UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form 10-Q
{Mark One}
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly and nine month periods ended: July 31, 2000
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
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 |_|
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock as of September 11, 2000:
Class A Common Stock: 36,909,292
Class B Common Stock: None
Page 1 of 25
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND OTHER INFORMATION
QUARTER ENDED JULY 31, 2000
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements:
Balance Sheets as of October 31, 1999
and July 31, 2000 3
Statements of Operations for the Three Months Ended
July 31, 1999 and 2000 4
Statements of Operations for the Nine Months Ended
July 31, 1999 and 2000 5
Statements of Cash Flows for the Nine Months Ended
July 31, 1999 and 2000 6
Notes to Consolidated Financial Statements 7-17
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 18-22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 23
Item 2. Changes in Securities 23
Item 6. Exhibits and Reports on Form 8-K 24
2
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
October 31, July 31,
1999 2000
----------- ---------
ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents ................................................ $ 5,067 3,181
Restricted cash .......................................................... 771 795
Accounts receivable, net ................................................. 25,755 23,645
Inventories .............................................................. 14,636 8,452
Prepaid expenses, deposits and other current assets ...................... 2,319 3,138
--------- ---------
Total current assets ................................................ 48,548 39,211
--------- ---------
Property and equipment, at cost ............................................... 199,767 223,791
Less accumulated depreciation ............................................ 123,039 132,424
--------- ---------
Net property and equipment .......................................... 76,728 91,367
--------- ---------
Goodwill, net of amortization ................................................. 5,237 3,992
Operating right, net of amortization .......................................... 13,848 13,098
Other assets and investments .................................................. 21,198 27,036
--------- ---------
$ 165,559 174,704
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current installments of long-term debt ................................... $ 4,253 877
Accounts payable ......................................................... 20,102 13,456
Accrued liabilities ...................................................... 28,015 20,770
Interest payable ......................................................... 3,898 7,588
--------- ---------
Total current liabilities ........................................... 56,268 42,691
--------- ---------
Deferred income taxes ......................................................... 1,656 1,642
Other long-term liabilities ................................................... 2,963 3,702
Long-term debt, excluding current installments ................................ 117,891 134,882
Long-term debt, convertible subordinated debentures ........................... 35,000 35,000
--------- ---------
Total liabilities ................................................... 213,778 217,917
--------- ---------
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,
36,268 and 36,909 shares outstanding at October 31, 1999
and July 31, 2000 , respectively ...................................... 364 370
Class B non-voting common stock, par value $0.01 per share, 700 shares
authorized, none outstanding .......................................... -- --
Additional paid-in capital ............................................... 149,622 151,289
Accumulated losses ....................................................... (196,852) (192,421)
Accumulated other comprehensive loss ..................................... (1,251) (2,349)
Treasury stock, at cost .................................................. (102) (102)
--------- ---------
Total stockholders' equity (deficit) ................................ (48,219) (43,213)
--------- ---------
$ 165,559 174,704
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended July 31, 1999 and 2000
(Unaudited, in thousands, except per share amounts)
<TABLE>
<CAPTION>
1999 2000
-------- --------
<S> <C> <C>
Operating revenues:
Services .............................................................. $ 38,883 40,840
Sales ................................................................. 14,287 9,139
-------- --------
53,170 49,979
-------- --------
Operating expenses (exclusive of depreciation and amortization shown below):
Services .............................................................. 25,908 26,164
Sales ................................................................. 9,631 5,563
-------- --------
35,539 31,727
-------- --------
Total gross profit ............................................... 17,631 18,252
Selling, general and administrative expenses ............................... 6,641 6,662
Depreciation and amortization .............................................. 5,352 5,308
-------- --------
Operating income ................................................. 5,638 6,282
-------- --------
Other deductions:
Interest expense ...................................................... 4,011 4,413
Other income .......................................................... (163) (67)
-------- --------
3,848 4,346
-------- --------
Income before income tax expense (benefit) ................................. 1,790 1,936
Income tax expense (benefit) ............................................... (105) 275
-------- --------
Net income ....................................................... $ 1,895 1,661
======== ========
Net income per basic share ....................................... $ 0.05 0.05
======== ========
Net income per diluted share ..................................... $ 0.05 0.04
======== ========
Weighted average number of shares used in per share calculation:
Basic shares ..................................................... 36,169 36,886
======== ========
Diluted shares ................................................... 38,699 41,430
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Nine Months Ended July 31, 1999 and 2000
(Unaudited, in thousands, except per share amounts)
<TABLE>
<CAPTION>
1999 2000
-------- --------
<S> <C> <C>
Operating revenues:
Services .............................................................. $109,608 115,458
Sales ................................................................. 42,293 35,147
-------- --------
151,901 150,605
-------- --------
Operating expenses (exclusive of depreciation and amortization shown below):
Services .............................................................. 72,801 75,091
Sales ................................................................. 30,505 21,916
-------- --------
103,306 97,007
-------- --------
Total gross profit ............................................... 48,595 53,598
Selling, general and administrative expenses ............................... 19,854 19,909
Depreciation and amortization .............................................. 16,363 15,960
-------- --------
Operating income ................................................. 12,378 17,729
-------- --------
Other deductions:
Interest expense ...................................................... 12,181 12,850
Other (income) expense ................................................ 77 (138)
-------- --------
12,258 12,712
-------- --------
Income before income tax expense ........................................... 120 5,017
Income tax expense ......................................................... 87 586
-------- --------
Net income ....................................................... $ 33 4,431
======== ========
Net income per basic share ....................................... $ -- 0.12
======== ========
Net income per diluted share ..................................... $ -- 0.11
======== ========
Weighted average number of shares used in per share calculation:
Basic shares ..................................................... 36,075 36,632
======== ========
Diluted shares ................................................... 38,004 41,250
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended July 31, 1999 and 2000
(Unaudited, in thousands)
<TABLE>
<CAPTION>
1999 2000
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income ...................................................... $ 33 4,431
-------- --------
Adjustments to reconcile net income to cash provided by operating
activities:
Depreciation and amortization .............................. 16,363 15,960
Changes in operating assets and liabilities ................ 8,797 (2,564)
Other ...................................................... 946 1,170
-------- --------
Total adjustments ..................................... 26,106 14,566
-------- --------
Net cash provided by operating activities ............................ 26,139 18,997
-------- --------
Cash flows from investing activities:
Capital expenditures ............................................ (1,306) (3,225)
Wagering systems expenditures ................................... (9,971) (24,490)
Increase in other assets and investments ........................ (5,034) (8,176)
-------- --------
Net cash used in investing activities ................................ (16,311) (35,891)
-------- --------
Cash flows from financing activities:
Net borrowings under revolving credit facility .................. -- 6,420
Proceeds from the issuance of long-term debt .................... 60 11,021
Payments on long-term debt ...................................... (2,356) (3,575)
Net proceeds from issuance of common stock ...................... 146 1,450
-------- --------
Net cash provided (used) by financing activities ..................... (2,150) 15,316
-------- --------
Effect of exchange rate changes on cash .............................. (22) (308)
-------- --------
Increase (decrease) in cash and cash equivalents ..................... 7,656 (1,886)
Cash and cash equivalents, beginning of period ....................... 6,809 5,067
-------- --------
Cash and cash equivalents, end of period ............................. $ 14,465 3,181
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest ........................................................ $ 7,843 8,500
======== ========
Income taxes .................................................... $ 579 586
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, in thousands, except per share amounts)
1) Consolidated Financial Statements
Basis of Presentation
The consolidated balance sheet as of July 31, 2000 and the consolidated
statements of operations for the three and nine months ended July 31, 1999 and
2000, 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, 2000 and the results of its operations for the three
and nine months ended July 31, 1999 and 2000 and its cash flows for the nine
months ended July 31, 1999 and 2000 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 Annual Report on Form 10-K for the year ended
October 31, 1999. The results of operations for the nine months ended July 31,
2000 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.
