<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form 10-Q
{Mark One}
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: July 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition from _________________________________ to ________________
Commission File number: 0-13063
AUTOTOTE CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 81-0422894
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
750 Lexington Avenue, New York, New York 10022
----------------------------------------------
(Address of principal executive offices)
(Zip Code)
(212)-754-2233
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock as of September 10, 1997:
Class A Common Stock: 35,334,868
Class B Common Stock: None
Page 1 of 21
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND OTHER INFORMATION
QUARTER ENDED JULY 31, 1997
<TABLE>
<CAPTION>
Page
PART I. FINANCIAL INFORMATION ----
<S> <C> <C>
Item 1. Consolidated Financial Statements:
Balance Sheets as of July 31, 1997
and October 31, 1996 3
Statements of Operations for the Three Months Ended
July 31, 1997 and 1996 4
Statements of Operations for the Nine Months Ended
July 31, 1997 and 1996 5
Statements of Cash Flows for the Nine Months Ended
July 31, 1997 and 1996 6
Notes to Consolidated Financial Statements 7-15
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 16-18
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Stockholders 20
Item 6. Exhibits and Reports on Form 8K 20
</TABLE>
2
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
July 31, October 31,
1997 1996
---------------- -----------------
ASSETS (Unaudited)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents............................................................. $ 12,357 5,988
Restricted cash....................................................................... 553 611
Accounts receivable, net.............................................................. 12,121 18,257
Inventories........................................................................... 7,013 5,780
Unbilled receivables.................................................................. 1,107 6,901
Prepaid expenses, deposits and other current assets................................... 2,684 3,131
----------- ----------
Total current assets............................................................. 35,835 40,668
----------- ----------
Property and equipment, at cost............................................................. 180,792 186,249
Less accumulated depreciation......................................................... 99,267 90,369
----------- ----------
Net property and equipment....................................................... 81,525 95,880
----------- ----------
Goodwill, net of amortization............................................................... 6,638 21,024
Operating right, net of amortization........................................................ 16,098 16,848
Other assets and investments................................................................ 15,159 22,373
----------- ----------
$ 155,255 196,793
=========== ==========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' DEFICIT
<S> <C> <C> <C>
Current liabilities:
Current installments of long-term debt................................................ $ 1,812 9,234
Accounts payable...................................................................... 8,758 14,242
Accrued liabilities................................................................... 23,261 20,436
----------- ----------
Total current liabilities........................................................ 33,831 43,912
----------- ----------
Deferred income taxes....................................................................... 2,758 7,675
Other long-term liabilities................................................................. 1,168 5,612
Long-term debt, excluding current installments.............................................. 112,615 119,790
Long-term debt, convertible subordinated debentures......................................... 35,000 40,000
----------- ----------
Total liabilities.............................................................. 185,372 216,989
----------- ----------
Stockholders' 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, 35,335
and 31,474 shares outstanding at July 31, 1997 and October 31, 1996, respectively.. 354 315
Class B non-voting common stock, par value $0.01 per share, 700 shares authorized,
none outstanding................................................................... -- --
Additional paid-in capital............................................................ 148,146 143,369
Accumulated deficit................................................................... (177,916) (163,664)
Treasury stock, at cost............................................................... (102) (102)
Translation adjustment................................................................ (599) (114)
----------- ----------
Total stockholders' deficit...................................................... (30,117) (20,196)
----------- ----------
$ 155,255 196,793
=========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended July 31, 1997 and 1996
(In Thousands, Except Per Share Amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
July 31, July 31,
1997 1996
----------------- -----------------
<S> <C> <C>
Operating revenues:.......................................................................
Services............................................................................ $ 32,525 34,470
Sales............................................................................... 3,293 7,358
----------- ----------
35,818 41,828
----------- ----------
Operating expenses (exclusive of depreciation and amortization):
Services............................................................................ 19,441 21,020
Sales............................................................................... 1,787 4,867
----------- ----------
21,228 25,887
----------- ----------
Total gross profit.......................................................... 14,590 15,941
Selling, general and administrative expenses.............................................. 6,532 8,638
Gain on sale of business.................................................................. (1,566) --
Restructuring............................................................................. -- (649)
Depreciation and amortization............................................................. 8,411 11,124
----------- ----------
Operating income (loss)..................................................... 1,213 (3,172)
----------- ----------
Interest expense.......................................................................... 3,410 3,667
Other deductions (income), net............................................................ (165) 629
----------- ----------
Loss before income tax expense (benefit) and extraordinary items ........... (2,032) (7,468)
Income tax expense (benefit).............................................................. (320) 336
----------- ----------
Loss before extraordinary items............................................. (1,712) (7,804)
Extraordinary items:
Write-off of deferred financing fees and expenses,
net of gain on early retirement of subordinated debt ............................ 426 --
----------- ----------
Net loss.................................................................... $ (2,138) (7,804)
=========== ==========
Net loss per common share:
Loss per common share before extraordinary items.................................... $ (0.05) (0.25)
Extraordinary loss per common share................................................. (0.01) --
----------- ----------
Net loss per common share................................................... $ (0.06) ( 0.25)
=========== ==========
Weighted average number of common shares outstanding...................................... 35,312 31,459
=========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended July 31, 1997 and 1996
(In Thousands, Except Per Share Amounts)
(Unaudited)
<TABLE>
<CAPTION>
Nine Nine
Months Ended Months Ended
July 31, July 31,
1997 1996
----------------- -----------------
<S> <C> <C>
Operating revenues:
Services........................................................................... $ 98,914 99,444
Sales.............................................................................. 14,340 31,431
------------ ------------
113,254 130,875
------------ ------------
Operating expenses (exclusive of depreciation and amortization):
Services........................................................................... 58,770 62,091
Sales.............................................................................. 9,220 21,007
------------ ------------
67,990 83,098
------------ ------------
Total gross profit.......................................................... 45,264 47,777
Selling, general and administrative expenses............................................. 21,737 25,186
Gain on sale of business................................................................. (1,823) --
Restructuring............................................................................ -- (649)
