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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED: OCTOBER 31, 2000,
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________TO___________________
COMMISSION FILE NUMBER: 0-13063
AUTOTOTE CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 81-0422894
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
750 LEXINGTON AVENUE, 25TH FLOOR
NEW YORK, NEW YORK 10022
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER: (212) 754-2233
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH
------------------- -------------------------------
REGISTERED
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Class A Common Stock, $.01 par value American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. / /
As of January 25, 2001, the aggregate market value of voting stock held by
non-affiliates of the registrant was approximately $136,530,369.
Common shares outstanding as of January 25, 2001 were 40,155,991.
DOCUMENTS INCORPORATED BY REFERENCE
The following document is incorporated herein by reference:
DOCUMENT PARTS INTO WHICH INCORPORATED
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Proxy Statement for the Company's 2001 Annual Part III
Meeting of Stockholders
EXHIBIT INDEX APPEARS ON PAGE 86
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PART I
FORWARD-LOOKING STATEMENTS
Throughout this Annual Report on Form 10-K we make "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended (the "Securities Act") and Section 21E of the Securities Exchange Act of
1934, as amended (the "Exchange Act"). Forward-looking statements include the
words "may," "will," "estimate," "intend," "continue," "believe," "except" or
"anticipate" and other similar words. The forward-looking statements contained
in this Annual Report are generally located in the material set forth under the
headings "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business," but may be found in other locations as
well. These forward-looking statements generally relate to plans and objectives
for future operations and are based upon management's reasonable estimates of
future results or trends. Although we believe that the plans and objectives
reflected in or suggested by such forward-looking statements are reasonable,
such plans or objectives may not be achieved. Actual results may differ from
projected results due, but not limited, to unforeseen developments, including
developments relating to the following:
o the availability and adequacy of our cash flow to satisfy our obligations,
including our debt service obligations and our need for additional funds
required to support capital improvements and development;
o economic, competitive, demographic, business and other conditions in
our local and regional markets;
o changes or developments in the laws, regulations or taxes in the gaming
and lottery industries;
o actions taken or omitted to be taken by third parties, including
customers, suppliers, competitors, members and shareholders, as well as
legislative, regulatory, judicial and other governmental authorities;
o changes in business strategy, capital improvements, development plans,
including those due to environmental remediation concerns, or changes in
personnel or their compensation, including federal, state and local
minimum wage requirements; and
o the loss of any license or permit, including the failure to obtain an
unconditional renewal of a required gaming license on a timely basis.
Actual future results may be materially different from what we expect. We
will not update forward-looking statements even though our situation may change
in the future.
ITEM 1. BUSINESS
OVERVIEW
As a result of Autotote's acquisition of Scientific Games Holdings Corp.
("Scientific Games") on September 6, 2000, we are the largest provider of
services, systems and products to both the pari-mutuel gaming and instant ticket
lottery industries, and we believe we are the only fully integrated lottery
service provider in the world. We believe that we offer the broadest and most
technologically advanced array of products and services in these industries and
that we are the market leader in creating innovative pari-mutuel wagering and
lottery products. Our lottery group is the leading provider of instant lottery
tickets and related services, accounting for approximately 68% of all retail
sales of instant lottery tickets in the United States in 1999. Our lottery group
also supplies technologically advanced on-line lottery systems and instant
ticket validation equipment to lotteries in the U.S. and internationally. Our
pari-mutuel group is the leading provider of pari-mutuel wagering systems
worldwide and has an approximate 65% share of the estimated $20.0 billion of
North American racing industry wagers, or "Handle." Our venue management group,
utilizing our pari-mutuel business expertise, owns or operates off-track betting
venues or "OTBs" in Connecticut, The Netherlands and Germany, from which we earn
a significantly higher percentage of the Handle than we earn by providing
services to third-party operators. Finally, our telecommunications products
group leverages our superior lottery technology to create highly secure,
paper-based, prepaid phone cards for the rapidly growing international cellular
telephone markets.
On September 6, 2000, Autotote completed the acquisition of Scientific
Games, a world leading supplier of lottery products, integrated lottery systems
and support services, and prepaid telephone cards. This acquisition combines
Autotote's pari-mutuel wagering, venue management and on-line lottery businesses
with Scientific
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Games' complementary instant lottery ticket and related services, on-line
lottery and instant ticket validation, and rapidly growing prepaid phone card
businesses. The acquisition was completed through a merger in which Scientific
Games became a wholly-owned subsidiary of Autotote at a cost of approximately
$308 million in aggregate merger consideration to Scientific Games stockholders,
plus related fees and expenses. The acquisition has been 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 and the
operating results of Scientific Games businesses have been 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 Autotote and Scientific Games, along with the payment of
related fees and expenses, was completed with funds provided by: (1) proceeds
from the issuance of $150.0 million principal amount of our series A notes; (2)
$280.0 million of term loan borrowings under our new senior credit facilities;
(3) $2.98 million of borrowings under the revolving credit facility of our new
senior credit facilities; (4) $4.805 million of cash on hand; and (5) $110.0
million of gross proceeds from the sale of new convertible preferred stock,
principally to an affiliated entity of Olivetti S.p.A.
We filed a registration statement on Form S-4 under the Securities Act of
1933, as amended, with the Securities Exchange Commission with respect to an
offer to exchange up to $150.0 million of new 12 1/2% Senior Subordinated
Notes due 2010, Seires B, for any and all of our outstanding 12 1/2% Senior
Subordinated Notes due 2010, Series A. The terms of the Series B notes are
substantially identical to the Series A notes, except for certain transfer
restrictions and registration rights relating to the Series A notes. That
registration statement was declared effective by the Securities Exchange
Commission on January 2, 2001 and we subsequently commenced the exchange
offer, which is scheduled to expire on February 7, 2001, unless extended.
With the combined operations of Autotote and Scientific Games, we are
engaged primarily in the following businesses:
o LOTTERY GROUP (55% of Pro-forma Revenues). We believe that we are the
world's only fully integrated service provider for both on-line and
instant ticket lotteries, the two principal types of lottery games. Our
instant ticket and related services business is the industry leader,
with approximately 68% of all retail sales in the U.S. instant ticket
market. Our instant ticket customers include 26 of the 39 U.S.
jurisdictions where lotteries are authorized as well as lotteries in
over 50 other countries. In addition to ticket design and
manufacturing, we provide lotteries with related value-added services
through our branded Cooperative Services Program, including game
design, sales and marketing support, inventory management and
warehousing and fulfillment services. We have recently introduced our
probability instant lottery tickets, which permit every ticket to have
the potential to become a winner based on the choices made by the
player, and probability ticket validation terminals based on our
proprietary security technology. We believe that these innovative
products will allow lotteries to increase retail sales of instant
tickets while enabling us to generate higher revenues and margins from
tickets, terminals and systems. Our instant ticket contracts generally
run for one to five years and frequently include renewal options. We
typically collect either a fixed fee per thousand instant tickets or a
percentage of the instant ticket retail sales of the lottery customer,
depending on the nature of the contract and the extent of the
cooperative services we provide. Instant tickets and related services
accounted for approximately 85% of the pro forma revenue of our Lottery
Group.
Our lottery systems business primarily provides sophisticated,
customized computer software, equipment (including state-of-the-art
lottery terminals) and data communication services to lotteries for
on-line and instant ticket games. To U.S.-based lotteries, we typically
provide the necessary equipment, software and maintenance services
pursuant to five to seven year contracts, under which we are generally
paid a percentage of retail sales. Our U.S. systems contracts
frequently include renewal options that have generally been exercised
by our customers. Internationally, we typically sell terminals and
systems to lotteries outright and provide ongoing fee-based software
support under long-term contracts. We have agreements to provide
systems and services to 10 states in the United States and to lotteries
in 24 countries internationally.
We have recently been selected by the Iowa Lottery to provide a 7-year
on-line lottery contract, beginning on July 1, 2001, with an estimated
$40.0 million of potential revenue generated over the life of the
contract. We also have been selected by the Maine State Lottery to
provide instant tickets and an on-line lottery system, beginning July
2001, with an estimated $45.0 million of potential revenue generated
over the six-year life of the contract. In January 2001, the British
Columbia
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Lottery Corporation announced that it had chosen
us to upgrade its lottery central gaming system. The arrangement is
expected to provide revenues of approximately $8.0 million. In
addition, in January 2001, the Jamaica Lottery Company Limited
announced that it has chosen us to supply terminals, central system and
support services for five years. When finalized, the arrangement will
have the potential to generate revenues of $10.9 million and may
include three two-year renewals.
o PARI-MUTUEL GROUP (23% of Pro-forma Revenues). We are the leading
worldwide supplier of technologically advanced computerized wagering
systems and related equipment. We provide technology, software,
equipment and services for pari-mutuel wagering conducted at
thoroughbred, harness and greyhound racetracks and OTBs worldwide. We
have approximately 65% of the market for pari-mutuel services in North
America based on total Handle, and have benefited from the growth in
remote wagering over the past ten years in the markets we serve. We
also provide simulcasting and telecommunications services, video gaming
terminals, and telephone and Internet account wagering. Based on
Handle, our customers include 10 of the 15 largest thoroughbred
racetracks in North America and 10 of the 12 largest North American OTB
networks, among the more than 800 OTBs we service. We typically
provide, install and maintain the necessary pari-mutuel systems and
equipment for these customers pursuant to five-year contracts under
which we receive a weighted average of approximately 0.35% of the
Handle wagered.
o VENUE MANAGEMENT GROUP (14% of Pro-forma Revenues). We own and, subject
to our compliance with certain licensing requirements, have the right
to operate in perpetuity substantially all off-track pari-mutuel
wagering in Connecticut. Our operations include 12 stand-alone OTBs
state-wide, including two simulcasting teletheaters and three
simulcasting raceview centers, and telephone account wagering to
customers in 31 states. We are also the exclusive licensed operator for
all pari-mutuel wagering in The Netherlands, with five racetracks and
39 OTBs under a contract with an initial term continuing through June
2003. In addition, we are a 50% participant in a joint venture to
operate up to approximately 2,500 OTBs in Germany. Our revenues are
based on a percentage of the Handle wagered at our OTB venues, which
ranges from 20% to 32%. We also provide facilities management services
to the Mohegan Sun Casino racebook.
o TELECOMMUNICATIONS PRODUCTS GROUP (8% of Pro-forma Revenues). In Europe
we are a leading manufacturer of prepaid scratch-off phone cards, which
entitle cellular phone users to a defined value of airtime. In 1999,
approximately 47% of all European cellular phone subscribers used
prepaid calling services. While less common in the U.S., prepaid phone
cards offer consumers worldwide a cost-effective way to purchase
cellular airtime while avoiding credit checks, connection fees and
contract commitments. We estimate that we have approximately 14% of the
fragmented European market for prepaid cellular phone cards and are the
largest supplier to Vodafone Limited and Orange Personal
Communications, two of Europe's leading cellular companies. To prevent
fraud, our phone cards incorporate proprietary security technology
originally developed for our lottery ticket operations. We have
invested approximately $22.0 million in the past two years in our U.K.
operations, to modernize our facilities and increase our annual prepaid
phone card manufacturing capacity from 120 million cards in early 1999
to an estimated one billion cards by early 2001.
For information concerning the Company's business and geographic segments,
see Note 20 to the Consolidated Financial Statements.
On December 20, 2000, we determined to change our fiscal year from the year
ending October 31 to a calendar year, beginning with the year ending December
31, 2001. This change will result in a two month transition period ending
December 31, 2000, with the next fiscal year commencing on January 1, 2001. We
expect to file with the SEC a transition report on Form 10-Q covering the
transition period from November 1, 2000 to December 31, 2000.
4
INDUSTRY OVERVIEW
LOTTERY MARKET. Lotteries are operated by domestic and foreign governmental
authorities and their licensees in approximately 200 jurisdictions throughout
the world. Currently, 39 jurisdictions in the United States sell instant and
on-line lottery tickets. Governments typically authorize lotteries as a means of
generating revenues without the imposition of additional taxes. Lottery revenues
are frequently set aside for particular public purposes, such as education, aid
to the elderly, conservation, transportation and economic development. As
lottery ticket sales have become a significant source of funding for such
programs, many jurisdictions have come to rely on the revenues generated by such
sales.
Although there are many types of lottery games worldwide, governmentally
authorized lotteries may generally be categorized into three principal groups:
instant lotteries, on-line lotteries and the traditional draw-type lotteries. An
instant ticket lottery is typically played by removing a coating from a
preprinted ticket to determine whether it is a winner. On-line lotteries, such
as Powerball, are based on a random selection of a series of numbers selected by
the player. On-line lotteries are generally pari-mutuel in nature in that the
prize is based on Handle and the number of winners who share the prize pool,
comprised of Handle less a predefined commission (although fixed prizes are also
offered). On-line lotteries are conducted through a computerized lottery system
in which lottery terminals are connected to a central computer, usually by
dedicated telephone lines. On-line lottery systems may also be used to validate
instant tickets to confirm large prize levels and prevent duplicate payments, or
separate instant ticket validation systems may be installed. Internationally,
the older form of traditional draw-type lottery games, in which players purchase
tickets which are manually processed for a future drawing for prizes of a fixed
amount, is a popular form of play. In addition, lotteries may offer keno, video
lottery, sports and other lottery games. Quick draw keno is typically played
every 5 minutes in restricted social settings such as bars and is usually
offered as an extension of on-line lottery systems. There are video lotteries
played on video lottery terminals ("VLTs") featuring "line-up" and card games,
typically targeted to locations such as horse and dog racing tracks, athletic
arenas, certain bars, clubs and similar establishments. Video lotteries
generally use a system different from an on-line system for accounting, security
and control of VLTs. In addition, in Oregon, several provinces in Canada and
several countries outside the U.S., lotteries offer pari-mutuel or fixed odds
wagers on various sports.
Instant and on-line lottery retail sales comprise 92.7% of the U.S. market
for lotteries. Based on industry information, it is estimated that 1999 U.S. and
international on-line lottery retail sales totaled approximately $19.0 billion
and $56.6 billion, respectively, and 1999 U.S. and international instant ticket
lottery sales totaled approximately $14.8 billion and $27.5 billion,
respectively. The U.S. instant ticket market grew at a compound annual growth
rate of 8.2% from 1994 to 1999. Industry data indicates that instant ticket
retail sales have been growing faster than on-line games because of "instant"
rewards, marketing promotions and game interactivity compared to the delayed
rewards of on-line games with periodic or weekly drawings.
PARI-MUTUEL MARKET. Pari-mutuel wagering is currently authorized in 43
states in the United States, Puerto Rico, all provinces in Canada and
approximately 100 other countries around the world. We estimate that total
worldwide Handle in the pari-mutuel business was approximately $116.0 billion in
1999. According to the most recent industry statistics, pari-mutuel thoroughbred
wagering Handle in the United States grew from $9.9 billion in 1994 to $13.7
billion in 1999, a compound annual growth rate of 6.7%.
Similar to on-line lotteries, pari-mutuel wagering patrons place specific
types of wagers (e.g., on a specified horse to win) and a patron's winnings are
"pari-mutuelly" determined based on dividing the total Handle wagered, less a
set commission, among the winners. Wagering is generally conducted at horse
racetracks, greyhound dog races, jai alai frontons and OTBs. Licenses to conduct
races and/or offer pari-mutuel wagering are granted by governments to private
enterprises, non-profit racing associations and occasionally government
organizations including lotteries.
The increases in remote Handle (i.e. Handle generated where customers place
wagers on location at one racetrack or OTB on races held at another racetrack)
have more than offset declines in live Handle (i.e., Handle at the race or event
itself). Remote wagering has increased its share of total Handle from 15% in
1986 to 83% of the U.S. thoroughbred pari-mutuel racing industry Handle in 1999.
The dollar volume of remote wagering in North America on thoroughbred racing has
grown from $5.4 billion in 1993 to $11.8 billion in 1999, a compound annual
growth rate of nearly 13.5%. A number of factors have led to this increase,
including simulcasting of live races on private satellite video networks, public
broadcasting and Internet video streaming, changes in pari-mutuel wagering
regulations enabling simulcasting and the expansion of distribution channels
including wagering at OTBs and by
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telephone and other interactive devices including personal computers. Remote
wagering has resulted in increased Handle by facilitating virtually around the
clock wagering availability, year-round racing events upon which to wager
(previously impracticable because of the seasonal nature of regional racing
activity) as well as the consolidation of "live" racing.
PREPAID PHONE CARDS MARKET. Prepaid phone cards offer consumers convenient
and less expensive cellular airtime purchases without credit checks, connection
fees or contract commitments. While less common in the U.S., prepaid phone cards
offer consumers worldwide a cost-effective way to purchase cellular airtime
while avoiding credit checks, connection fees and contract commitments.
OPERATIONAL OVERVIEW
LOTTERY GROUP
Our Lottery Group provides two product lines: Instant Tickets and Related
Services ("ITRS") and Lottery Systems. Our Cooperative Services Program is the
branded marketing name we have given to the combination of any of the products
and services offered by both the Instant Ticket and Related Services and the
Lottery Systems product lines when bundled under one customer contract.
INSTANT TICKETS AND RELATED SERVICES. We are a leading provider of game
design, instant ticket manufacturing and the associated logistics and marketing
of instant tickets. We market instant tickets and related services to domestic
lottery jurisdictions, foreign lottery jurisdictions and commercial customers.
We presently have contracts with 26 of the 39 jurisdictions in the U.S. which
currently sell instant lottery tickets. These U.S. Instant Ticket and Related
Services contracts typically pay us a fixed price per thousand tickets or a
percentage of lottery sales to the public and typically range from one to five
years in duration, although they usually include one or more extension options
which our customers generally exercise. Our U.S. based customers have typically
exercised these extension options. In addition, we have instant lottery
customers in over 50 countries internationally. In most international markets,
lotteries typically purchase tickets and systems in an unbundled fashion. Of the
approximately 8.4 billion instant tickets (12.3 billion 2x4 equivalent card
size) we sold in 1999, approximately 20% were sold outside the United States.
Some international customers purchase instant tickets as needed rather than
through supply contracts. Central computer systems, terminals and associated
software are typically purchased in the U.S. through facilities management
contracts and internationally through outright sales, often from different
vendors.
In 1974, we introduced the first secure instant game ticket. Today, the
instant tickets we manufacture are typically printed on recyclable ticket stock
by a series of computer controlled presses and ink-jet imagers, which we believe
incorporate the most advanced technology and security currently available in the
industry. Instant tickets generally range in size from 2 inches by 3 inches to
ticket sizes as large as some greeting cards; instant tickets are normally
played by removing a coating to determine if they are winning tickets.
The increased application of computer-based and communications technologies
(including proprietary technologies) to the manufacturing and servicing of
instant tickets continues to separate the instant ticket from conventional forms
of printing. We are generally recognized within the lottery industry as the
leader in applying these technologies to the manufacturing and sale of instant
tickets. In order to maintain our position as a leading innovator within the
lottery industry, we intend to continue to explore and develop new technologies
and their application to instant lottery tickets and systems. However, we also
expect continued price-based competition in the instant ticket segment.
We also manufacture instant tickets for promotional games and sell pull-tab
tickets to our lottery customers through a marketing agreement with
International Gamco, Inc.
In addition, we pioneered the idea of privatizing lottery functions, branded
as the Cooperative Services Program, as a means of reducing the operating costs
of lotteries while increasing lottery revenues and are the only instant ticket
manufacturer which offers separate lottery ticket cooperative support services
to supplement its manufacturing operations. Cooperative service contracts bundle
instant tickets, systems facilities management and/or other cooperative
services, including designing and installing game management software,
telemarketing, field sales, accounting, instant ticket distribution, sales staff
training, estimating ticket needs, managing staff, advising with respect to
security, maintenance, communication network and sales agent hot-line service
for lottery jurisdictions. While the majority of lottery jurisdictions to date
have chosen to control the distribution and sales of tickets, we have been
successful in demonstrating to a number of jurisdictions that we can perform
these functions
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effectively and at a low cost. We expect that more state or foreign governments
will decide to privatize or outsource various lottery operations. We have
significant experience in these services for lotteries and pari-mutuel
operations and are well-positioned to offer this privatization or outsourcing
option to lotteries.
We now have contracts for expanded or cooperative services with the states
of Delaware, Florida, Georgia, Kentucky, Maine, Nebraska, New York, and
Pennsylvania. Under such contracts, we are paid a percentage of the lottery's
total instant ticket revenues. Customers select those services which they desire
to privatize from a menu of cooperative services offered. Replacement of these
agreements may be associated with large conversion costs incurred by the lottery
to hire and/or retrain staff and redesign and install a software system and
other protocols to manage its instant ticket business.
LOTTERY SYSTEMS. We are a leading provider of sophisticated, customized
computer software, equipment and data communication services to
government-sponsored and privately operated lotteries in the United States and
internationally. This business includes the sale of on-line systems, instant
ticket validation systems and terminals. Our lottery systems utilize proprietary
technology that is similar to that used for pari-mutuel wagering, but is
specialized for lottery operations. Our systems facilitate high speed processing
of on-line wagers as well as validation of winning on-line and instant play
tickets, including probability tickets. Our lottery business includes the supply
of transaction processing software that accommodates instant ticket accounting
and validation and on-line lottery games, point-of-sale terminal hardware which
connects to these systems, central site computers and communication hardware
which run these systems, and on-going operation support and maintenance
services. We also provide software, hardware and support for sports betting and
credit card processing systems for non-lottery customers.
