diverse group of customers
throughout the world. As such, we are subject to certain risks and uncertainties
as a result of changes in general economic conditions, sources of supply,
competition, foreign exchange rates, tax reform, litigation and regulatory
developments. The diversity and breadth of our products and geographic
operations mitigate the risk that adverse changes in any event would materially
affect our financial position. Additionally, as a result of the diversity of our
customer base, we do not consider ourselves exposed to concentration of credit
risks. These risks are further minimized by setting credit limits, ongoing
monitoring of customers' account balances, and assessment of the customers'
financial strengths. See Note 11 to the Consolidated Financial Statements for
information regarding fair value of financial instruments.
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 Auditor's Report .................................................... 31
Consolidated Financial Statements:
Balance Sheets as of October 31, 1998 and 1999 ............................. 32
Statements of Operations for the years ended October 31, 1997, 1998 and 1999 33
Statements of Stockholders' Equity (Deficit) and Comprehensive Loss
for the years ended October 31, 1997, 1998 and 1999 ................... 34
Statements of Cash Flows for the years ended October 31, 1997, 1998 and 1999 35
Notes to Consolidated Financial Statements ...................................... 37
Schedule:
II. Valuation and Qualifying Accounts ........................................... 66
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 1999, and the results of
their operations and their cash flows for each of the years in the three-year
period ended October 31, 1999, 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 15, 1999
31
AUTOTOTE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
October 31, 1998 and 1999
(in thousands, except per share amounts)
1998 1999
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents ........................................................... $ 6,809 5,067
Restricted cash ..................................................................... 638 771
Accounts receivable, net of allowance for doubtful accounts of $1,811 and $2,789 in
1998 and 1999, respectively ...................................................... 21,752 25,755
Inventories ......................................................................... 11,295 14,636
Prepaid expenses, deposits and other current assets ................................. 1,932 2,319
--------- ---------
Total current assets .......................................................... 42,426 48,548
--------- ---------
Property and equipment, at cost ......................................................... 196,748 199,767
Less accumulated depreciation ....................................................... 118,315 123,039
--------- ---------
Net property and equipment .................................................... 78,433 76,728
--------- ---------
Goodwill, net of amortization ........................................................... 3,614 5,237
Operating right, net of amortization .................................................... 14,848 13,848
Other assets and investments ............................................................ 17,179 21,198
--------- ---------
$ 156,500 165,559
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current installments of long-term debt .............................................. $ 2,992 4,253
Accounts payable .................................................................... 13,610 20,102
Accrued liabilities ................................................................. 24,996 28,015
Interest payable .................................................................... 3,706 3,898
--------- ---------
Total current liabilities ..................................................... 45,304 56,268
--------- ---------
Deferred income taxes ................................................................... 1,832 1,656
Other long-term liabilities ............................................................. 2,124 2,963
Long-term debt, excluding current installments .......................................... 120,878 117,891
Long-term debt, convertible subordinated debentures ..................................... 35,000 35,000
--------- ---------
Total liabilities ............................................................. 205,138 213,778
--------- ---------
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 36,268 shares outstanding at October 31, 1998 and 1999, respectively ......... 360 364
Class B non-voting common stock, par value $0.01 per share, 700 shares
authorized, none outstanding ..................................................... -- --
Additional paid-in capital .......................................................... 149,119 149,622
Accumulated losses .................................................................. (197,231) (196,852)
Treasury stock, at cost ............................................................. (102) (102)
Accumulated other comprehensive loss ................................................ (784) (1,251)
--------- ---------
Total stockholders' equity (deficit) .......................................... (48,638) (48,219)
--------- ---------
Commitments and contingencies (Notes 8, 10, 13 and 14) .................................. $ 156,500 165,559
========= =========
See accompanying notes to consolidated financial statements.
32
AUTOTOTE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended October 31, 1997, 1998 and 1999
(in thousands, except per share amounts)
1997 1998 1999
--------- --------- ---------
Operating revenues:
Services ............................................................. $ 132,989 135,790 148,660
Sales ................................................................ 24,343 23,523 62,488
--------- --------- ---------
157,332 159,313 211,148
--------- --------- ---------
Operating expenses (exclusive of depreciation and amortization shown below):
Services ............................................................. 80,496 88,916 99,496
Sales ................................................................ 15,396 15,739 43,937
--------- --------- ---------
95,892 104,655 143,433
--------- --------- ---------
Total gross profit ............................................. 61,440 54,658 67,715
Selling, general and administrative expenses ............................... 28,444 26,205 27,178
(Gain) loss on sale of businesses .......................................... (1,823) 66 1,600
Depreciation and amortization .............................................. 36,728 29,489 22,189
--------- --------- ---------
Operating income (loss) ........................................ (1,909) (1,102) 16,748
Other (income) deductions:
Interest expense ..................................................... 14,367 15,521 15,941
Other (income) expense ............................................... 79 (1,064) 251
--------- --------- ---------
14,446 14,457 16,192
--------- --------- ---------
Income (loss) before income tax expense and extraordinary item ....... (16,355) (15,559) 556
Income tax expense ......................................................... 906 321 177
--------- --------- ---------
Income (loss) before extraordinary item .............................. (17,261) (15,880) 379
Extraordinary item--write-off of deferred financing fees and expenses,
net of gain on early retirement of subordinated debt ..................... (426) -- --
--------- --------- ---------
Net income (loss) .................................................... $ (17,687) (15,880) 379
========= ========= =========
Net income (loss) per common share:
Net income (loss) per basic share and diluted share before
extraordinary item ................................................ (0.50) (0.44) 0.01
Extraordinary loss per basic share and diluted share ................. (0.01) -- --
--------- --------- ---------
Net income (loss) per basic share and diluted share .................. $ (0.51) (0.44) 0.01
========= ========= =========
Weighted average number of shares used in per share calculations:
Basic shares ......................................................... 34,469 35,696 36,118
Diluted shares ....................................................... 34,469 35,696 38,343
========= ========= =========
See accompanying notes to consolidated financial statements.
33
AUTOTOTE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
AND COMPREHENSIVE LOSS
Years Ended October 31, 1997, 1998 and 1999
(in thousands)
1997 1998 1999
--------- --------- ---------
Common stock:
Beginning balance ............................................................ $ 315 354 360
Issuance of Class A common stock, net of issuance expenses .............. 9 6 4
Issuance of 2,964 shares of Class A common stock in litigation settlement 30 -- --
--------- --------- ---------
Ending balance ............................................................... 354 360 364
--------- --------- ---------
Additional paid-in capital:
Beginning balance ............................................................ 143,369 148,238 149,119
Issuance of Class A common stock, net of issuance expenses .............. 952 511 233
Issuance of Class A common stock in litigation settlement ............... 3,470 -- --
Deferred compensation ................................................... 447 370 270
--------- --------- ---------
Ending balance ............................................................... 148,238 149,119 149,622
--------- --------- ---------
Accumulated losses:
Beginning balance ............................................................ (163,664) (181,351) (197,231)
Net income (loss) ....................................................... (17,687) (15,880) 379
--------- --------- ---------
Ending balance ............................................................... (181,351) (197,231) (196,852)
--------- --------- ---------
Treasury stock ............................................................... (102) (102) (102)
--------- --------- ---------
Accumulated other comprehensive loss:
Beginning balance ............................................................ (114) (379) (784)
Other comprehensive loss ................................................ (265) (405) (467)
--------- --------- ---------
Ending balance ............................................................... (379) (784) (1,251)
--------- --------- ---------
Total stockholders' equity (deficit) ......................................... $ (33,240) (48,638) (48,219)
========= ========= =========
Comprehensive loss:
Net income (loss) ............................................................ $ (17,687) (15,880) 379
Other comprehensive loss:
Minimum pension liability adjustment .................................... -- (495) (107)
Foreign currency translation adjustment ................................. (265) 90 (360)
--------- --------- ---------
Other comprehensive loss ..................................................... (265) (405) (467)
--------- --------- ---------
Comprehensive loss ........................................................... $ (17,952) (16,285) (88)
========= ========= =========
See accompanying notes to consolidated financial statements.