Depreciation and amortization............................................................ 28,263 30,118
------------ ------------
Operating loss.............................................................. (2,913) (6,878)
------------ ------------
Interest expense......................................................................... 10,724 10,999
Litigation settlement.................................................................... -- 6,800
Other deductions (income), net........................................................... (33) 772
------------ ------------
Loss before income tax expense and extraordinary items ..................... (13,604) (25,449)
Income tax expense....................................................................... 222 2,050
------------ ------------
Loss before extraordinary items............................................. (13,826) (27,499)
Extraordinary items:
Write-off of deferred financing fees and expenses,
net of gain on early retirement of subordinated debt............................ 426 --
------------ ------------
Net loss ................................................................... $ (14,252) (27,499)
============ ============
Net loss per common share:
Loss per common share before extraordinary items................................... $ (0.41) (0.88)
Extraordinary loss per common share................................................ (0.01) --
------------ ------------
Net loss per common share................................................... $ (0.42) (0.88)
============ ============
Weighted average number of common shares outstanding..................................... 34,182 31,426
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended July 31, 1997 and 1996
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Nine Months
Months Ended Ended
July 31, July 31,
1997 1996
----------------- ----------------
<S> <C> <C>
Cash flows from operating activities:
Net loss............................................................................... $ (14,252) (27,499)
---------- ----------
Adjustments to reconcile net loss to cash provided by operating activities:
Depreciation and amortization..................................................... 28,263 30,118
Restructuring..................................................................... -- (649)
Litigation settlement, net of cash payments....................................... -- 4,250
(Gain) loss on sale of assets..................................................... (1,823) --
Non-cash extraordinary items...................................................... 426 --
Changes in operating assets and liabilities....................................... 1,850 470
Other............................................................................. 2,514 2,711
---------- ----------
Total adjustments............................................................ 31,230 36,900
---------- ----------
Net cash provided by operating activities.................................................... 16,978 9,401
---------- ----------
Cash flows from investing activities:
Capital expenditures................................................................... (2,078) (1,935)
Wagering systems expenditures.......................................................... (4,303) (5,797)
Proceeds from sale of business and asset disposals, net of cash transferred............ 21,050 1,026
Increase in other assets and other liabilities......................................... (2,650) (1,819)
---------- ----------
Net cash provided by (used in) investing activities.......................................... 12,019 (8,525)
---------- ----------
Cash flows from financing activities:
Net borrowings (repayments) under revolving credit facilities.......................... (10,500) 2,260
Proceeds from the issuance of long-term debt, net of financing fees.................... 105,623 2,168
Payments on long-term debt............................................................. (118,428) (6,234)
Net proceeds from issuance of common stock............................................. 962 --
---------- ----------
Net cash used in financing activities........................................................ (22,343) (1,806)
---------- ----------
Effect of exchange rate changes on cash...................................................... (285) 96
---------- ----------
Increase (decrease) in cash and cash equivalents............................................. 6,369 (834)
Cash and cash equivalents, beginning of period............................................... 5,988 4,991
---------- ----------
Cash and cash equivalents, end of period..................................................... $ 12,357 4,157
========== ==========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest............................................................................... $ 9,166 10,232
========== ==========
Income taxes........................................................................... $ 869 1,201
========== ==========
</TABLE>
The Company issued 2,964 shares of Class A Common Stock during the 1997
period in connection with the settlement of its stockholder litigation.
See accompanying notes to consolidated financial statements.
6
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1997
(Unaudited)
1) Consolidated Financial Statements
The consolidated balance sheet as of July 31, 1997 and the consolidated
statements of operations for the three months and nine months ended July 31,
1997 and 1996, and the consolidated statements of cash flows for the nine months
then ended have been prepared by the Company without audit. In the opinion of
management, all adjustments necessary to present fairly the financial position
of the Company at July 31, 1997, and the results of its operations for the three
and nine months ended July 31, 1997 and 1996, and its cash flows for the nine
months ended July 31, 1997 and 1996 have been made.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. These consolidated financial
statements should be read in conjunction with the financial statements and notes
thereto included in the Company's 1996 Annual Report on Form 10-K. The results
of operations for the periods ended July 31, 1997 are not necessarily indicative
of the operating results for the full year.
Certain items in the prior year's financial statements have been
reclassified to conform with the current year presentation.
2) Sale of the European Lottery Business
On April 15, 1997, the Company completed the sale of its European
lottery business through the sale of its stock ownership of Tele Control
Kommunikations und Computersysteme Aktien Gesellschaft ("Tele Control") for cash
consideration of approximately $26.6 million, including contingent consideration
of approximately $1.6 million. At closing, the Company provided the purchaser
with a letter of credit in the amount of $2.5 million to secure certain
obligations under the sales agreement. The letter of credit reduces to zero in
specified amounts and on specified dates through October 1998. The Company
recorded gains on the sale of $0.2 million and $1.6 million in the second and
third quarters of fiscal 1997, respectively.
Under the terms of the sale, the purchaser will have the right to
license and purchase the Company's terminals for use in lottery applications.
Also under the agreement, the purchaser will have the right of first refusal to
purchase the Company's remaining lottery business. The Company, however, has no
plans to sell this business at the present time and remains committed to serving
the North American lottery market and its existing customers.
The following unaudited information shows the revenues, expenses and
operating income of the European lottery business for the three months ended
July 31, 1996 and for the nine months ended July 31, 1997 and 1996. Interest and
income tax expenses have not been included in the table below.
<TABLE>
<CAPTION>
Three Nine
Months Months
Ended Ended
July 31, July 31,
1996 1997 1996
---------------- --------------- ---------------
(in thousands)
<S> <C> <C> <C>
Operating revenue........................................ $ 3,638 6,119 23,156
Operating expenses, including selling, general
and administrative expenses, and depreciation
and amortization expenses........................... 4,372 6,181 21,095
------ ------ ------
Operating (loss) income.................................. $ (734) (62) 2,061
====== ====== ======
</TABLE>
7
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
July 31, 1997
(Unaudited)
3) Inventories
Inventories consist of the following:
<TABLE>
<CAPTION>
July 31, October 31,
1997 1996
------------------ -----------------
(in thousands)
<S> <C> <C>
Parts............................................................ $ 5,014 3,295
Work-in-process.................................................. 1,033 909
Finished goods................................................... 575 1,028
Ticket paper..................................................... 391 548
------ ------
Total............................................................ $ 7,013 5,780
====== ======
</TABLE>
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.