In the U.S., we currently provide on-line systems and services to the
Connecticut, Montana, Vermont and New Hampshire state lotteries. We also
provide instant ticket validation systems to Nebraska, Maine, New York,
Missouri and Kentucky. Virginia leased our SciScan Technology(R) terminals,
including ongoing technical support. Recent on-line lottery system
procurements have requested the capability to support the secure validation
of probability tickets and we have both bid our on-line systems with SciScan
Technology's(R) terminals and bid SciScan Technology's(R) terminals through
other on-line lottery system providers.
Internationally, we have systems in France, The Netherlands, Switzerland,
Spain, Greece, Australia, Canada, Mexico, nine states in Germany and other
countries, and provide on-line system facilities management services to
nationwide lotteries in Barbados and the Dominican Republic.
We have recently been selected to provide on-line services to Iowa, Maine
and Jamaica lotteries and to provide an on-line lottery central system to the
British Columbia lottery.
We also sell standalone terminals for lottery applications. This includes
the EXTREMA(TM) on-line lottery terminals and our SciScan Technology(R)
terminals. Our EXTREMA(TM) on-line terminals utilize a standard PC
architecture, graphical interface touch screens for teller input without a
keyboard and high speed thermal printers. Beginning in the fourth quarter of
1998 and throughout fiscal 1999, we shipped approximately 12,500 terminals to
Sisal Sport Italia S.p.A. pursuant to a contract to deliver a total of 20,000
EXTREMA(TM) lottery terminals by August 2000. SciScan Technologys(R) is a
keyless validation system for retailers which significantly reduces the time
required for ticket validation while at the same time improving security of
the game. SciScan Technologys(R) terminals can be operated standalone or
attached to an on-line lottery terminal to validate traditional instant
tickets utilizing optical bar code technology, or our proprietary Winner's
Choice(TM) probability tickets. Through our joint venture agreement with La
Francaise des Jeux, the operator of the French National Lottery, we are
developing a new generation of integrated on-line terminals with SciScan
Technologys(R).
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UNITED STATES LOTTERY CONTRACTS
The table below lists the United States lottery contracts for which we had
executed agreements as of January 26, 2001 and certain information with respect
thereto. We are the primary provider of systems and services unless otherwise
noted. The table also includes 1999 instant ticket or on-line retail sales, as
applicable, for each state or district.
1999 INSTANT
TICKET/
ON-LINE RETAIL COMMENCEMENT EXPIRATION DATE
SALES DATE OF OF
(DOLLARS CURRENT CURRENT CURRENT RENEWAL TYPE OF
STATE/DISTRICT IN MILLIONS) CONTRACT CONTRACT OPTIONS REMAINING CONTRACT
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Arizona........ $125.0 January 1998 January 2001 2 one-year ITRS
Colorado....... 240.4 July 2000 June 2004 1 one-year ITRS
Connecticut.... 503.3 August 1998 August 2001 1 one-year ITRS
Connecticut.... 326.9 May 1998 May 2003 5 one-year On-line
Delaware....... 19.7 November 2000 November 2001 3 one-year ITRS
District of
Columbia..... 31.5 May 1996 May 2001 none ITRS
Florida........ 664.6 April 1997 September 2002 none ITRS
Georgia........ 900.7 May 1993 June 2003 none ITRS
Idaho.......... 56.9 October 1999 October 2001 2 one-year ITRS (1)
Iowa........... 93.1 January 2001 June 2008 3 one-year on-line
Illinois....... 549.4 July 1996 June 2001 1 one-year ITRS
Indiana........ 337.1 December 1997 December 2001 none ITRS
Kentucky....... 252.4 October 1997 September 2002 none ITRS and Systems
Maine (4)...... 39.0 July 2001 June 2007 2 two-year ITRS and On-line
Maine.......... 107.7 July 1990 June 2001 none ITRS and Systems
Massachusetts.. 2,305.4 August 1999 August 2001 3 one-year ITRS
Minnesota...... 280.0 February 2000 January 2002 3 one-year ITRS (1)
Missouri....... 259.6 July 1993 June 2001 none ITRS
Montana........ 19.6 March 1999 May 2006 none On-line
Nebraska....... 36.1 July 1993 June 2001 none ITRS and Systems
New Hampshire.. 62.8 July 2000 June 2006 2 two-year On-line
New Jersey..... 547.1 November 1996 October 2001 none ITRS
New Mexico..... 58.2 March 1997 March 2001 2 one-year ITRS (1)
New York(3).... 937.5 July 1996 July 2001 none ITRS
New York(3).... 2,634.0 January 2000 March 2002 none ITRS and Systems
Oregon......... 143.7 June 1998 June 2001 3 one-year ITRS (1)
Pennsylvania... 457.0 April 1997 April 2002 5 one-year ITRS
Rhode Island... 59.5 April 1998 April 2001 2 one-year ITRS (1)
South Dakota... 13.1 June 2000 June 2003 2 one-year ITRS
Texas.......... 1,426.0 September 1999 September 2002 none ITRS
Vermont........ 13.7 July 2000 June 2006 2 two-year On-line
Virginia....... 576.7 January 1997 July 2002 1 three- or five-year Systems(2)
Washington..... 261.3 March 2000 March 2003 3 one-year ITRS
W. Virginia.... 77.0 June 2000 June 2003 2 one-year ITRS
(1) Secondary supplier
(2) Support of previously sold lottery system; fee not based on Handle
(3) There are separate contracts for the supply of instant tickets and the
supply of warehousing, distribution, telemarketing and systems.
(4) Contract awarded but not executed.
ITRS = Instant Ticket and Related Services
Systems = Instant ticket validation systems
8
PARI-MUTUEL GROUP
We are the leading worldwide supplier of technologically advanced
computerized wagering systems and related equipment. We also provide
simulcasting and telecommunications services, video gaming terminals and
telephone and Internet account wagering.
NORTH AMERICAN PARI-MUTUEL OPERATIONS. We processed approximately 65% of the
estimated $20 billion of pari-mutuel wagering Handle in North America during
1999, and have benefited from the growth in remote wagering over the past ten
years in the markets we serve. Based on Handle, our customers include 10 of the
15 largest thoroughbred racetracks in North America and 10 of the 12 largest
North American OTB networks, among the more than 800 OTBs we service. We
typically provide, install and maintain the necessary pari-mutuel systems and
equipment for our customers.
The pari-mutuel wagering systems we provide in North America typically
include the terminals that issue the wagering tickets, the central processing
unit which calculates the betting odds of a particular event and tabulates and
accounts for the Handle, the display board which indicates the betting odds of a
particular event and the communication equipment necessary for additional
wagering from sources outside the wagering facility. These systems utilize high
volume, real-time transaction and data processing networks managed by central
computers, communications equipment, special purpose microcomputer-based
terminals, peripheral and display equipment and operations and applications
software. The type of central processing unit and the number of ticket-issuing
terminals used in a system are generally determined by physical layout and
amount of wagering at, each facility. We also provide additional software and
other support functions.
In recent years, we have focused on the creation of regional networks of
large and medium sized racetracks and OTB networks, rather than single
facilities at smaller racetracks. These networks allow achievement of economies
of scale by centralizing our computer system operations into hubs. Additionally,
when linked to our other regional and national pari-mutuel wagering networks,
these networks provide our customers with access to new markets and revenue
sources by increasing the number and variety of wagering opportunities that
customers can offer to their patrons. We believe our established wagering
networks will give us a competitive advantage in renewing existing contracts and
winning new contracts in regions where such networks exist because of our
ability to offer customers greater services more efficiently than our
competitors. We currently operate regional pari-mutuel wagering networks in
California, Connecticut, Florida, Illinois, New Jersey, New York, Oregon,
Pennsylvania, Texas, Washington, West Virginia, Puerto Rico, British Columbia
and Ontario.
Our pari-mutuel wagering system contracts typically run five years and
contain certain warranties regarding implementation, operation, performance, and
reliability of our wagering systems relating to, among other things, data
accuracy, repairs and validation procedures. The particulars of our warranties
vary from contract to contract, depending on the outcome of negotiations. We
also provide the operations, maintenance and supervisory personnel necessary to
operate the pari-mutuel wagering system. We maintain ownership of the
pari-mutuel wagering systems, which enables us to employ such equipment in more
than one racetrack at different times during the year if a given customer does
not operate wagering all year long.
We typically receive revenue for our services in North America as a varying
percentage of Handle, generally ranging up to approximately 0.55% of the Handle
on a particular event (with a weighted average of approximately 0.31% of the
Handle), subject, in many instances, to minimum fees which are usually exceeded
under normal operating conditions. Minimum fees under our service contracts are
generally based on the number of days the facility operates, as well as other
factors, including the type of system and number of terminals installed at the
facility. In addition to the Handle-based fees and minimums, fees for extra
equipment and services may be charged, particularly for new terminal models and
equipment levels which exceed those originally contracted.
As part of our Handle-based fees, we may also receive an "interface fee" of
0.125% of Handle for combining these wagers into the "combined pools" of host
tracks that we operate. This interface fee is collected from all tracks and OTBs
that bet into host tracks, regardless whether we or another vendor provides
wagering services for on-track wagering. We hold contracts with most of the
U.S.'s premier thoroughbred venues which typically attract the greatest levels
of simulcast and remote wagering, and therefore generate the highest interface
revenues.
INTERNATIONAL PARI-MUTUEL OPERATIONS. In Europe, we provide and operate
pari-mutuel wagering systems at all of the racetracks in Germany, Ireland, The
Netherlands, Turkey and Austria, as well as all of the OTBs in The
9
Netherlands and Germany. In France, we provide these systems and services to
approximately 30% of the racetracks in the provinces. Our high volume, real-time
data processing systems are comparable to those deployed in North America, and
include computer software, ticket terminals, a central processing unit, display
boards and communication equipment. Our European services are provided under
long-term contracts of five to ten years.
In Germany, we have been providing pari-mutuel wagering systems and services
to the nine major harness racetracks since 1994, and simulcasting services since
January 1998. In September 1999, we began providing both pari-mutuel and
simulcasting services to the 16 major thoroughbred racetracks, approximately 50
OTBs and approximately 120 bookmaker shops as a result of our acquisition of
selected pari-mutuel assets of Datasport Toto Dienstleistung GmbH & Co KG. In
April 1999 we sold a pari-mutuel wagering system and began to provide ongoing
maintenance and operating services for the next 10 years to Tote Ireland Ltd., a
wholly-owned subsidiary of the Irish Horseracing Authority. In Turkey, we have
been providing a pari-mutuel system and associated maintenance services since
1995 for five racetracks and approximately 1,250 OTBs.
In other international markets, we generally sell, deliver and install
pari-mutuel wagering systems in racetracks and OTBs rather than operating them
pursuant to service contracts. We have sold systems in approximately 25
countries. Each of these systems is customized to meet the unique needs of each
customer, including game designs, regulatory requirements, language preferences,
network communication standards and other key elements. The sale of a
pari-mutuel wagering system includes a license for use of our proprietary system
software, as well as installation, training, technical assistance, support,
accessories and limited spare parts.
OTHER PARI-MUTUEL OPERATIONS:
o SIMULCASTING. We are one of the leading providers of simulcasts of live
horse and greyhound racing and jai alai events to racing facilities,
OTBs and casinos in North America and Europe. We simulcast racing
events from over 60 racetracks and jai alai frontons to more than 200
racetracks and more than 1,100 OTBs throughout North America. We
provide similar services in Europe, particularly in The Netherlands and
Germany, where we service all 29 racetracks and more than 250 OTBs and
bookmaker shops.
In general, we receive a daily event fee from the racetracks for
up-linking the video and audio signals and a monthly fee from
racetracks, OTBs and casinos for the use of our decoders which are
needed to unscramble the simulcast transmission. In addition, we sell
any excess satellite transponder capacity to other users of satellite
communications outside the racing industry, generally for short
periods, but, from time to time, under long-term contracts.
o NASRIN(TM). In conjunction with our 70% interest in a joint venture
with Churchill Downs, we operate a national voice/data
telecommunications network, known as the North American Simulcast
Racing Information Network ("NASRIN(TM)"), that serves more than 50
racetracks. In 1997, Autotote was selected by the Thoroughbred Racing
Association to implement this telecommunication system in partnership
with AT&T, our primary telecommunications service provider. The system
is designed to link all racing and simulcasting locations in North
America and to be a platform for future technology developments. Built
around AT&T's international frame relay network, NASRIN(TM) securely
transmits betting data at a fraction of the cost previously paid by the
racetracks and other facilities, allowing racetracks and OTBs to expand
their simulcast wagering opportunities. In exchange for our services,
we are paid certain fees based on bandwidth and level of service.
o VIDEO GAMING MACHINES. We have developed a proprietary line of
progressive video gaming machines for use at racetracks in North
America, which combine full gaming functionality, such as video poker,
blackjack, simulated spinning reels and keno, with full race betting
functionality, including picture-in-picture capabilities. As a result,
our video gaming machines allow patrons to wager on horse races and
watch simulcasted races or other televised programs on a
picture-in-picture video window, while continuing to wager on selected
video games. We typically collect a flat fee per terminal plus fees for
software upgrades and maintenance.
VENUE MANAGEMENT GROUP
Subject to certain licensing and operational requirements, we own and have
the right to operate in perpetuity substantially all off-track pari-mutuel
wagering in Connecticut. Our operations include 12 stand-alone OTBs state-
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wide, including two simulcasting teletheaters and three simulcasting raceview
centers, and telephone account wagering to customers in 31 states. We are also
the exclusive licensed operator for all pari-mutuel wagering in The Netherlands,
with five racetracks and 39 OTBs under a contract whose initial term continues
through June 2003. In addition, we are a 50% participant in a joint venture to
operate up to 2,500 OTBs in Germany. Our revenues are based on a percentage of
the Handle wagered at our OTB venues, which ranges from 20% to 32%. We also
provide facilities management services to the Mohegan Sun Casino racebook.
In Connecticut, approximately $214.0 million was wagered in fiscal 1999 on
more than 60 U.S. based thoroughbred, harness and greyhound racetracks and jai
alai frontons at or through our facilities. Since we commenced operations in
1993, we have implemented several important product and service enhancements,
including expanded simulcasting from across the country, common-pool wagering,
seven day per week operations at nine locations and expanded telephone betting.
In addition, our teletheaters and raceview centers feature large screen
televisions and numerous other televisions throughout the facility to enhance
the customer's entertainment experience. In September 1998, we began providing
an extension of our OTB services, including pari-mutuel wagering and
simulcasting services, to the Mohegan Tribal Gaming Authority for its new
racebook located at the Mohegan Sun Casino in Uncasville, Connecticut under a
seven-year agreement. We believe this racebook is a state-of-the-art facility
which incorporates the latest wagering technology and the most advanced audio
and video simulcasting signals. Since our license permits us to add an
additional teletheater location to our operations, we have undertaken to explore
new and upgraded site locations around the state.
Our revenues are based on an allowed percentage of Handle wagered through
the Connecticut OTB. The percentage of the total Handle, or commission, which we
may receive is determined by the track where the event is held and varies by
type of wager. Our weighted average commission, based on Handle is approximately
22%.
In July 1998, we acquired the rights to and began operating, all on-track
and off-track pari-mutuel wagering in The Netherlands under a license granted by
the Dutch Ministry of Agriculture which extends through June 30, 2003. We
received additional license approvals to allow us to modernize and expand
pari-mutuel wagering in The Netherlands. These approvals allow us to open up to
10 teletheaters, increase the number of OTBs, expand into arcade shops,
implement interactive account wagering, and expand national and international
simulcasting of racing.
In fiscal 1999, approximately $42 million was wagered in The Netherlands
primarily on racing from The Netherlands, UK, and Germany. This is the first
year since 1991 that Handle in The Netherlands has increased over the
previous year. This improvement was possible because, in fiscal 1999, we
provided simulcasting of Dutch racing to all of the OTBs throughout the
entire year, and, in August 1999, we added simulcasting of French racing. We
currently operate 33 OTB locations countrywide, including three sports cafes,
and four on-track OTBs, as well as four on-track wagering systems. Our
weighted average commission, based on Handle, for our Dutch operations is
approximately 32%.
TELECOMMUNICATIONS PRODUCTS GROUP
In Europe we are a leading manufacturer of prepaid scratch-off phone cards,
which entitle cellular phone users to a defined value of airtime. In 1999,
approximately 47% of all European cellular phone subscribers used prepaid
calling services. While less common in the U.S., prepaid phone cards offer
consumers worldwide a cost-effective way to purchase cellular airtime while
avoiding credit checks, connection fees and contract commitments. We estimate
that we have approximately 14% of the fragmented European market for prepaid
cellular phone cards and are the largest supplier to Vodafone Limited and Orange
Personal Communications, two of Europe's leading cellular companies. To prevent
fraud, our phone cards incorporate proprietary security technology originally
developed for our lottery ticket operations. We have invested approximately $22
million in our U.K. operations in the past two years to modernize our facilities
and increase our annual prepaid phone card manufacturing capacity from 120
million cards in early 1999 to an estimated one billion cards by early 2001.
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SEASONALITY
The first quarter of our fiscal year and a portion of our second fiscal
quarter traditionally comprise the weakest season for pari-mutuel wagering
service revenue. Wagering equipment sales and software license revenues usually
reflect a limited number of large transactions which do not recur on an annual
basis. 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 and software license revenue. In addition, instant ticket and
prepaid phone card sales may vary depending on the size and timing of contract
awards, changes in customer budgets, inventory ticket position, lottery retail
sales and general economic conditions.
CONTRACT PROCUREMENT
LOTTERY GROUP
Government operated lotteries in the United States typically operate under
state mandated public procurement regulations. Lotteries select an instant
ticket or on-line supplier by issuing a Request for Proposal ("RFP") which
outlines contractual obligations as well as products and services to be
delivered. An evaluation committee frequently comprised of key lottery staff
evaluates responses based on various criteria. These criteria usually include
quality of product, security plan and features, experience in the industry,
quality of personnel and services to be delivered and price. We believe that our
product functionality, the quality of our personnel, our technical expertise and
our manufacturing efficiency give us many advantages relative to the competition
when responding to state lottery RFPs. However, many lotteries still award the
contract to the qualified vendor with the lowest price, regardless of factors
other than price. Contract awards by lottery authorities in the United States
are sometimes challenged by unsuccessful competitors which can result in
protracted legal proceedings. Internationally, lottery authorities do not always
utilize such a formal bidding process, but rather negotiate with one or more
potential vendors.
Our contracts periodically expire and/or reach optional extension dates.
Upon the expiration of a contract (including any extensions thereof), lottery
authorities may award new contracts through the competitive procurement process
described above. There can be no assurance that our current contracts will be
extended or that we will be awarded new contracts as a result of competitive
procurement processes in the future. Lottery contracts typically permit a
lottery authority to terminate the contract at any time for failure to perform
and other specified reasons, and many of such contracts permit the lottery
authority to terminate the contract at will without penalty. Depending upon,
among other factors, the amount of revenue derived thereunder, the termination,
expiration or failure to renew one or more instant lottery contracts could have
a material adverse effect on our results of operation, business or prospects.
U.S. instant ticket lottery contracts typically have an initial term of from one
to five years and usually provide the customer with options to extend the
contract one or more times under the same or mutually agreeable terms and
conditions for additional periods generally ranging from one to five years. The
average term of a U.S. systems contract is five to ten years, with additional
extension options, which limits the number of contracts available for bidding in
any given year.
PARI-MUTUEL GROUP
Contract awards by owners of horse and greyhound racetracks, OTBs and
casinos and jai alai frontons, and from state and foreign governments, often
involve a lengthy competitive bid process, spanning from specification
development to contract negotiation and award. Our contracts for the provision
of pari-mutuel services in North America are typically for terms of five years.
We have historically been successful in renewing our largest contracts as they
have come due for renewal. However, there can be no assurance that we will
continue to be able to renew our pari-mutuel systems contracts with our largest
customers or our lottery contracts or our other major agreements. If we are
unable to renew these contracts, there would be a material adverse effect on us.
VENUE MANAGEMENT GROUP
Subject to certain licensing and operational requirements, we own and have
the right to operate in perpetuity substantially all off-track pari-mutuel
wagering in Connecticut. Our license to provide on-track and off-track services
in The Netherlands expires in the year 2003. New venue management opportunities
generally occur via the privatization of existing government operated OTBs, as
in the case of Connecticut and The Netherlands, the acquisition or outsourcing
of an existing private racetrack or OTB operations, or new legislation or
regulation
12
enabling new distribution channels. These opportunities occur infrequently and
may be subject to public procurement bidding requirements.
TELECOMMUNICATIONS PRODUCTS GROUP
We have contracts with customers representing approximately 25% of our
telecommunications products revenues. The remaining customers issue purchase
orders with agreed upon terms and conditions. In addition, certain customer
purchase orders contain numerous orders for varying periods of time.
RESEARCH AND PRODUCT DEVELOPMENT
We believe that our ability to attract new lottery and wagering system
customers and retain existing customers depends in part on our ability to
continue to incorporate technological advances into, and to improve, our systems
and related equipment. We maintain a development program directed toward systems
development as well as toward the improvement and refinement of our present
products and the expansion of their uses and applications. Many of our product
developments and innovations have quickly become industry standards.
INTELLECTUAL PROPERTY
Certain technology associated with our pari-mutuel wagering and lottery
products is the subject of issued patents and patent applications currently
pending with the United States and selected other countries. Most notable are
our patents for the secure printing and validation of probability tickets. We
have a number of registered trademarks and other common law trademark rights
for certain of our products, including Winner's Choice(TM), Terra 2000(R),
SciScan Technologys(R), PROBEs(R), EXTREMA(TM), AEGIS(TM), SGI-NET(TM),
ECLIPSE(TM), SAMs(R), MAX(TM), TINY TIMs(R) and others. The software and
control systems for our wagering systems are also the subject of copyright
and/or trade secret laws. We are not aware of any pending claims of
infringement or other challenges to our right to use our patents, trademarks
or other intellectual property in any of our current businesses in the United
States.