34
AUTOTOTE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended October 31, 1997, 1998 and 1999
(in thousands)
1997 1998 1999
--------- --------- ---------
Cash flows from operating activities:
Net income (loss) ...................................................... $ (17,687) (15,880) 379
--------- --------- ---------
Adjustments to reconcile net income (loss) to cash provided by operating
activities:
Depreciation and amortization .................................... 36,728 29,489 22,189
Change in deferred income taxes,
net of effects of businesses sold .......................... (784) (592) 54
(Gain) loss on sale of businesses ................................ (1,823) 66 1,600
Non-cash extraordinary items ..................................... 426 -- --
Changes in operating assets and liabilities, net of effects of
acquisitions/dispositions of subsidiaries:
Restricted cash ............................................ 99 57 (150)
Accounts receivable ........................................ 1,339 (7,841) (4,826)
Inventories ................................................ (1,585) (4,600) (3,314)
Unbilled receivables ....................................... 2,553 -- --
Accounts payable ........................................... (3,314) 2,909 7,494
Accrued liabilities ........................................ 5,125 2,762 2,034
Other ............................................................ 2,641 1,790 1,089
--------- --------- ---------
Total adjustments .......................................... 41,405 24,040 26,170
--------- --------- ---------
Net cash provided by operating activities .................................... 23,718 8,160 26,549
--------- --------- ---------
Cash flows from investing activities:
Capital expenditures ................................................... (2,262) (2,773) (2,069)
Wagering systems expenditures .......................................... (5,226) (21,287) (12,865)
Increase in other assets and investments ............................... (2,336) (7,277) (9,035)
Business acquisitions, net of cash acquired ............................ -- 2,177 (2,333)
Proceeds from sale of business and assets, net of cash transferred ..... 21,056 -- --
Other .................................................................. (351) (63) 759
--------- --------- ---------
Net cash provided by (used in) investing activities .......................... 10,881 (29,223) (25,543)
--------- --------- ---------
Cash flows from financing activities:
Net repayments under revolving credit facility ......................... (71,890) -- --
Proceeds from issuance of long-term debt, net of financing fees ........ 106,334 12,059 --
Payments on long-term debt ............................................. (57,395) (3,072) (3,154)
Net proceeds from issuance of common stock ............................. 961 516 237
--------- --------- ---------
Net cash provided by (used in) financing activities .......................... (21,990) 9,503 (2,917)
--------- --------- ---------
Effect of exchange rate changes on cash ...................................... (390) 162 169
--------- --------- ---------
Increase (decrease) in cash and cash equivalents ............................. 12,219 (11,398) (1,742)
Cash and cash equivalents, beginning of year ................................. 5,988 18,207 6,809
========= ========= =========
Cash and cash equivalents, end of year ....................................... $ 18,207 6,809 5,067
========= ========= =========
(Continued)
35
AUTOTOTE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS--(Continued)
Years Ended October 31, 1997, 1998 and 1999
(in thousands)
Non-cash investing and financing activities
1997, 1998 and 1999
See Notes 9 and 10 for a description of the write-off of deferred
financing fees, and capital lease transactions; and also in 1997 see Notes 9 and
12 for a description of the gain on early retirement of subordinated debt and
the issuance of common stock in settlement of a stockholder litigation.
Supplemental cash flow information
Cash paid during the year for:
October 31,
-------------------------------------------
1997 1998 1999
------- ------ ------
Interest ................. $10,199 14,786 15,077
Income taxes ............. $ 938 630 710
See accompanying notes to consolidated financial statements.
36
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
October 31, 1998 and 1999
(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") operates primarily in three
business segments, Pari-mutuel Operations, Venue Management and
Lottery Operations.
Pari-mutuel Operations-- include all aspects of our pari-mutuel
service business, which encompass our North American and
international on-track, off-track and inter-track pari-mutuel
services, simulcasting and communications services, video gaming,
and sales of pari-mutuel systems and equipment. We are the leading
provider of computerized pari-mutuel wagering systems to the North
American Racing Industry and are also a leading provider of such
systems worldwide. We are one of the leading providers of
simulcasting services to the racing industry in the United States
and Europe. Additionally, we provide technologically advanced VGMs
to the North American Racing Industry for use at racetracks. Venue
Management-- we own and operate the Connecticut off-track betting
operations ("OTBs") and we are the exclusive licensed operator of
all on-track and off-track pari-mutuel wagering operations in The
Netherlands. Lottery Operations-- include both domestic and
international lottery service operations. We provide lottery systems
and services to three states in the United States, Latin America and
we sell lottery systems and equipment 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 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 Specific identification or
& finished goods 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
Transportation equipment ........... 3-7
Furniture and fixtures ............. 5-10
Buildings and leasehold improvements 5-40
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 lengthened the depreciable lives of its pari-mutuel
terminals from seven to ten years commencing November 1, 1998. As a
result of the change in depreciable lives, depreciation expense was
reduced by approximately $4.4 million annually. 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 $5,807 at
October 31, 1998 and 1999, respectively.
(h) Goodwill
Goodwill represents the excess of the purchase price over the fair
value of the net assets of acquired companies. Goodwill acquired
arising from the Company's acquisition of its simulcasting operation
is being amortized on a straight-line basis over five years; for its
German pari-mutuel wagering business, goodwill is being amortized on
a straight-line basis over 10 to 15 years; for its French
pari-mutuel wagering business, goodwill was fully amortized in
fiscal 1998 due to the loss of a major service contract; for its SJC
Video business, goodwill was fully written-off in fiscal 1999 in
connection with the loss on disposition of that business. Total
goodwill amounted to $3,614 and $5,237, net of accumulated
amortization of $10,648 and $12,503 as of October 31, 1998 and 1999,
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)
(1) 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 $13,848 net of accumulated amortization of
$5,357 and $6,357 at October 31, 1998 and 1999, 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.
(m) 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 accumulated other
comprehensive loss in stockholders' equity (deficit). Gains or
losses resulting from foreign currency transactions are included in
other income deductions in the consolidated statements of
operations.