4) Debt
On July 28, 1997, the Company issued $110 million of Senior Notes (the
"Notes") due August 1, 2004. 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.
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, on 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, limits the ability of the Company and its
restricted subsidiaries, as defined, to incur additional indebtedness, create
certain liens, pay dividends, consummate certain asset sales, enter into certain
transactions with affiliates and merge or consolidate with any other person or
sell, assign, transfer, lease, convey or otherwise dispose of all or
substantially all of the assets of the Company. The net proceeds from the
offering, after deducting fees and expenses of approximately $4.9 million, were
approximately $105.1 million, of which approximately $93.6 million was used to
repay $91.4 million of indebtedness and $2.2 million of accrued interest under
the Company's previously existing senior bank credit facility (the "Senior
Facility"). In addition, approximately $4.1 million of the net proceeds were
used to repurchase, at a discount, Subordinated Debentures plus accrued interest
and fees (see Note 5). 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 million, with a $15 million sublimit for
letters of credit. The Facility requires mandatory commitment reductions upon
the occurrence of certain events, including asset sales and the incurrence of
certain indebtedness, in each case, in excess of specified thresholds. In
addition, the Company may make optional prepayments and commitment reductions.
Borrowings under the Facility are available for working capital and general
corporate purposes and will bear interest at the Base Rate (as defined) plus a
margin ranging from 1.00% to 1.75% per annum, or the Eurodollar Rate (as
defined) plus a margin ranging from 2.00% to 2.75% per annum, in each case
depending on the Company's performance as measured by the ratio of debt (as
defined) to EBITDA. Fees will be payable on outstanding letters of credit equal
to the applicable Eurodollar Rate margin (2.5% as of July 31, 1997), 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
8
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
July 31, 1997
(Unaudited)
4) Debt, continued
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 debt
to EBITDA ratio. Although there were no borrowings outstanding under the
Facility at July 31, 1997, approximately $5.2 million of letters of credit
issued under the Company's Senior Facility were guaranteed under the new
Facility. As of July 31, 1997, the Company had approximately $19.8 million
available for borrowing under its Facility, with approximately $5.2 million in
outstanding letters of credit, including $2.5 million issued in connection with
the sale of the European lottery business.
Prior to the issuance of the Notes and entering into the Facility, and
after giving effect to the April 15, 1997 sale of the European lottery business,
the Company's senior bank credit facility (the "Senior Facility") provided for:
1) a $55 million term loan (the "A Term Loan"), of which $52 million was
outstanding at October 31, 1996, which required principal repayments of $21.0
million in fiscal 1997 and matured on February 13, 1998; 2) a $5 million term
loan (the "B Term Loan"), of which $1.0 million was outstanding at October 31,
1996, which matured April 30, 1997, and 3) a $75 million revolving credit
facility (the "Revolver") which was to mature July 31, 1998. The outstanding
balance under the Revolver was $71.9 million at October 31, 1996, against which
the Company had made voluntary net repayments in fiscal 1997 of $10.5 million
prior to the refinancing. Interest on borrowings under the Senior Facility was
calculated at the Prime lending rate plus a margin of 0.75%. A commitment fee of
0.5% per year was payable on the unused amount under the Revolver. A letter of
credit fee equal to 2.75% plus a facing fee of 1/8 of 1% per year was payable on
each letter of credit issued. See Note 7 to the Consolidated Financial
Statements for the year ended October 31, 1996 included in the Company's 1996
Annual Report on Form 10-K.
5) Extraordinary Items
In connection with the issuance of the Notes and the subsequent
repayment of all amounts outstanding under the Senior Facility (see Note 4 to
the Consolidated Financial Statements), the Company wrote-off $1.4 million of
deferred financing fees associated with the Senior Facility. The Company also
used a portion of the net proceeds from the offering of the Notes to repurchase
$5.0 million of its Subordinated Debt for $4.1 million, resulting in a $0.9
million gain on the early retirement of this debt. There were no tax benefits
recognized on the net extraordinary loss because the Company is currently in a
tax loss carryforward position.
6) New Accounting Standards
In October 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). This pronouncement permits the Company to choose
either a new fair value based method or the current Accounting Principles Board
Opinion 25 intrinsic value based method of accounting for its stock based
compensation arrangements. The Company intends to retain the intrinsic value
based method of accounting for its stock based compensation arrangements and
provide the footnote disclosures as required by SFAS No. 123 in fiscal 1997.
Consequently, implementation of this pronouncement will not impact the Company's
financial position or results of operations.
In February 1997, the FASB issued Statement of Financial Accounting
Standards No. 128, "Earnings per Share" ("SFAS 128"). This statement simplifies
the standards for computing earnings per share ("EPS") and makes them comparable
to international EPS standards. It replaces the presentation of primary EPS with
a presentation of basic EPS and requires dual presentation of basic and diluted
EPS on the face of the income statement of all entities with complex capital
structures. SFAS 128 also requires a reconciliation of the numerator and
denominator of the basic EPS computation to the numerator and denominator of the
diluted EPS computation. The Company intends to implement SFAS 128, as required,
in fiscal 1998.
9
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
July 31, 1997
(Unaudited)
6) New Accounting Standards, continued
Since the Company has experienced net losses in each quarter of fiscal 1996
and in the first, second and third quarters of fiscal 1997, stock options and
stock warrants are anti-dilutive. Therefore, they have been and would continue
to be excluded from the denominator of the earnings per common share calculation
as reported in the accompanying financial statements and as contemplated under
SFAS 128. Earnings per common share in the third quarter and first nine months
of fiscal 1996 and 1997 as computed under SFAS 128 are thus equal to earnings
per share as presented in the accompanying financial statements.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" ("SFAS 130") and Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131").