PRODUCTION PROCESSES; SOURCES AND AVAILABILITY OF COMPONENTS
Our instant lottery ticket production process uses a series of dedicated
computer-controlled printing presses and ink-jet imagers. We believe that our
tickets incorporate the most advanced technology and security methodology
available in the industry. Our facilities are designed for efficient, secure
production of instant game tickets and support ink-jet image tape generation,
printing, packaging and storage of instant game tickets.
Our dedicated computer-controlled printing process is specifically designed
for producing instant lottery game tickets for governmentally sanctioned
lotteries and promotional games as well as prepaid phone cards. Our specialized
equipment contributes to the underlying superior manufacturing and product
quality. Instant ticket games are delivered finished and ready for distribution
by the lottery, or by us in the jurisdictions which are part of an instant
ticket contract with cooperative services provided by us.
Paper and ink are the principal raw materials consumed in our ticket
manufacturing operations. We have a variety of sources for both paper and ink
and should, therefore, not be dependent on any particular supplier.
Production of our systems and related component products primarily involve
the assembly of electronic components into more complex systems and products. We
produce our terminal products primarily at our manufacturing facility in
Ballymahon, Ireland, or on a limited basis at our Newark, Delaware
administration and development facility. Other manufacturing may be contracted
out to third-party vendors, as needed.
We normally have sufficient lead-time between reaching an agreement to
provide a system and the commencement of operations so that we are able to
provide the customer with a fully functioning system, customized to meet their
requirements. In the event that current suppliers of central processing units
were no longer available, we believe we would be able to adapt our application
software to run on the then available hardware in time to allow us to meet new
contractual obligations, although the price competitiveness of our products
might diminish. The lead-time for obtaining most of the electronic components we
use is approximately 90 days. We believe that this is consistent with our
competitors' lead-times and is also consistent with the needs of our customers.
13
COMPETITION
LOTTERY GROUP
The instant and on-line lottery businesses are highly competitive, and we
face competition from a number of domestic and foreign instant ticket
manufacturers, on-line lottery system providers and other competitors.
We currently have two primary instant lottery ticket competitors in the
U.S.: Pollard Banknote Limited ("Pollard") and Oberthur Gaming Technologies
("OGT", a subsidiary of Group Francois-Charles Oberthur of France). In addition,
Creative Games International, Inc. ("Creative Games", a subsidiary of Canadian
Bank Note Company, Ltd.) is a competitor in the U.S. We estimate that the retail
sales value of our U.S. customer base was approximately 68% of total U.S.
instant ticket retail sales in 1999--approximately twice as large as our next
largest competitor. Except as permitted by the applicable provisions of the
North American Free Trade Act with respect to Canada and Mexico, it is currently
illegal to import lottery tickets into the United States from a foreign country.
Our business could be adversely affected should additional foreign competitors
in Canada or Mexico export their lottery products to the U.S. or should other
foreign competitors establish printing facilities in the U.S., Canada or Mexico
to supply the U.S. market. Internationally, there are many lottery instant
ticket vendors which compete with us including, among others, OGT, Pollard,
Creative Games, GPS Honsel and various other vendors.
Our principal competitors in the on-line lottery systems business are GTECH
Holdings Corporation ("GTECH") (our major competitor in the on-line market with
approximately 72% of the U.S. market based on retail sales) and Automated
Wagering International Inc. ("AWI"), a subsidiary of Anchor Gaming Inc. GTECH
is also our major competitor in the international on-line market with the
balance of the market being served by AWI, EssNet AB, International Lottery and
Totalizator Systems, Inc. and a few other companies.
The market for our products is affected by changing technology, new
legislation and evolving industry standards. Our ability to anticipate such
changes and to develop and introduce new and enhanced products on a timely basis
will be significant factors in our ability to expand, remain competitive,
attract new customers and retain existing contracts. There can be no assurance
that we will have the financial or other resources to respond to such changes or
to develop and introduce new products on a timely basis.
PARI-MUTUEL GROUP
The market for pari-mutuel wagering systems is also highly competitive. We
compete primarily on the basis of design, performance, reliability and pricing
of our products as well as customer service.
To effectively compete, we expect to make continued investments in product
development and/or acquisitions of technology.
Our two principal competitors in the North American pari-mutuel wagering
systems business are AmTote International, Inc. and Anchor Gaming, Inc., which
operates its pari-mutuel wagering systems business through its subsidiary United
Tote. Our competition outside of North America is more fragmented, with
competition being provided by several international and regional companies.
Competition in the video and data simulcasting business is highly fragmented
with ourselves and Roberts Communications Network, LLC having achieved among the
most significant market shares in North America. Current and future competitors
in Internet-based wagering include YouBet.com and TVG.
VENUE MANAGEMENT GROUP
While we have exclusive licenses for the operation of our Connecticut and
Dutch OTB operations, our revenues may be adversely affected by competition for
the consumer's wagering dollar. Other pari-mutuel operations compete with us in
Connecticut as well as other gaming entertainment including the lottery, two
casinos in Connecticut as well as surrounding states and illegal gambling. Any
new non-gaming products in a given market may result in increased competition
for wagering dollars. Competition for wagers comes from casinos, lotteries and
other forms of legal and illegal gambling. In addition, there are other
entertainment options for the consumer's recreational time and dollars.
TELECOMMUNICATIONS PRODUCTS GROUP
14
The market for prepaid phone cards is highly fragmented but competition
comes from other instant ticket lottery printers utilizing similar lottery
security and printing technologies, as well as alternative printing and
non-printing technologies. In addition, there are alternative technologies such
as smart cards or alternative means to provide the funding of telephone
services. We are investing in new higher speed and higher capacity printing and
packaging technologies that we believe, in combination with our lottery security
and logistics expertise, will provide us a competitive advantage in this market.
Our competitors in this area include OGT, Schlumberger Limited and Gemplus S.A.
REGULATION
GENERAL
Lotteries, pari-mutuel wagering, sports wagering, and video gaming may be
lawfully conducted only in jurisdictions that have enacted enabling legislation.
In jurisdictions that currently permit various wagering activities, regulation
is extensive and evolving but customarily includes some form of licensing of a
company and its subsidiaries. Regulators in those jurisdictions review many
facets of an applicant for or holder of a license including, among other items,
financial stability, integrity and business experience. We believe that we are
currently in substantial compliance with all regulatory requirements in the
jurisdictions where we operate. Any failure to receive a material license or the
loss of a material license that we currently hold could have a material adverse
effect on our overall operations and financial condition.
In 1996, the United States Congress passed legislation authorizing a
comprehensive study of gaming, including segments of the gaming industry served
by us. That study was completed and released in 1999. In part, as a result of
this study, legislation further regulating various forms of wagering on the
Internet and telephone wagering on pari-mutuel events is pending in the United
States Congress. Current legislation before the U.S. Congress known as the Kyl
Bill would generally ban Internet wagering except for, subject to any contrary
state law, pari-mutuel wagering and intrastate lotteries. Various proposed
amendments to the Kyl Bill may impact intrastate Internet lotteries or
inter-state pari-mutuel wagering. In December 2000, Congress enacted legislation
authorizing patrons to place pari-mutuel wagers, where lawful in each state
involved, by "telephone or other electronic media" with off track betting
systems in the same or a different state. This legislation may expand the number
of jurisdictions from which we and our customers may accept pari-mutuel wagers
by phone or the internet and reduce legal uncertainties concerning such wagers.
We are unable to predict how this legislation will be interpreted by regulatory
authorities, whether other legislation may be enacted that would impose other
regulations or restrictions on telephone and Internet wagering operations, and
whether such interpretations or legislation, if any, would have a material
adverse impact on us.
Furthermore, law enforcement in certain jurisdictions have aggressively
opposed the expansion of wagering via the Internet and telecommunications
facilities through criminal prosecutions and civil actions. While we believe
that our current and planned business activities comply with all applicable
laws, and we have not been materially challenged, there can be no assurance that
that such activities might not be challenged in the future or that such
challenges would not have a material adverse impact on us or our business plans.
We have developed and implemented an extensive internal compliance program
in an effort to assure that we comply with legal requirements imposed in
connection with our wagering-related activities, as well as legal requirements
generally applicable to all publicly traded corporations. The compliance program
is run on a day-to-day basis by a full-time compliance officer, and is overseen
by the Compliance Committee authorized by our Board of Directors. While we are
firmly committed to full compliance with all applicable laws, there can be no
assurance that such steps will prevent the violation of one or more laws or
regulations, or that a violation by us or an employee will not result in the
imposition of a monetary fine or suspension or revocation of one or more of our
licenses.
LOTTERY OPERATIONS
At the present time, 37 states, the District of Columbia, Puerto Rico, all
the Canadian provinces, Mexico and many other foreign countries authorize
lotteries. Lottery contracts and ongoing operations of lotteries both
domestically and abroad are subject to extensive regulation. Although certain of
the features of a lottery, such as the percentage of gross revenues which must
be paid back to players in prize money, are usually fixed by legislation, the
various lottery regulatory authorities generally exercise significant
discretion, including the determination of the types of games played, the price
of each wager, the manner in which the lottery is marketed and the selection of
the vendors of equipment and services and retailers of lottery products.
Furthermore, laws and regulations applicable to lotteries in
15
the United States and foreign jurisdictions are subject to change and the effect
of such changes on our ongoing and potential operations cannot be predicted with
certainty.
To ensure the integrity of the contract award and wagering process, most
jurisdictions require detailed background disclosure on a continuous basis from,
and conduct background investigations of, the vendor, its subsidiaries and
affiliates and its principal shareholders. Background investigations of the
vendor's employees who will be directly responsible for the operation of the
system are also generally conducted, and most states reserve the right to
require the removal of employees whom they deem to be unsuitable or whose
presence they believe may adversely affect the operational security or integrity
of the lottery. Certain jurisdictions also require extensive personal and
financial disclosure and background checks from persons and entities
beneficially owning a specified percentage (typically five percent or more) of a
company's securities. The failure of beneficial owners of our securities to
submit to background checks and provide such disclosure could result in the
imposition of penalties upon these beneficial owners and could jeopardize the
award of a lottery contract to us or provide grounds for termination of an
existing lottery contract.
We from time to time retain governmental affairs representatives in various
states of the United States to advise legislators and the public concerning our
views on lottery legislation, to monitor such legislation and to advise us in
our relations with lottery authorities. We also make campaign contributions to
various state political parties and state political candidates. We believe we
have complied with applicable laws and regulations concerning campaign
contributions and lobbying disclosures.
The award of lottery contracts and ongoing operations of lotteries in
international jurisdictions also are extensively regulated, although this
regulation usually varies from that prevailing in the United States.
Restrictions are frequently imposed on foreign corporations seeking to do
business in such jurisdictions and, as a consequence, we have, in a number of
instances, allied ourselves with a local company when seeking foreign lottery
contracts. Laws and regulations applicable to lotteries in the United States and
foreign jurisdictions are subject to change and the effect of such changes on
our ongoing and potential operations cannot be predicted with certainty.
PARI-MUTUEL WAGERING
Forty-three states, Puerto Rico, all of the Canadian provinces, Mexico and
many other foreign countries have authorized pari-mutuel wagering on horse
races, and nineteen states and many foreign countries, including Mexico, have
authorized pari-mutuel wagering on dog races. In addition, Connecticut, Rhode
Island, Nevada, Florida and Mexico also allow pari-mutuel betting on jai alai
matches.
Companies that manufacture, distribute and operate pari-mutuel wagering
systems in these jurisdictions are subject to the regulations of the applicable
regulatory authorities there. These authorities generally require a company, as
well as its directors, officers, certain employees and holders of 5% or more of
the company's common stock, to obtain various licenses, permits and approvals.
Regulatory authorities may also conduct background investigations of the company
and its key personnel and stockholders in order to ensure the integrity of the
wagering system. These authorities have the power to refuse, revoke or restrict
a license for any cause they deem reasonable. The loss of a license in one
jurisdiction may cause the company's licensing status to come under review in
other jurisdictions as well.
In order for our subsidiary to provide pari-mutuel wagering equipment and/or
services to certain casinos located in Atlantic City, New Jersey, it must be
licensed by the New Jersey Casino Control Commission ("New Jersey Commission")
as a gaming related casino service industry and by the New Jersey Racing
Commission in accordance with the New Jersey Casino Control Act ("Casino Control
Act"). An applicant for a gaming related casino service industry license is
required to establish, by clear and convincing evidence, financial stability,
integrity and responsibility; good character, honesty and integrity; and
sufficient business ability and experience to conduct a successful operation. We
must also qualify under the standards of the Casino Control Act. We and our
subsidiary may also be required to produce such information, documentation and
assurances as required by the regulators to establish the integrity of all our
directors, officers and financial backers, who may be required to seek
qualification or waiver of qualification. For casino holding companies, the New
Jersey Commission traditionally has waived the qualification requirement for
non-institutional investors holding less than 15% of a debt issue and for
institutional investors holding less than 50% of a debt issue and less than 20%
of the issuer's overall debt.
The New Jersey Commission has broad discretion in licensing matters and may
at any time condition a license or suspend or revoke a license or impose fines
upon a finding of disqualification or non-compliance. The New Jersey
16
Commission may require that persons holding five percent or more of our Class A
Common Stock qualify under the Casino Control Act. Under the Casino Control Act,
a security holder is rebuttably presumed to control a publicly traded
corporation if the holder owns at least five percent of the corporation's equity
securities; however, for passive institutional investors, qualification is
generally not required for a position of less than 10%, and upon a showing of
good cause, qualification may be excused for a position of 10% or more. Failure
to qualify could jeopardize our license. In addition, the New Jersey Racing
Commission also licenses our subsidiary and retains concurrent regulatory
oversight over this subsidiary with the New Jersey Commission.
As a consequence of the sale of our new convertible preferred stock, the
Casino Control Act required our subsidiary that held a casino service industry
license to relinquish said license upon the closing of that sale and apply anew
for licensure. We obtained preliminary approval from the New Jersey Racing
Commission and a transactional waiver from the New Jersey Commission that allows
us to continue providing services to Atlantic City casinos pending investigation
of the new application that we filed and until our subsidiary is relicensed and
our directors, officers and certain security holders are qualified. The
prospective purchasers of the convertible preferred stock and certain of their
directors and officers will be required to seek qualification, and to seek
waiver of qualification, of their directors, officers and shareholders. We
believe that all the foregoing actions will be satisfactorily concluded in due
course. However, there can be no assurance that this will be the case, and our
failure to obtain any of the foregoing approvals could have a material adverse
effect on us or our business plans.
Our rights to operate the Connecticut OTB system are conditioned on our
continuing to hold all licenses required for the operation of the system. In
addition, our officers and directors and certain other employees must be
licensed. Licensees are generally required to submit to background
investigations and provide required disclosures. The Division of Special Revenue
of the State of Connecticut (the "Division") may revoke the license to operate
the system under certain circumstances, including a false statement in the
licensing disclosure materials, a transfer of ownership of the licensed entity
without Division approval and failure to meet financial obligations. The
approval of the Connecticut regulatory authorities is required before any
off-track betting facility is closed or relocated or any new branch or simulcast
facility is established. Our telephone wagering operations, based in
Connecticut, are subject to the Division's regulation. Legislation recently
enacted by Congress may subject these operations to regulation by states in
which patrons are located when they call the telephone wagering operation. We
are unable to predict whether and how such legislation will effect telephone
wagering operations conducted by us and our customers. We have begun to expand
the market for our "business-to-consumer" On the Wire(TM) account wagering
business through our Connecticut OTB from 13 states to over 30.
While in the past and at present we have been the subject of enforcement
proceedings instituted by one or more regulatory bodies, we have been able to
consensually resolve any such proceedings upon the implementation of remedial
measures and/or the payment of settlements or monetary fines to such bodies. We
do not believe that any of these proceedings, past or pending, will have a
material adverse effect on us. However, there can be no assurance that similar
proceedings in the future will be similarly resolved, or that such proceedings
will not have a material adverse impact on our ability to retain and renew
existing licenses or to obtain new licenses in other jurisdictions.
VIDEO GAMING
Coin or voucher operated gambling devices offering electronic, video
versions of spinning reels, poker, blackjack and similar games are known as VGMs
or video lottery terminals ("VLTs"), depending on the jurisdiction. These
devices represent a growing area in the wagering industry. We or our
subsidiaries manufacture and supply terminals and wagering systems designed for
use as VGMs or VLTs.
Twenty-four states and Puerto Rico authorize wagering on VGMs or VLTs at
casinos, riverboats, racetracks and/or other licensed facilities. Although some
states, such as Rhode Island and West Virginia, currently restrict VGMs or VLTs
to already existing wagering facilities, others permit these devices to be
placed at bars and restaurants as well. Several Indian tribes throughout the
United States are also authorized to operate these devices on reservation lands.
In addition, all of the Canadian provinces and various foreign countries have
authorized their use.
From time to time, government officials in other states are considering
proposals to legalize or expand video gaming, or video lottery in their states.
Many legislators have been enthusiastic about the potential of video gaming to
raise significant additional revenues. Some officials, however, are reluctant to
expand gaming industry opportunities or have expressed a desire to limit video
gaming to established wagering facilities if video gaming is authorized in their
jurisdiction at all.
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Companies that manufacture, sell or distribute VGMs or VLTs are subject to
various provincial, state, county and municipal laws and regulations. The
primary purposes of these rules are (i) to ensure the responsibility, financial
stability and character of equipment manufacturers and their key personnel and
stockholders through licensing requirements, (ii) to ensure the integrity and
randomness of the machines, and (iii) to prohibit the use of VGMs or VLTs at
unauthorized locations or for the benefit of undesirable individuals or
entities. The regulations governing VGMs and VLTs generally resemble the
pari-mutuel and sports wagering regulations in all the basic elements described
above.
However, every jurisdiction has differing terminal design and operational
requirements, and terminals generally must be certified by local regulatory
authorities before being distributed in any particular jurisdiction. These
requirements may require us or our subsidiaries to modify our terminals to some
degree in order to achieve certification in particular locales. In addition, the
intrastate movement of such devices in a jurisdiction where they will be used by
the general public is usually allowed only upon prior notification and/or
approval of the relevant regulatory authorities.
The West Virginia Lottery Commission has licensed us or our subsidiaries to
supply VLTs to authorized pari-mutuel racing facilities in that state in
accordance with the Racetrack Video Lottery Act.
In Canada, one of our subsidiaries has been granted registration as a casino
gaming related supplier by the Alcohol and Gaming Commission of Ontario in
accordance with the Gaming Control Act, 1992 of Ontario and the Alberta Gaming
and Liquor Commission in accordance with the Gaming and Liquor Act of Alberta.
Another subsidiary has been granted interim registration as a gaming related
supplier to the Manitoba Lottery Commission by the Manitoba Gaming Control
Commission. The gaming laws of Ontario, Alberta and Manitoba primarily deal with
the responsibility, honesty, integrity and financial stability of gaming
equipment manufacturers, distributors and operators as well as persons
financially interested or involved in gaming operations. To ensure the integrity
of manufacturers and suppliers of gaming supplies, gaming regulators in Ontario,
Alberta and Manitoba have the authority to conduct thorough background
investigations of us, our officers, directors, key personnel and significant
stockholders who are required to file applications detailing their personal and
financial information. The gaming regulators may at any time revoke, suspend,
condition or restrict a registration for an appropriate cause as determined
under the applicable gaming legislation. We believe that we are in compliance
with the terms and conditions of its registrations in Ontario, Alberta and
Manitoba.
We may apply for all necessary licenses in other jurisdictions that may now
or in the future authorize video gaming or video lottery operations. We cannot
predict the nature of the regulatory schemes or the terminal requirements that
will be adopted in any of these jurisdictions, nor whether we or any of our
subsidiaries can obtain any required licenses and equipment certifications or
will be found suitable.
Federal law also affects our video gaming industry activities. The Federal
Gambling Devices Act of 1962 (the "Devices Act") makes it unlawful for any
person to manufacture, deliver or receive gambling devices, including VGMs and
VLTs, across interstate lines unless that person has first registered with the
Attorney General of the United States, or to transport such devices into
jurisdictions where their possession is not specifically authorized by state
law. The Devices Act permits states to exempt themselves from its prohibition on
transportation, and several states that authorize the manufacture or use of such
devices within their jurisdictions have done so. Certain of our products, such
as the PROBE? XLC terminal, are gaming devices subject to the Devices Act and
state laws governing such devices. The Devices Act does not apply to machines
designed for pari-mutuel betting at a racetrack, such as our pari-mutuel
wagering terminals. We have registered under the Devices Act, and believe that
we are substantially in compliance with all of the Devices Act's record-keeping
and equipment identification requirements.
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SIMULCASTING
The Federal Communications Commission (the "FCC") regulates the use and
transfer of earth station licenses used to operate our domestic simulcasting
operations.
At present, 43 states, Puerto Rico, all of the Canadian provinces, Mexico
and many other foreign countries authorize interstate and/or intrastate
pari-mutuel wagering, which may involve the simulcasting of the races in
question. Licensing and other regulatory requirements associated with such
simulcasting activities are similar to those governing pari-mutuel wagering, and
are generally enforced by pari-mutuel regulators. In addition, contracts with
host tracks whose races are simulcast by us to other facilities within or
outside the jurisdictions in which such races are held may be subject to
approval by regulatory authorities in the jurisdictions from and/or to which the
races are simulcast. We believe that we are in substantial compliance with
applicable regulations and that we, and/or the appropriate third parties, have
entered into contracts and obtained the necessary regulatory approvals to
lawfully conduct current simulcast operations.