Basic Net Income Per Share and Diluted Net Income Per Share
The following represents a reconciliation of the numerator and denominator
used in computing basic and diluted net income per share for the three and nine
month periods ended July 31, 1999 and 2000:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
July 31, July 31,
------------------ ------------------
1999 2000 1999 2000
------- ------- ------- -------
<S> <C> <C> <C> <C>
Income (numerator)
Net income .............................................. $ 1,895 1,661 33 4,431
======= ======= ======= =======
Shares (denominator)
Basic weighted average common shares outstanding ........ 36,169 36,886 36,075 36,632
Effect of diluted securities-stock options, warrants, and
deferred shares .................................... 2,530 4,544 1,929 4,618
------- ------- ------- -------
Diluted weighted average common shares outstanding ...... 38,699 41,430 38,004 41,250
======= ======= ======= =======
Per Share Amount
Basic net income per share .............................. $ 0.05 0.05 -- 0.12
======= ======= ======= =======
Diluted net income per share ............................ $ 0.05 0.04 -- 0.11
======= ======= ======= =======
</TABLE>
At July 31, 2000, the Company had outstanding stock options, warrants,
convertible subordinated debentures and deferred shares which could potentially
dilute basic earnings per share in the future. (See Notes 12 and 13 to the
Consolidated Financial Statements for the year ended October 31, 1999 in the
Company's 1999 Annual Report on Form 10-K.)
7
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited, in thousands, except per share amounts)
2) 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 off-track betting establishments ("OTBs") and bookmakers
in Germany. The purchase, which included a cash payment of approximately $2,333
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 for the three and nine month
periods ended July 31, 1999 would not have been materially different.
3) Business Segments
The following tables represent revenues and profits by business segments
for the three and nine month periods ended July 31, 1999 and 2000. Corporate
expenses are allocated among business segments. Interest expense and other
(income) deductions are not allocated to business segments.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
July 31, July 31,
-------------------- --------------------
1999 2000 1999 2000
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Service revenue and product sales:
Pari-mutuel operations ...... $ 27,597 22,185 69,082 73,525
Venue management operations . 16,277 16,139 46,023 46,208
Lottery operations .......... 9,282 11,655 36,196 30,545
SJC Video operations ........ 14 -- 600 327
-------- -------- -------- --------
$ 53,170 49,979 151,901 150,605
======== ======== ======== ========
Gross profit:
Pari-mutuel operations ...... $ 10,928 10,050 27,761 31,579
Venue management operations . 4,163 4,525 11,500 12,840
Lottery operations .......... 2,679 3,677 9,268 9,179
SJC Video operations ........ (139) -- 66 --
-------- -------- -------- --------
Total gross profit ..... $ 17,631 18,252 48,595 53,598
======== ======== ======== ========
Operating income (loss):
Pari-mutuel operations ...... $ 2,825 1,945 2,909 6,639
Venue management operations . 1,784 2,204 4,498 6,048
Lottery operations .......... 1,459 2,133 5,843 5,042
SJC Video operations ........ (430) -- (872) --
-------- -------- -------- --------
5,638 6,282 12,378 17,729
Other deductions:
Interest expense ............ 4,011 4,413 12,181 12,850
Other (income) expense ...... (163) (67) 77 (138)
-------- -------- -------- --------
Income before income tax expense . $ 1,790 1,936 120 5,017
======== ======== ======== ========
</TABLE>
8
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited, in thousands, except per share amounts)
3) Business Segments--(Continued)
October 31, July 31,
1999 2000
----------- --------
Assets
Pari-mutuel operations ............. $110,598 111,293
Venue management operations ........ 34,613 34,832
Lottery operations ................. 20,348 28,579
SJC Video operations ............... -- --
-------- --------
$165,559 174,704
======== ========
Nine Months Ended July 31,
--------------------------
1999 2000
-------- --------
Capital and wagering systems expenditures
Pari-mutuel operations ............. $ 7,749 16,981
Venue management operations ........ 1,016 1,479
Lottery operations ................. 2,428 9,255
SJC Video operations ............... 84 --
-------- --------
$ 11,277 27,715
======== ========
4) Comprehensive Income (Loss)
The following presents a reconciliation of net income to comprehensive
income (loss) for the three and nine months ended July 31, 1999 and 2000:
<TABLE>
<CAPTION>
Three months ended Nine months ended
July 31, July 31,
------------------ -------------------
1999 2000 1999 2000
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net income ....................... $1,895 1,661 33 4,431
Other comprehensive income (loss):
Foreign currency translation 50 78 (287) (1,098)
------ ------ ------ ------
Comprehensive income (loss) ...... $1,945 1,739 (254) 3,333
====== ====== ====== ======
</TABLE>
5) Inventories
Inventories consist of the following:
October 31, July 31,
1999 2000
---------- --------
Parts and work-in-process .......... $13,735 7,429
Finished goods ..................... 344 189
Ticket paper ....................... 557 834
------- -------
$14,636 8,452
======= =======
Work-in-process includes costs for equipment expected to be sold. Costs
incurred for equipment associated with specific wagering system service
contracts not yet placed in service are classified as construction in progress
in property and equipment.
9
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, in thousands, except per share amounts)
6) Other Assets and Investments
Other assets at July 31, 2000 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
had the right to acquire ACRA for an additional $6,250 subject to certain other
adjustments. The Company had extended its option to acquire the ACRA until
August 31, 2000. The extension period expired without the Company exercising its
option. The Company is currently evaluating its ability to extend the option and
determining what portion, if any, of the loan will be recovered. If the Company
decides in the fourth quarter of fiscal 2000 not to pursue the acquisition of
ACRA, the Company will charge to expense deferred acquisition costs of
approximately $350, and may charge $750 to expense if the Company decides that
the loan is not recoverable.
7) Debt
On June 19, 2000, the Company entered into a $10,000 term loan (the "2000
Term Loan") which matures on February 15, 2001. The 2000 Term Loan bears
interest at a rate of prime plus 2.50% per annum or LIBOR plus 3.50% per annum,
and such interest is paid quarterly. Loan repayments of $100 were due August 15
and November 15, 2000, with a final principal payment of $9,800 due at maturity.
At July 31, 2000, the Company had approximately $17,806 available for
borrowing under the Company's then existing revolving credit facility (the "Old
Facility"). There were $6,420 in borrowings outstanding under the Old Facility
at July 31, 2000, approximately $774 in letters of credit were issued under the
Old Facility, and $110,000 was outstanding under the 10 7/8%, Series B Senior
Notes due 2004 (the "10 7/8% Notes"). All borrowings outstanding under the Old
Facility, the 2000 Term Loan, the 1998 Term Loan, the 10 7/8% Notes and $35,000
of convertible subordinated debentures were repaid on September 6, 2000 at the
time of the Scientific Games acquisition and approximately $450 in letters of
credit were collateralized by funds deposited into escrow. (See below.)