39
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)
(n) Stock-Based Compensation
Stock-based compensation is recognized using the intrinsic value
method. For disclosure purposes (see Note 13), pro forma net income
(loss) and income (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.
(o) 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.
(p) Comprehensive Income (Loss)
On November 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income"
("SFAS 130"). SFAS 130 establishes standards for the reporting and
display of comprehensive income (loss) and its components in a full
set of financial statements. SFAS 130 requires that unrealized
losses from the Company's foreign currency translation adjustments
and unrecognized minimum pension liability, which prior to adoption
were reported separately in stockholders' equity (deficit), to be
included in other comprehensive income (loss). Prior year
consolidated financial statements have been reclassified to conform
to the requirements of SFAS 130.
(q) Reclassification
Certain reclassifications have been made to the prior years
consolidated financial statements to conform to the current
presentation.
(2) Basic Net Income (Loss) Per Common Share and Diluted Net Income (Loss) Per
Common Share
Basic net income (loss) per common share is computed by dividing net
income (loss) by the weighted average number of common shares outstanding during
the period. Diluted net income 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
applicable years presented, since their inclusion would be anti-dilutive. Basic
and diluted net loss per common share for the applicable years presented,
therefore, are the same. At October 31, 1999, 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 (see Notes 12 and 13).
40
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except per share amounts)
(2) Basic Net Income (Loss) Per Common Share and Diluted Net Income (Loss) Per
Common Share --(Continued)
The following represents a reconciliation of the numerator and denominator
used in computing basic and diluted net income per share for the years ended
October 31, 1997, 1998 and 1999:
Years Ended October 31,
------------------------------------
1997 1998 1999
-------- -------- --------
Income (numerator)
Net income (loss) ................................... $(17,687) (15,880) 379
======== ======== ========
Shares (denominator)
Basic weighted average common shares outstanding .... 34,469 35,696 36,118
Effect of diluted securities-stock options, warrants,
and deferred shares ............................ -- -- 2,225
-------- -------- --------
Diluted weighted average common shares outstanding .. 34,469 35,696 38,343
======== ======== ========
Per Share Amount
Basic net income (loss) per share ................... $ (0.51) (0.44) 0.01
======== ======== ========
Diluted net income (loss) per share ................. $ (0.51) (0.44) 0.01
======== ======== ========
(3) Acquisitions and Dispositions
Acquisition of Datasport Assets and Interest in Datek
On September 1, 1999, the Company completed the purchase of selected
assets and the assumption of certain liabilities, from Datasport Toto
Dienstleistung GmbH & Co KG ("Datasport"). As a result of this purchase, the
Company is the sole provider of totalisator and simulcasting services to the 14
thoroughbred racetracks in Germany. The transaction also increased the Company's
ownership and control of Datek GmbH ("Datek"), the primary provider of
pari-mutuel wagering to OTBs and bookmakers in Germany. The purchase, which
included approximately $2,333 in cash and the assumption of certain liabilities,
was recorded using the purchase method of accounting, and the acquired assets
and liabilities have been recorded at their estimated fair value at the date of
acquisition. The excess of the purchase price over the fair values of the net
assets acquired was approximately $3.2 million and has been recorded as goodwill
which is being amortized over 15 years. The operating results of the Datasport
and Datek businesses have been included in the consolidated statements of
operations since the date of acquisition. Had the operating results of the
Datasport and Datek businesses been included as if the transaction had been
consummated on November 1, 1998, the pro forma operating results of the Company
would not have been materially different.
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.
41
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except per share amounts)
(3) Acquisitions and Dispositions--(Continued)
Disposition of Businesses
In the fourth quarter of fiscal 1999, the Company commenced negotiations
to sell its SJC Video business. The Company expects to incur a loss on the sale
of approximately $1.6 million and, accordingly, has recorded this anticipated
loss in fiscal 1999.
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. The results of operations of Tele Control were included in the Company's
Lottery operations segment.
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 $1,823 in fiscal 1997 and $1,184 in fiscal 1998.
The following unaudited information shows the revenues, expenses and
operating income of the European lottery business that were included in the
Company's consolidated statements of operations for the fiscal year ended
October 31, 1997. Interest and income tax expenses have not been included in the
table below.
1997
-------
Operating revenue ............................................... $ 6,119
Operating expenses, including selling, general and administrative
expenses, and depreciation and amortization expenses ........ 6,181
-------
Operating loss .................................................. $ (62)
=======
(4) Inventories
Inventories consist of the following:
October 31,
-------------------
1998 1999
------- -------
Parts and work-in-process ....................................... $10,082 13,735
Finished goods .................................................. 448 344
Ticket paper .................................................... 765 557
------- -------
$11,295 14,636
======= =======
Terminals manufactured by the Company may be sold to customers or included
as part of a long-term wagering system contract. 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 5).
42
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except per share amounts)
(5) Property and Equipment
Property and equipment, including assets under capital leases, consist of
the following:
October 31,
-------------------
1998 1999
-------- --------
Machinery, equipment and deferred installation costs $167,914 169,334
Land and buildings ................................. 14,455 14,251
Transportation equipment ........................... 509 722
Furniture and fixtures ............................. 3,629 3,971
Leasehold improvements ............................. 4,941 5,886
Construction in progress ........................... 5,300 5,603
-------- --------
$196,748 199,767
======== ========
Depreciation expense for the years ended October 31, 1997, 1998, and 1999
amounted to $21,790, $19,310, and $14,158, respectively.
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, and the
Company commences depreciation of the costs.
(6) Other Assets and Investments
Other assets and investments (net) consist of the following:
October 31,
-------------------
1998 1999
-------- --------
Software systems development costs ................. $ 5,978 8,718
Deferred financing costs ........................... 4,293 3,351
Customer notes ..................................... 2,014 3,031
Other intangible assets ............................ 911 862
Other assets ....................................... 3,983 5,236
-------- --------
$ 17,179 21,198
======== ========
In fiscal 1998 and 1999, the Company capitalized $3,700 and $5,246,
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 $4,962,
$2,318 and $2,506 for the years ended October 31, 1997, 1998 and 1999,
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, the Company capitalized
$363 in deferred financing fees. Amortization of deferred financing costs
amounted to $1,268, $893 and $942 for the fiscal years ended October 31, 1997,
1998 and 1999, respectively.
43
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except per share amounts)
(6) Other Assets and Investments--(Continued)
Other assets in fiscal 1998 and 1999 includes $750 loaned by the Company
to Atlantic City Racing Association ("ACRA"). 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 or if the Company's option is extended, 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 $1,125 and $1,406 for the years ended October 31, 1997 and
1998, respectively.
(7) Accrued Liabilities
Accrued liabilities consist of the following:
October 31,
--------------------
1998 1999
-------- --------
Compensation and benefits .................................. $ 8,825 8,830
Customer advances .......................................... 2,402 3,760
Taxes, other than income ................................... 1,861 2,043
Income taxes payable ....................................... 861 244
Other ...................................................... 11,047 13,138
-------- --------
$ 24,996 28,015
======== ========
(8) Long-Term Debt
Long-term debt consists of the following:
October 31,
--------------------
1998 1999
-------- --------
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 9,000
Term Loan due in November 1999 ............................. 1,250 1,250
Capital lease obligations, payable monthly through May 2003
Interest from 5.9% to 13.0% ........................... 362 1,453
Various loans and bank facilities, interest from 4.3% to 13% 858 441
-------- --------
Total long-term debt ................................ 158,870 157,144
Less current installments ........................... 2,992 4,253
-------- --------
Long-term debt, excluding current installments ...... $155,878 152,891
======== ========
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.