SFAS 130 establishes standards for the reporting and display of
comprehensive income in the financial statements. Comprehensive income is the
total of net income and all other non-owner changes in equity. SFAS 131 requires
that companies disclose segment data based on how management makes decisions
about allocating resources to segments and measuring their performance. SFAS 130
and 131 are effective for fiscal 1998. Adoption of these standards is expected
to result in additional disclosures, but will not have an effect on the
Company's financial position or results of operations.
7) 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
million 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 4). The Notes are jointly and
severally guaranteed by substantially all of the Company's wholly-owned domestic
subsidiaries (the "Guarantor Subsidiaries").
Presented below is condensed consolidating financial information for
Autotote Corporation (the "Parent Company"), the Guarantor Subsidiaries and the
wholly owned foreign subsidiaries and the non-wholly owned domestic and foreign
subsidiaries (the "Non-Guarantor Subsidiaries") as of July 31, 1997 (unaudited)
and October 31, 1996 (audited) and for the three and nine month periods ended
July 31, 1997 and 1996 (unaudited). The condensed consolidating financial
information has been presented to show the nature of assets held, results of
operations and cash flows of the Parent Company, Guarantor Subsidiaries and
Non-Guarantor Subsidiaries assuming the guarantee structure of the Notes was in
effect at the beginning of the periods presented. Separate financial statements
for 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.
10
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
July 31, 1997
(in thousands)
<TABLE>
<CAPTION>
Parent Guarantor Non-Guarantor Eliminating
Company Subsidiaries Subsidiaries Entries Consolidated
------- ------------ ------------ ------- ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents...................... $ 11,071 (355) 1,641 -- 12,357
Accounts receivable, net....................... -- 9,905 2,216 -- 12,121
Other current assets........................... 786 7,754 3,055 (238) 11,357
Property and equipment, net.................... 165 71,729 9,830 (199) 81,525
Investment in subsidiaries..................... 51,256 -- -- (51,256) --
Goodwill....................................... 212 2,988 3,438 -- 6,638
Other assets................................... 6,031 25,984 614 (1,372) 31,257
---------- -------- ------- ------- --------
Total assets................................ $ 69,521 118,005 20,794 (53,065) 155,255
========== ======== ======= ======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities............................ $ 12,302 15,364 4,526 (173) 32,019
Current installments of long-term debt......... 625 510 704 (27) 1,812
Long-term debt, excluding current installments. 145,625 422 1,581 (13) 147,615
Other non-current liabilities.................. 1,111 560 2,255 -- 3,926
Intercompany balances.......................... (60,025) 62,744 (3,085) 366 --
Stockholders' equity (deficit)................. (30,117) 38,405 14,813 (53,218) (30,117)
---------- -------- ------- ------- --------
Total liabilities and stockholders' equity
(deficit)................................ $ 69,521 118,005 20,794 (53,065) 155,255
========== ======== ======= ======= ========
</TABLE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
October 31, 1996
(in thousands)
<TABLE>
<CAPTION>
Parent Guarantor Non-Guarantor Eliminating
Company Subsidiaries Subsidiaries Entries Consolidated
------- ------------ ------------ ------- ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents...................... $ 3,376 261 2,351 5,988
Accounts receivable, net....................... -- 9,557 8,700 -- 18,257
Other current assets........................... 704 5,135 10,795 (211) 16,423
Property and equipment, net.................... 158 83,522 12,649 (449) 95,880
Investment in subsidiaries..................... 65,402 -- -- (65,402) --
Goodwill....................................... 217 4,021 16,786 -- 21,024
Other assets................................... 3,184 29,142 8,537 (1,642) 39,221
---------- -------- ------- ------- --------
Total assets................................ $ 73,041 131,638 59,818 (67,704) 196,793
========== ======== ======= ======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities............................ $ 9,855 16,788 7,988 47 34,678
Current installments of long-term debt......... -- 8,478 781 (25) 9,234
Long-term debt, excluding current installments. 40,000 117,983 1,832 (25) 159,790
Other non-current liabilities.................. 3,644 778 8,557 308 13,287
Intercompany balances.......................... 39,738 (46,908) 7,234 (64) --
Stockholders' equity (deficit)................. (20,196) 34,519 33,426 (67,945) (20,196)
---------- -------- ------- ------- --------
Total liabilities and stockholders'
equity (deficit).......................... $ 73,041 131,638 59,818 (67,704) 196,793
========== ======== ======= ======= ========
</TABLE>
11
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED STATEMENT OF OPERATIONS
Three Months Ended July 31, 1997
(in thousands)
<TABLE>
<CAPTION>
Parent Guarantor Non-Guarantor Eliminating
Company Subsidiaries Subsidiaries Entries Consolidated
------- ------------ ------------- ------- ------------
<S> <C> <C> <C> <C> <C>
Operating revenues................................ $ -- 31,262 5,007 (451) 35,818
Operating expenses................................ -- 18,712 2,961 (445) 21,228
------- ------- ------ ------- ------
Gross profit..................................... -- 12,550 2,046 (6) 14,590
Selling, general and administrative expenses...... 2,354 3,109 1,069 -- 6,532
Gain on sale of business.......................... (1,566) -- -- -- (1,566)
Depreciation and amortization..................... 13 7,071 1,406 (79) 8,411
------- ------- ------ ------- ------
Operating income (loss).......................... (801) 2,370 (429) 73 1,213
Interest expense.................................. 3,230 73 47 60 3,410
Other (income) expense............................ 9 (105) (9) (60) (165)
------- ------- ------ ------- ------
Income (loss) before equity in income of
subsidiaries, income taxes, and extraordinary
items............................................ (4,040) 2,402 (467) 73 (2,032)
------- ------- ------ ------- ------
Equity in income of subsidiaries.................. 950 -- -- (950) --
Income tax benefit................................ (2) -- (318) -- (320)