8) Acquisition of Scientific Games Holdings Corp. and New Debt and Equity
Financing
On September 6, 2000, the Company completed the acquisition of Scientific
Games Holdings Corp. ("Scientific Games"), a world leading supplier of lottery
products, integrated lottery systems and support services, and pre-paid
telephone cards. The acquisition was completed through a merger in which
Scientific Games became a wholly-owned subsidiary of the Company, at a cost of
approximately $308,000 in aggregate merger consideration to Scientific Games
stockholders, plus related fees and expenses. The acquisition will be recorded
using the purchase method of accounting, the acquired assets and liabilities
will be recorded at their estimated fair value at the date of acquisition and
the operating results of Scientific Games' businesses will be included in the
consolidated statements of operations from the date of the acquisition.
The Scientific Games acquisition and the refinancing of substantially all
existing debt of both the Company (see Note 7) and Scientific Games, along with
the payment of certain related fees and expenses, was completed with funds
provided by: (1) proceeds from the issuance of $150,000 principal amount of the
Company's 12 1/2% Senior Subordinated Notes due August 15, 2010 (the "Notes");
(2) $280,000 of term loan borrowings under the terms of a new senior credit
facility (the "New Facility"); (3) $2,987 of borrowings under the revolving
credit facility of the New Facility; (4) $4,805 of cash on hand; and (5)
$110,000 of gross proceeds from the sale of new convertible preferred stock,
principally to an affiliated entity of Olivetti S.p.A. (collectively, the
"Transactions").
The Notes were originally issued on August 14, 2000, in anticipation of
the completion of the pending Scientific Games acquisition, with the proceeds of
the Note issuance being held in escrow for the redemption of the Notes if the
consummation of the Scientific Games acquisition and other Transactions did not
occur. The process was completed and the escrow released on September 6, 2000.
The Notes bear interest at the rate of 12 1/2% per annum payable semi-annually
on each February 15 and August 15, commencing February 15, 2001. The Notes are
senior subordinated, unsecured obligations of the Company, ranking junior to all
existing and future senior debt including obligations under the New Facility.
The Notes are fully and unconditionally guaranteed on a senior subordinated
basis by all of the Company's wholly-owned U.S. subsidiaries.
10
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, in thousands, except per share amounts)
8) Acquisition of Scientific Games Holdings Corp. and New Debt and Equity
Financing--(Continued)
The Notes will be redeemable, at the option of the Company, at any time on
or after August 15, 2005, in whole or in part. In addition, on or before August
15, 2003, the Company may, at its option, redeem up to 35% of the Notes at 112%
of the principal amount thereof, plus accrued and unpaid interest, with the net
proceeds of equity offerings, provided at least 65% of the original aggregate
principal amount of the Company's new Notes remains outstanding immediately
after such redemption.
In addition to the issuance of the Notes, the Company also entered into a
New Facility with certain lenders, providing for borrowings of up to $345,000.
The New Facility, consists of: (a) a $65,000 revolving credit facility (the
"Revolver") which matures in September 2006 with interest at the Base Rate (as
defined) plus a margin of 2.25% per annum, or at the rate of LIBOR plus a margin
of 3.50% per annum, plus a commitment fee on the unused portion of 0.05% per
annum for the first six months and thereafter as determined by reference to a
leverage-based pricing grid; (b) a $60,000 term loan (the "Term A Loan") which
matures in September 2006 with interest at the Base Rate plus a margin of 2.25%
per annum, or at the rate of LIBOR plus 3.50% per annum for the first six months
and thereafter as determined by reference to a leverage-based pricing grid; and
(c) a $220,000 term loan (the "Term B Loan") which matures in September 2007
with interest at the Base Rate plus a margin of 3.00% per annum or at the rate
of LIBOR plus 4.25% per annum. The New Facility is secured by a first-priority,
perfected lien on: (i) substantially all the property and assets (real and
personal, tangible and intangible) of the Company and its domestic subsidiaries,
(ii) 100% of the capital stock of all of the direct and indirect domestic
subsidiaries and 65% of the capital stock of the foreign subsidiaries of the
Company and (iii) all inter-company indebtedness owing to the Company and its
material subsidiaries. The New Facility will also be supported by guarantees
provided by all of the Company's direct and indirect, wholly-owned domestic
subsidiaries. The New Facility will be subject to the following mandatory
prepayments with certain customary exceptions, to the extent of: (i) 100% of the
net cash proceeds from the sale or issuance of debt securities; (ii) 100% of the
net proceeds from the sale of assets and casualty insurance proceeds; (iii) 50%
of the Company's excess cash flow (as defined), or if the leverage ratio is less
than 3.00 to 1.00, 25% of the Company's excess cash flow; and (iv) 50% of the
net cash proceeds from the sale or issuance of equity (except for the issuance
of the Company's new convertible preferred stock).
The indenture governing the Notes and the agreement governing the New
Facility contain certain covenants that, among other things, limit the Company's
ability and the ability of certain of the Company's restricted subsidiaries, to
incur additional indebtedness, pay dividends or distributions or make certain
other restricted payments, purchase or redeem capital stock, make investments or
extend credit, engage in certain transactions with affiliates, engage in
sale-leaseback transactions, consummate certain asset sales, effect a
consolidation or merger or sell, transfer, lease or otherwise dispose of all or
substantially all assets, and create certain liens and other encumbrances on new
assets. Additionally, the agreement governing the New Facility contains the
following financial covenants which will be computed quarterly on a rolling
four-quarter basis as applicable: (i) minimum Interest Coverage ratio, (ii)
minimum Fixed Charge Coverage ratio; (iii) maximum Leverage ratio; and (iv)
minimum Net Worth.
On September 6, 2000, the Company issued, for gross proceeds of $110,000,
1.1 million shares of new Series A Convertible Preferred Stock (the "Preferred
Stock"), including $100,000 to Cirmatica Gaming, S.A., an affiliate of
Lottomatica S.p.A. (the state concessionaire for the Italian Lotto game and an
affiliate of Olivetti S.p.A. and Telecom Italia S.p.A.), and $10,000 to other
investors through Ramius Securities, LLC ("Ramius"), which acted as placement
agent.
The Preferred Stock is convertible into Company common stock at a price of
$6.00 per share (subject to potential reset to no less than $5.00 per share
based on possible future market price minimums), will mature and become
mandatorily convertible into common stock after five years and will pay
dividends at the rate of 6% per annum (payable in kind in additional shares or,
at the Company's option beginning with the ninth quarterly dividend date, in
cash). The holders of Preferred Stock also have the right to participate on an
as-converted basis in any dividends with respect to the common stock. The
holders of Preferred Stock have the right to vote along with the holders of
common stock on all matters on which the holders of common stock are entitled to
vote, are entitled to vote separately as a class with respect to certain
matters, and are also entitled to certain rights of first refusal with respect
to future financings. The Preferred Stock is also subject to certain customary
anti-dilution provisions. In addition, the holders of Preferred Stock have the
right to designate, initially, four members of the Company's Board of Directors
(and to elect three additional Directors in the event of certain defaults by the
Company). The Preferred Stock has preference over common stock with regard to
the distribution of assets upon a liquidation, dissolution or other winding up
of the Company.