44
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except per share amounts)
(8) Long-Term Debt--(Continued)
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 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 23). 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 bank credit 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.
45
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except per share amounts)
(8) Long-Term Debt--(Continued)
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 (2.25% as of October 31,
1999), 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,
1999, approximately $1,040 of letters of credit were guaranteed under the
Facility. As of October 31, 1999, the Company had approximately $23,960
available for borrowing under the Facility.
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.
(9) Extraordinary Items
In connection with the fiscal 1997 issuance of the Notes and the
subsequent repayment of all amounts outstanding under the Company's previously
existing bank credit facility (see Note 8), 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.
(10) Leases
At October 31, 1999, 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, 1999 are as follows:
2000, $7,937; 2001, $7,319; 2002, $7,173; 2003, $7,100; 2004, $6,920; and
thereafter $1,659. The Company also leases equipment as needed under various
month-to-month lease agreements. Total rental expense under these operating
leases was $8,890, $9,109 and $8,155 in the years ended October 31, 1997, 1998
and 1999, respectively.
The Company entered into capital leases obligations of $141 in the year
ended October 31, 1997, and acquired $59 of capitalized leases with the
acquisition of the Netherlands operations in the year ended October 31, 1998.
During the year ended October 31, 1999, the Company entered into capital lease
obligations of $201 and acquired $1,426 of capitalized leases with the
acquisition of the Datasport and Datek businesses.
46
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except per share amounts)
(11) 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 and $112,200 at October 31, 1999, based on
reference to dealer markets and quoted market prices. The Company was, however,
unable to determine the fair value of the Debentures in fiscal years 1998 and
1999.
(12) 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.
On April 1, 1999, the Company issued 14 shares of Class A Common Stock due
to the vesting, in connection with an employee's retirement, of certain PARS
issued May 1995 (see Note 13 for a description of PARS).
Warrants
At October 31, 1999, 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:
1998 Warrants .......................... 2,298 $ 1.69 October 31, 2002
1995 Warrants .......................... 387 $ 2.98 April 30, 2000
-----
Total Class A Common Stock Warrants .... 2,685
=====
Warrants to purchase Class B Common Stock ..... 147 $ 3.83 October 30, 2003
=====
On November 2, 1998, the Company amended and restated certain 1991
Warrants to adjust the exercise price and expiration date (the "1998 Warrants").
The warrants were priced at no less than the fair market value of the Company's
Class A Common Stock on the amendment date.
47
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except per share amounts)
(13) Stock Options
The Company has four stock option plans under which shares of Class A
Common Stock have been authorized 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 110 deferred shares at a fair market value of
$4.1250 per share were granted in fiscal 1995, a total of 50 deferred shares at
a fair market value of $3.1875 per share were granted in fiscal 1996, a total of
135 deferred shares at a fair market value of $1.3125 per share were granted in
fiscal 1997, a total of 40 restricted shares at a fair market value of $2.4375
per share were granted in fiscal 1998 and a total of 40 restricted shares at a
fair market value of $2.000 per share were granted in fiscal 1999. Accordingly,
the Company has recorded compensation expense of $499, $371 and $272 in fiscal
1997, 1998 and 1999, respectively. Additional compensation expense aggregating
$852 will be charged to expense through fiscal 2002 as the restricted 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)
(13) 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, 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
Granted ................................ 1,860 2.24
Canceled ............................... 365 2.40
Exercised .............................. 216 1.09
----- --------
Outstanding at October 31, 1999 .............. 7,373 $ 2.63
===== ========
(1) Weighted average exercise price
Summarized information about stock options outstanding and exercisable at
October 31, 1999 is as follows:
Outstanding Exercisable
------------------------------------- -------------------------
Exercisable Average Average Average
Price Range Shares Life(1) Price(2) Shares Price(2)
-------------- ------ ------- -------- ------ --------
$ 1.00 to 2.00 2,637 7.18 $ 1.33 996 $ 1.19
$ 2.01 to 3.00 3,367 7.14 2.66 1,566 2.68
$ 3.01 to 4.00 1,009 3.28 3.40 937 3.41
over $4.00 360 3.63 9.73 360 9.73
----- -----
7,373 3,859
===== =====
(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, 1997, 1998, and 1999 were 2,301 shares at
$3.90, 3,185 shares at $3.36 and 3,859 shares at $3.13, respectively. At October
31, 1997, 1998 and 1999, 3,677 shares, 3,302 shares and 1,797 shares,
respectively, were available for future grants under the terms of these plans.
Outstanding options expire prior to July 7, 2009 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)
(13) 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 income (loss) and net income (loss) per share
would have changed to the pro forma amounts indicated in the table below.
Pro forma net income (loss) and income (loss) per basic and diluted share
for the years ended:
October 31,
---------------------------------------
1997 1998 1999
---------- ------- ------
Net income (loss):
As reported ......................... $ (17,687) (15,880) 379
Pro forma ........................... (19,182) (17,605) (1,597)
Net income (loss) per basic and diluted share:
As reported ......................... (0.51) (0.44) 0.01
Pro forma ........................... (0.56) (0.49) (0.04)
The fair value of the options granted was estimated using the
Black-Scholes option-pricing model based on the weighted average market price at
date of grant of $1.20 in fiscal 1997, $2.65 in fiscal 1998 and $2.24 in fiscal
1999 and the following weighted average assumptions: risk-free interest rate of
6.1% for fiscal 1997, 4.5% for fiscal 1998 and 5.8% for fiscal 1999; expected
option life of 7.0 years for fiscal 1997, 1998 and 1999; volatility of 81% for
fiscal 1997, 75% fiscal 1998 and 59% for 1999; and no dividend yield in any
year. The average fair values of options granted during fiscal years 1997, 1998
and 1999 were $0.93, $1.93 and $1.45 respectively.
(14) 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, 1999 with specified minimums are as follows: 2000,
$18,931; 2001, $7,014; 2002, $15,974; 2003, $14,804; 2004, $13,120 and
thereafter $10,593.
(15) Export Sales and Major Customers
Sales to foreign customers amounted to $14,230, $9,717 and $49,939 in
fiscal years 1997, 1998 and 1999, respectively. No single customer represented
more than 10% of revenues in fiscal 1997 and 1998. In fiscal 1999, one customer
in the Lottery operations segment represented $35,969 or 17% of revenues.