------- ------- ------ ------- ------
Net income (loss) before extraordinary items...... (3,088) 2,402 (149) (877) (1,712)
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)................................. $ (2,138) 1,026 (149) (877) (2,138)
======= ======= ====== ======= =======
</TABLE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED STATEMENT OF OPERATIONS
Three Months Ended July 31, 1996
(in thousands)
<TABLE>
<CAPTION>
Parent Guarantor Non-Guarantor Eliminating
Company Subsidiaries Subsidiaries Entries Consolidated
------- ------------ ------------ ------- ------------
<S> <C> <C> <C> <C> <C>
Operating revenues................................ $ -- 30,002 12,090 (264) 41,828
Operating expenses................................ -- 18,746 7,539 (398) 25,887
------- -------- ------- ------- -------
Gross profit..................................... -- 11,256 4,551 134 15,941
Selling, general and administrative expenses...... 2,924 3,653 1,934 127 8,638
Restructuring..................................... 233 -- (882) -- (649)
Depreciation and amortization..................... 13 8,284 2,909 (82) 11,124
------- -------- ------- ------- -------
Operating income (loss).......................... (3,170) (681) 590 89 (3,172)
Interest expense.................................. 3,552 18 97 -- 3,667
Other (income) expense............................ 647 76 (3) (91) 629
------- -------- ------- ------- -------
Income (loss) before equity in loss of subsidiaries,
income taxes, and extraordinary items............ (7,369) (775) 496 180 (7,468)
Equity in loss of subsidiaries.................... (232) -- -- 232 --
Income tax expense................................ 203 -- 133 -- 336
------- -------- ------- ------- -------
Net income (loss)................................. $ (7,804) (775) 363 412 (7,804)
======= ======== ======= ======= =======
</TABLE>
12
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED STATEMENT OF OPERATIONS
Nine Months Ended July 31, 1997
(in thousands)
<TABLE>
<CAPTION>
Parent Guarantor Non-Guarantor Eliminating
Company Subsidiaries Subsidiaries Entries Consolidated
------- ------------ ------------ ------- ------------
<S> <C> <C> <C> <C> <C>
Operating revenues................................ $ -- 91,438 23,486 (1,670) 113,254
Operating expenses................................ -- 56,050 13,570 (1,630) 67,990
-------- ------- ------- ------- --------
Gross profit..................................... -- 35,388 9,916 (40) 45,264
-------- ------- ------- ------- --------
Selling, general and administrative expenses...... 8,031 9,436 4,154 116 21,737
Gain on sale of business.......................... (1,823) -- -- -- (1,823)
Depreciation and amortization..................... 38 21,110 7,378 (263) 28,263
-------- ------- ------- ------- --------
Operating income (loss).......................... (6,246) 4,842 (1,616) 107 (2,913)
Interest expense.................................. 10,632 88 158 (154) 10,724
Other (income) expense............................ (326) (511) 650 154 (33)
-------- ------- ------- ------- --------
Income (loss) before equity in income of
subsidiaries, income taxes, and extraordinary (16,552) 5,265 (2,424) 107 (13,604)
items............................................
Equity in income of subsidiaries.................. 1,348 -- -- (1,348) --
Income tax expense................................ (2) 7 217 -- 222
-------- ------- ------- ------- --------
Net income (loss) before extraordinary items...... (15,202) 5,258 (2,641) (1,241) (13,826)
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)................................. $ (14,252) 3,882 (2,641) (1,241) (14,252)
======== ======= ======= ======= ========
</TABLE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED STATEMENT OF OPERATIONS
Nine Months Ended July 31, 1996
(in thousands)
<TABLE>
<CAPTION>
Parent Guarantor Non-Guarantor Eliminating
Company Subsidiaries Subsidiaries Entries Consolidated
------- ------------ ------------ ------- ------------
<S> <C> <C> <C> <C> <C>
Operating revenues................................ $ -- 87,044 45,268 (1,437) 130,875
Operating expenses................................ -- 55,556 28,984 (1,442) 83,098
-------- ------- ------- ------- --------
Gross profit..................................... -- 31,488 16,284 5 47,777
Selling, general and administrative expenses...... 8,708 10,449 6,029 -- 25,186
Restructuring and write-off of assets............. 233 -- (882) -- (649)
Depreciation and amortization..................... 26 21,974 8,351 (233) 30,118
-------- ------- ------- ------- --------
Operating income (loss).......................... (8,967) (935) 2,786 238 (6,878)
Interest expense.................................. 10,488 205 306 -- 10,999
Other (income) expense............................ 7,447 286 (88) (73) 7,572
-------- ------- ------- ------- --------
Income (loss) before equity in loss of subsidiaries
and income taxes................................. (26,902) (1,426) 2,568 311 (25,449)
Equity in loss of subsidiaries.................... (394) -- -- 394 --
Income tax expense................................ 203 -- 1,847 -- 2,050
-------- ------- ------- ------- --------
Net income (loss)................................. $ (27,499) (1,426) 721 705 (27,499)
======== ======= ======= ======= ========
</TABLE>
13
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED STATEMENT OF CASH FLOWS
Nine Months Ended July 31, 1997
(in thousands)
<TABLE>
<CAPTION>
Parent Guarantor Non-Guarantor Eliminating
Company Subsidiaries Subsidiaries Entries Consolidated
------- ------------ ------------ ------- ------------
<S> <C> <C> <C> <C> <C>
Net income (loss)................................. $ (14,252) 3,882 (2,641) (1,241) (14,252)
Depreciation and amortization.................. 38 21,110 7,378 (263) 28,263
Equity in income of subsidiaries............... (1,348) -- -- 1,348 --
Gain on sale of business....................... (1,823) -- -- -- (1,823)
Non-cash extraordinary items................... (950) 1,376 -- -- 426
Other non-cash adjustments..................... 2,962 40 (488) -- 2,514
Changes in working capital..................... 2,374 (4,572) 4,079 (31) 1,850
--------- --------- --------- --------- ---------
Net cash provided by (used in) operating
activities..................................... (12,999) 21,836 8,328 (187) 16,978
--------- --------- --------- --------- ---------
Cash flows from investing activities:
Capital and wagering system expenditures....... (40) (4,457) (1,897) 13 (6,381)