11
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited, in thousands, except per share amounts)
8) Acquisition of Scientific Games Holdings Corp. and New Debt and Equity
Financing--(Continued)
In connection with the Transactions, the Company also issued 27.5 shares
of Preferred Stock to Ramius, which acted as placement agent in connection with
the sale of the Preferred Stock, and issued warrants to purchase at a nominal
price 2,900 shares of the Company's common stock to Donaldson, Lufkin & Jenrette
Securities Corporation and LBI Group, Inc. (an affiliate of Lehman Brothers),
the Company's financial advisors in connection with their services to the
Company in obtaining certain financing commitments.
In the fourth quarter of fiscal 2000, the Company expects to take charges
in connection with the refinancing which could aggregate approximately $23
million for the write-off of deferred financing fees related to the Old
Facility, to record the premium paid to repurchase the 10 7/8% Notes and
expenses associated with certain bridge loans.
Further information regarding aspects of the Scientific Games acquisition
and financing can be found in the Current Reports on Form 8-K filed by the
Company on May 19, 2000 and May 26, 2000 and certain Exhibits to this Quarterly
Report on Form 10-Q.
9) Financial Information for Guarantor Subsidiaries and Non-Guarantor
Subsidiaries
The Company conducts substantially all of its business through its
domestic and foreign subsidiaries. In July 1997, the Company issued $110,000
aggregate principal amount of 10 7/8% Notes. On May 22, 1998, the Company and
Autotote Lottery Corporation entered into a $12,000 three-year term loan
arrangement that bears interest at a fixed annual rate of 8.87% (the "1998 Term
Loan"). On June 19, 2000, the Company entered into a $10,000 term loan (the
"2000 Term Loan") which bears interest at a rate of prime plus 2.50% per annum
or LIBOR plus 3.50% per annum and matures on February 15, 2001. The 1998 Term
Loan and the 2000 Term Loan were extended in conjunction with the Old Facility
and are subject to certain restrictive and financial covenants contained in the
Old Facility. Obligations under the Old Facility and the 10 7/8% Notes are
jointly and severally guaranteed by substantially all of the Company's
wholly-owned domestic subsidiaries (the "Guarantor Subsidiaries"). (See Note 8
to the Consolidated Financial Statements for the year ended October 31, 1999 in
the Company's 1999 Annual Report on Form 10-K.)
On August 14, 2000, in connection with the Transactions, the Company
issued $150,000 aggregate principal amount of its new Notes, with the proceeds
being held in escrow, and on September 6, 2000 the escrow was released and the
Company entered into its New Facility with certain lenders for borrowings of up
to $345,000. Obligations under the New Facility and the Notes are fully and
unconditionally guaranteed by all of the Company's Guarantor Subsidiaries. (See
Note 8).
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, 1999 (audited)
and July 31, 2000 (unaudited) and for the three and nine month periods ended
July 31, 1999 and 2000 (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 and the
New Facility were in effect at the beginning of the periods presented. Separate
financial statements for Guarantor Subsidiaries are not presented based on
management's determination that they would not provide additional information
that is material to investors.
The condensed consolidating financial information reflects the investments
of the Parent Company in the Guarantor and Non-Guarantor Subsidiaries using the
equity method of accounting. In addition, corporate interest and administrative
expenses have not been allocated to the subsidiaries.
12
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
October 31, 1999
(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 .............................. $ 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 installments of long-term debt ................. $ 1,250 2,429 574 -- 4,253
Current liabilities .................................... 12,219 29,546 10,922 (672) 52,015
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
========= ========= ========= ========= =========
</TABLE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
July 31, 2000
(Unaudited, 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 .............................. $ 35 1,147 1,998 1 3,181
Accounts receivable, net ............................... -- 18,473 5,172 -- 23,645
Other current assets ................................... 17 8,933 3,686 (251) 12,385
Property and equipment, net ............................ 272 80,343 11,019 (267) 91,367
Investment in subsidiaries ............................. 81,938 -- -- (81,938) --
Goodwill ............................................... 193 -- 3,799 -- 3,992
Other assets ........................................... 9,440 31,669 1,387 (2,362) 40,134
--------- --------- --------- --------- ---------
Total assets ........................................ $ 91,895 140,565 27,061 (84,817) 174,704
========= ========= ========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current installments of long-term debt ................. $ 100 7 770 -- 877
Current liabilities .................................... 14,427 20,058 7,631 (302) 41,814
Long-term debt, excluding current installments ......... 161,320 7,222 1,340 -- 169,882
Other non-current liabilities .......................... 3,086 648 2,183 (573) 5,344
Intercompany balances .................................. (43,825) 39,657 3,783 385 --
Stockholders' equity (deficit) ......................... (43,213) 72,973 11,354 (84,327) (43,213)
--------- --------- --------- --------- ---------
Total liabilities and stockholders' equity (deficit) $ 91,895 140,565 27,061 (84,817) 174,704
========= ========= ========= ========= =========
</TABLE>
13
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
Three Months Ended July 31, 1999
(Unaudited, in thousands)
<TABLE>
<CAPTION>
Parent Guarantor Non-Guarantor Eliminating
Company Subsidiaries Subsidiaries Entries Consolidated
--------- ------------ ------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Operating revenues ........................................... $ -- 46,250 13,351 (6,431) 53,170
Operating expenses ........................................... -- 29,284 12,682 (6,427) 35,539
------- ------- ------- ------- -------
Gross profit .............................................. -- 16,966 669 (4) 17,631
Selling, general and administrative expenses ................. 2,387 3,286 972 (4) 6,641
Depreciation and amortization ................................ 46 4,578 753 (25) 5,352
------- ------- ------- ------- -------
Operating income (loss) ................................... (2,433) 9,102 (1,056) 25 5,638
Interest expense ............................................. 3,679 221 111 -- 4,011
Other (income) expense ....................................... (50) (28) (85) -- (163)
------- ------- ------- ------- -------
Income (loss) before equity in income of subsidiaries,
and income taxes .......................................... (6,062) 8,909 (1,082) 25 1,790
Equity in income of subsidiaries ............................. 8,008 -- -- (8,008) --
Income tax expense (benefit) ................................. 51 57 (213) -- (105)
------- ------- ------- ------- -------
Net income (loss) ............................................ $ 1,895 8,852 (869) (7,983) 1,895
======= ======= ======= ======= =======
</TABLE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
Three Months Ended July 31, 2000
(Unaudited, in thousands)
<TABLE>
<CAPTION>
Parent Guarantor Non-Guarantor Eliminating
Company Subsidiaries Subsidiaries Entries Consolidated
--------- ------------ ------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Operating revenues ........................................... $ -- 40,384 13,539 (3,944) 49,979
Operating expenses ........................................... -- 25,893 9,745 (3,911) 31,727
------- ------- ------- ------- -------
Gross profit .............................................. -- 14,491 3,794 (33) 18,252
Selling, general and administrative expenses ................. 2,735 3,017 913 (3) 6,662
Depreciation and amortization ................................ 69 4,489 775 (25) 5,308
------- ------- ------- ------- -------
Operating income (loss) ................................... (2,804) 6,985 2,106 (5) 6,282
Interest expense ............................................. 4,199 141 267 (194) 4,413
Other (income) expense ....................................... (146) (9) (106) 194 (67)
------- ------- ------- ------- -------
Income (loss) before equity in income of subsidiaries,
and income taxes .......................................... (6,857) 6,853 1,945 (5) 1,936
Equity in income of subsidiaries ............................. 8,539 -- -- (8,539) --