NEVADA REGULATORY MATTERS
We and certain of our wholly-owned subsidiaries are applicants or will be
applicants for certain registrations, approvals, findings of suitability and
licenses in the State of Nevada (collectively, the "Applications"). There can be
no assurances that the pending Applications by us and our Nevada Operating
Subsidiaries will be approved or that if approved, they will be approved on a
timely basis or without conditions or limitations.
The manufacture, sale and distribution of gaming devices for use or play in
Nevada or for distribution outside of Nevada, the manufacture and distribution
of associated equipment for use in Nevada, the operation of an off-track
pari-mutuel wagering system in Nevada, the operation an off-track pari-mutuel
sports wagering system in Nevada and the operation of slot machine routes in
Nevada are subject to: (i) The Nevada Gaming Control Act and the regulations
promulgated thereunder (collectively, "Nevada Act"); and (ii) various local
ordinances and regulations. Such activities are subject to the licensing and
regulatory control of the Nevada Gaming Commission ("Nevada Commission"), the
Nevada State Gaming Control Board ("Nevada Board"), and various local, city and
county regulatory agencies (collectively referred to as the "Nevada Gaming
Authorities").
The laws, regulations and supervisory procedures of the Nevada Gaming
Authorities are based upon declarations of public policy which are concerned
with, among other things: (i) the prevention of unsavory or unsuitable persons
from having a direct or indirect involvement with gaming, or manufacturing or
distribution of gaming devices at any time or in any capacity; (ii) the strict
regulation of all persons, locations, practices, associations and activities
related to the operation of licensed gaming establishments and the manufacture
or distribution of gaming devices and equipment; (iii) the establishment and
maintenance of responsible accounting practices and procedures; (iv) the
maintenance of effective controls over the financial practices of licensees,
including the establishment of minimum procedures for internal fiscal affairs
and the safeguarding of assets and revenues, providing reliable record keeping
and requiring the filing of periodic reports with the Nevada Gaming Authorities;
(v) the prevention of cheating and fraudulent practices; and (vi) to provide a
source of state and local revenues through taxation and licensing fees. Changes
in such laws, regulations and procedures could have an adverse effect on our
various Applications in the event they are granted. No assurances can be given
that the Applications will be granted by the Nevada Gaming Authorities. The
grant or denial of the Applications is within the discretion of the Nevada
Gaming Authorities.
We are an applicant for registration by the Nevada Commission as a publicly
traded corporation (a "Registered Corporation") and are or will be an applicant
to be found suitable to own the stock, both directly and indirectly of various
wholly-owned subsidiaries which are or will be applicants for approvals and
licensing as a manufacturer, distributor an operator of a slot machine route, an
operator of an off-track pari-mutuel wagering system and an operator of an
off-track pari-mutuel sports wagering system (our "Nevada Operating
Subsidiaries"). As a Registered Corporation, we will be required periodically to
submit detailed financial and operating reports to the Nevada Commission and
furnish any other information that the Nevada Commission may require. No person
may become a stockholder of, or receive any percentage of profits from, our
Nevada Operating Subsidiaries without first obtaining licenses and approvals
from the Nevada Gaming Authorities. We and our Nevada Operating Subsidiaries
have or will apply to the Nevada Gaming Authorities for the various
registrations, approvals, permits, findings of suitability and licenses
(collectively "Gaming Licenses") in order to engage in manufacturing,
distribution, slot route activities, and off-track pari-mutuel wagering systems
operations in Nevada. The following regulatory requirements will apply to us and
our Nevada Operating Subsidiaries if they are approved and licensed. All gaming
devices and cashless wagering
19
systems that are manufactured, sold or distributed for use or play in Nevada, or
for distribution outside of Nevada, must be manufactured by licensed
manufacturers and distributed or sold by licensed distributors. All gaming
devices manufactured for use or play in Nevada must be approved by the Nevada
Commission before distribution or exposure for play. The approval process for
gaming devices includes rigorous testing by the Nevada Board, a field trial and
a determination as to whether the gaming device meets strict technical standards
that are set forth in the regulations of the Nevada Commission. Associated
equipment must be administratively approved by the Chairman of the Nevada Board
before it is distributed for use in Nevada.
The Nevada Gaming Authorities may investigate any individual who has a
material relationship to, or material involvement with, us or our Nevada
Operating Subsidiaries in order to determine whether such individual is suitable
or should be licensed as a business associate of a gaming licensee. Officers,
directors and certain key employees of our Nevada Operating Subsidiaries are
required to file applications with the Nevada Gaming Authorities and may be
required to be licensed or found suitable by the Nevada Gaming Authorities. Our
officers, directors and key employees who are actively and directly involved in
the licensed activities of our Nevada Operating Subsidiaries may be required to
be licensed or found suitable by the Nevada Gaming Authorities. The Nevada
Gaming Authorities may deny an application for licensing for any cause that they
deem reasonable. A finding of suitability is comparable to licensing, and both
require submission of detailed personal and financial information followed by a
thorough investigation. The entity with which the applicant is employed or for
which the applicant serves must pay all the costs of the investigation. Changes
in licensed positions must be reported to the Nevada Gaming Authorities and in
addition to their authority to deny an application for a finding of suitability
or licensure, the Nevada Gaming Authorities have jurisdiction to disapprove a
change in a corporate position.
If the Nevada Gaming Authorities were to find an officer, director or key
employee unsuitable for licensing or unsuitable to continue having a
relationship with us or our Nevada Operating Subsidiaries, the companies
involved would have to sever all relationships with such person. In addition,
the Nevada Commission may require us and our Nevada Operating Subsidiaries to
terminate the employment of any person who refuses to file appropriate
applications. Determinations of suitability or of questions pertaining to
licensing are not subject to judicial review in Nevada.
We and our Nevada Operating Subsidiaries will be required to submit detailed
financial and operating reports to the Nevada Commission. Substantially all
material loans, leases, sales of securities and similar financing transactions
by our Nevada Operating Subsidiaries will be required to be reported to or
approved by the Nevada Commission. If we are licensed by the Nevada Gaming
Authorities, any (i) guarantees issued by our Nevada Operating Subsidiaries in
connection with any financing; (ii) hypothecation of the assets of our Nevada
Operating Subsidiaries as security in connection with any financing; and/or
(iii) pledges of the equity securities of our Nevada Operating Subsidiaries as
security in connection with any financing will require the approval of the
Nevada Commission to remain effective. If it were determined that the Nevada Act
was violated by us or any of our Nevada Operating Subsidiaries, the licenses we
or they hold could be limited, conditioned, suspended or revoked, subject to
compliance with certain statutory and regulatory procedures. In addition, any of
our Nevada Operating Subsidiaries, us and the persons involved could be subject
to substantial fines for each separate violation of the Nevada Act at the
discretion of the Nevada Commission. Limitation, conditioning or suspension of
the licenses held by us and our Nevada Operating Subsidiaries could (and
revocation of any license would) materially adversely affect our manufacturing,
distribution and system operations in Nevada.
Any beneficial holder of our voting securities, regardless of the number of
shares owned, may be required to file an application, be investigated, and have
his suitability determined as a beneficial holder of our voting securities if
the Nevada Commission has reason to believe that such ownership would otherwise
be inconsistent with the declared policies of the state of Nevada. The applicant
must pay all costs of investigation incurred by the Nevada Gaming Authorities in
conducting any such investigation. The Nevada Act requires any person who
acquires beneficial ownership of more than 5% of a Registered Corporation's
voting securities to report the acquisition to the Nevada Commission. The Nevada
Act requires that beneficial owners of more than 10% of a Registered
Corporation's voting securities apply to the Nevada Commission for a finding of
suitability within thirty days after the Chairman of the Nevada Board mails the
written notice requiring such filing. Under certain circumstances, an
"institutional investor," as defined in the Nevada Act, which acquires more than
10%, but not more than 15%, of the Registered Corporation's voting securities
may apply to the Nevada Commission for a waiver of such finding of suitability
if such institutional investor holds the voting securities for investment
purposes only. An institutional investor shall not be deemed to hold voting
securities for investment purposes unless the voting securities were acquired
and are held in the ordinary course of business as an institutional investor and
not for the purpose of causing, directly or indirectly, the election of a
majority of the members of the board of directors of the Registered Corporation,
any change in the Registered
20
Corporation's corporate charter, bylaws, management, policies or operations of
the Registered Corporation, or any of its gaming affiliates, or any other action
which the Nevada Commission finds to be inconsistent with holding the Registered
Corporation's voting securities for investment purposes only. Activities which
are not deemed to be inconsistent with holding voting securities for investment
purposes only include: (i) voting on all matters voted on by stockholders; (ii)
making financial and other inquiries of management of the type normally made by
securities analysts for informational purposes and not to cause a change in its
management, policies or operations; and (iii) such other activities as the
Nevada Commission may determine to be consistent with such investment intent. If
the beneficial holder of voting securities who must be found suitable is a
corporation, partnership or trust, it must submit detailed business and
financial information including a list of beneficial owners. The applicant is
required to pay all costs of investigation.
Any person who fails or refuses to apply for a finding of suitability or a
license within thirty days after being ordered to do so by the Nevada Commission
or the Chairman of the Nevada Board, may be found unsuitable. The same
restrictions apply to a record owner if the record owner, after request, fails
to identify the beneficial owner. Any stockholder found unsuitable and who
holds, directly or indirectly, any beneficial ownership of the common stock
beyond such period of time as may be prescribed by the Nevada Commission may be
guilty of a criminal offense. We will be subject to disciplinary action if,
after we receive notice that a person is unsuitable to be a stockholder or to
have any other relationship with us, our Nevada Operating Subsidiaries or we (i)
pay that person any dividend or interest upon our voting securities, (ii) allow
that person to exercise, directly or indirectly, any voting right conferred
through securities held by that person, (iii) pay remuneration in any form to
that person for services rendered or otherwise, or (iv) fail to pursue all
lawful efforts to require such unsuitable person to relinquish his voting
securities including, if necessary, the immediate purchase of said voting
securities for cash at fair market value.
The Nevada Commission may, in its discretion, require the holder of any debt
security of a Registered Corporation to file applications, be investigated and
be found suitable to own the debt security of a Registered Corporation if the
Nevada Commission has reason to believe that his acquisition of such debt
security would otherwise be inconsistent with the declared policy of the State
of Nevada. If the Nevada Commission determines that a person is unsuitable to
own such security, then pursuant to the Nevada Act, the Registered Corporation
can be sanctioned, including the loss of its approvals, if without the prior
approval of the Nevada Commission, it: (i) pays to the unsuitable person any
dividend, interest, or any distribution whatsoever; (ii) recognizes any voting
right by such unsuitable person in connection with such securities; (iii) pays
the unsuitable person remuneration in any form; or (iv) makes any payment to the
unsuitable person by way of principal, redemption, conversion, exchange,
liquidation, or similar transaction.
We and our Nevada Operating Subsidiaries will be required to maintain a
current stock ledger in Nevada, which may be examined by the Nevada Gaming
Authorities at any time. If any securities are held in trust by an agent or by a
nominee, the record holder may be required to disclose the identity of the
beneficial owner to the Nevada Gaming Authorities. A failure to make such
disclosure may be grounds for finding the record holder unsuitable. We are also
required to render maximum assistance in determining the identity of the
beneficial owner. The Nevada Commission has the power to require our stock
certificates to bear a legend indicating that the securities are subject to the
Nevada Act.
After becoming a Registered Corporation, we may not make a public offering
of our securities without the prior approval of the Nevada Commission if the
securities or proceeds from that sale are intended to be used to construct,
acquire or finance gaming facilities in Nevada, or to retire or extend
obligations incurred for such purposes. Such approval, if given, does not
constitute a finding, recommendation or approval by the Nevada Commission or the
Nevada Board as to the accuracy or adequacy of the prospectus or the investment
merits of the securities offered. Any representation to the contrary is
unlawful. While we are not yet subject to the provisions of the Nevada Act or
the regulations of the Nevada Commission, such regulations also provide that any
entity that is not an "affiliated company," as such term is defined in the
Nevada Act, or which is not otherwise subject to the Nevada Act or such
regulations, which plans to make a public offering of securities intending to
use such securities, or the proceeds from the sale thereof, for the construction
or operation of gaming facilities in Nevada, or to retire or extend obligations
incurred for such purposes, may apply to the Nevada Commission for prior
approval of such offering. The Nevada Commission may find an applicant
unsuitable based solely on the fact that it did not submit such an application,
unless upon a written request for a ruling, the Nevada Board Chairman has ruled
that it is not necessary to submit an application. The exchange offer to
exchange publicly registered notes for the notes offered hereby may constitute
such a public offering. In response to our request for a ruling from the Nevada
Board Chairman that it is not necessary to submit the exchange offer for the
Nevada Commission's prior approval, the Nevada Board Chairman ruled that the
exchange offer is not subject to the prior approval requirement.
21
Changes in control of a Registered Corporation through merger,
consolidation, stock or asset acquisitions, management or consulting agreements,
or any act or conduct by a person whereby he obtains control, may not occur
without the prior approval of the Nevada Commission. Entities seeking to acquire
control of a Registered Corporation must satisfy the Nevada Board and the Nevada
Commission in a variety of stringent standards prior to assuming control of such
Registered Corporation. The Nevada Commission may also require controlling
stockholders, officers, directors and other persons having a material
relationship or involvement with the entity proposing to acquire control, to be
investigated and licensed as part of the approval process relating to the
transaction.
The Nevada Legislature has declared that some corporate acquisitions opposed
by management, repurchases of voting securities and corporate defense tactics
affecting Nevada corporate gaming licensees, and Registered Corporations that
are affiliated with those operations, may be injurious to stable and productive
corporate gaming. The Nevada Commission has established a regulatory scheme to
ameliorate the potentially adverse effects of these business practices upon
Nevada's gaming industry and to further Nevada's policy to: (i) assure the
financial stability of corporate gaming licensees and their affiliates; (ii)
preserve the beneficial aspects of conducting business in the corporate form;
and (iii) promote a neutral environment for the orderly governance of corporate
affairs. Approvals are, in certain circumstances, required from the Nevada
Commission before the Registered Corporation can make exceptional repurchases of
voting securities above the current market price thereof and before a corporate
acquisition opposed by management can be consummated. The Nevada Act also
requires prior approval of a plan of recapitalization proposed by the Registered
Corporation's Board of Directors in response to a tender offer made directly to
the Registered Corporation's stockholders for the purposes of acquiring control
of the Registered Corporation.
License fees and taxes, computed in various ways depending on the type of
gaming or activity involved, are payable to the State of Nevada and to the
counties and cities in which gaming operations are to be conducted. Depending
upon the particular fee or tax involved, these fees and taxes are payable either
monthly, quarterly or annually and are based upon either: (i) a percentage of
the gross revenues received; or (ii) the number of gaming devices operated.
Annual fees are also payable to the State of Nevada for renewal of licenses as a
manufacturer, distributor, operator of a slot machine route and operator of an
off-track pari-mutuel wagering system.
Any person who is licensed, required to be licensed, registered, required to
be registered, or is under common control with such persons (collectively,
"Licensees"), and who proposes to become involved in a gaming venture outside of
Nevada, is required to deposit with the Nevada Board, and thereafter maintain, a
revolving fund in the amount of $10,000 to pay the expenses of investigation by
the Nevada Board of their participation in such foreign gaming. The revolving
fund is subject to increase or decrease in the discretion of the Nevada
Commission. Thereafter, Licensees are required to comply with certain reporting
requirements imposed by the Nevada Act. Licensees are also subject to
disciplinary action by the Nevada Commission if it knowingly violates any laws
of the foreign jurisdiction pertaining to the foreign gaming operation, fails to
conduct the foreign gaming operation in accordance with the standards of honesty
and integrity required of Nevada gaming operations, engages in activities that
are harmful to the state of Nevada or its ability to collect gaming taxes and
fees, or employs a person in the foreign operation who has been denied a license
or finding of suitability in Nevada on the ground of personal unsuitability.
APPLICATION OF ADDITIONAL OR FUTURE REGULATORY REQUIREMENTS
In the future, we intend to seek the necessary licenses, approvals and
findings of suitability for us, our personnel and products in other
jurisdictions throughout the world wherever significant sales are anticipated to
be made. There can be no assurance, however, that such licenses, approvals or
findings of suitability will be obtained or, if obtained, will not be
conditioned, suspended or revoked or that we will be able to obtain the
necessary approvals for any future products as they are developed. If a license,
approval or a finding of suitability is required by a regulatory authority and
we fail to obtain the necessary license, we may be prohibited from selling our
products for use in the respective jurisdiction or may be required to sell our
products through other licensed entities at a reduced profit.
22
SECURITY
We recognize that security and integrity are the foundation of successful
lottery organizations. As the incidence and severity of publicly reported cases
of physical and computer crime continue, major lotteries periodically reassess
key security questions concerning the vulnerability of lottery games. Attempts
to penetrate security measures may come from various combinations of customers,
retailers, vendors, lottery employees and others. Because the integrity of a
lottery is believed essential to its successful operation, both the vendor and
lottery must guard their systems against unauthorized actions. We are not aware
of any practical, economically feasible way to breach the security of our
instant lottery tickets or on-line games which could result in a material loss
to any of our customers, nor are we aware of any breach thereof which has
resulted in any material loss to any of our lottery customers.
We constantly assess the adequacy of our security systems, incorporating
various improvements, such as bar coding and additional layers of protection in
our instant tickets. There must be well-planned security measures in place at
every stage of the lottery operation. We have pioneered and effected security
safeguards in areas of ticket specifications, production, packaging, delivery,
distribution and accounting. Also, computer function safeguards, including
secure ticket data, control number encryption, winner file data, and ticket
stock control have been incorporated in our data processing and the computer
operations phase. We also retain a major public accounting firm to perform
agreed upon procedures for each game produced before it is sent to the customer.
EMPLOYEES
As of October 31, 2000, we employed approximately 2,560 persons. Most of
Autotote's North American pari-mutuel employees involved in field operations and
repairs are represented by the International Brotherhood of Electrical Workers
under two separate contracts, extending through October 2001 and May 2004,
respectively. Two of Scientific Games' employee groups are represented by a
labor union. SG Austria's employees are represented by a Worker's Council, which
is typical in many European companies. At the Leeds and Bradford facilities in
the United Kingdom, approximately 328 employees are members of the Graphic Print
and Media Union.
EXECUTIVE OFFICERS OF THE COMPANY
Certain information concerning Autotote Corporation's executive
officers is set forth below:
NAME AGE POSITION
- ----------------------------------------------------------------------------------------------------
A. Lorne Weil.............54 Chairman of the Board, President and Chief Executive Officer
Martin E. Schloss.........54 Vice President, General Counsel and Secretary
DeWayne E. Laird..........53 Vice President, Chief Financial Officer and Controller
Gerald Lawrence...........61 Executive Vice President
William J. Huntley........51 President, Scientific Games Systems Division
Cliff O. Bickell..........57 President, Printed Products Division of Scientific Games
Our Executive Officers hold office for an indefinite term, subject to the
discretion of our Board of Directors.
MR. A. LORNE WEIL has been an Autotote director since December 1989,
Chairman of the Board since October 31, 1991, Chief Executive Officer since
April 1992 and President since August 1997. Mr. Weil held various senior
management positions with us and our subsidiaries from October 1990 to April
1992 and was a director and consultant to Autotote Systems, Incorporated from
1982 until we acquired it in 1989. Mr. Weil was President of Lorne Weil, Inc., a
firm providing strategic planning and corporate development services to high
technology industries, from 1979 to November 1992. Mr. Weil is currently a
director of Fruit of the Loom, Inc., General Growth Properties, Inc. and
XESystems Inc., a subsidiary of XEROX Corporation.
MR. MARTIN E. SCHLOSS has been Autotote's Vice President and General Counsel
since December 1992 and Secretary since May 1995. Mr. Schloss also serves as a
Vice President and Secretary of most of our subsidiaries.
23
From 1976 to 1992, Mr. Schloss served in various positions in the legal
department of General Instrument Corporation, with the exception of a hiatus of
approximately one and one-half years.
MR. DEWAYNE E. LAIRD has been Autotote's Vice President and Chief Financial
Officer since November 1998 and our Corporate Controller since April 1996. From
January 1992 to March 1996, Mr. Laird was President of Laird Associates, PC, a
CPA firm providing financial consulting services to a variety of industries.
From April 1984 to December 1991, he held various senior positions with
Philadelphia Suburban Corporation, including Chief Financial Officer and
Treasurer.
MR. GERALD LAWRENCE has been Autotote's Executive Vice President and
President of Autotote Enterprises, Inc., the Autotote subsidiary that operates
the Connecticut OTB, since June 1998. Mr. Lawrence served as President of
Autotote Systems, Inc., Autotote's principal pari-mutuel subsidiary, from March
1996 to June 1998 and as Vice President from November 1994 to June 1998. From
January 1991 to August 1994, Mr. Lawrence held the position of Executive Vice
President of The New York Racing Association, Inc. From November 1984 through
December 1990, he served as Executive Vice President and Chief Operating Officer
of Churchill Downs Incorporated.
MR. WILLIAM J. HUNTLEY joined Autotote in 1973 and has served as
President of Autotote Lottery Corporation, Autotote's lottery subsidiary,
since November 1997. Mr. Huntley served as Vice President of Autotote
Systems, Inc. from June 1989 to November 1997 and as Vice President of
Operations from 1991 to 1994. In September, 2000, after the Scientific Games
acquisition, Mr. Huntley was named President of Scientific Games' Systems
division.