Proceeds from sale of business and assets
disposals...................................... 23,216 247 (2,413) -- 21,050
Other assets and investments................... (308) (1,171) (1,071) (100) (2,650)
--------- --------- --------- --------- ---------
Net cash provided by (used in) investing
activities..................................... 22,868 (5,381) (5,381) (87) 12,019
--------- --------- --------- --------- ---------
Cash flows provided from financing activities:
Net borrowings under lines of credit........... -- (10,500) -- -- (10,500)
Net proceeds from issuance of long term-debt... 105,100 -- 523 -- 105,623
Payments on long-term debt..................... (4,350) (113,480) (608) 10 (118,428)
Other, principally intercompany balances....... (102,963) 106,908 (3,260) 277 962
--------- --------- --------- --------- ---------
Net cash provided by (used in) financing activities (2,213) (17,072) (3,345) 287 (22,343)
--------- --------- --------- --------- ---------
Effect of exchange rate changes on cash........... 39 1 (312) (13) (285)
--------- --------- --------- --------- ---------
Increase/(decrease) in cash and cash equivalents.. 7,695 (616) (710) -- 6,369
Cash and cash equivalents, beginning of year...... 3,376 261 2,351 -- 5,988
--------- --------- --------- --------- ---------
Cash and cash equivalents, end of period.......... $ 11,071 (355) 1,641 -- 12,357
========= ========= ========= ========== =========
</TABLE>
14
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED STATEMENT OF CASH FLOWS
Nine Months Ended July 31, 1996
(in thousands)
<TABLE>
<CAPTION>
Parent Guarantor Non-Guarantor Eliminating
Company Subsidiaries Subsidiaries Entries Consolidated
------- ------------ ------------ ------- ------------
<S> <C> <C> <C> <C> <C>
Net income (loss)................................. $ (27,499) (1,426) 721 705 (27,499)
Depreciation and amortization.................. 26 21,974 8,351 (233) 30,118
Equity in loss of subsidiaries................. 394 -- -- (394) --
Litigation settlement, net of cash payments.... 4,250 -- -- -- 4,250
Other non-cash adjustments..................... 2,148 441 (527) -- 2,062
Changes in working capital..................... (699) (3,813) 4,978 4 470
--------- --------- --------- --------- ---------
Net cash provided by (used in) operating
activities..................................... (21,380) 17,176 13,523 82 9,401
--------- --------- --------- --------- ---------
Cash flows from investing activities:
Capital and wagering system expenditures....... (90) (6,467) (1,173) (2) (7,732)
Other assets and investments................... (942) 2,519 (2,654) 284 (793)
--------- --------- --------- --------- ---------
Net cash provided by (used in) investing
activities..................................... (1,032) (3,948) (3,827) 282 (8,525)
--------- --------- --------- --------- ---------
Cash flows provided from financing activities:
Net borrowings under lines of credit........... -- 2,353 -- (93) 2,260
Net proceeds from issuance of long term-debt... -- 1,593 575 -- 2,168
Payments on long-term debt..................... -- (5,261) (992) 19 (6,234)
Other, principally intercompany balances....... 19,352 (11,805) (7,143) (404) --
--------- --------- --------- --------- ---------
Net cash provided by (used in) financing
activities..................................... 19,352 (13,120) (7,560) (478) (1,806)
--------- --------- --------- --------- ---------
Effect of exchange rate changes on cash........... 280 1 (299) 114 96
--------- --------- --------- --------- ---------
Increase/(decrease) in cash and cash equivalents.. (2,780) 109 1,837 -- (834)
Cash and cash equivalents, beginning of year...... 3,385 350 1,256 -- 4,991
--------- --------- --------- --------- ---------
Cash and cash equivalents, end of period.......... $ 605 459 3,093 -- 4,157
========= ========= ========= ========== =========
</TABLE>
15
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion addresses the financial condition of the
Company as of July 31, 1997 and the results of its operations for the three and
nine month periods ended July 31, 1997, compared to the same periods last year.
This discussion should be read in conjunction with the Management's Discussion
and Analysis section for the fiscal year ended October 31, 1996 ("fiscal 1996")
included in the Company's 1996 Annual Report on Form 10-K.
Three Months Ended July 31, 1997 Compared to Three Months Ended July 31, 1996
<TABLE>
<CAPTION>
Third Quarter Fiscal 1997 Third Quarter Fiscal 1996
Pari- Pari-
Mutuel Lottery Mutuel Lottery
Operations Operations Total Operations Operations Total
---------------- --------------- ---------------- --------------- ---------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Services $ 30,476 2,049 32,525 30,182 4,288 34,470
Sales 2,857 436 3,293 2,849 4,509 7,358
----------- ----------- ----------- ----------- ----------- -----------
Total Revenues $ 33,333 2,485 35,818 33,031 8,797 41,828
----------- ----------- ----------- ----------- ----------- -----------
Gross Margin (excluding
depreciation
and amortization) $ 13,558 1,032 14,590 13,031 2,910 15,941
----------- ----------- ----------- ----------- ----------- -----------
</TABLE>
Third Quarter Revenue Analysis
Revenues decreased 14% or $6.0 million to $35.8 million in the third
quarter of the fiscal year ended October 31, 1997 from $41.8 million in the
third quarter of the fiscal year ended October 31, 1996.
Pari-mutuel Operations service revenues of $30.5 million for the third
quarter of fiscal 1997 improved $0.3 million or 1% as compared to the third
quarter of prior year. This improvement reflects revenue increases of $1.1
million as a result of growth in handle in the Company's North American
pari-mutuel and Connecticut OTB operations, and the addition of new customers in
the simulcasting business. These increases were partially offset by the absence
of $0.5 million in revenue provided in the prior year period by the
casino/sports wagering business which was sold in October 1996. The growth in
handle during the third quarter of fiscal 1997 compared to the third quarter of
fiscal 1996 is attributable to the addition of six new North American racetrack
and OTB sites, full card simulcasting at two North American racetrack customers,
320 VGM machines to the lease base and the expansion of OTB operations in
Connecticut to seven days a week in the first quarter of fiscal 1997. Sales
revenue in the third quarter of fiscal 1997 of $2.9 million remained comparable
to the level in the third quarter of the prior year.