Income tax expense ........................................... 21 69 185 -- 275
------- ------- ------- ------- -------
Net income ................................................... $ 1,661 6,784 1,760 (8,544) 1,661
======= ======= ======= ======= =======
</TABLE>
14
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
Nine Months Ended July 31, 1999
(Unaudited, in thousands)
<TABLE>
<CAPTION>
Parent Guarantor Non-Guarantor Eliminating
Company Subsidiaries Subsidiaries Entries Consolidated
--------- ------------ ------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Operating revenues ........................................... $ -- 131,715 34,239 (14,053) 151,901
Operating expenses ........................................... -- 86,694 30,654 (14,042) 103,306
-------- -------- -------- -------- --------
Gross profit .............................................. -- 45,021 3,585 (11) 48,595
Selling, general and administrative expenses ................. 6,852 9,859 3,159 (16) 19,854
Depreciation and amortization ................................ 136 14,105 2,199 (77) 16,363
-------- -------- -------- -------- --------
Operating income (loss) ................................... (6,988) 21,057 (1,773) 82 12,378
Interest expense ............................................. 11,232 727 222 -- 12,181
Other (income) expense ....................................... (1,825) 52 2 1,848 77
-------- -------- -------- -------- --------
Income (loss) before equity in income of subsidiaries,
and income taxes .......................................... (16,395) 20,278 (1,997) (1,766) 120
Equity in income of subsidiaries ............................ 16,597 -- -- (16,597) --
Income tax expense (benefit) ................................. 169 102 (184) -- 87
-------- -------- -------- -------- --------
Net income (loss) ............................................ $ 33 20,176 (1,813) (18,363) 33
======== ======== ======== ======== ========
</TABLE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
Nine Months Ended July 31, 2000
(Unaudited, in thousands)
<TABLE>
<CAPTION>
Parent Guarantor Non-Guarantor Eliminating
Company Subsidiaries Subsidiaries Entries Consolidated
--------- ------------ ------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Operating revenues ........................................... $ -- 125,464 37,904 (12,763) 150,605
Operating expenses ........................................... -- 79,074 30,658 (12,725) 97,007
-------- -------- -------- -------- --------
Gross profit .............................................. -- 46,390 7,246 (38) 53,598
Selling, general and administrative expenses ................. 7,297 9,481 3,139 (8) 19,909
Depreciation and amortization ................................ 213 13,336 2,488 (77) 15,960
-------- -------- -------- -------- --------
Operating income (loss) ................................... (7,510) 23,573 1,619 47 17,729
Interest expense ............................................. 12,106 580 578 (414) 12,850
Other (income) expense ....................................... (369) (168) (15) 414 (138)
-------- -------- -------- -------- --------
Income (loss) before equity in income of subsidiaries,
and income taxes .......................................... (19,247) 23,161 1,056 47 5,017
Equity in income of subsidiaries ............................ 23,785 -- -- (23,785) --
Income tax expense ........................................... 107 384 95 -- 586
-------- -------- -------- -------- --------
Net income ................................................... $ 4,431 22,777 961 (23,738) 4,431
======== ======== ======== ======== ========
</TABLE>
15
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Nine Months Ended July 31, 1999
(Unaudited, in thousands)
<TABLE>
<CAPTION>
Parent Guarantor Non-Guarantor Eliminating
Company Subsidiaries Subsidiaries Entries Consolidated
--------- ------------ ------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Net income (loss) ............................................ $ 33 20,176 (1,813) (18,363) 33
Depreciation and amortization ............................. 136 14,105 2,199 (77) 16,363
Equity in income of subsidiaries .......................... (16,597) -- -- 16,597 --
Other non-cash adjustments ................................ 930 15 1 -- 946
Changes in working capital ................................ 2,557 8,343 (1,944) (159) 8,797
-------- -------- -------- -------- --------
Net cash provided by (used in) operating activities .......... (12,941) 42,639 (1,557) (2,002) 26,139
-------- -------- -------- -------- --------
Cash flows from investing activities:
Capital and wagering systems expenditures ................. (26) (9,467) (1,780) (4) (11,277)
Other assets and investments .............................. (504) (5,447) (275) 1,192 (5,034)
-------- -------- -------- -------- --------
Net cash provided by (used in) investing activities .......... (530) (14,914) (2,055) 1,188 (16,311)
-------- -------- -------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of long-term debt .................. -- 60 -- -- 60
Payments on long-term debt ................................ -- (2,066) (290) -- (2,356)
Net proceeds from stock issue ............................. 146 -- -- -- 146
Other, principally intercompany balances .................. 23,081 (25,316) 1,621 614 --
-------- -------- -------- -------- --------
Net cash provided by (used in) financing activities .......... 23,227 (27,322) 1,331 614 (2,150)
-------- -------- -------- -------- --------
Effect of exchange rate changes on cash ...................... 45 -- (267) 200 (22)
-------- -------- -------- -------- --------
Increase/(decrease) in cash and cash equivalents ............. 9,801 403 (2,548) -- 7,656
Cash and cash equivalents, beginning of period ............... 2,054 193 4,562 -- 6,809
-------- -------- -------- -------- --------
Cash and cash equivalents, end of period ..................... $ 11,855 596 2,014 -- 14,465
======== ======== ======== ======== ========
</TABLE>
16
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Nine Months Ended July 31, 2000
(Unaudited, in thousands)
<TABLE>
<CAPTION>
Parent Guarantor Non-Guarantor Eliminating
Company Subsidiaries Subsidiaries Entries Consolidated
--------- ------------ ------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Net income (loss) ............................................ $ 4,431 22,777 961 (23,738) 4,431
Depreciation and amortization ............................. 213 13,336 2,488 (77) 15,960
Equity in income of subsidiaries .......................... (23,785) -- -- 23,785 --
Other non-cash adjustments ................................ 915 369 (114) -- 1,170
Changes in working capital ................................ 2,260 (1,550) (3,274) -- (2,564)
-------- -------- -------- -------- --------
Net cash provided by (used in ) operating activities ......... (15,966) 34,932 61 (30) 18,997
-------- -------- -------- -------- --------
Cash flows from investing activities:
Capital and wagering systems expenditures ................. (68) (23,735) (3,942) 30 (27,715)
Other assets and investments .............................. (3,188) (5,040) (453) 505 (8,176)
-------- -------- -------- -------- --------
Net cash provided by (used in) investing activities .......... (3,256) (28,775) (4,395) 535 (35,891)
-------- -------- -------- -------- --------
Cash flows from financing activities:
Net proceeds from issuance of long-term debt .............. 16,420 -- 1,021 -- 17,441
Payments on long-term debt ................................ (1,250) (1,827) (498) -- (3,575)
Net Proceeds from stock issue ............................. 1,450 -- -- -- 1,450
Other, principally intercompany balances .................. 1,039 (3,923) 3,389 (505) --
-------- -------- -------- -------- --------
Net cash provided by (used in) financing activities .......... 17,659 (5,750) 3,912 (505) 15,316
-------- -------- -------- -------- --------
Effect of exchange rate changes on cash ...................... -- 235 (543) -- (308)
-------- -------- -------- -------- --------
Increase/(decrease) in cash and cash equivalents ............. (1,563) 642 (965) -- (1,886)
Cash and cash equivalents, beginning of period ............... 1,598 506 2,963 -- 5,067
-------- -------- -------- -------- --------
Cash and cash equivalents, end of period ..................... $ 35 1,148 1,998 -- 3,181
======== ======== ======== ======== ========
</TABLE>
17
<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, 2000 and the results of its operations for the three and nine
month periods ended July 31, 2000, compared to the same periods last year. This
discussion should be read in conjunction with the Management's Discussion and
Analysis of Financial Condition and Results of Operations for the fiscal year
ended October 31, 1999 included in the Company's 1999 Annual Report on Form
10-K.