MR. CLIFF O. BICKELL became President-Printed Products Division of
Scientific Games Inc. in September, 2000 after Scientific Games acquisition.
Since joining Scientific Games in 1995, he served as Vice President, Treasurer
and Chief Financial Officer until the acquisition was completed. Prior to
joining Scientific Games, Mr. Bickell was Vice President, Chief Financial
Officer and Treasurer of Paragon Trade Brands, a multi-national consumer
products manufacturer. In addition, Mr. Bickell has held positions as Senior
Vice President, Corporate Administration--Chief Financial Officer of W.A.
Krueger Co., a commercial printing company, and Treasurer of Dataproducts
Corporation, a multinational electronics manufacturer.
24
ITEM 2. PROPERTIES
The following is a list of facilities that we use in the operation of our
business. Under the terms of our Credit Facility, all of our interests in the
following facilities are subject to a Security interest in favor of Our
Senior Secured lenders.
BUSINESS LOCATION SQUARE FEET OWNED/LEASED PURPOSE
- ------------------------------------------------------------------------------------------------------------------------
Corporate.......... New York, NY 12,000 Leased Corporate Headquarters
Pari-Mutuel........ Newark, DE 45,000 Leased Administration, operations and manufacturing
Essen, Germany 4,000 Leased Operations
Various 28,500 Leased Warehouse space
Cedex, France 10,000 Owned Administration and operations
Venue Management... Various cities, CT 44,000 Leased OTB facilities
New Haven, CT 2,000 Leased Administration
Netherlands 16,000 Leased Administration and operations
Various cities, Netherlands 44,000 Leased OTB facilities Netherlands
Windsor Locks, CT 39,000 Owned OTB facility
New Haven, CT 55,000 Owned OTB facility, administration and operations
Lottery............ Rocky Hill, CT 17,000 Leased Administration and operations
Barre, VT 3,100 Leased Administration
Concord, NH 5,600 Leased Administration and operations
Helena, MT 4,000 Leased Administration and operations
Urbandale, IA 7,500 Leased Administration and operations
Gardner, ME 10,000 Leased Administration and operations
Ballymahon, Ireland 10,000 Leased Manufacturing
Bradford, England 30,000 Leased Manufacturing
Vienna, Austria 10,000 Leased Administration and operations
Paris, France 12,000 Leased Administration and operations
Various 200,000 Leased Warehouse space
Alpharetta, GA (1) 245,000 Owned Manufacturing
Telecommunication
Products......... Leeds, England 112,000 Leased Manufacturing
- ----------
(1) We have expanded the Alpharetta, Georgia facility by 60,000 square feet to
accommodate additional manufacturing and office space. We commenced
manufacturing operations in our expanded manufacturing facility in
December of 2000 and expect to achieve full operational capacity by March
2001.
ITEM 3. LEGAL PROCEEDINGS
Although the Company is a party to various claims and legal actions
arising in the ordinary course of business, management believes, on the basis
of information presently available to it, that the ultimate disposition of
these matters will not likely have a material adverse effect on the
consolidated financial position or results of operations of the Company.
Autotote's subsidiary, Scientific Games Inc. ("SGI"), owns a minority
interest in Wintech de Colombia S.A. ("Wintech"), which formerly operated the
Colombian national lottery under contract with Empresa Colombiana de Recursos
para la Salud, S.A. ("Ecosalud"), an agency of the Colombian government. The
contract projected that certain levels of lottery ticket sales would be attained
and provided a penalty against Wintech, SGI and the other shareholders of
Wintech of up to $5.0 million if such performance levels were not achieved. In
addition, with respect to a further guarantee of performance under the contract
with Ecosalud, SGI delivered to Ecosalud a $4.0 million bond issued by a
Colombian surety, Seguros del Estado ("Seguros"). Wintech started the instant
lottery in Colombia, but, due to difficulties beyond its control, including,
among other factors, social and political unrest in Colombia, frequently
interrupted telephone service and power outages, and competition from another
lottery being operated in a province of Colombia in violation of Wintech's
exclusive license from Ecosalud, the projected sales level was not met for the
year ended June 1993. On July 1, 1993, Ecosalud adopted resolutions declaring,
among other things, that the contract was in default and asserted various claims
for compensation and penalties against Wintech, SGI and other shareholders of
Wintech. Litigation is pending in Colombia concerning various claims among
Ecosalud, Wintech and SGI, relating to the termination of the contracts with
Ecosalud (the "Colombian
25
Litigation"). Ecosalud's claims in the Colombian Litigation were for, among
other things, realization on the full amount of the penalty, plus interest and
costs of the bond.
The Colombian surety, Seguros, paid $2.4 million to Ecosalud under its $4.0
million bond, and made demand upon SGI for that amount under the indemnity
agreement between the surety and SGI. SGI declined to make or authorize any such
payment and notified the surety that any payment in response to Ecosalud's
demand on the bond was at the surety's risk. On April 2, 1998, Seguros brought
suit against SGI in the District Court for the Northern District of Georgia,
Atlanta Division seeking $2.4 million for sums paid by Seguros to Ecosalud under
the surety bond on November 1, 1994, plus interest at the Colombian bank rate of
interest.
On September 29, 1999, the District Court denied various motions of SGI,
including a motion to dismiss, based on the Colombian statute of limitations of
two years, and granted Seguros' motion for summary judgment, which was filed on
May 6, 1998, and entered judgment for Seguros in the amount of $2.4 million or
the equivalent in Colombian pesos as of the judgment date, plus pre-judgment
interest at a rate of 38.76% per annum, equivalent to approximately $4.6
million. SGI has appealed the District Court's order and judgment and posted a
$7.0 million appeal bond. SGI continues to believe that it has meritorious
defenses, including that the amount paid by Seguros was improperly paid because
of the default by Ecosalud of its obligations to SGI, which claims remain the
subject of separate litigation in Colombia.
SGI has been advised by Colombian counsel that SGI has various legal
defenses to Ecosalud's claims which we intend to vigorously pursue. SGI also has
certain cross indemnities and undertakings from the two other privately held
shareholders of Wintech for their respective shares of any liability to
Ecosalud. That obligation is secured in part by a $1.5 million confirmed letter
of credit in favor of SGI. No assurance can be given that the other shareholders
of Wintech will, or have sufficient assets, to honor their indemnity
undertakings to SGI when the claims by Ecosalud against SGI and Wintech are
finally resolved, in the event such claims result in any final liability.
Although it is not possible to determine the ultimate outcome of the
appeal of the order and judgment granted to Seguros or the outcome of any
litigation in Colombia, management, believes that any potential losses will
not have a material adverse effect on the consolidated financial position or
results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of our security holders during the
fourth quarter of fiscal 2001.
26
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATE
STOCKHOLDER MATTERS
Our Class A Common Stock is traded under the symbol "TTE" on the American
Stock Exchange. The following table sets forth, for the periods indicated, the
range of high and low closing prices of our Class A Common Stock.
Fiscal 1999 Fiscal 2000
--------------- -----------------
High Low High Low
-------- ------ ------- --------
First Quarter.............................$ 2.38 1.69 4.69 2.25
Second Quarter............................ 2.06 1.50 5.31 3.06
Third Quarter............................. 3.38 1.75 4.88 3.00
Fourth Quarter............................ 3.63 2.50 4.75 2.95
On January 25, 2001, the last reported sales price for our Class A Common
Stock on the American Stock Exchange was $3.40 per share. The approximate number
of holders of record of our Class A Common Stock as of January 26, 2001 was
1,791.
We have never paid any cash dividends on our Class A Common Stock. The Board
presently intends to retain all earnings, if any, for use in the business. Any
future determination as to payment of dividends will depend upon our financial
condition and results of operations and such other factors as are deemed
relevant by the Board. Further, under the terms of the Indenture governing our
Senior Notes, we and our Restricted Subsidiaries (as defined) are not permitted
to pay any cash dividends or make certain other restricted payments (other than
stock dividends) on our Class A Common Stock.
RECENT SALES OF UNREGISTERED SECURITIES; USES OF PROCEEDS FROM REGISTERED
SECURITIES
As of October 2, 2000, we issued Warrants to purchase up to 250,000 shares
of our Class A Common Stock at a price of $3.58 per share to Ramius Securities,
LLC (together with its affiliates, "Ramius") in connection with the services of
Ramius as our financial advisor in obtaining certain financing commitments in
connection with the acquisition of Scientific Games. Based on representations of
Ramius, such Warrants were issued in a private transaction in reliance upon an
exemption from registration under Section 4(2) of the Securities Act of 1933, as
amended (the "Securities Act"). Holders of the Warrants will be entitled to
certain registration rights.
As of October 5, 2000, certain Warrants to purchase up to 2.9 million shares
of our Class A Common Stock originally issued to our financial advisors,
Donaldson, Lufkin & Jenrette Securities Corporation and LBI Group, Inc. (an
affiliate of Lehman Brothers), were retired in exchange for the issuance of 2.9
million shares of such Common Stock, pro rata to the Warrant holders, in a
transaction exempt from registration under the Securities Act pursuant to
Sections 3(a)(9) and 4(2) thereof. Holders of such shares will be entitled to
certain registration rights.
The terms of the Company's outstanding Series A Convertible Preferred Stock
provide for quarterly dividends at a rate equal to 6% per annum, which must be
paid in kind in the form of additional shares of Preferred Stock until the ninth
dividend payment, in September 2002, and thereafter may be paid in kind at the
Company's option. An aggregate of 21.6 thousand shares of Preferred Stock were
issued by the Company in payment of the September 2000 and December 2000
dividends, pro rata to the holders of the outstanding Preferred Stock, as a
dividend on the Preferred Stock originally issued in a private transaction
exempt from registration under the Securities Act in reliance on Section 4(2)
thereof, and without additional consideration.
The foregoing is only a summary of certain terms of our Series A
Convertible Preferred Stock, the Warrants and related agreements and is
qualified by reference to Exhibits 3.2, 10.11, 10.26 and 99.5 which are
hereby incorporated by this reference.
27
ITEM 6. SELECTED FINANCIAL DATA
Selected historical financial data presented below as of and for the five
years ended October 31, 2000 have been derived from the audited consolidated
financial statements of the Company, which financial statements have been
audited by KPMG LLP, independent certified public accountants. The following
financial information reflects the acquisitions and dispositions of certain
businesses during the period 1995 through 2000, including the acquisition of
Scientific Games since September 6, 2000, and should be read in conjunction with
Item 7, Management's Discussion and Analysis of Financial Condition and Results
of Operations, and the Consolidated Financial Statements of the Company and the
notes thereto, included in Item 8 of this Annual Report.
FIVE YEAR SUMMARY OF SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED OCTOBER 31,
---------------------------------------------------------------------
1996 1997 1998 1999 2000
--------- --------- --------- --------- ---------
SELECTED STATEMENT OF OPERATIONS DATA:
Operating Revenues:
Services ....................................... $ 137,794 132,989 135,790 148,660 186,520
Sales .......................................... 38,441 24,343 23,523 62,488 46,828
--------- --------- --------- --------- ---------
176,235 157,332 159,313 211,148 233,348
--------- --------- --------- --------- ---------
Costs and Expenses:
Cost of services ............................... 86,674 80,496 88,916 99,496 126,601
Cost of sales .................................. 25,864 15,396 15,739 43,937 29,299
Selling, general and administrative ............ 31,921 28,444 26,205 27,178 35,664
Restructuring and write-off of assets .......... (649) -- -- -- --
Depreciation and amortization .................. 40,853 36,728 29,489 22,189 27,826
Interest expense ............................... 14,837 14,367 15,521 16,177 31,231
Other (income) expense ......................... 560 79 (1,064) 15 (456)
Litigation settlement .......................... 6,800 -- -- -- --
(Gain) loss on sale of businesses .............. 1,127 (1,823) 66 1,600 --
--------- --------- --------- --------- ---------
Total costs and expenses ......................... 207,987 173,687 174,872 210,592 250,165
--------- --------- --------- --------- ---------
Income (loss) before income tax
expense and extraordinary item ................... (31,752) (16,355) (15,559) 556 (16,817)
Income tax expense .................................. 2,443 906 321 177 1,603
--------- --------- --------- --------- ---------
Income (loss) before extraordinary item ............. (34,195) (17,261) (15,880) 379 (18,420)
Extraordinary item .................................. -- (426) -- -- 12,567
--------- --------- --------- --------- ---------
Net income (loss) ................................... (34,195) (17,687) (15,880) 379 (30,987)
Preferred dividend .................................. $ -- -- -- -- 1,014
========= ========= ========= ========= =========
Net Income (loss) available to common stockholders .. $ (34,195) (17,687) (15,880) 379 (32,001)
========= ========= ========= ========= =========
Basic and diluted income (loss) per share:
Income (loss) before extraordinary items ............ $ (1.09) (0.50) (0.44) 0.01 (0.50)
Extraordinary items ................................. -- (0.01) -- -- (0.34)
--------- --------- --------- --------- ---------
Net Income (loss) ................................... $ (1.09) (0.51) (0.44) 0.01 (0.84)
========= ========= ========= ========= =========
Net Income (loss) available to common stockholders .. $ (1.09) (0.51) (0.44) 0.01 (0.87)
========= ========= ========= ========= =========
SELECTED BALANCE SHEET DATA (END OF PERIOD):
Total assets ........................................ $ 196,793 153,541 156,500 165,559 647,215
Total long-term debt, including
current installments ............................... $ 169,024 149,857 158,870 157,144 443,834
Stockholders' equity (deficit) ...................... $ (20,196) (33,240) (48,638) (48,219) 34,319
Weighted average number of shares used in per share
calculation:
Basic shares ................................... 31,305 34,469 35,696 36,118 36,928
Diluted shares ................................. 31,305 34,469 35,696 38,343 36,928
========= ========= ========= ========= =========
28
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
BACKGROUND
As a result of the Scientific Games acquisition, we are the largest provider
of services, systems and products to both the pari-mutuel gaming and instant
ticket lottery industries, and we believe we are the only fully integrated
lottery service provider in the world. We believe that we offer the broadest and
most technologically advanced array of products and services in these industries
and that we are the market leader in creating innovative pari-mutuel wagering
and lottery products. Our Lottery Group is the leading provider of instant
lottery tickets and related services, accounting for approximately 68% of all
retail sales of instant lottery tickets in the United States in 1999. Our
Lottery Group also supplies technologically advanced on-line lottery systems and
instant ticket validation equipment to lotteries in the U.S. and
internationally. Our Pari-mutuel Group is the leading provider of pari-mutuel
wagering systems worldwide and has an approximate 65% share of the estimated
$20.0 billion of North American racing industry wagers, or "Handle." Our Venue
Management Group, utilizing our pari-mutuel business expertise, owns or operates
off-track betting venues or "OTBs" in Connecticut, The Netherlands and Germany,
from which we earn a significantly higher percentage of the Handle than we earn
by providing services to third-party operators. Finally, our Telecommunications
Products Group leverages our superior lottery technology to create highly
secure, paper-based, prepaid phone cards for the rapidly growing international
cellular telephone markets.
On September 6, 2000, Autotote completed the acquisition of Scientific
Games, a world leading supplier of lottery products, integrated lottery systems
and support services, and prepaid telephone cards. This acquisition combines
Autotote's pari-mutuel wagering, venue management and on-line lottery businesses
with Scientific Games' complementary instant lottery ticket and related
services, on-line lottery and instant ticket validation, and rapidly growing
prepaid phone card businesses. The acquisition was completed through a merger in
which Scientific Games became a wholly-owned subsidiary of Autotote at a cost of
approximately $308 million in aggregate merger consideration to Scientific Games
stockholders, plus related fees and expenses. The acquisition has been 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 and
the operating results of Scientific Games businesses have been 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 Autotote and Scientific Games, along with the payment of
related fees and expenses, was completed with funds provided by: (1) proceeds
from the issuance of $150.0 million principal amount of our series A notes; (2)
$280.0 million of term loan borrowings under our new senior credit facility; (3)
$2.98 million of borrowings under the revolving credit facility of our new
senior credit facility; (4) $4.805 million of cash on hand; and (5) $110.0
million of gross proceeds from the sale of new convertible preferred stock,
principally to an affiliated entity of Olivetti S.p.A.
Autotote historically operated primarily in three business segments:
Pari-mutuel Operations, Venue Management Operations and Lottery Operations.
Autotote's Lottery Operations have historically included both domestic and
international lottery service operations, including the sale of lottery systems
and equipment. Autotote's Pari-mutuel Operations have included all aspects of
its pari-mutuel service business, encompassing Autotote's 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. Autotote's Venue Management Operations have included its
Connecticut off-track betting operations and its Dutch on-track and off-track
betting operations.
Subsequent to the Scientific Games acquisition, we reorganized our
operations into four business segments: Lottery Group, Pari-Mutuel Group, Venue
Management Group and Telecommunications Products Group.
Our Lottery Group consists of two product lines: Instant Tickets and Related
Services ("ITRS") and Lottery Systems. ITRS includes ticket design and
manufacturing as well as value-added services, including game design, sales and
marketing support, inventory management and warehousing and fulfillment
services. In addition, this division includes promotional instant tickets and
pull-tab tickets that we sell to both lottery and non-lottery customers. Lottery
Systems is comprised of our historical Lottery Operations segment as well as
Scientific Games' systems business, both of which include the supply of
transaction processing software for the accounting and validation of both
instant ticket and on-line lottery games, point-of-sale terminal hardware sales,
central site computers and communication hardware sales, and ongoing support and
maintenance services for these products.
29
This product line also includes software and hardware and support service for
sports betting and credit card processing systems.
Our Pari-Mutuel Group is comprised of the same businesses historically
reported in Autotote's Pari-mutuel Operations segment which encompasses our
North American and international on-track, off-track and inter-track pari-mutuel
services, simulcasting and communications services, and video gaming, as well as
sales of pari-mutuel systems and equipment.
Our Venue Management Group is comprised of the same businesses historically
reported in Autotote's Venue Management Operations segment and include the
Connecticut off-track betting operations, and Autotote's Netherlands on-track
and off-track betting operations.
Our Telecommunications Products Group is comprised of the prepaid cellular
phone cards business.
In the second quarter of fiscal 2000, Autotote completed the sale of its SJC
Video business, which had previously been reported as a separate segment.
Autotote's revenues are derived from two principal sources: service revenues
and sales revenues. Service revenues are earned pursuant to multi-year contracts
to provide ITRS and wagering systems and services; or are derived from wagering
by customers at facilities owned or leased by Autotote. Sales revenues are
derived from sales of prepaid phone cards, and from contracts for the sale of
wagering systems, equipment, and software licenses.
The first quarter of Autotote's fiscal year and a portion of its second
fiscal quarter traditionally comprise the weakest season for pari-mutuel
wagering service revenue. Wagering equipment sales and software license revenues
usually reflect a limited number of large transactions which do not recur on an
annual basis. 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 and software license revenue. In addition,
instant ticket and prepaid phone card sales may vary depending on the size and
timing of contract awards, changes in customer budgets, inventory ticket
position, lottery retail sales and general economic conditions.
Operating results may also vary significantly from period to period
depending on the addition or disposition of business units in each period. The
acquisition of Scientific Games in fiscal 2000, the German pari-mutuel service
business in fiscal 1999, and the Netherlands pari-mutuel venue management
business in fiscal 1998, which were all accounted for as purchases, all affect
the comparability of operations from period to period (see Note 3 to Autotote's
Consolidated Financial Statements).
RESULTS OF OPERATIONS:
YEARS ENDED OCTOBER 31,
-------------------------------
1998 1999 2000
------- ------- -------
LOTTERY GROUP (IN THOUSANDS)
Service revenue ........................ $ 9,217 10,238 43,219
Sales revenue .......................... $ 8,830 39,102 21,161
------- ------- -------
Total operating revenue ................ $18,047 49,340 64,380
======= ======= =======
Gross Profit (excluding depreciation and
amortization) .......................... $ 5,313 12,672 17,136
======= ======= =======
PARI-MUTUEL GROUP
Service revenue ........................ $74,171 75,788 81,563
Sales revenue .......................... $14,693 23,386 19,678
------- ------- -------
Total operating revenue ................ $88,864 99,174 101,241
======= ======= =======
Gross Profit (excluding depreciation and
amortization) .......................... $35,317 39,612 40,885
======= ======= =======
30
YEARS ENDED OCTOBER 31,
----------------------------------
1998 1999 2000
-------- -------- --------
VENUE MANAGEMENT GROUP
Service revenue ........................ $ 50,525 61,562 61,411
======== ======== ========
Gross Profit (excluding depreciation and
amortization) .......................... $ 13,569 15,121 16,785
======== ======== ========
TELECOMMUNICATIONS PRODUCTS GROUP
Sales revenue .......................... $ -- -- 5,989
======== ======== ========
Gross Profit (excluding depreciation and
amortization) .......................... $ -- -- 2,642
======== ======== ========
SJC VIDEO GROUP
Service revenue ........................ $ 1,877 1,072 327
======== ======== ========
Gross Profit (excluding depreciation and
amortization) .......................... $ 459 310 --
======== ======== ========
COMPANY TOTAL
Service revenue ........................ $135,790 148,660 186,520
Sales revenue .......................... $ 23,523 62,488 46,828
-------- -------- --------
Total operating revenue ................ $159,313 211,148 233,348
======== ======== ========
Gross Profit (excluding depreciation and
amortization) .......................... $ 54,658 67,715 77,448
======== ======== ========
FISCAL 2000 COMPARED TO FISCAL 1999
REVENUE ANALYSIS
Lottery Group service revenue of $43.2 million in fiscal 2000 improved $33.0
million from fiscal 1999 due to the addition of Scientific Games in September
2000, plus a full year of service to the Montana lottery which was launched in
April 1999, and the start-up of the Vermont and New Hampshire lotteries in July
2000. Sales revenue of $21.2 million in fiscal 2000 decreased $17.9 million from
fiscal 1999 due to the April 1999 equipment sale to the Montana lottery plus
completion of the 20,000 terminal sale to Sisal Sport Italia SpA.