50
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except per share amounts)
(16) 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 net cost for the Company's defined benefit plan for union employees
consisted of the following components:
Pension Benefits
-------------------
1998 1999
------- -----
Change in benefit obligation
Benefit obligation at beginning of year .................................. $ 1,499 1,802
Service cost ............................................................. 63 88
Loss due to census change ................................................ 29 --
Interest cost ............................................................ 108 116
Actuarial gain ........................................................... -- (49)
Benefits paid ............................................................ (53) (129)
Revaluation loss ......................................................... 156 --
------- -----
Benefit obligation at end of year ........................................ 1,802 1,828
------- -----
Change in plan assets
Fair value of plan assets at beginning of year ........................... 1,419 1,600
Actual return on plan assets ............................................. 108 (45)
Employer contribution .................................................... 126 129
Benefits paid ............................................................ (53) (129)
------- -----
Fair value of plan assets at end of year ................................. 1,600 1,555
------- -----
Funded status ............................................................ (202) (273)
Unrecognized actuarial loss .............................................. 454 567
Unrecognized prior service cost .......................................... 88 79
Unrecognized net transition obligation ................................... 16 35
------- -----
Net amount recognized .................................................... $ 356 408
======= =======
Amounts recognized in the statement of financial position consist of:
Accrued benefit liability ................................................ $ (583) (681)
Intangible asset ......................................................... 88 79
Accumulated other comprehensive income ................................... 495 602
Prepaid pension cost ..................................................... 356 408
------- -----
Net amount recognized .................................................... $ 356 408
======= =======
51
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except per share amounts)
(16) Pension Plans--(Continued)
Pension Benefits
-----------------
1998 1999
----- -----
Weighted-average assumptions as of October 31:
Discount rate .......................................... 6.750% 6.750%
Expected return on plan assets ......................... 8.000% 8.000%
Rate of compensation ................................... None None
Pension Benefits
--------------------------
1997 1998 1999
---- ---- ----
Components of net periodic benefit cost:
Service cost .................................. $ 67 63 88
Interest cost ................................. 97 108 116
Expected return on plan assets ................ (85) (114) (129)
Net amortization and deferral ................. (8) 23 27
---- ---- ----
Net periodic cost ............................. $ 71 80 102
==== ==== ====
The accumulated benefit obligation represents the actuarial present value
of benefits based upon the benefit multiplied by the participants' historical
years of service.
The plan assets are invested in insurance company general accounts
guaranteed as to principal.
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 consolidated balance sheet at October 31, 1998 and
1999 the additional minimum liability of the unfunded accumulated benefit
obligation of $583 and $681, respectively, 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
$403, $280 and $469 during the years ended October 31, 1997, 1998 and 1999,
respectively.
The Company has a 401K plan covering all employees who are not covered by
a collective bargaining agreement. Company contributions to the plan are at the
discretion of the Board of Directors. Pension expense for the years ended
October 31, 1997, 1998 and 1999 amounted to approximately $760, $926 and $1,015,
respectively. The Company has a 401K plan for all union employees which does not
provide for Company contributions.
(17) Management Incentive Compensation
The Company has an incentive compensation plan for key management
personnel based on business unit performance, overall performance of the Company
and individual performance. Management incentive compensation expense amounted
to $1,707, $1,686 and $2,000 in fiscal years 1997, 1998 and 1999, respectively.
52
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except per share amounts)
(18) Income Tax Expense (Benefit)
The consolidated income (loss) before income tax expense (benefit) and
extraordinary item, by domestic and foreign source, is as follows:
Years Ended October 31,
----------------------------------
1997 1998 1999
-------- -------- --------
Domestic ..................................................... $(14,367) (14,371) 128
Foreign ...................................................... (1,988) (1,188) 428
-------- -------- --------
Consolidated income (loss) before income tax expense (benefit)
and extraordinary item ....................................... $(16,355) (15,559) 556
======== ======== ========
Income tax expense (benefit) consists of:
Current Deferred Total
-------- -------- --------
1997- Foreign ................................................ $ 938 (32) 906
======== ======== ========
1998- Foreign ................................................ $ 1,040 (719) 321
======== ======== ========
1999- Federal ................................................ $ (33) (15) (48)
- Foreign .............................................. 137 (161) (24)
- State ................................................ 249 -- 249
-------- -------- --------
- Total ................................................ $ 353 (176) 177
======== ======== ========
53
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except per share amounts)
(18) Income Tax Expense (Benefit)--(Continued)
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 1999
-------- --------
Accrued vacation ......................................... $ (815) (767)
Inventory reserve ........................................ (704) (532)
Accrued litigation expenses .............................. (120) (612)
Accrued loss on disposition of business .................. -- (600)
Other accrued liabilities ................................ (74) (942)
Reserve for doubtful accounts ............................ (569) (959)
Accrued downsizing costs ................................. (761) --
-------- --------
Current deferred tax asset ......................... (3,043) (4,412)
-------- --------
Intangible assets-difference in amortization periods ..... 1,159 1,298
Property and equipment differences in depreciation methods 5,493 4,747
Other, net ............................................... 54 58
Interest charge, Domestic International Sales Corp. ...... 5,290 5,927
-------- --------
Noncurrent deferred tax liability, net ............. 11,996 12,030
-------- --------
Net operating loss carryforward .......................... (52,476) (48,746)
Deferred compensation .................................... (615) (627)
Partnership investments .................................. (343) (354)
Alternative minimum tax credits .......................... (184) (335)
Research and experimentation credits ..................... (51) (34)
-------- --------
Noncurrent deferred tax asset ...................... (53,669) (50,096)
Valuation allowance ...................................... 46,548 44,134
-------- --------
Noncurrent deferred tax asset, net ................. (7,121) (5,962)
-------- --------
Noncurrent deferred tax liability .................. 4,875 6,068
-------- --------
Net deferred tax liability on balance sheet ........ $ 1,832 1,656
======== ========
The aggregate deferred tax assets before valuation allowance at October
31, 1998 and 1999 were $56,712 and $54,508, respectively. The aggregate deferred
tax liabilities at October 31, 1998 and 1999 were $11,996 and $12,030,
respectively.
54
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except per share amounts)
(18) Income Tax Expense (Benefit)--(Continued)
The actual tax expense differs from the "expected" tax expense (benefit)
(computed by applying the U.S. Federal corporate rate of 34% to income (loss)
before income tax expense and extraordinary item) as follows:
October 31,
-------------------------------
1997 1998 1999
------- ------- -------
Computed "expected" tax expense (benefit) .......... $(5,561) (5,290) 189
Increase (reduction) in income taxes resulting from:
Unused net operating loss .................... 4,155 4,788 --
Foreign tax differential ..................... 1,782 725 (201)
Other, net ................................... 530 98 189
------- ------- -------
$ 906 321 177
======= ======= =======
The Company has regular tax net operating loss carryforwards of
approximately $35,116 that expire in 2009, $40,777 that expire in 2010, $25,406
that expire in 2011, $11,074 that expire in 2012 and $10,150 that expire in
2018.
The Company has minimum tax credit carryforwards (which can be carried
forward indefinitely) of approximately $335 and research and experimentation
credit carryforwards of approximately $34. The research and experimentation
credits expire from 2000 to 2003.