The Company operates primarily in three business segments, Pari-mutuel
Operations, Venue Management and Lottery Operations. Pari-mutuel Operations
include all aspects of the Company's pari-mutuel service business, which
encompass 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 ("OTB") operations and the Netherlands on-track
and off-track betting operations. Lottery Operations include both domestic and
international lottery service, as well as sales of lottery systems and
equipment. In the second quarter of fiscal 2000, the Company completed the sale
of its SJC Video business.
Historically, the Company's revenues have been derived from two principal
sources: service revenues and sales revenues. Service revenues are earned
pursuant to multi-year contracts to provide wagering systems and other services,
which are typically based on a percentage of Handle and/or daily or monthly
fees; or are derived from wagering by customers at facilities owned or leased by
the Company. Sales revenues are derived from sales contracts for wagering
equipment, services and software. The first quarter and a portion of the second
quarter of the Company's fiscal year 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.
<TABLE>
<CAPTION>
Three Months ended Nine Months ended
Results of Operations: July 31, July 31,
------------------- -------------------
1999 2000 1999 2000
------- ------- ------- -------
(in thousands)
<S> <C> <C> <C> <C>
Pari-mutuel Operations
Operating Revenues:
Service revenue ...................................... $19,663 21,137 55,548 59,539
Sales revenue ........................................ 7,934 1,048 13,534 13,986
------- ------- ------- -------
Total Revenue ................................... $27,597 22,185 69,082 73,525
======= ======= ======= =======
Gross Profit (excluding depreciation and amortization) ... $10,928 10,050 27,761 31,579
======= ======= ======= =======
Venue Management Operations
Operating Revenues:
Service revenue ...................................... $16,277 16,139 46,023 46,208
======= ======= ======= =======
Gross Profit (excluding depreciation and amortization) ... $ 4,163 4,525 11,500 12,840
======= ======= ======= =======
</TABLE>
18
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-(Continued)
<TABLE>
<CAPTION>
Three Months ended Nine Months ended
July 31, July 31,
------------------- -------------------
1999 2000 1999 2000
------- ------- ------- -------
Results of Operations: (in thousands)
<S> <C> <C> <C> <C>
Lottery Operations
Operating Revenues:
Service revenue ...................................... $ 2,929 3,564 7,437 9,384
Sales revenue ........................................ 6,353 8,091 28,759 21,161
------- ------- ------- -------
Total Revenue ................................... $ 9,282 11,655 36,196 30,545
======= ======= ======= =======
Gross Profit (excluding depreciation and amortization) ... $ 2,679 3,677 9,268 9,179
======= ======= ======= =======
SJC Video Operations
Operating Revenues:
Service revenue ...................................... $ 14 -- 600 327
======= ======= ======= =======
Gross Profit (Loss)(excluding depreciation and
amortization) ........................................ $ (139) -- 66 --
======= ======= ======= =======
Company Total
Operating Revenues:
Service revenue ...................................... $38,883 40,840 109,608 115,458
Sales revenue ........................................ 14,287 9,139 42,293 35,147
------- ------- ------- -------
Total Revenue ................................... $53,170 49,979 151,901 150,605
======= ======= ======= =======
Gross Profit (excluding depreciation and amortization) ... $17,631 18,252 48,595 53,598
======= ======= ======= =======
</TABLE>
Three Months Ended July 31, 2000 Compared to Three Months Ended July 31, 1999
Pari-mutuel Operations service revenues of $21.1 million for the third
quarter of fiscal 2000 improved $1.5 million or 7% from the third quarter of the
prior year. This improvement reflects primarily $1.5 million in revenues from
the German operations that were acquired in the fourth quarter of fiscal 1999
and improved revenues in the Company's NASRIN(TM) operations. These increases
were partially offset by lower service revenues in the North American
simulcasting operations. Pari-mutuel Operations sales revenues decreased by $6.9
million to $1.0 million in the third quarter of fiscal 2000 due primarily to the
prior year period sales of systems and terminals to the Company's customers in
the UK, Ireland, Korea and Finland. Pari-mutuel Operations gross profit of $10.1
million or 45% of total revenues, decreased from gross profit of $10.9 million
or 40% of total revenues in the same period last year. Lower gross profit on
international equipment sales and lower revenues in the North American
simulcasting operations, were partially offset by an increase in gross profit on
improved NASRIN(TM) service revenues and improved Handle in the German
pari-mutuel operations.
Venue Management Operations service revenues of $16.1 million for the
third quarter of fiscal 2000 decreased 1% from the service revenues in the third
quarter of the prior year. Handle-related revenue increases of 4% in the
Connecticut OTB operations were offset by a decrease in the Netherlands
operations, due primarily to the impact of foreign exchange on reported
revenues. Gross profit was $4.5 million or 28% of service revenue in the third
quarter of fiscal 2000, increased over the gross profit of $4.2 million or 26%
of service revenue in the third quarter of fiscal 1999. This improvement
primarily reflects higher Handle-related revenues and cost savings in the
Connecticut OTB operations.
Lottery Operations service revenues in the third quarter of fiscal 2000 of
$3.6 million improved $0.6 million from the third quarter of the prior year due
to the July 2000 launch of the Vermont and New Hampshire lotteries. The $1.7
million increase in sales revenues to $8.1 million in the third quarter of
fiscal 2000 is primarily attributable to sales of lottery equipment to the
Vermont and New Hampshire lotteries and increased sales of Extrema(TM) terminals
to the Company's customer in Italy. Lottery Operations gross profit of $3.7
million or 32% of total revenues, increased from gross profit of $2.7 million or
29% of total revenues in the same period last year. Higher gross profit was
earned on improved service revenues due to the two new lottery service contracts
and higher margins on domestic equipment sales.
19
<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 including software
development costs increased less than $0.1 million or less than 1% to $6.7
million in the third quarter of fiscal 2000. Higher expenses due to increased
operating levels in the North American and German pari-mutuel operations, and
the Vermont and New Hampshire lotteries which began in July 2000, were partially
offset by cost reductions in NASRIN(TM) and France, and the absence of the SJC
Video business.
Depreciation and amortization expenses decreased $0.1 million to $5.3
million in the third quarter of fiscal 2000. Depreciation increased $0.1
million, primarily due to the installation of wagering system equipment at new
North American pari-mutuel customers, partly offset by the absence of the SJC
Video business depreciation. Amortization expense decreased $0.2 million as a
result of the full amortization of intangible assets associated with the North
American simulcasting operations.
Interest expense increased $0.4 million to $4.4 million in the third
quarter of fiscal 2000 as a result of an increase in average outstanding
borrowings during the period.
Income Taxes
Income tax expense was $0.3 million in the third quarter of fiscal 2000 as
compared to a tax benefit $0.1 million in the third quarter of fiscal 1999.
Income tax expense principally reflects federal alternative minimum tax, foreign
and state income taxes.
Nine Months Ended July 31, 2000 Compared to Nine Months Ended July 31, 1999
Pari-mutuel Operations service revenues of $59.5 million for the first
nine months of fiscal 2000 improved $4.0 million or 7% from the first nine
months of the prior year. This improvement primarily reflects $4.1 million in
revenues from the German operations that were acquired in the fourth quarter of
fiscal 1999 and improved revenues in the Company's North American pari-mutuel
operations, NASRIN(TM) service operations and Ireland pari-mutuel services.