Pari-mutuel Group service revenue of $81.6 million in fiscal 2000 improved
$5.8 million or 7.6% from fiscal 1999. $4.0 million of this increase is
attributable to the addition of the expanded German operations in the fourth
quarter of fiscal 1999, plus revenue improvements in Ireland and in the
NASRIN(TM) service operation. These revenue increases were partially offset by
lower revenues in the French racing operations and in the North American
simulcasting operations. Sales revenue of $19.7 million in fiscal 2000 decreased
$3.7 million or 15.9% from fiscal 1999 primarily due to the fiscal 1999 sale of
terminals to the UK Tote, partially offset by fiscal 2000 sales to Italy and
Chile.
Venue Management Group service revenue of $61.4 million in fiscal 2000 were
slightly lower than in fiscal 1999 as Handle related revenue increases of 3.4%
in the Connecticut OTB operations were completely offset by the effect of the
lower Euro exchange rate on the Netherlands revenues.
Telecommunications Group sales revenue of $6.0 million in fiscal 2000 are
the result of the acquisition of Scientific Games in September 2000.
SJC Video Group service revenue of $.3 million in fiscal 2000 are $.7
million less than fiscal 1999 as a result of the sale of the business in
February 2000.
GROSS PROFIT ANALYSIS
The total gross profit earned, exclusive of depreciation and amortization,
of $77.4 million in fiscal 2000 increased by $9.7 million, or 14.4%, from fiscal
1999.
31
Lottery Group gross profit of $17.2 million or 26.9% of revenues improved
$4.5 million in fiscal 2000 from $12.7 million or 25.7% of revenues in fiscal
1999. The improvement is attributable to the addition of the Scientific Games
business coupled with the addition of a full year of operation on the Montana
lottery contract and the addition of the Vermont and New Hampshire lottery
contracts since July 2000. These increases were offset by lower equipment
sales revenues in fiscal 2000 plus Scientific Games business integration
costs. In addition, the increases were impacted by the shutdown of the
California plant and corresponding start-up of the new press in the Atlanta
plant in the Scientific Games manufacturing operation. The combination of the
interrupted production and unusually high costs (such as overtime and scrap),
coupled with excess costs in the systems business of Scientific Games, is
estimated to have had a $5.0 million negative impact on EBITDA in the fourth
quarter of fiscal 2000.
Pari-mutuel Group gross profit of $40.9 million in fiscal 2000 or 40.4% of
revenues improved $1.3 million from $39.6 million or 39.9% of revenues in fiscal
1999. This improvement primarily reflects the benefits of additional revenue in
the German operations and the continued growth of the NASRIN operations, plus
higher equipment sales, all partially offset by lower revenues in the French
operations, reduced satellite transponder bulk market 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. During the year, the
Company largely completed the conversion of its satellite network to 8 to 1
compression but was unable to eliminate the resulting excess transponder
capacity until late in the year due to market softness. Consequently an
annualized saving of approximately $2.0 million that was expected to contribute
to profitability in fiscal 2000 will not begin until 2001.
Venue Management Group gross profit of $16.8 million in fiscal 2000 or 27.3%
of revenues improved $1.7 million from $15.1 million or 24.6% of revenues in
fiscal 1999. This improvement primarily reflects higher Handle and reduced
operating costs in the Connecticut OTB operation, partially offset by
approximately $1.0 million of start-up costs incurred in connection with the
German OTB joint venture.
Telecommunications Group gross profit of $2.6 million in fiscal 2000
represents the Group's results since their acquisition as part of Scientific
Games in September 2000.
SJC Video Group gross profit of nil in fiscal 2000 is $.3 million less than
fiscal 1999 as a result of the sale of the business in January 2000.
Gross profit as a percent of service revenues decreased to 32% in fiscal
2000 compared to 33% in fiscal 1999, primarily as a result of the unusual
production problems and excess systems costs in the Lottery Group in the fourth
quarter of fiscal 2000. The gross profit as a percent of sales revenues was 37%
in fiscal 2000, an increase from the gross profit percent of 30% in fiscal 1999
as a result of changes in the mix of equipment and systems sold, and the
addition of the Telecommunications Products Group.
EXPENSE ANALYSIS
Selling, general and administrative expenses, including software development
costs, of $35.7 million were $8.5 million or 31.2% higher than in fiscal 1999.
This increase is attributable to the addition of the Scientific Games business,
expanded German pari-mutuel operations, growing domestic lottery operations in
Vermont and New Hampshire, the $1.1 million write-off of the option to purchase
Atlantic City Raceway, and Scientific Games business integration costs. These
increases were partially offset by cost reductions in NASRIN(TM) and France, and
the absence of the SJC Video business.
Depreciation and amortization expense of $27.8 million in fiscal 2000
increased $5.6 million from $22.2 million in fiscal 1999. This increase is
primarily attributable to the acquisition of Scientific Games, coupled with the
expanded domestic lottery business and the expanded German pari-mutuel business.
These increases were partially offset by the absence of the SJC Video business
and the full depreciation of certain assets in prior periods.
Interest expense of $31.2 million in fiscal 2000 increased $15.1 million
from $16.2 million in fiscal 1999. $7.5 million of this increase is attributable
to payments, in the form of warrants to purchase 2.9 million shares of Autotote
common stock, to certain financial advisors in connection with their services in
obtaining certain financial commitments; an additional $1.2 million is due to
the required pre-funding of the new subordinated debt; and the balance is a
result of higher debt levels incurred in connection with the acquisition of
Scientific Games.
Other income of $.5 million in fiscal 2000 consisted primarily of interest
on invested excess cash, and other expense in fiscal 1999 consisted primarily of
currency translation expense.
32
INCOME TAX EXPENSE
Income tax expense was $1.6 million in fiscal 2000, up from $0.2 million in
fiscal 1999. The increase reflects the effects of the acquisition of Scientific
Games. Income tax expense principally reflects federal alternative minimum tax,
state taxes and foreign taxes, since no tax benefit has been recognized on
domestic operating losses.
EXTRAORDINARY ITEMS
In connection with the fiscal 2000 issuance of the Notes and the subsequent
repayment of all amounts outstanding under the existing bank credit facility
(see Note 9 and 10 to the Consolidated Financial Statements), Autotote wrote off
$2.9 million of unamortized deferred financing fees associated with the Old
Notes and the 1998 and 2000 Term Loans and expensed $9.7 million of call premium
paid in connection with the redemption of the Old Notes. There were no tax
benefits recognized on the net extraordinary loss because Autotote is currently
in a tax loss carryforward position.
FISCAL 1999 COMPARED TO FISCAL 1998
REVENUE ANALYSIS
Revenues increased 32.5% or $51.8 million to $211.1 million in fiscal 1999
from $159.3 million in fiscal 1998.
Pari-mutuel Group services revenues of $75.8 million in fiscal 1999 improved
$1.6 million or 2.2% from the prior year. This improvement primarily reflects
revenues from the new NASRIN(TM) operation and improved simulcasting revenues in
Germany. These improvements were partially offset by the loss of a French
pari-mutuel service contract and fewer sales of excess transponder time in the
domestic simulcasting operations. Pari-mutuel equipment sales revenues of $23.4
million in fiscal 1999 increased $8.7 million or 59.2% from the prior year,
primarily due to sales of a system to the Irish Horseracing Association,
EXTREMA(TM) terminals to the UK Tote and Max 3000 terminals to other
international customers.
Venue Management Group service revenues of $61.6 million in fiscal 1999
improved $11.0 million or 21.8% from the prior year. This improvement primarily
reflects revenues from the Netherlands operations that were acquired in July
1998, higher Connecticut OTB revenues attributable to increased Handle and the
September 1998 opening of the racebook at the Mohegan Sun Casino.
Lottery Group service revenues increased $1.0 million in fiscal 1999 to
$10.2 million primarily due to the April 1999 launch of the Montana lottery.
Lottery equipment sales revenues increased to $39.1 million in fiscal 1999 from
$8.8 million in fiscal 1998. This increase is primarily attributable to the
fiscal 1999 sales of approximately 10,600 EXTREMA(TM) terminals for use in the
Sisal Sport Italia SpA lottery operations, and the March 1999 delivery of a
central system, terminals and communications equipment to the Montana Lottery.
SJC Video Group service revenues decreased $0.8 million in fiscal 1999 to
$1.1 million due to changes in customer preference from video production to
film.
GROSS PROFIT ANALYSIS
The total gross profit earned, exclusive of depreciation and amortization,
of $67.7 million in fiscal 1999 increased by $13.1 million, or 23.9%, from
fiscal 1998.
Gross profits earned by the Pari-mutuel Group of $39.6 million in fiscal
1999 increased $4.3 million from $35.3 million in fiscal 1998, principally due
to higher profits in North American pari-mutuel service operations, sales of
EXTREMA(TM) terminals to the UK Tote operations, sales of Max 3000 terminals to
other international customers, and a full year of operation of the NASRIN(TM)
business. These gross profit increases were partially offset by lower profit in
the French pari-mutuel operations due to the loss of a service contract in
fiscal 1998.
Gross profits earned by the Venue Management Group of $15.1 million in
fiscal 1999 increased $1.5 million from $13.6 million in fiscal 1998,
principally due to the growth in Handle in the Connecticut OTB operations.
33
Gross profits earned by the Lottery Group of $12.7 million for fiscal 1999
increased $7.4 million from $5.3 million in fiscal 1998, primarily due to sales
of EXTREMA(TM) terminals for use in the Sisal Sport Italia SpA lottery
operations and the March 1999 delivery of a central system, terminals and
communications equipment to the Montana Lottery.
Gross profit as a percent of service revenues was 33% in fiscal 1999
compared to 35% in fiscal 1998, primarily reflecting lower margins on the
Netherlands operations that were acquired in July 1998, partially offset by
improved margins in the OTB operations and a full year of NASRIN(TM) operations.
The gross profit earned from systems and equipment sales was 30% in fiscal 1999,
a decrease from the gross profit percent of 33% in fiscal 1998 as a result of
changes in the mix of equipment and systems sold.
EXPENSE ANALYSIS
Selling, general and administrative expenses include marketing, sales,
administrative, engineering and software development, finance, legal and other
expenses. Selling, general and administrative expenses increased $1.0 million or
4% to $27.2 million in fiscal 1999 from $26.2 million in fiscal 1998. The
increase is primarily the result of the inclusion of the Netherlands operations
acquired in July 1998 and lower expenses reported in fiscal 1998 resulting from
the collection of receivables previously reserved due to concerns about their
recoverability.
Depreciation and amortization expenses decreased $7.3 million or 25% to
$22.2 million in fiscal 1999 from $29.5 million in fiscal 1998. Depreciation
decreased by $5.2 million primarily due to the lengthening of depreciable lives
of pari-mutuel terminals from seven to ten years effective November 1, 1998, as
the result of the renewal of a number of service contracts and realized
equipment durability. Additionally, in fiscal 1998, we completed the
installation of new lottery terminals for the Connecticut State Lottery under a
contract with an initial five-year term plus five one-year options to extend the
contract through May 2008. Based on industry practice of lottery contracts and
our historical relationship with the Connecticut State Lottery for the past ten
years, we are depreciating the terminals and installation costs on a
straight-line method over their estimated useful lives of 10 years. Amortization
expenses decreased by $2.1 million primarily as a result of the full
amortization of certain intangible assets in fiscal 1998.
Interest expense of $16.2 million in fiscal 1999 increased $0.7 million from
fiscal 1998 as a result of borrowings in connection with the fiscal 1998
installation of the Connecticut lottery terminals.
Other expense in fiscal 1999 consisted primarily of currency translation
expenses, and other income of $1.1 million in fiscal 1998 consisted primarily of
interest on invested excess cash.
LOSS ON DISPOSITION OF BUSINESS
A charge of $1.6 million was recorded to reflect the expected loss on
disposition by sale of the SJC Video production business as compared to a net
loss on disposition of businesses of $0.1 million in fiscal 1998. In fiscal
1999, the SJC Video production business incurred an operating loss of $2.5
million.
INCOME TAXES
Income tax expense was $0.2 million in fiscal 1999 compared to $0.3 million
in fiscal 1998. Income tax expense principally reflects state taxes on
Connecticut OTB operations and foreign taxes in fiscal 1999, and foreign taxes
in fiscal 1998, since no tax benefit has been recognized on domestic operating
losses.
LIQUIDITY, CAPITAL RESOURCES AND WORKING CAPITAL DEFICIENCY
In order to finance the Scientific Games acquisition and refinance certain
existing indebtedness, we conducted a series of financings. As a result, our
capital structure changed significantly and, among other things, we are a
significantly leveraged company. As a result of the Transactions, at October
31, 2000 we have total indebtedness outstanding of approximately $443.8
million. We have also recorded a substantial increase in goodwill and other
intangible assets in connection with the Scientific Games acquisition and a
corresponding increase in amortization expense.
Under our new senior secured credit facilities, a group of lenders has
provided aggregate facilities totaling $345.0 million, comprised of (1) a
six-year Term A Loan of $60.0 million, (2) a seven-year Term B Loan of
34
$220.0 million, and (3) a six-year Revolver of $65.0 million. We borrowed the
entire $280.0 million of the term loan facilities in connection with the
consummation of the Scientific Games acquisition. See Note 9 to the Consolidated
Financial Statements for a more detailed explanation of these loan facilities,
including interest rates, amortization requirements and other terms.
In connection with the consummation of the Scientific Games acquisition, we
issued $110.0 million of new convertible preferred stock. The dividends on the
new convertible preferred stock accrue at the annual rate of 6% per annum and
are payable-in-kind until the ninth dividend payment, at which time we have the
option, subject to the terms of the Facility and Notes, to pay dividends in
cash; the new convertible preferred stock also has the right to participate in
common stock dividends, if any, on an as-converted basis. The new convertible
preferred stock is convertible at any time into shares of our common stock at
the adjusted conversion price of $5.56 per share, subject to a potential reset
to not less than $5.00 per share, and will automatically convert into common
stock five years after issuance at the conversion price then in effect. The
initial conversion price of $6 per share was adjusted to $5.56 per share due to
the issuance of 2.9 million shares in redemption of the warrants issued to our
financial advisors. See Note 13 to the Consolidated Financial Statements for a
more detailed description of the new convertible preferred stock.
At October 31, 2000, Autotote's available cash and borrowing capacity
totaled $67.4 million compared to $29.0 million at October 31, 1999. Net cash
provided by operating activities was $25.4 million for the year ended October
31, 2000. In fiscal 2000, we spent $34.9 million for wagering systems and
capital expenditures, including $6.6 million for the installation of a
pari-mutuel system for the Monmouth and Meadowlands Racetrack, $8.8 million in
connection with the installation of the New Hampshire and Vermont on-line
lotteries and $2.9 million to upgrade our satellite communications
infrastructure. In addition, we invested an additional $5.0 million in software,
primarily in connection with the above start-up projects. These investments were
funded primarily with net cash provided by operating activities, $1.9 million of
proceeds from the sale of common stock, and long-term debt.
A substantial portion of our cash flows from operations must be used to
pay our interest expense and repay our indebtedness, which will reduce the
funds that would otherwise be available to us for our operations, and capital
expenditures. Based on our current level of operations and anticipated cost
savings and operating improvements, we believe that our cash flow from
operations, available cash and available borrowings under our new revolving
credit facility will be sufficient to meet our liquidity needs for the
foreseeable future; however, we cannot assure you that this will be the case.
We also may need to refinance all or part of our indebtedness, including the
Notes, on or before their maturity; however, we cannot assure that we will
able to refinance any of our indebtedness, including our new senior credit
facilities and the notes on commercially reasonable terms or at all.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES ("SFAS 133"), as amended by SFAS 138. SFAS
133 establishes accounting and reporting standards for derivative instruments
and hedging activities. It requires entities to record all derivative
instruments on the balance sheet at fair value. Changes in the fair value of
derivatives are recorded in each period in current operations or other
comprehensive income (loss), based on whether a derivative is designated as
part of a hedge transaction and the type of hedge transaction. The
ineffective portion of all hedges is recognized in operations. The Company is
required to adopt SFAS 133, as amended, effective November 1, 2000.
Pursuant to the terms of the Company's credit facility, the Company is
required to maintain interest rate hedges for a notional amount of not less
than $140 million for a period of not less than two years. In satisfaction of
this requirement, the Company entered into three interest rate swap
agreements in November 2000 which obligate the Company to pay a fixed LIBOR
rate and entitle the Company to receive a variable LIBOR rate on an aggregate
$140 million notional amount of debt. The Company has structured these
interest rate swap agreements and intends to structure all future such
agreements to qualify for hedge accounting pursuant to the provisions of SFAS
133. The Adoption of SFAS 133 did not have a material affect on the
Company's consolidated operations or financial position at November 1, 2000.
Based on current derivative usage and hedging activities, the Company does
not expect the adoption of SFAS 133 to have a material impact on its future
consolidated operations or financial position.
In December 1999, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin No. 101, REVENUE RECOGNITION ("SAB 101"), which
provides guidance on the recognition, presentation and disclosure of revenue
in financial statements filed with the SEC. SAB 101 outlines the basic
criteria that must be met to recognize revenue and provides guidance for
disclosures related to revenue recognition policies. Management believes that
the Company's revenue recognition policy is in compliance with the provisions
of SAB 101 and that SAB 101 will have not material effect on the consolidated
financial positon or results of operations of the Company.
RECENT DEVELOPMENTS
On January 8, 2001, we announced that the Jamaica Lottery Company Limited
had chosen Autotote to supply 750 EXTREMA(TM) terminals, a central system and
support services for five years. When finalized, the arrangement will have
the potential to generate revenue of $10.9 million and may include three
two-year renewals.
On January 3, 2001, we announced that the British Columbia Lottery
Corporation has chosen us to provide an upgrade of its lottery central gaming
system and related lottery support systems. The arrangement is expected to
provide revenues of approximately $8.0 million and the new system should be
operational in 12-18 months.
35
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our products and services are sold to a diverse group of customers
throughout the world. As such, we are subject to certain risks and uncertainties
as a result of changes in general economic conditions, sources of supply,
competition, foreign exchange rates, tax reform, litigation and regulatory
developments. The diversity and breadth of our products and geographic
operations mitigate the risk that adverse changes in any event would materially
affect our financial position. Additionally, as a result of the diversity of our
customer base, we do not consider ourselves exposed to concentration of credit
risks. These risks are further minimized by setting credit limits, ongoing
monitoring of customer account balances, and assessment of the customers'
financial strengths.
Inflation has not had an abnormal or unanticipated effect on our operations.
Inflationary pressures would be significant to our business if raw materials
used for instant lottery ticket production, prepaid phone card production or
terminal manufacturing are significantly affected. Available supply from the
paper and electronics industries tends to fluctuate and prices may be affected
by supply.
For fiscal 2000, inflation was not a significant factor in our results of
operations, and we were not impacted by significant pricing changes in our
costs, except for personnel related expenditures. We are unable to forecast the
prices or supply of substrate, component parts or other raw materials in 2001,
but we currently do not anticipate any substantial changes that will materially
affect our operating results.
In certain limited cases, our lottery contracts with our customers contain
provisions to adjust for inflation on an annual basis, but we cannot be assured
that this adjustment would cover raw material price increases or other costs of
services. While we have long-term and generally satisfactory relationships with
most of our suppliers, we also believe alternative sources to meet our raw
material and production needs are available.
In the normal course of business, the Company is exposed to fluctuations in
interest rates and equity market risks as the Company seeks debt and equity
capital to sustain its operations. At October 31, 2000, approximately one-third
of the Company's debt was in fixed rate instruments. We consider the fair value
of all financial instruments to be not materially different from their carrying
value at year-end. The following table provides information about the Company's
financial instruments that are sensitive to changes in interest rates. The table
presents principal cash flows and related weighted-average interest rates by
expected maturity dates.
PRINCIPAL AMOUNT BY EXPECTED MATURITY - AVERAGE INTEREST RATE
OCTOBER 31, 2000
EXPECTED MATURITY DATE (DOLLARS IN $000)
THERE
2001 2002 2003 2004 2005 AFTER TOTAL FAIR VALUE
---------- --------- ---------- --------- ---------- ---------- --------- ------------
Long-term debt:
Fixed interest rate debt $ 150,000 150,000 147,750
Interest rate 12.5%
Variable interest rate $ 5,200 8,200 11,200 14,200 17,200 235,250 291,250 291,250
Average interest rate 10.48% 10.35% 10.29% 10.26% 10.24% 10.88% 10.77%
In November 2000, to reduce the risks associated with fluctuations in market
interest rates and in response to requirements in the Facility (see Note 9 to
the Consolidated Financial Statements) the Company entered into three interest
rate swap contracts for an aggregate notional amount of $140,000. The following
table provides information about the Company's derivative financial instruments.
The table presents notional amounts and weighted-average swap rates by
contractual maturity dates. The Company does not hold any market risk
instruments for trading purposes.