The net changes in the valuation allowance for deferred tax assets for the
years ended October 31, 1998 and 1999 were an increase of $4,375 and a decrease
of $2,414, 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, 1999 will be allocated as follows:
Income tax benefit that would be reported in the consolidated statements of operations $41,284
Additional capital (benefit from exercise of stock options) .......................... 2,850
-------
$44,134
=======
55
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except per share amounts)
(19) Business and Geographic Segments
The Company adopted Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information" ("SFAS
131") in fiscal 1999. Business segments are defined by SFAS 131 as components of
an enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker assessing performance
and making operating and capital decisions.
The following tables represent revenues, profits, depreciation and assets
by business and geographic segments for the years ended October 31, 1997, 1998
and 1999. Service revenues and product sales are allocated among business and
geographic segments based on where the customer is located. The accounting
policies of the segments are the same as those described in the summary of
significant accounting policies in Note 1. Corporate expenses are allocated
among business and geographic segments. Interest expense and other (income)
deductions are not allocated to business segments. Prior year's segment
information has been restated to conform to the requirements of SFAS 131.
Years Ended October 31,
-------------------------------------
Business Segments 1997 1998 1999
--------- ------- -------
Service revenue and product sales
Pari-mutuel operations ................... $ 88,390 88,864 99,174
Venue management operations .............. 43,732 50,525 61,562
Lottery operations ....................... 23,106 18,047 49,340
SJC Video operations ..................... 2,104 1,877 1,072
--------- ------- -------
$ 157,332 159,313 211,148
========= ======= =======
Gross profit
Pari-mutuel operations ................... $ 37,823 35,317 39,612
Venue management operations .............. 12,903 13,569 15,121
Lottery operations ....................... 9,731 5,313 12,672
SJC Video operations ..................... 983 459 310
--------- ------- -------
$ 61,440 54,658 67,715
========= ======= =======
Operating income (loss)
Pari-mutuel operations ................... $ (7,745) (6,410) 5,383
Venue management operations .............. 4,998 5,570 5,839
Lottery operations ....................... 625 321 7,999
SJC Video operations ..................... 213 (583) (2,473)
--------- ------- -------
$ (1,909) (1,102) 16,748
========= ======= =======
Included in operating income (loss)
Depreciation and amortization
Pari-mutuel operations ................... $ 26,382 23,912 16,386
Venue management operations .............. 2,483 2,633 2,778
Lottery operations ....................... 7,205 2,100 2,297
SJC Video operations ..................... 658 844 728
--------- ------- -------
$ 36,728 29,489 22,189
========= ======= =======
(Gain) loss on sale/disposition of businesses
Lottery operations ....................... (1,823) (1,184) --
SJC Video operations ..................... -- 1,250 1,600
--------- ------- -------
$ (1,823) 66 1,600
========= ======= =======
56
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except per share amounts)
(19) Business and Geographic Segments--(Continued)
Years Ended October 31,
-------------------------------------
Business Segments 1997 1998 1999
--------- --------- ---------
A reconciliation of total segment operating income to consolidated income
(loss) before income tax expense and extraordinary item is as follows:
Total reported segments .............................................. $ (1,909) (1,102) 16,748
Interest expense ..................................................... 14,367 15,521 15,941
Other (income) expense ............................................... 79 (1,064) 251
--------- --------- ---------
$ (16,355) (15,559) 556
========= ========= =========
Assets
Pari-mutuel operations ............................................ $ 111,957 99,946 110,598
Venue management operations ....................................... 35,358 36,537 34,613
Lottery operations ................................................ 3,512 17,380 20,348
SJC Video operations .............................................. 2,714 2,637 --
--------- --------- ---------
$ 153,541 156,500 165,559
========= ========= =========
Capital and wagering systems expenditures
Pari-mutuel operations ............................................ $ 5,262 9,217 10,714
Venue management operations ....................................... 446 1,368 1,492
Lottery operations ................................................ 102 13,312 2,615
SJC Video operations .............................................. 1,678 163 113
--------- --------- ---------
$ 7,488 24,060 14,934
========= ========= =========
Years Ended October 31,
-------------------------------------
Geographic Segments 1997 1998 1999
--------- --------- ---------
Service revenue and product sales
North America ..................................................... $ 125,402 126,726 135,299
Italy ............................................................. 3,632 11,298 36,331
Other ............................................................. 28,298 21,289 39,518
--------- --------- ---------
$ 157,332 159,313 211,148
========= ========= =========
Long-lived assets
North America ..................................................... $ 72,648 73,270 70,576
Europe ............................................................ 2,925 4,252 5,629
Other ............................................................. 816 911 523
--------- --------- ---------
$ 76,389 78,433 76,728
========= ========= =========
57
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except per share amounts)
(20) Selected Quarterly Financial Data--(Unaudited)
Selected quarterly financial data for the years ended October 31, 1998 and
1999 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:
Basic and diluted shares .......................................... 35,389 35,504 35,916 35,941
======== ====== ====== ======
Year Ended October 31, 1999
-----------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- ------- ------- -------
Total operating revenues ............................................... $ 45,652 53,079 53,170 59,247
Gross profit ........................................................... 14,333 16,631 17,631 19,120
Net income (loss) ...................................................... (2,434) 572 1,895 346
Net income (loss) per basic share and diluted share .................... $ (0.07) 0.02 0.05 0.01
======== ====== ====== ======
Weighted average number of shares used in per share calculation:
Basic share ....................................................... 35,998 36,032 36,169 36,246
Diluted share ..................................................... 35,998 37,371 38,699 39,465
======== ====== ====== ======
(21) 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.
(22) Litigation
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.
58
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except per share amounts)
(23) 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 8). 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 (i)
Autotote Corporation (the "Parent Company") which includes the activities of
Autotote Management Corporation, (ii) the Guarantor Subsidiaries and (iii) the
wholly owned foreign subsidiaries and the non-wholly owned domestic and foreign
subsidiaries (the "Non-Guarantor Subsidiaries") as of October 31, 1998 and
October 31, 1999 and for the fiscal years ended October 31, 1997, 1998 and 1999.
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.