These increases were partially offset by lower service revenues in the French
operations and lower service revenues in North American simulcasting operations.
Pari-mutuel Operations sales revenues increased by $0.5 million to $14.0 million
in the first nine months of fiscal 2000 due to the sales of terminals to the
Company's international customers, primarily in Italy and Chile. Pari-mutuel
Operations gross profit of $31.6 million or 43% of total revenues, increased
from gross profit of $27.8 million or 40% in the same period last year. Higher
gross profit on improved Handle, primarily in the German and North American
pari-mutuel operations, higher NASRIN(TM) service revenues and increased
equipment sales, were partially offset by a decrease in gross profit due to
lower Handle in the French pari-mutuel operations, lower satellite time sales,
and higher satellite service fees due to a credit received in fiscal 1999 from
our satellite provider as a result of a service interruption.
Venue Management Operations service revenues of $46.2 million for the
first nine months of fiscal 2000 increased $0.2 million over the service
revenues of the first nine months of the prior year. Handle-related revenue
increases of 3% in the Connecticut OTB operations, were partly offset by the
impact of foreign exchange on the reported Netherlands operations revenues.
Gross profit was $12.8 million or 28% of service revenue in the first nine
months of fiscal 2000, an increase over the gross profit of $11.5 million or 25%
of service revenue in the first nine months of fiscal 1999. This improvement
primarily reflects higher Handle-related revenues and cost savings in the
Connecticut OTB operations.
Lottery Operations service revenues in the first nine months of fiscal
2000 of $9.4 million improved $1.9 million from the first nine months of the
prior year due to the April 1999 launch of the Montana lottery and the July 2000
launches of the Vermont and New Hampshire lotteries. The $7.6 million decrease
in equipment sales to $21.2 million in the first nine months of fiscal 2000 is
primarily attributable to the April 1999 Montana lottery equipment sale and
fewer terminal sales as compared to the fiscal 1999 period, primarily for use in
Italy. Lottery Operations gross profit of $9.2 million or 30% of total revenues,
decreased from gross profit of $9.3 million or 26% of total revenues in the same
period last year. Higher gross profit on improved service revenue due to the
three new lottery service contracts and improved equipment sales gross margins
due to the mix of products sold, were more than offset by a decrease in gross
profit due to the lower volume of domestic and international equipment sales.
20
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AUTOTOTE CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-(Continued)
Expense Analysis
Selling, general and administrative expenses including software
development costs were comparable at $19.9 million for the first nine months of
fiscal 2000 and fiscal 1999. Higher expenses due to increased operating levels
in the North American and German pari-mutuel operations and the Montana lottery
which began in April 1999, and the Vermont and New Hampshire lotteries which
began in July 2000, were offset by cost reductions in NASRIN(TM) and France, and
the absence of the SJC Video business.
Depreciation and amortization expenses decreased $0.4 million or 2% to
$16.0 million in the first nine months of fiscal 2000. Depreciation expense
decreased $0.1 million, primarily due to the full depreciation of certain assets
in prior periods and the absence of the SJC Video business. Amortization expense
decreased $0.3 million as a result of the full amortization of intangible assets
associated with the North American simulcasting operations.
Interest expense increased $0.7 million to $12.9 million in the first nine
months of fiscal 2000 as a result of an increase in average outstanding
borrowings during the period.
Income Taxes
Income tax expense was $0.6 million in the first nine months of fiscal
2000, as compared to $0.1 million in the first nine months of fiscal 1999.
Income tax expense principally reflects federal alternative minimum tax, foreign
and state income taxes.
Liquidity, Capital Resources and Working Capital Deficiency
At July 31, 2000, the Company's available cash and borrowing capacity
totaled $21.0 million compared to $29.0 million at October 31, 1999. Net cash
provided by operating activities decreased by $7.1 million to $19.0 million for
the nine months ended July 31, 2000 from $26.1 million in the nine months ended
July 31, 1999. A $4.4 million increase in net income was offset by a $11.4
million decrease in changes in operating assets and liabilities, primarily
decreases in accounts payable and other current liabilities and increases in
accounts receivable and inventory. In the first nine months of fiscal 2000, the
Company utilized $19.0 million of cash provided by operating activities, $17.4
million of long-term borrowings, $1.5 million in proceeds from stock sales, and
$1.9 million of available cash, to invest $27.7 million principally in capital
and contract expenditures in connection with the January 2000 start-up of the
Monmouth/Meadowlands service contract and the July 2000 start-ups of the Vermont
and New Hampshire state lotteries. The Company also invested $8.2 million in
software systems development and other assets, and used $3.6 million to reduce
other long-term loans.
At July 31, 2000, the Company's current liabilities exceeded current
assets by $3.5 million, an improvement of $4.2 million from October 31, 1999.
The improvement results principally from a $9.3 million reduction in current
assets, offset by a $13.6 million reduction in current liabilities, which
included the classification of substantially all debt as long term. The
classification of debt as long-term is the result of the debt refinancing which
was done in connection with the September 6, 2000 acquisition of Scientific
Games Holdings Corp (see below).
As described above in Note 7 to the Consolidated Financial Statements, the
Company had $17.8 million of borrowing availability under its Old Facility at
July 31, 2000. At September 6, 2000 following consummation of the Transactions
(see below), the Company had $62.0 million of borrowing availability under its
New Facility. The Company believes that its cash resources, anticipated cash
flows from operations and borrowing availability under the New Facility will
provide sufficient liquidity to meet scheduled interest payments and anticipated
capital expenditures during the next twelve months.
21
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-(Continued)
Acquisition of Scientific Games Holdings Corp and New Debt and Equity Financing
On September 6, 2000 the Company completed the acquisition of Scientific
Games, a world leading supplier of lottery products, integrated lottery systems
and support services, and pre-paid telephone cards. The acquisition was
completed through a merger in which Scientific Games became a wholly-owned
subsidiary of the Company at a cost of approximately $308,000 in aggregate
merger consideration to Scientific Games stockholders, plus related fees and
expenses. The acquisition will be recorded using the purchase method of
accounting, and the acquired assets and liabilities will be recorded at their
estimated fair value at the date of acquisition and the operating results of
Scientific Games businesses will be included in the consolidated statements of
operations from the date of the acquisition.
The Scientific Games acquisition and the refinancing of substantially all
existing debt of both the Company (see Note 8) and Scientific Games, along with
the payment of related fees and expenses, was completed with funds provided by:
(1) proceeds from the issuance of $150,000 of the new Notes; (2) $280,000 of
term loan borrowings under the New Facility; (3) $2,987 of borrowings under the
revolving credit facility of the New Facility; (4) $4,805 of cash on hand, and
(5) $110,000 of gross proceeds from the sale of new Preferred Stock.
Further information regarding the acquisition and financing can be found
in current reports on Form 8-K filed by the Company on May 19, 2000 and May 26,
2000 and certain Exhibits to this Quarterly Report on Form 10-Q.
Recent Accounting Pronouncements
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities," as
amended. SFAS 133, as amended, 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, as
amended, 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.