36
NOTIONAL AMOUNT BY EXPECTED MATURITY - AVERAGE SWAP RATE
EXPECTED MATURITY DATE (DOLLARS IN $000)
THERE
2001 2002 2003 2004 2005 AFTER TOTAL FAIR VALUE
---------- --------- ---------- --------- ---------- ---------- --------- ------------
Interest rate swaps:
Fixed to variable $ -- -- 140,000 -- -- -- 140,000 137,605
Receive fixed-3-month
LIBOR -- -- 6.52% -- -- -- 6.52%
The Company is also exposed to fluctuations in foreign currency exchange
rates as the financial results of its foreign subsidiaries are translated into
U.S. dollars in consolidation. Assets and liabilities outside the United States
are primarily located in the United Kingdom, Germany, Netherlands, France and
Austria. The Company's investment in foreign subsidiaries with a functional
currency other than the U.S. dollar are generally considered long-term
investments. Accordingly, the Company does not hedge these net investments.
Translation gains and losses historically have not been material. We manage our
foreign currency exchange risks on a global basis by one or more of the
following: (i) securing payment from our customers in U.S. dollars, when
possible, (ii) utilizing borrowings denominated in foreign currency, and (iii)
entering into foreign currency exchange contracts. In addition, a significant
portion of the cost attributable to our foreign operations is incurred in the
local currencies. We believe that a 10% adverse change in currency exchange
rates would not have a significant adverse effect on the net earnings or cash
flows of the Company. We may, from time to time, enter into foreign currency
exchange or other contracts to hedge the risk associated with certain firm sales
commitments, anticipated revenue streams and certain assets and liabilities
denominated in foreign currencies. We do not engage in currency speculation.
Our cash and cash equivalents and investments are in high-quality securities
placed with a wide array of financial institutions with high credit ratings.
This investment policy limits our exposure to concentration of credit risks.
37
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULE
AUTOTOTE CORPORATION AND SUBSIDIARIES
FORM 10-K
(PAGE)
Independent Auditors' Report......................................... 40
Consolidated Financial Statements:
Balance Sheets as of October 31, 1999 and 2000.................. 41
Statements of Operations for the years ended
October 31, 1998, 1999 and 2000.............................. 42
Statements of Stockholders' Equity (Deficit) and Comprehensive
Loss for the years ended October 31, 1998, 1999 and 2000..... 43
Statements of Cash Flows for the years ended
October 31, 1998, 1999 and 2000.............................. 44
Notes to Consolidated Financial Statements........................... 46
Schedule:
II. Valuation and Qualifying Accounts................................ 80
All other schedules are omitted as the required information is inapplicable
or the information is presented in the consolidated financial statements or
related notes.
38
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Autotote Corporation:
We have audited the consolidated financial statements of Autotote
Corporation and subsidiaries as listed in the accompanying index. In connection
with our audits of the consolidated financial statements, we have also audited
the financial statement schedule as listed in the accompanying index. These
consolidated financial statements and the financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Autotote
Corporation and subsidiaries as of October 31, 1999 and 2000, and the results of
their operations and their cash flows for each of the years in the three-year
period ended October 31, 2000, in conformity with accounting principles
generally accepted in the United States of America. Also in our opinion, the
related financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
KPMG LLP
Short Hills, New Jersey
December 15, 2000
39
AUTOTOTE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
OCTOBER 31, 1999 AND 2000
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1999 2000
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents ............................. $ 5,067 15,308
Restricted cash ....................................... 771 758
Accounts receivable, net of allowance for doubtful
accounts of $2,789 and $4,308 in 1999 and 2000,
respectively ......................................... 25,755 54,263
Inventories ........................................... 14,636 24,678
Prepaid expenses, deposits and other current assets ... 2,319 17,420
--------- ---------
Total current assets ............................... 48,548 112,427
--------- ---------
Property and equipment, at cost ........................... 199,767 317,549
Less accumulated depreciation ......................... 123,039 130,895
--------- ---------
Net property and equipment ......................... 76,728 186,654
--------- ---------
Goodwill, net ............................................. 5,237 156,557
Operating right, net ...................................... 13,848 12,848
Other intangible assets, net .............................. -- 119,871
Other assets and investments .............................. 21,198 58,858
--------- ---------
Total assets ......................................... $ 165,559 647,215
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current installments of long-term debt ................ $ 4,253 5,823
Accounts payable ...................................... 20,102 29,746
Accrued liabilities ................................... 28,015 66,875
Interest payable ...................................... 3,898 4,126
--------- ---------
Total current liabilities .......................... 56,268 106,570
--------- ---------
Deferred income taxes ..................................... 1,656 60,834
Other long-term liabilities ............................... 2,963 7,481
Long-term debt, excluding current installments ............ 117,891 438,011
Long-term debt, convertible subordinated debentures ....... 35,000 --
--------- ---------
Total liabilities .................................. 213,778 612,896
--------- ---------
Stockholders' equity (deficit):
Convertible preferred stock, par value $1.00 per share,
2,000 shares authorized, none and 1,132 shares
outstanding at October 31, 1999 and 2000,
respectively.......................................... -- 1,132
Class A common stock, par value $0.01 per share, 99,300
shares authorized, 36,268 and 39,922 shares
outstanding at October 31, 1999 and 2000,
respectively ......................................... 364 371
Class B non-voting common stock, par value $0.01 per
share, 700 shares authorized, none outstanding ....... -- --
Additional paid-in capital ............................ 149,622 264,987
Accumulated losses .................................... (196,852) (228,853)
Treasury stock, at cost ............................... (102) (102)
Accumulated other comprehensive loss .................. (1,251) (3,216)
--------- ---------
Total stockholders' equity (deficit) ............... (48,219) 34,319
--------- ---------
Commitments and contingencies (Notes 9, 11, 13, 15 and 23). $ 165,559 647,215
========= =========
See accompanying notes to consolidated financial statements.
40
AUTOTOTE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED OCTOBER 31, 1998, 1999 AND 2000
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1998 1999 2000
--------- --------- ---------
Operating revenues:
Services .............................................................. $ 135,790 148,660 186,520
Sales ................................................................. 23,523 62,488 46,828
--------- --------- ---------
159,313 211,148 233,348
--------- --------- ---------
Operating expenses (exclusive of depreciation and amortization shown below):
Services .............................................................. 88,916 99,496 126,601
Sales ................................................................. 15,739 43,937 29,299
--------- --------- ---------
104,655 143,433 155,900
--------- --------- ---------
Total gross profit ............................................... 54,658 67,715 77,448
Selling, general and administrative expenses ............................... 26,205 27,178 35,664
Loss on sale of businesses ................................................. 66 1,600 --
Depreciation and amortization .............................................. 29,489 22,189 27,826
--------- --------- ---------
Operating income (loss) .......................................... (1,102) 16,748 13,958
Other (income) deductions:
Interest expense ...................................................... 15,521 16,177 31,231
Other (income) expense ................................................ (1,064) 15 (456)
--------- --------- ---------
14,457 16,192 30,775
--------- --------- ---------
Income (loss) before income tax expense and extraordinary items ....... (15,559) 556 (16,817)
Income tax expense ......................................................... 321 177 1,603
--------- --------- ---------
Income (loss) before extraordinary items .............................. (15,880) 379 (18,420)
Extraordinary items--write-off of deferred financing fees and
debt call premium ....................................................... -- -- 12,567
--------- --------- ---------
Net income (loss) ..................................................... (15,880) 379 (30,987)
Convertible preferred stock dividend ....................................... -- -- 1,014
--------- --------- ---------
Net income (loss) available to common stockholders ......................... $ (15,880) 379 (32,001)
========= ========= =========
Basic and diluted income (loss) per share:
Income (loss) before extraordinary items ................................... $ (0.44) 0.01 (0.50)
Extraordinary items ........................................................ -- -- (0.34)
--------- --------- ---------
Net income (loss) .......................................................... $ (0.44) 0.01 (0.84)
========= ========= =========
Net income (loss) available to common stockholders ......................... $ (0.44) 0.01 (0.87)
========= ========= =========
Weighted average number of shares used in per share calculations:
Basic shares .......................................................... 35,696 36,118 36,928
Diluted shares ........................................................ 35,696 38,343 36,928
========= ========= =========
See accompanying notes to consolidated financial statements.
41
AUTOTOTE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
AND COMPREHENSIVE LOSS
YEARS ENDED OCTOBER 31, 1998, 1999 AND 2000
(IN THOUSANDS)
1998 1999 2000
--------- --------- ---------
COMMON STOCK:
Beginning balance .......................................................... $ 354 360 364
Issuance of Class A common stock, net of issuance expenses ............ 6 4 4
Issuance of 2,900 shares of Class A common stock in warrant exercises . -- -- 3
--------- --------- ---------
Ending balance ............................................................. 360 364 371
--------- --------- ---------
PREFERRED STOCK:
Beginning balance .......................................................... -- -- --
Issuance of 1,128 shares of convertible preferred stock,
net of issuance expenses .......................................... -- -- 1,128
Issuance of 4 shares of convertible preferred stock as in-kind dividend -- -- 4
--------- --------- ---------
Ending balance ............................................................. -- -- 1,132
--------- --------- ---------
ADDITIONAL PAID-IN CAPITAL:
Beginning balance .......................................................... 148,238 149,119 149,622
Issuance of Class A common stock, net of issuance expenses ............ 511 233 1,107
Issuance of convertible preferred stock, net of issuance expenses ..... -- -- 105,673
Issuance and exercise of warrants ..................................... -- -- 8,321
Deferred compensation ................................................. 370 270 264
--------- --------- ---------
Ending balance ............................................................. 149,119 149,622 264,987
--------- --------- ---------
ACCUMULATED LOSSES:
Beginning balance .......................................................... (181,351) (197,231) (196,852)
Net income (loss) ..................................................... (15,880) 379 (30,987)
Convertible preferred stock dividend .................................. -- -- (1,014)
--------- --------- ---------
Ending balance ............................................................. (197,231) (196,852) (228,853)
--------- --------- ---------
TREASURY STOCK ............................................................. (102) (102) (102)
--------- --------- ---------
ACCUMULATED OTHER COMPREHENSIVE LOSS:
Beginning balance .......................................................... (379) (784) (1,251)
Other comprehensive loss .............................................. (405) (467) (1,965)
--------- --------- ---------
Ending balance ............................................................. (784) (1,251) (3,216)
--------- --------- ---------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) ....................................... $ (48,638) (48,219) 34,319
========= ========= =========
COMPREHENSIVE LOSS:
Net income (loss) .......................................................... $ (15,880) 379 (30,987)
Other comprehensive loss:
Minimum pension liability adjustment .................................. (495) (107) (5)
Foreign currency translation adjustment ............................... 90 (360) (2,277)
Unrealized gain on investments ........................................ -- -- 317
--------- --------- ---------
Other comprehensive loss ................................................... (405) (467) (1,965)
--------- --------- ---------
COMPREHENSIVE LOSS ......................................................... $ (16,285) (88) (32,952)
========= ========= =========
See accompanying notes to consolidated financial statements.
42
AUTOTOTE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED OCTOBER 31, 1998, 1999 AND 2000
(IN THOUSANDS)
1998 1999 2000
-------- -------- --------
Cash flows from operating activities:
Net income (loss) ........................................... $(15,880) 379 (30,987)
-------- -------- --------
Adjustments to reconcile net income (loss) to cash provided
by operating activities:
Depreciation and amortization .......................... 29,489 22,189 27,826
Change in deferred income taxes,
net of effects of businesses acquired ............. (592) 54 120
Loss on sale of businesses ............................. 66 1,600 --
Non-cash interest expense .............................. -- -- 7,511
Extraordinary items .................................... -- -- 12,567
Changes in operating assets and liabilities, net of
effects of acquisitions/dispositions of businesses:
Restricted cash ................................... 57 (150) (19)
Accounts receivable ............................... (7,841) (4,826) 8,605
Inventories ....................................... (4,600) (3,314) 4,681
Accounts payable .................................. 2,909 7,494 (4,351)
Accrued liabilities ............................... 2,762 2,034 764
Other .................................................. 1,790 1,089 (1,390)
-------- -------- --------
Total adjustments ................................. 24,040 26,170 56,395
-------- -------- --------
Net cash provided by operating activities ........................ 8,160 26,549 25,408
-------- -------- --------
Cash flows from investing activities:
Capital expenditures ........................................ (2,773) (2,069) (6,131)
Wagering systems expenditures ............................... (21,287) (12,865) (28,915)
Increase in other assets and investments .................... (7,277) (9,035) (7,304)
Business acquisitions, net of cash acquired ................. 2,177 (2,333) (316,242)
Other ....................................................... (63) 759 1,109
-------- -------- --------
Net cash used in investing activities ............................ (29,223) (25,543) (357,483)
-------- -------- --------
Cash flows from financing activities:
Net borrowings under revolving credit facility .............. -- -- 11,250
Proceeds from issuance of long-term debt .................... 12,059 -- 442,522
Payments on long-term debt .................................. (3,072) (3,154) (201,362)
Payment of financing fees ................................... -- -- (16,792)
Net proceeds from issuance of common stock .................. 516 237 1,114
Net proceeds from issuance of convertible preferred stock ... -- -- 106,378
-------- -------- --------
Net cash provided by (used in) financing activities .............. 9,503 (2,917) 343,110
-------- -------- --------
Effect of exchange rate changes on cash .......................... 162 169 (794)
-------- -------- --------
Increase (decrease) in cash and cash equivalents ................. (11,398) (1,742) 10,241
Cash and cash equivalents, beginning of year ..................... 18,207 6,809 5,067
-------- -------- --------
Cash and cash equivalents, end of year ........................... $ 6,809 5,067 15,308
======== ======== ========
(Continued)
43
AUTOTOTE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS--(CONTINUED)
YEARS ENDED OCTOBER 31, 1998, 1999 AND 2000
(IN THOUSANDS)
NON-CASH INVESTING AND FINANCING ACTIVITIES
1998, 1999 AND 2000
See Notes 10, 11 and 13 for a description of the write-off of deferred
financing fees, capital lease transactions and the issuance of common stock
warrants to the Company's financial advisors in connection with their services
and convertible preferred stock dividends paid-in-kind.
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the year for:
OCTOBER 31,
------------------------------
1998 1999 2000
----------- --------- --------
Interest.................................. $ 14,786 15,077 22,177
Income taxes.............................. $ 630 710 2,413
See accompanying notes to consolidated financial statements.
44
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1999 AND 2000
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(1) DESCRIPTION OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) DESCRIPTION OF THE BUSINESS
Autotote Corporation (the "Company") operates primarily in four business
segments: Lottery Group, Pari-mutuel Group, Venue Management Group and
Telecommunications Products Group.
Lottery Group-- encompasses the full range of lottery game consulting and
production services, including the manufacturing, warehousing and
distribution of instant lottery tickets and related instant-ticket
services such as game design, sales and marketing support, retailer
telemarketing and field services. The Company also provides on-line
lottery systems and systems-related services, including transaction
processing software that accommodates instant ticket game accounting and
validation and on-line games, point-of-sale terminal hardware which
connect to these systems, central site computer and communications
hardware which runs these systems and ongoing maintenance for each of
these items. Our lottery products and services are provided primarily to
domestic and international governmentally sanctioned lotteries worldwide.
Pari-mutuel Group-- includes all aspects of our pari-mutuel service
business, which encompass our North American and international on-track,
off-track and inter-track pari-mutuel services, simulcasting and
communications services, video gaming, and sales of pari-mutuel systems
and equipment. We are the leading provider of computerized pari-mutuel
wagering worldwide. We are one of the leading providers of simulcasting
services to the racing industry in the United States and Europe.
Venue Management Group-- we own and operate the Connecticut off-track
betting operations ("OTBs") and we are the exclusive licensed operator of
all on-track and off-track pari-mutuel wagering operations in the
Netherlands.
Telecommunication Products Group-- through our United Kingdom based
operations, we manufacture prepaid scratch-off phone cards incorporating
our superior lottery based proprietary technology to create highly
secure, paper-based, prepaid phone cards for the rapidly growing
international cellular telephone markets.
(b) PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts
of the Company and subsidiaries in which the Company's ownership is
greater than 50%. Investments in other entities where the Company has the
ability to exercise significant influence over the investee are accounted
for on the equity basis. Under the equity method, investments are stated
at cost plus the Company's equity in undistributed earnings after
acquisition. All significant inter-company balances and transactions have
been eliminated in consolidation.
(c) CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments with an original
maturity at the date of purchase of three months or less to be cash
equivalents.
(d) RESTRICTED CASH
Restricted cash represents amounts on deposit by customers for TeleBet
wagering. State regulations require the Company to maintain such balances
until deposited amounts are wagered or returned to the customer.
AUTOTOTE CORPORATION AND SUBSIDIARIES
45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(1) DESCRIPTION OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES--(CONTINUED)
(e) INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined
as follows:
ITEM COST METHOD
---- -----------
Parts First-in, first-out or weighted moving average.
Work-in-process First-in, first-out or weighted moving average for direct material and
& finished goods labor; other fixed and variable production costs are
allocated as a percentage of direct labor cost.
The Company adjusts inventory accounts on a periodic basis to reflect the
impact of potential obsolescence.
(f) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation of property
and equipment is calculated using the straight-line method over the
estimated useful lives of the assets as follows:
ESTIMATED LIFE
ITEM IN YEARS
---- --------------
Machinery and equipment................ 3-10
Transportation equipment............... 3-7
Furniture and fixtures................. 5-10
Buildings and leasehold improvements... 5-40
Depreciation expense includes the amortization of capital leased assets.
The Company typically depreciates the equipment and installation costs
for new customers on a straight-line method over the life of the initial
term of their contracts.
(g) DEFERRED INSTALLATION COSTS
Certain installation costs consisting of installation materials, customer
contracted software and installation labor associated with leased systems
are deferred and amortized over the lives of the leases unless such costs
are reimbursed by the lessee, in which case such amounts are included in
revenue and cost of sales. Deferred installation costs, net of
accumulated depreciation, included in property and equipment were
approximately $5,807 and $9,831 at October 31, 1999 and 2000,
respectively.
46
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(1) DESCRIPTION OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES--(CONTINUED)
(h) GOODWILL
Goodwill represents the excess of the purchase price over the fair value
of the net assets of acquired companies. Goodwill acquired in connection
with the acquisition of Scientific Games (Note 3) and its operating
business units is being amortized on a straight-line basis over 20 years,
and for the German pari-mutuel wagering business acquired in 1999,
goodwill is being amortized on a straight-line basis over 10 to 15 years.
Total goodwill amounted to $5,237 and $156,557, net of accumulated
amortization of $12,503 and $13,725 as of October 31, 1999 and 2000,
respectively.
(i) OTHER ASSETS AND INVESTMENTS
The Company capitalizes costs associated with internally developed and/or
purchased software systems for new products and enhancements to existing
products that meet technological feasibility and recoverability tests.
The Company also capitalizes costs associated with the procurement of
long-term financing, and costs attributable to transponder leases,
patents, trademarks, marketing rights, and non-competition and employment
agreements arising primarily from business acquisitions. These
capitalized costs are amortized on the straight-line basis over their
useful lives.
(j) IMPAIRMENT OF LONG-LIVED ASSETS AND GOODWILL
The Company assesses the recoverability of long-lived assets and
intangibles, including goodwill, whenever events or changes in
circumstances indicate that the carrying value of such an asset may not
be recoverable. Recoverability of assets to be held and used is measured
by a comparison of the carrying amount of the asset to the expected net
future cash flows to be generated by that asset, or, for goodwill and
intangibles, by determining whether the amortization of the goodwill
and intangible asset balance over its remaining life can be recovered
through undiscounted future cash flows of the acquired operation and
other considerations. The amount of impairment of goodwill and
intangible assets, if any, is measured based on projected discounted
future cash flows. The amount of impairment of other long-lived assets
is measured by the amount by which the carrying value of the asset
exceeds the fair market value of the asset. Assets to be disposed of are
reported at the lower of the carrying amount or fair market value, less
costs to sell.
(k) REVENUE RECOGNITION
Revenues from pari-mutuel wagering services, simulcast and communication
services and lottery service support contracts are recognized over the
contract period pursuant to the terms of the contracts. Costs of
providing operating services under contracts are charged to operations in
the period incurred. Revenue from the operation of off-track betting
concerns is recognized based on a percentage of amounts wagered. Revenues
from the sales of products and supplies are recognized when shipped.
Revenues from major contracts for the sale of lottery development
projects, pari-mutuel wagering systems and revenues for contracted
software development are recognized on the percentage of completion
method of accounting based on the ratio of costs incurred to estimated
costs to complete, or other comparable measures of progress toward
completion. Any anticipated losses on fixed price contracts are charged
to operations when such losses can be estimated. The Company recognizes
revenue from software licenses upon shipment if post-delivery obligations
are insignificant and if the terms of the agreement are such that the
payment obligation is non-cancelable and non-refundable.
47
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(1) DESCRIPTION OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES--(CONTINUED)
(l) INCOME TAXES
Income taxes are calculated using the asset and liability method under
Statement of Financial Accounting Standard (SFAS) No. 109. Under this
method, deferred income taxes are calculated by applying enacted
statutory tax rates to cumulative temporary differences between financial
statement carrying amounts and the tax basis of existing assets and
liabilities. Under SFAS 109, the effect on deferred taxes of a change in
tax rates is recognized in income in the period that includes the
enactment date.
(m) FOREIGN CURRENCY TRANSLATION
Assets and liabilities of foreign operations are translated at year-end
rates of exchange and operations are translated at the average rates of
exchange for the year. Gains or losses resulting from translating the
foreign currency financial statements are accumulated as a separate
component of accumulated other comprehensive loss in stockholders' equity
(deficit). Gains or losses resulting from foreign currency transactions
are included in other income (expense) in the consolidated statements of
operations.
(n) STOCK-BASED COMPENSATION
Stock-based compensation is recognized using the intrinsic value method.