59
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, 1999
(in thousands)
Parent Guarantor Non-Guarantor Eliminating
Company Subsidiaries Subsidiaries Entries Consolidated
------- ------------ ------------- ----------- ------------
ASSETS
Cash and cash equivalents ....................... $ 1,598 506 2,963 -- 5,067
Accounts receivable, net ........................ -- 21,083 4,672 -- 25,755
Other current assets ............................ 30 14,143 4,017 (464) 17,726
Property and equipment, net ..................... 298 66,973 9,708 (251) 76,728
Investment in subsidiaries ...................... 58,214 -- -- (58,214) --
Goodwill ........................................ 198 353 4,686 -- 5,237
Other assets .................................... 6,199 30,385 659 (2,197) 35,046
--------- ------- ------ ------- -------
Total assets ................................ $ 66,537 133,443 26,705 (61,126) 165,559
========= ======= ====== ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities ............................. $ 12,219 29,546 10,922 (672) 52,015
Current installments of long-term debt .......... 1,250 2,429 574 -- 4,253
Long-term debt, excluding current installments .. 145,000 6,627 1,264 -- 152,891
Other non-current liabilities ................... 2,193 1,233 1,766 (573) 4,619
Intercompany balances ........................... (45,906) 43,214 1,942 750 --
Stockholders' equity (deficit) .................. (48,219) 50,394 10,237 (60,631) (48,219)
--------- ------- ------ ------- -------
Total liabilities and stockholders'equity
(deficit) ................................. $ 66,537 133,443 26,705 (61,126) 165,559
========= ======= ====== ======= =======
60
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/disposition 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) deductions .......................... (326) (413) 746 72 79
--------- ------- ------ ------- -------
Income (loss) before equity in income of sub-
sidiaries, 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)
======================================================================
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
Gain on sale/disposition of business ............... 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) deductions .......................... (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)
========= ======= ====== ======= =======
61
AUTOTOTE CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED STATEMENT OF OPERATIONS
Year Ended October 31, 1999
(in thousands)
Parent Guarantor Non-Guarantor Eliminating
Company Subsidiaries Subsidiaries Entries Consolidated
------- ------------ ------------- ----------- ------------
Operating revenues ................................. $ -- 181,387 48,660 (18,899) 211,148
Operating expenses ................................. -- 119,324 42,994 (18,885) 143,433
--------- ------- ------ ------- -------
Gross profit .................................... -- 62,063 5,666 (14) 67,715
Selling, general and administrative expenses ....... 9,170 13,515 4,511 (18) 27,178
Loss on sale/disposition of businesses ............ -- 1,600 -- -- 1,600
Depreciation and amortization ...................... 196 18,981 3,115 (103) 22,189
--------- ------- ------ ------- -------
Operating income (loss) ......................... (9,366) 27,967 (1,960) 107 16,748
Interest expense ................................... 14,893 883 401 (236) 15,941
Other (income) deductions .......................... (1,839) (690) 36 2,744 251
--------- ------- ------ ------- -------
Income (loss) before equity in income
of subsidiaries, and income taxes ............... (22,420) 27,774 (2,397) (2,401) 556
Equity in income of subsidiaries ................... 23,031 -- -- (23,031) --
Income tax expense (benefit) ....................... 232 252 (307) -- 177
--------- ------- ------ ------- -------
Net income (loss) .................................. $ 379 27,522 (2,090) (25,432) 379
========= ======= ====== ======= =======
62
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
========= ======= ====== ======= =======
63
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/disposition 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) (27,679) (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
========= ======= ====== ======= =======
64
AUTOTOTE CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED STATEMENT OF CASH FLOWS
Year Ended October 31, 1999
(in thousands)
Parent Guarantor Non-Guarantor Eliminating
Company Subsidiaries Subsidiaries Entries Consolidated
------- ------------ ------------- ----------- ------------
Net income (loss) .................................. $ 379 27,522 (2,090) (25,432) 379
Depreciation and amortization ................... 196 18,981 3,115 (103) 22,189
Equity in income of subsidiaries ................ (23,031) -- -- 23,031 --
Loss on sale/disposition of businesses .......... -- 1,600 -- -- 1,600
Other non-cash adjustments ...................... 1,081 109 25 -- 1,215
Changes in working capital ...................... (235) 924 568 (91) 1,166
--------- ------ ------ ------- ------
Net cash provided by (used in) operating activities (21,610) 49,136 1,618 (2,595) 26,549
--------- ------ ------ ------- ------
Cash flows from investing activities:
Capital and wagering systems expenditures ....... (41) (11,835) (3,054) (4) (14,934)
Business acquisition, net of cash acquired ...... (512) -- (2,333) 512 (2,333)
Other assets and investments .................... (631) (6,559) (699) (387) (8,276)
--------- ------ ------ ------- ------
Net cash provided by (used in) investing activities (1,184) (18,394) (6,086) 121 (25,543)
--------- ------ ------ ------- ------
Cash flows from financing activities:
Net proceeds from issuance of long term-debt .... -- 60 26 (86) --
Payments on long-term debt ...................... -- (2,739) (514) 99 (3,154)
Other, principally intercompany balances ........ 22,286 (27,450) 3,141 2,260 237
--------- ------ ------ ------- ------
Net cash provided by (used in) financing activities 22,286 (30,129) 2,653 2,273 (2,917)
--------- ------ ------ ------- ------
Effect of exchange rate changes on cash ............ 52 (367) 283 201 169
--------- ------ ------ ------- ------
Increase/(decrease) in cash and cash equivalents ... (456) 246 (1,532) -- (1,742)
Cash and cash equivalents, beginning of year ....... 2,054 260 4,495 -- 6,809
--------- ------ ------ ------- ------
Cash and cash equivalents, end of year ............. $ 1,598 506 2,963 -- 5,067
========= ====== ====== ======= ======
65
AUTOTOTE CORPORATION AND SUBSIDIARIES
Valuation and Qualifying Accounts
Three Years Ended October 31, 1999
(in thousands)
Additions
----------------------
Balance at Charged to Charged Balance at
Beginning Costs and to other end of
of period Expenses accounts Deductions (1) period
--------- --------- -------- -------------- ----------
Year ended October 31, 1997
Allowance for doubtful accounts .............. $ 2,053 1,070 -- 1,147 1,976
Reserve for inventory obsolescence ........... $ 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 obsolescence ........... $ 2,238 296 50 247 2,337
Year ended October 31, 1999
Allowance for doubtful accounts .............. $ 1,811 1,140 -- 162 2,789
Reserve for inventory obsolescence ........... $ 2,337 221 -- 712 1,846
(1) Amounts written off or collected.
66
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 year 2000 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 year 2000 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 year 2000 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 year 2000 Annual Meeting of Stockholders is incorporated herein by
reference.