Lottery Operations service revenues decreased $2.3 million during the
third quarter of fiscal 1997 from $4.3 million to $2.0 million primarily because
of the sale of the European lottery business in April 1997. Sales revenues
decreased significantly in the third quarter of fiscal 1997 to $0.4 million from
$4.5 million in the same period in fiscal 1996. This decrease is primarily
attributable to the fiscal 1996 delivery of systems to several German lottery
contract sites.
Gross Profit Analysis
The total gross profit of $14.6 million for the third quarter of fiscal
1997 decreased by $1.4 million, or 8.5%, compared to the third quarter of fiscal
1996, principally due to the sale of the European lottery business in the second
quarter of fiscal 1997. Gross margins on equipment sales were 46% in the third
quarter of fiscal 1997, up from margins of 34% earned in the third quarter of
fiscal 1996 as a result of a change in the mix of equipment and systems being
sold. Gross margins on service revenues improved slightly to 40% during the
third quarter of fiscal 1997 compared to 39% for the third quarter of fiscal
1996 due to higher volumes and improved margins in the North American
pari-mutuel business and communications operations, offsetting the effect of the
sale of the European lottery business.
16
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
Expense Analysis
Selling, general and administrative expenses include marketing, sales,
administrative, engineering and software development, finance, legal and other
expenses. Selling, general and administrative expenses decreased $2.1 million or
24% to $6.5 million in the third quarter of fiscal 1997 from $8.6 million in the
third quarter of fiscal 1996 as a result of the sale of the Company's
casino/sports wagering business in the fourth quarter of fiscal 1996, the sale
of the European lottery business in April 1997, and the continuing effects of
the Company's cost containment and reduction programs.
Depreciation and amortization expenses decreased 24% to $8.4 million in
the third quarter of fiscal 1997 compared to $11.1 million in the third quarter
of fiscal 1996. The decrease results from the sale of the European lottery
business in April 1997, and the non-recurring effect of depreciation on certain
assets in fiscal 1996.
Interest expense decreased $0.3 million in the third quarter of 1997
primarily reflecting lower borrowing levels as a result of asset sales,
partially offset by higher interest rates.
Income Taxes
Income tax benefit was $0.3 million in the fiscal 1997 period compared
to an expense of $0.3 million in the fiscal 1996 period. Income tax benefit and
expense principally reflect foreign taxes, since no tax benefit has been
recognized on domestic operating losses.
Extraordinary Items
In connection with the Company's issuance of Notes as more fully
described in Note 4, the Company repurchased $5.0 million of Subordinated Debt
for $4.1 million in cash and recorded the resulting $0.9 million gain as
extraordinary income. This income was offset by the write-off of $1.4 million of
unamortized deferred costs associated with the refinanced Senior Facility.
Nine Months Ended July 31, 1997 Compared to Nine Months Ended July 31, 1996
<TABLE>
<CAPTION>
Nine Months Fiscal 1997 Nine Months Fiscal 1996
Pari- Pari-
Mutuel Lottery Mutuel Lottery
Operations Operations Total Operation Operations Total
---------------- --------------- ---------------- --------------- ---------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Services $ 87,393 11,521 98,914 85,270 14,174 99,444
Sales 6,052 8,288 14,340 7,396 24,035 31,431
------ ------ ------ ------ ------ ------
Total Revenues $ 93,445 19,809 113,254 92,666 38,209 130,875
------ ------ ------ ------ ------ ------
Gross Margin (excluding
depreciation and
amortization) $ 37,135 8,129 45,264 35,945 11,832 47,777
------ ------ ------ ------ ------ ------
</TABLE>
Nine Month Revenue Analysis
Revenues decreased 13% or $17.6 million to $113.3 million in the first
nine months of the fiscal year ended October 31, 1997 from $130.9 million in the
first nine months of the fiscal year ended October 31, 1996.
Pari-mutuel Operations service revenues of $87.4 million for the first
nine months of fiscal 1997 improved $2.1 million or 2% compared to the same
period of the prior year. This improvement reflects revenue increases of $4.6
million as a result of growth in handle in the Company's North American
pari-mutuel and Connecticut OTB operations, and the addition of new customers in
the simulcasting business. These increases were partially offset by the absence
of $1.7 million in revenue provided in the prior year period by the
casino/sports wagering business which was sold in October 1996. The growth in
handle during the first nine months of fiscal
17
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
Nine Month Revenue Analysis, continued
1997 compared to the first nine months of fiscal 1996 is attributable to the
addition of six new North American racetrack and OTB sites, introduction of full
card simulcasting at two North American racetrack customers, 320 VGM machines to
the lease base and the expansion of OTB operations in Connecticut to seven days
a week, as well as to a much milder winter in fiscal 1997 than in the prior
year. Sales revenue in the first nine months of fiscal 1997 decreased $1.3
million to $6.1 million from the first nine months of fiscal 1996 principally
due to reduced level of equipment sales to the international market, coupled
with the absence of sales revenues from the casino/sports wagering business in
fiscal 1997.
Lottery Operations service revenues decreased $2.7 million during the
first nine months of fiscal 1997 from $14.2 million to $11.5 million primarily
because of the sale of the European lottery business in April 1997. Sales
revenues decreased significantly in the first nine months of fiscal 1997 to $8.3
million from $24.0 million in the same period in fiscal 1996. This decrease is
primarily attributable to the fiscal 1996 delivery of systems to several German
lottery contract sites by the European lottery business, coupled with deliveries
by the Company of terminals and parts to EIS for sale to Italy's TOTIP
pari-mutuel lottery pool, partially offset by the delivery of approximately 450
terminals to the Israel lottery in the second quarter of fiscal 1997.
Gross Profit Analysis
The total gross profits earned by the Company, exclusive of depreciation
and amortization, of $45.3 million for the first nine months of fiscal 1997
decreased by $2.5 million, or 5%, compared to the first nine months of fiscal
1996. This decrease is primarily attributable to the non-recurring nature of the
margins earned on the delivery of the German lottery systems in fiscal 1996 of
approximately $5.0 million, coupled with the absence of margins as a result of
the sale of the casino/sports wagering businesses, partially offset by profit
improvements in the Company's North American pari-mutuel, simulcasting and
off-track betting businesses in fiscal 1997. Gross margins on equipment sales
were 36% in the first nine months of fiscal 1997, an increase of 3% compared to
the margins earned in the first nine months of fiscal 1996. Gross margins on
service revenues improved to 41% during the first nine months of fiscal 1997
compared to 38% for the first nine months of fiscal 1996 due to higher volumes
and improved margins in the North American pari-mutuel business and improved
margins in the European lottery business, which was sold in April 1997.