Forward-Looking Statements
This quarterly report on Form 10-Q contains certain statements and
projections (including statements concerning plans and objectives of management
for the future operations and services, statements concerning revenue
expectations and statements concerning mergers and re-financing) other than
those covering historical information, that should be considered forward-looking
and subject to certain risks and uncertainties. Such forward-looking statements
are based on management's belief as well as assumptions made by, and information
currently available to, management pursuant to "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995. The Company's actual results
may differ materially from the plans envisioned in, or results projected by,
those statements if the Company's assumptions prove to be incorrect or for a
variety of other reasons, including those relating to factors identified in the
Company's Annual Report on Form 10-K for the year ended October 31, 1999 as part
of a Cautionary Statement for purposes of such safe harbor. The Company cautions
that such factors are not exclusive. The Company does not undertake to update
any forward-looking statement that may be made from time to time by, or on
behalf of, the Company.
22
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
Quarter Ended July 31, 2000
PART II. Other Information
Item 1. Legal Proceedings
No significant changes have occurred with respect to legal proceedings
disclosed in Part 1, Item 3, of the Company's Annual Report on Form 10-K for the
year ended October 31, 1999.
Item 2. Changes in Securities
There were no changes in securities subject to this item during the third
quarter of 2000. On September 6, 2000, as part of the Transactions, the Company
issued, for gross proceeds of $110 million, 1.1 million shares of new Series A
Convertible Preferred Stock, including $100 million to Cirmatica Gaming, S.A.,
an affiliate of Lottomatica S.p.A. (the state concessionaire for the Italian
Lotto game and an affiliate of Olivetti S.p.A. and Telecom Italia S.p.A.), and
$10 million to other investors through Ramius Securities, LLC, which acted as
placement agent. The Company also issued 27,500 shares of Preferred Stock to
Ramius in connection with such services.
The Preferred Stock is convertible into Company common stock at a price of
$6.00 per share (subject to potential reset to no less than $5.00 per share
based on possible future market price minimums), will mature and become
mandatorily convertible into common stock after five years and will pay
dividends at the rate of 6% per annum (payable in kind in additional shares or,
at the Company's option beginning with the ninth quarterly dividend date, in
cash). The holders of Preferred Stock also have the right to participate on an
as-converted basis in any dividends with respect to the common stock. The
holders of Preferred Stock have the right to vote along with the holders of
common stock on all matters on which the holders of common stock are entitled to
vote, are entitled to vote separately as a class with respect to certain
matters, and are also entitled to certain rights of first refusal with respect
to future financings. The Preferred Stock is also subject to certain customary
anti-dilution provisions. In addition, the holders of Preferred Stock have the
right to designate, initially, four members of the Company's Board of Directors
(and to elect three additional Directors in the event of certain defaults by the
Company). The Preferred Stock has preference over common stock with regard to
the distribution of assets upon a liquidation, dissolution or other winding up
of the Company.
On September 6, 2000, the Company also issued Warrants (the "Warrants") to
purchase up to 2.9 million shares of the Company's common stock to its financial
advisors, Donaldson, Lufkin & Jenrette Securities Corporation and LBI Group,
Inc. (an affiliate of Lehman Brothers) (which received 80% and 20%,
respectively, of such Warrants), in connection with their services to the
Company in obtaining certain financing commitments. The Warrants are exercisable
until September 6, 2007 at a nominal exercise price determined by a formula set
forth in the Warrant.
Based upon representations of the acquirers of the Preferred Stock and the
Warrants, the Preferred Stock and the Warrants were issued in private
transactions in reliance upon exemptions from registration under Section 4(2) of
the Securities Act of 1933, as amended. Holders of both the Preferred Stock and
the Warrants are entitled to the benefits of certain registration rights.
The foregoing is only a summary of certain terms of the Preferred Stock,
the Warrants, and related agreements and is qualified by reference to Exhibits
3.3, 10.38, 10.41 and 99.11 hereto, which are incorporated herein by reference.
23
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
Quarter Ended July 31, 2000
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
Number Description
------ -----------
3.3 Certificate of Designations, Preferences and Relative,
Participating, Optional and Other Special Rights of Preferred Stock
and Qualifications, Limitations and Restrictions Thereof of Series A
Convertible Preferred Stock, filed with the Secretary of State of
Delaware on September 6, 2000.
3.4 Amendment to Bylaws of the Company.(1)
4.5 First Supplemental Indenture, dated as August 5, 2000, among the
Company, the Guarantors and The Bank of New York (successor to IBJ
Schroder Bank & Trust Company), as trustee, supplementing the
Indenture, dated as of July 28, 1997, among the Company, the
subsidiaries of the Company named therein as guarantors and IBJ
Schroder Bank & Trust Company, as trustee, relating to the Company's
10 7/8% Senior Notes due 2004.
4.6 Indenture, dated as of August 14, 2000, among the Company, the
Subsidiary Guarantors and The Bank of New York, as Trustee.
4.7 Form of Series A 12 1/2% Senior Subordinated Note due 2010.(2)
4.8 First Supplemental Indenture, dated as of September 6, 2000, among
the Company, the Guarantors, the Additional Guarantors and The Bank
of New York, as trustee, supplementing the Indenture, dated as of
August 14, 2000, among the Company, the Guarantors and the Trustee,
relating to the Company's 12 1/2% Senior Subordinated Notes due
2010.
4.9 Registration Rights Agreement by and among the Company, the
Guarantors and Donaldson, Lufkin & Jenrette Securities Corporation
and Lehman Brothers Inc., dated as of August 14, 2000.
10.38 Form of Stockholders' Agreement by and among Cirmatica Gaming, S.A.,
The Oak Fund, Peconic Fund Ltd., Ramius Securities, LLC, Olivetti
International S.A. and the Company, dated September 6, 2000,
relating to the Preferred Stock.
10.39 Credit Agreement among the Company, DLJ Capital Funding, Inc.,
Lehman Commercial Paper Inc., DLJ Capital Funding, Inc., as
Administrative Agent, Syndication Agent, Lead Arranger and Sole Book
Running Manager, Lehman Commercial Paper Inc., as Documentation
Agent, and Lehman Brothers Inc., as Co-Arranger, dated as of
September 6, 2000.
10.40 Security Agreement among the Company, the Subsidiary Guarantors and
the Administrative Agent, dated as of September 6, 2000.
10.41 Form of Warrant Registration Rights Agreement among the Company,
Donaldson, Lufkin & Jenrette Securities Corporation and LBI Group
Inc. dated as of September 6, 2000.
10.42 Form of Employment and Severance Benefit Agreement, entered into
between Scientific Games Holdings Corp. and certain employees
effective September 6, 2000.
10.43 Form of Consulting Agreement by and between the Company and William
G. Malloy, dated May 18, 2000 and effective September 6, 2000.
99.11 Form of Warrant issued to Donaldson, Lufkin & Jenrette Securities
Corporation and LBI Group Inc.
(1) The amendment to the Company's Bylaws is filed herewith. The Company's
Bylaws are incorporated by reference to Exhibit 4.4 to the Company's
Registration Statement on Form S-8 (Registration No. 33-46594) which became
effective March 20, 1992.
(2) Filed herewith as Exhibit A to Exhibit 4.2.
27 Financial Data Schedule.
Current reports on Form 8-K were filed on May 19, 2000 and May 26, 2000,
regarding the proposed acquisition by the Company of Scientific Games Holdings
Corp. and certain related matters.
24
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
Quarter Ended July 31, 2000
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
AUTOTOTE CORPORATION
--------------------
(Registrant)
By: /s/ DeWayne E. Laird
--------------------
Name: DeWayne E. Laird
Title: Vice President & Chief Financial Officer
Dated: September 14, 2000
25