67
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements--See Index to Consolidated Financial Statements
attached hereto, page 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 Stock Purchase Agreement dated July 15, 1994 among the Company,
Marvin H. Sugarman, Robert Melican, Racing Technology, Inc. and
Marvin H. Sugarman Productions, Inc.(9)
10.6 Asset Purchase Agreement dated January 12, 1995 between Autotote
Communication Services, Inc. and IDB Communications Group Inc.(10)
10.7 Purchase Agreement dated October 14, 1994 between Autotote
Corporation, Yves Alexandre, Marie A. Alexandre and Frederic
Alexandre. (English summary attached to French original).(11)
10.8 Purchase Agreement among the Company, Autotote Enterprises, Inc.,
and the State of Connecticut, Division of Special Revenue, dated
June 30, 1993.(12)
10.9 Stock Purchase Agreement between the Company and General Instrument
Corporation dated May 18, 1993.(13)
10.10 Purchase and Sale Agreement between the Company and Sven Eriksson
dated May 27, 1993.(14)
10.11 Agreement among ETAG Electronic Totalisator AG, Gerhard Harwalik,
Peter Freudenschuss, Peter Tinkl and Manfred Harwalik dated July 27,
1993.(15)
68
Exhibit
Number Description
------ -----------
10.12 Purchase Agreement among certain purchasers and Autotote Corporation
dated August 13, 1993 with respect to the 51/2% Convertible
Subordinated Debentures due 2001.(16)
10.13 1992 Equity Incentive Plan, as amended and restated.(17)*
10.14 Letter Agreement, dated as of January 3, 1995, between the Company
and Martin E. Schloss.(18)*
10.15 Agreement of Purchase and Sale, dated January 19, 1996, between
Autotote Systems, Inc. and Fusco Properties, L.P. ("Fusco").(19)
10.16 Lease Agreement, dated as of January 19, 1996, between Fusco and
Autotote Systems, Inc.(20)
10.17 Stock Transfer Agreement among the Company and American Wagering,
Inc., dated October 25, 1996, with respect to all outstanding stock
of Autotote CBS, Inc.(21)
10.18 Stock Purchase Agreement among the Company and Scientific Games
Holding Corp., Tele Control Kommunikations und Computersysteme
Aktien Gesellschaft.(22)
10.19 1997 Incentive Compensation Plan.(23)*
10.20 1995 Equity Incentive Plan.(24)*
10.21 Employment Agreement effective November 1, 1997 between A. Lorne
Weil and Autotote Corporation (the "Weil Employment
Agreement").(25)*
10.22 Amendment dated September 10, 1998, to the Weil Employment
Agreement.(26) *
10.23 Form of Change in Control Agreement effective November 1, 1997
between the Company and its executive officers and certain
non-executive officers.(27)*
10.24 Agreement between the Company and Elettronica Ingegneria Sistemi
dated February 19, 1998.(28)
10.25 General Agreement between the Company and Sisal Sport Italia SpA
dated February 19, 1998.(29)
10.26 Term Loan Agreement dated May 22, 1998 by and among Autotote
Corporation, Autotote Lottery Corporation, various financial
institutions and Heller Financial, Inc., as agent.(30)
10.27 Purchase Agreement between Autotote Corporation and Stichting Hippo
Toto dated June 29, 1998.(31)
10.28 The Autotote Corporation Key Executive Deferred Compensation Plan,
and Plan Adoption Agreement.(32)*
10.29 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.(33)
10.30 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.(34)
10.31 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.(35)
10.32 Warrant to Purchase Class B Nonvoting Common Stock of Autotote
Corporation dated October 30, 1992 issued to various lenders.(36)
69
Exhibit
Number Description
------ -----------
10.33 Warrant Agreement dated as of September 14, 1995 (the "1995 Warrant
Agreement").(37)
10.34 Amendment dated January 29, 1997 amending both the 1995 Warrant
Agreement and the 1996 Warrant Agreement.(38)
10.35 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)
10.36 Form of Amended and Restated Warrant issued November 2, 1998 to
Certain Members of Management and Several Employees.(+)
21.1 List of Subsidiaries.(+)
23 Consent of KPMG LLP.(+)
(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. Incorporated by
reference to Exhibit 4.4 to the Company's Registration Statement on Form
S-8 (Registration No. 33-46594) which
(2) 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.
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
(7) (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 10.19 to the Company's Annual Report
on Form 10-K for the fiscal year ended October 31, 1994
(the "1994 10-K").
(10) Incorporated by reference to Exhibit 10.20 to the Company's 1994 10-K.
(11) Incorporated by reference to Exhibit 10.21 to the Company's 1994 10-K.
(12) Incorporated by reference to Exhibit 2.1 to the Company's Current Report
on Form 8-K dated July 1, 1993.
(13) Incorporated by reference to Exhibit 2.1 to the Company's Current Report
on Form 8-K dated June 22, 1993.
(14) Incorporated by reference to Exhibit 2.2 to the Company's Current Report
on Form 8-K dated June 22, 1993.
(15) Incorporated by reference to Exhibit 2.1 to the Company's Current Report
on Form 8-K dated September 8, 1993.
(16) Incorporated by reference to Exhibit 10 to the Company's Current Report
on Form 8-K dated September 8, 1993.
(17) Incorporated by reference to Exhibit 10.33 to the Company's 1998 10-K.
(18) Incorporated by reference to Exhibit 10.40 to the Company's 1995 10-K.
(19) 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").
(20) Incorporated by reference to Exhibit 10.43 to the Company's 1995 10-K/A.
(21) 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").
(22) Incorporated by reference to Exhibit 10.27 to the Company's Current
Report on Form 8-K dated April 15, 1997.
(23) 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.
(24) 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.
(25) Incorporated by reference to Exhibit 10.26 to the Company's Quarterly
Report on Form 10-Q for the quarter ended January 31, 1998.
(26) Incorporated by reference to Exhibit 10.27 to the Company's 1998 10-K.
70
(27) Incorporated by reference to Exhibit 10.27 to the Company's Quarterly
Report on Form 10-Q for the quarter ended April 30, 1998
(28) Incorporated by reference to Exhibit 10.28 to the Company's Quarterly
Report on Form 10-Q for the quarter ended April 30, 1998
(29) Incorporated by reference to Exhibit 10.29 to the Company's Quarterly
Report on Form 10-Q for the quarter ended April 30, 1998.
(30) Incorporated by reference to Exhibit 10.30 to the Company's Quarterly
Report on Form 10-Q for the quarter ended April 30, 1998.
(31) Incorporated by reference to Exhibit 10.31 to the Company's Quarterly
Report on Form 10-Q for the quarter ended July 31, 1998.
(32) Incorporated by reference to Exhibit 10.34 to the Company's 1998 10-K.
(33) Incorporated by reference to Exhibit 10.35 to the Company's 1998 10-K.
(34) Incorporated by reference to Exhibit 10.36 to the Company's 1998 10-K.
(35) Incorporated by reference to Exhibit 10.37 to the Company's 1998 10-K.
(36) Incorporated by reference to Exhibit 10.34 to the Company's 1992 10-K.
(37) Incorporated by reference to Exhibit 99.8 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.
71
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
AUTOTOTE CORPORATION
Dated: January 28, 2000
By: /s/A. Lorne Weil
----------------------------------
A. Lorne Weil, Chairman of Board,
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on January 28, 2000.
Signature Title Date
------------------------------ -------------------------------------------- ----------------
/S/ A. LORNE WEIL Chairman of the Board, President and Chief January 28, 2000
------------------------------ Executive Officer, and Director
A. Lorne Weil (principal executive officer)
/S/ DEWAYNE E. LAIRD Vice President and Chief January 28, 2000
------------------------------ Financial Officer
DeWayne E. Laird (principal financial and accounting officer)
/S/ LARRY J. LAWRENCE Director January 28, 2000
------------------------------
Larry J. Lawrence
/S/ SIR BRIAN G. WOLFSON Director January 28, 2000
------------------------------
Sir Brian G. Wolfson
/S/ ALAN J. ZAKON Director January 28, 2000
------------------------------
Alan J. Zakon
/S/ MARSHALL BARTLETT Director January 28, 2000
------------------------------
Marshall Bartlett
72
EXHIBIT INDEX
Exhibit No. Description Page
- ----------- ----------- ----
10.36 Form of Amended and Restated Warrant issued November 2, 1998
to Certain Members of Management and Several Employees.
21.1 List of Subsidiaries.
23 Consent of KPMG LLP.
27 Financial Data Schedule.
73