Expense Analysis
Selling, general and administrative expenses decreased $3.4 million or
14% to $21.7 million in the first nine months of fiscal 1997 from $25.2 million
in the first nine months of fiscal 1996 as a result of the sale of the Company's
casino/sports wagering business in the fourth quarter of fiscal 1996, the sale
of the European lottery business in April 1997 and the continuing effects of the
Company's cost containment and reduction programs.
Depreciation and amortization expenses decreased 6% to $28.3 million in
the first nine months of 1997 compared to $30.1 million in the first nine months
of fiscal 1996. The decrease is due to the sale of the Company's casino/sports
wagering business in the fourth quarter of fiscal 1996, the sale of the European
lottery business in April 1997 and the non-recurring effect of depreciation on
certain assets in fiscal 1996.
Interest expense decreased $0.3 million in the first nine months of 1997
primarily reflecting lower borrowing levels as a result of asset sales,
partially offset by higher interest rates.
Income Taxes
Income tax expense was $0.2 million in the 1997 period as compared to an
expense of $2.1 million in the 1996 period. Income tax expense principally
reflects foreign tax expense, since no tax benefit has been recognized on
domestic operating losses.
Extraordinary Items
In connection with the Company's issuance of Notes as more fully
described in Note 4, the Company repurchased $5.0 million of Subordinated Debt
for $4.1 million in cash and recorded the resulting $0.9 million gain as
extraordinary income. This income was offset by the write-off of $1.4 million of
unamortized deferred costs associated with the refinanced Senior Facility.
18
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
Liquidity and Capital Resources
At July 31, 1997, as a result of the refinancing, the Company's
available cash and borrowing capacity totaled $32.2 million compared to $6.0
million at October 31, 1996. Net cash provided by operating activities was $17.0
million for the nine months ended July 31, 1997. Utilizing $6.4 million of cash
provided by operating activities, the Company invested principally in contract
expenditures and software systems development. The balance of the cash provided
by operating activities of $10.6 million, together with approximately $20.8
million of cash proceeds from the sale of the European lottery business and the
cash balance on hand at the business unit at the closing of the sale, $1.0
million of proceeds from the sale of common stock, and $1.1 million of available
cash, were used to reduce borrowings by $32.5 million under the Company's Senior
Facility prior to the refinancing and by $0.9 million on other long-term loans.
In addition to the above debt repayments, on July 27, 1997, the Company
repaid $91.4 million, representing all amounts then outstanding under the Senior
Facility with proceeds from the issuance of the Notes. The Company also used
$4.1 million of the proceeds from the issuance of the Notes to repay $5.0
million of Subordinated Debt. The balance of the proceeds were used for general
corporate purposes.
As described in Note 4 to the Consolidated Financial Statements above,
the Company had $19.8 million of borrowing availability cash under its Facility
at July 31, 1997. The Company believes that, although it will incur net losses
in fiscal 1997 and 1998, its cash resources, anticipated cash flows from
operations and borrowing availability under the Facility will provide sufficient
liquidity to meet scheduled interest payments and anticipated capital
expenditures during the next twelve months. The Company believes that additional
financing will be required for capital expenditures thereafter and to enable it
to meet its debt service obligations, including principal payments under the
Notes, the Facility and the Subordinated Debentures.
19
<PAGE>
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Stockholders
The Annual Meeting of the stockholders of the Company was held on
August 13, 1997 to elect five directors of the Company, to approve the Autotote
Corporation 1997 Incentive Compensation Plan and to ratify the appointment of
KPMG Peat Marwick LLP as auditors for the Company's next fiscal year. All
matters put before the stockholders passed as follows:
<TABLE>
<CAPTION>
Director Nominees/ Other Matters For Against Abstain
-------------------------------- --- ------- -------
<S> <C> <C> <C>
A. Lorne Weil 27,453,373 334,514 -
Marshall Bartlett 27,431,307 338,580 -
Larry Lawrence 27,456,316 313,571 -
Sir Brian Wolfson 27,455,809 314,078 -
Alan J. Zakon 27,457,101 312,786 -
Approval of Autotote Corporation 1997 Incentive Compensation Plan 22,314,993 4,979,581 68,377
Approval of KPMG Peat Marwick LLP 27,556,480 125,419 87,988
</TABLE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule.
No current reports on Form 8-K were filed during the third quarter of
fiscal 1997.
20
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
Quarter Ended July 31, 1997
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
AUTOTOTE CORPORATION
--------------------
(Registrant)
By: /s/ William Luke
------------------------------------------
Name: William Luke
Title: Vice President & Chief Financial Officer
Dated: September 12, 1997
21
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF AUTOTOTE CORPORATION AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-1-1996
<PERIOD-END> JUL-31-1997
<CASH> 12,357
<SECURITIES> 0
<RECEIVABLES> 13,937
<ALLOWANCES> 1,816
<INVENTORY> 7,013
<CURRENT-ASSETS> 35,835
<PP&E> 180,792
<DEPRECIATION> 99,267
<TOTAL-ASSETS> 155,255
<CURRENT-LIABILITIES> 33,831
<BONDS> 35,000
0
0
<COMMON> 354
<OTHER-SE> (30,471)
<TOTAL-LIABILITY-AND-EQUITY> 155,255
<SALES> 113,254
<TOTAL-REVENUES> 113,254
<CGS> 67,990
<TOTAL-COSTS> 67,990
<OTHER-EXPENSES> 48,144
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,724
<INCOME-PRETAX> (13,604)
<INCOME-TAX> 222
<INCOME-CONTINUING> (13,826)
<DISCONTINUED> 0
<EXTRAORDINARY> (426)
<CHANGES> 0
<NET-INCOME> (14,252)
<EPS-PRIMARY> (0.42)
<EPS-DILUTED> (0.42)
</TABLE>