For disclosure purposes (see Note 14), pro forma net income (loss) and
income (loss) per share data are provided in accordance with Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation"
as if the fair value method had been applied.
(o) FINANCIAL STATEMENT PREPARATION
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Some of the
more significant estimates being made involve percentage of completion
for contracted lottery development projects and pari-mutuel systems
software development projects, capitalization of software development
costs, evaluation of the recoverability of assets and assessment of
litigation and contingencies, including income and other taxes. Actual
results could differ from those estimates.
(p) COMPREHENSIVE INCOME (LOSS)
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" ("SFAS 130") establishes standards for the reporting
and display of comprehensive income (loss) and its components in a full
set of financial statements. SFAS 130 requires that unrealized losses from
the Company's foreign currency translation adjustments, unrecognized
minimum pension liability and unrealized gains (losses) on investments be
included in other comprehensive income (loss).
(q) RECLASSIFICATION
Certain reclassifications have been made to the prior years consolidated
financial statements to conform to the current presentation.
48
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(2) BASIC INCOME (LOSS) PER COMMON SHARE AND DILUTED INCOME (LOSS) PER COMMON
SHARE
Basic income (loss) per common share is computed by dividing income (loss)
by the weighted average number of common shares outstanding during the period.
Diluted income per common share gives effect to all dilutive potential common
shares that were outstanding during the period. Potential common shares are not
included in the calculation of the dilutive loss per share in the applicable
years presented, since their inclusion would be anti-dilutive. At October 31,
2000, the Company had outstanding common stock options, warrants, Performance
Accelerated Restricted Stock Units, convertible preferred stock and deferred
shares which could potentially dilute basic earnings per share in the future
(see Notes 13 and 14).
The following represents a reconciliation of the numerator and denominator
used in computing basic and diluted income (loss) per common share for the years
ended October 31, 1998, 1999 and 2000:
YEARS ENDED OCTOBER 31,
-----------------------------------
1998 1999 2000
-------- -------- --------
INCOME (NUMERATOR)
Income (loss) before extraordinary items ............. $(15,880) 379 (18,420)
Extraordinary items .................................. -- -- (12,567)
-------- -------- --------
Net income (loss) .................................... (15,880) 379 (30,987)
Convertible preferred stock dividend ................. -- -- 1,014
-------- -------- --------
Net income (loss) available to common stockholders ... $(15,880) 379 (32,001)
======== ======== ========
SHARES (DENOMINATOR)
Basic weighted average common shares outstanding ..... 35,696 36,118 36,928
Effect of dilutive securities-stock options, warrants,
and deferred shares ............................. -- 2,225 --
-------- -------- --------
Diluted weighted average common shares outstanding ... 35,696 38,343 36,928
======== ======== ========
BASIC AND DILUTED PER SHARE AMOUNT
Income (loss) before extraordinary items ............. $ (0.44) 0.01 (0.50)
Extraordinary items .................................. -- -- (0.34)
-------- -------- --------
Net income (loss) .................................... $ (0.44) 0.01 (0.84)
======== ======== ========
Net income (loss) available to common stockholders ... $ (0.44) 0.01 (0.87)
======== ======== ========
(3) ACQUISITIONS AND DISPOSITIONS
ACQUISITION OF SCIENTIFIC GAMES HOLDINGS CORP.
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 was recorded using
the purchase method of accounting. The acquired assets and liabilities were
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 $154,300 and has been recorded as goodwill which is being
amortized over 20 years. The operating results of Scientific Games' businesses
have been included in the accompanying consolidated statements of operations
from the date of the acquisition.
49
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(3) ACQUISITIONS AND DISPOSITIONS -- (CONTINUED)
The Scientific Games acquisition and the refinancing of substantially all
existing debt of both the Company 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; (2) $280,000 of term loan
borrowings under the terms of a new senior credit facility; (3) $2,987 of
borrowings under the new revolving credit facility of the senior credit
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. (see notes 9 and 13).
The following table presents unaudited pro forma results of
operations as if the Scientific Games acquisition and related financing
transactions had occurred at the beginning of the periods presented after giving
effect to certain adjustments, including amortization of goodwill and other
identifiable intangible assets, additional depreciation expense, increased
interest expense, convertible preferred stock dividends and related income tax
effects. These pro forma results have been prepared for comparative purposes and
do not purport to be indicative of what would have occurred had the acquisition
been made at the beginning of fiscal year 1999 or the results which may occur in
the future.
YEARS ENDED OCTOBER 31,
------------------------
1999 2000
--------- ---------
(unaudited)
Operating revenues ................................... $ 439,811 437,073
Operating income ..................................... 40,158 29,847
Loss before income tax expense and extraordinary items $ (10,084) (19,993)
Net loss ............................................. $ (13,738) (24,006)
Convertible preferred stock dividend ................. (6,765) (6,765)
--------- ---------
Net loss available to common stockholders ............ $ (20,503) (30,771)
Basic and diluted net loss per share ................. $ (0.57) (0.83)
========= =========
Basic and diluted net loss per common share .......... $ (0.57) (0.83)
========= =========
ACQUISITION OF DATASPORT ASSETS AND INTEREST IN DATEK
On September 1, 1999, the Company completed the purchase of selected assets
and the assumption of certain liabilities, from Datasport Toto Dienstleistung
GmbH & Co KG ("Datasport"). As a result of this purchase, the Company is the
sole provider of totalisator and simulcasting services to the 14 thoroughbred
racetracks in Germany. The transaction also increased the Company's ownership
and control of Datek GmbH ("Datek"), the primary provider of pari-mutuel
wagering to OTBs and bookmakers in Germany. The purchase, which included
approximately $2,333 in cash and the assumption of certain liabilities, was
recorded using the purchase method of accounting, and the acquired assets and
liabilities have been recorded at their estimated fair value at the date of
acquisition. The excess of the purchase price over the fair values of the net
assets acquired was approximately $3,200 and has been recorded as goodwill which
is being amortized over 15 years. The operating results of the Datasport and
Datek businesses have been included in the consolidated statements of operations
since the date of acquisition. Had the operating results of the Datasport and
Datek businesses been included as if the transaction had been consummated on
November 1, 1998, the pro forma operating results of the Company would not have
been materially different.
50
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(3) ACQUISITIONS AND DISPOSITIONS -- (CONTINUED)
ACQUISITION OF NETHERLANDS SUBSIDIARY
On July 1, 1998, the Company completed the purchase of Hippo Toto B.V.,
which was renamed Autotote Nederland B.V. This wholly owned subsidiary holds an
exclusive five-year license to operate all on-track and off-track pari-mutuel
wagering in The Netherlands. The initial license, granted by the Dutch Ministry
of Agriculture, extends through June 30, 2003. The purchase was for nominal
consideration and the acquisition was recorded using the purchase method of
accounting and, accordingly, the assets and liabilities of the acquired entities
have been recorded at their estimated fair value at the date of acquisition. The
operating results of Autotote Nederland B.V. have been included in the
consolidated statements of operations since the date of acquisition.
DISPOSITION OF BUSINESSES
In the fourth quarter of fiscal 1999, the Company commenced negotiations to
sell its SJC Video business and recorded an anticipated loss on the sale of
approximately $1,600 in fiscal 1999. The sale of the business was completed
in the first quarter of fiscal 2000 for its then approximate net book value.
(4) INVENTORIES
Inventories consist of the following:
OCTOBER 31,
-------------------
1999 2000
--------- --------
Parts and work-in-process.......................... $ 13,735 12,545
Finished goods..................................... 901 12,133
--------- --------
$ 14,636 24,678
========= ========
Terminals manufactured by the Company may be sold to customers or included
as part of a long-term wagering system contract. Parts and work-in-process
includes costs for equipment expected to be sold. Costs incurred for equipment
associated with specific wagering system contracts not yet placed in service are
classified as construction in progress in property and equipment (see Note 5).
(5) PROPERTY AND EQUIPMENT
Property and equipment, including assets under capital leases, consist of
the following:
OCTOBER 31,
---------------------
1999 2000
-------- --------
Machinery, equipment and deferred installation costs... $169,334 245,504
Land and buildings .................................... 14,251 39,154
Transportation equipment .............................. 722 3,097
Furniture and fixtures ................................ 3,971 6,699
Leasehold improvements ................................ 5,886 9,376
Construction in progress .............................. 5,603 13,719
-------- --------
$199,767 317,549
======== ========
Depreciation expense for the years ended October 31, 1998, 1999, and 2000
amounted to $19,310, $14,158 and $16,528, respectively.
51
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(5) PROPERTY AND EQUIPMENT -- (CONTINUED)
Costs for equipment associated with specific wagering systems contracts not
yet placed in service are recorded as construction in progress. When the
equipment is placed in service at wagering facilities, the related costs are
transferred from construction in progress to machinery and equipment, and the
Company commences depreciation of the costs.
(6) OPERATING RIGHT AND OTHER INTANGIBLE ASSETS
Operating right and other intangible assets (net) consist of the following:
OCTOBER 31,
--------------------------
1999 2000
-------- --------
Operating Right ... $ 13,848 12,848
======== ========
Employee work force $ -- 6,980
Patents ........... -- 15,441
Customer lists .... -- 65,496
Trade name ........ -- 31,954
-------- --------
$ -- 119,871
======== ========
In connection with the acquisition of Scientific Games (Note 3) identifiable
intangible assets were recorded at their estimated fair value at the date of
acquisition in the amount of $121,000. These identifiable assets are being
amortized on a straight line basis over their estimated useful lives as follows:
employee work force- 5 years; patents- 15 years; customer lists- 20 years and
trade name- 20 years. Amortization of these intangible assets totaled $1,129 for
the year ended October 31, 2000.
On July 1, 1993, the Company acquired the exclusive right to operate the
Connecticut off-track betting system. This operating asset is being amortized on
a straight-line basis over 20 years and amounted to $13,848 and $12,848, net of
accumulated amortization of $6,357 and $7,357 at October 31, 1999 and 2000,
respectively.
(7) OTHER ASSETS AND INVESTMENTS
Other assets and investments (net) consist of the following:
OCTOBER 31,
----------------------
1999 2000
---------- ---------
Software systems development costs........... $ 8,718 29,252
Deferred financing costs..................... 3,351 16,153
Customer notes............................... 3,031 3,154
Other assets................................. 6,098 10,299
---------- ---------
$ 21,198 58,858
========== =========
In fiscal 1999 and 2000, the Company capitalized $5,246 and $5,695,
respectively, of software systems development costs related primarily to video
gaming, pari-mutuel wagering and lottery applications, plus $16,800 for the fair
value of internally developed software acquired in connection with the
acquisition of Scientific Games. Capitalized costs are amortized on a
straight-line basis over a period of five to ten years. Amortization of
capitalized software systems development costs was $2,318, $2,506 and $2,454 for
the years ended October 31, 1998, 1999 and 2000, respectively.
52
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(7) OTHER ASSETS AND INVESTMENTS--(CONTINUED)
Deferred financing costs arose in connection with the procurement of long
term financing by the Company, and are amortized over the life of the financing
agreements. In fiscal 2000, the Company capitalized $16,517 of financing fees
incurred in connection with the Transactions. Accordingly, the Company
wrote-off, as an extraordinary charge, $2,865 of previously deferred financing
costs in connection with its repayment of the Old Facility and 1998 and 2000
Term Loans. Amortization of deferred financing costs amounted to $893, $942 and
$1,224 for the fiscal years ended October 31, 1998, 1999 and 2000, respectively.
Other assets in fiscal 1999 included $750 loaned by the Company to Atlantic
City Racing Association ("ACRA"). The loan was 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. Several anticipated legislative and regulatory actions by the State
of New Jersey did not occur, and the Company decided not to purchase ACRA at
this time. The loan and approximately $385 in deferred acquisition costs were
written off in the fourth quarter of fiscal 2000.
(8) ACCRUED LIABILITIES
Accrued liabilities consist of the following:
OCTOBER 31,
-------------------
1999 2000
--------- --------
Compensation and benefits............................ $ 8,830 12,393
Customer advances.................................... 3,760 1,447
Taxes, other than income............................. 2,043 3,717
Accrued acquisition costs............................ -- 10,571
Accrued contract costs............................... -- 11,746
Other................................................ 13,382 27,001
--------- --------
$ 28,015 66,875
========= ========
(9) LONG-TERM DEBT
Long-term debt consists of the following:
OCTOBER 31,
---------------------
1999 2000
-------- --------
12 1/2% Series B Senior Subordinated Notes due 2010 ......... $ -- 150,000
Term A loan with varying interest rate due 2006 ............. -- 60,000
Term B loan with varying interest rate due 2007 ............. -- 220,000
Revolving credit facility with varying interest rate due 2006 -- 11,250
10 7/8% Series B Senior Notes due 2004 ...................... 110,000 --
8.87% Term Loan Due February 2001 ........................... 9,000 --
Term Loan due in November 1999 .............................. 1,250 --
5.5% convertible subordinated debentures due August 2001 .... 35,000 --
Capital lease obligations, payable monthly through May 2003
Interest from 5.9% to 13.0% ............................ 1,453 1,939
Various loans and bank facilities, interest from 4.3% to 13% 441 645
-------- --------
Total long-term debt .................................. 157,144 443,834
Less current installments ............................. 4,253 5,823
-------- --------
Long-term debt, excluding current installments ........ $152,891 438,011
======== ========
53
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(9) LONG-TERM DEBT--(CONTINUED)
On September 6, 2000, in addition to the payment of the acquisition
consideration to the shareholders of Scientific Games, the Company refinanced
substantially all existing debt of both the Company and Scientific Games and
paid certain related fees and expenses (collectively, the "Transactions"). In
addition to cash on hand and proceeds from the sale of convertible preferred
stock, the Company incurred the following debt to fund the Transactions: (i)
$150,000 principal amount of 12 1/2% Senior Subordinated Notes due August 15,
2010 (the "Notes"); (ii) $280,000 of term loan borrowings under the terms of a
new senior credit facility (the "Facility"); and (iii) $2,987 of borrowings
under the revolving credit portion of the Facility.
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
Facility. The Notes are fully and unconditionally guaranteed on a senior
subordinated basis by all of the Company's wholly-owned U.S. subsidiaries(Note
24). 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, at redemption prices equal to
106.250%, 104.167%, 102.083% and 100.000% of the principal amount thereof if
redeemed during the 12-month periods commencing on August 15 of years 2005,
2006, 2007, and 2008 and thereafter, respectively. In addition, on or before
August 15, 2003, the Company may, at its option, redeem up to 35% of the Notes
at 112.5% 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 Notes remain outstanding immediately after
such redemption.
In addition to the issuance of the Notes, the Company also entered into the
Facility with certain lenders, providing for borrowings of up to $345,000. The
Facility consists of: (a) a $65,000 revolving credit facility, available for
working capital and general corporate purposes (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 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 Facility is supported by guarantees provided by all of the Company's
direct and indirect, wholly-owned domestic subsidiaries. Average interest
rates at October 31, 2000 were 10.45% per annum on Revolver borrowings,
10.13% per annum on Term A Loan borrowings and 10.96% per annum on Term B Loan
borrowings. At October 31, 2000, availability under the Revolver was $52,091.
Under the terms of the Facility, the Company is required to maintain interest
rate hedges for a notional amount of not less than $140,000 for a period of not
less than two years. In satisfaction of this requirement, the Company entered
into three interest rate swap agreements in November 2000 which obligate the
Company to pay a fixed LIBOR rate and entitle the Company to receive a variable
LIBOR rate on an aggregate $140,000 notional amount of debt.
54
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(9) LONG-TERM DEBT--(CONTINUED)
Term A Loan requires quarterly principal payments $750 in the first year of
borrowing, $1,500 in the second year after the borrowing, $2,250 in the third
year after the borrowing, $3,000 in the fourth year after the borrowing, and
$3,750 in the fifth and sixth years after the borrowing. Term B Loan requires
quarterly principal payments of $550 during the first through the sixth years
after the borrowing, and $51,700 in the seventh year after the borrowing. The
aggregate scheduled maturities under the Facility are $5,200, $8,200, $11,200,
$14,200, and $17,200 for fiscal years 2001, 2002, 2003, 2004 and 2005,
respectively. In addition, the Facility will be subject to the following
mandatory prepayments, with certain customary exceptions: (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 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 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.
Prior to the September 6, 2000 Transactions, the Company's debt consisted
primarily of: (a) $110,000 of 10 7/8% Series B Senior Notes due August 1, 2004
(the "Old Notes"), (b) $35,000 of 5.5% convertible subordinated debentures due
2001 (the "Debentures"), (c) $18,634 of borrowings under a revolving credit
facility (the "Old Facility"), (d) a $7,200 term loan (the "1998 Term Loan"),
and (e) a $9,900 term loan (the "2000 Term Loan"). The Old Notes, the
Debentures, borrowings under the Old Facility, the 1998 Term Loan, and the 2000
Term Loan were all repaid in full with cash on hand and with proceeds from the
debt and equity financing in the Transactions. The Debentures were convertible
into 1,750 shares of Class A Common Stock at a conversion price of $20.00 per
share.
The Old Notes were issued by the Company in July 1997. The Old Notes bore
interest at a rate of 10 7/8% per annum payable semi-annually on each February 1
and August 1. The Old Notes were senior, unsecured obligations of the Company,
ranking senior in right and priority of payment to all indebtedness of the
Company that by its terms was expressly subordinated to the Old Notes. The Old
Notes were jointly and severally guaranteed by substantially all of the
Company's wholly-owned U.S. subsidiaries. The Old Notes were redeemable, in
whole or in part, at the option of the Company, at any time on or after August
1, 2001, at varying redemption prices plus accrued and unpaid interest, if any,
to the date of redemption. In connection with the redemption of the Old Notes on
September 6, 2000, the Company paid a call premium to the Old Note holders in
the amount of $9,702. This call premium was recorded as an extraordinary item in
the Company's consolidated statements of operations in fiscal 2000.
In connection with the issuance of the Old Notes, the Company also entered
into the Old Facility with certain lenders which had an original maturity date
of February 2001, and which provided, subject to certain terms and conditions,
for borrowings of up to $25,000 with a $15,000 sublimit for letters of credit.
Borrowings under the Old Facility were available for working capital and general
corporate purposes and bore 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
55
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(9) LONG-TERM DEBT--(CONTINUED)
measured by the ratio of net debt (as defined) to EBITDA (as defined). Fees were
payable on outstanding letters of credit equal to the applicable Eurodollar Rate
margin (2.25% as of October 31, 1999), plus a facing fee of 1/8% per annum. A
commitment fee of 1/2% per annum was payable on the unused amount of the Old
Facility. Obligations under the Old Facility were jointly and severally
guaranteed by substantially all of the Company's U.S. subsidiaries. In addition,
the Old Facility was secured by (i) first priority security interests in
substantially all tangible and intangible assets of the Company and its U.S.
subsidiaries, and (ii) a first priority lien on all of the capital stock of the
Company's U.S subsidiaries and on 65% of the capital stock of the Company's
non-U.S. subsidiaries. At October 31, 1999, there were no borrowings outstanding
under the Old Facility. Therefore, the Company had approximately $23,960
available for borrowing, after deducting approximately $1,040 for letters of
credit which were guaranteed under the Old Facility.
The 1998 Term Loan was arranged to partially finance the development and
installation of a lottery system for the Connecticut State Lottery, including
the manufacture of approximately three thousand new lottery terminals, entered
into by the Company and Autotote Lottery Corporation on May 22, 1998. The 1998
Term Loan bore interest at a fixed rate of 8.87% payable quarterly and at
maturity on February 15, 2001, with principal payments of $600 due quarterly
through January 31, 2001 with a final principal payment of $6,000 due at
maturity. The Term Loan was secured by a first priority security interest in
substantially all of the Company's Connecticut lottery assets.
The 2000 Term Loan was arranged in June 2000 with an original maturity of
February 15, 2001. The 2000 Term Loan bore interest at a rate of prime plus
2.50% per annum or LIBOR plus 3.50% per annum, with such interest to be paid
quarterly beginning August 15, 2000. Principal payments of $100 were due on
August 15 and November 15, 2000, with a final principal payment of $9,800 due at
maturity.
(10) EXTRAORDINARY ITEMS
In connection with the acquisition of Scientific Games and the related
financing transactions and the subsequent repayment of all amounts outstanding
under the Company's previous credit facilities (see Note 9), the Company
wrote-off $2,865 of deferred financing fees and expensed $9,702 in call premium
on the Old Notes. There were no tax benefits recognized on the net extraordinary
loss because the Company is currently in a tax loss carryforward position.
56
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(11) COMMITMENTS
LEASES
At October 31, 2000, the Company was obligated under operating leases
covering office equipment, office and warehouse space, transponders and
transportation equipment expiring at various dates through 2006. Future minimum
lease payments required under these leasing arrangements at October 31, 2000 are
as follows: 2001, $10,313; 2002, $9,680; 2003, $8,511; 2004, $8,100; 2005 $7,861
and thereafter $5,186. The Company also leases equipment as needed under various
month-to-month lease agreements. Total rental expense under these operating
leases was $9,109, $8,155, and $9,051 in the years ended October 31, 1998, 1999
and 2000, respectively.
The Company acquired $59 of capitalized leases with the acquisition of the
Netherlands operations in the year ended October 31, 1998 and acquired $1,426 of
capitalized leases with the acquisition of the Datasport and Datek businesses in
the year ended October 31, 1999. During the year ended October 31, 2000, the
Company entered into capital lease obligations of $62 and acquired capitalized
leases of $40 in connection with the Scientific Games acquisition.
PERFORMANCE OBLIGATIONS
The Company is required to provide performance bonds under many of its
lottery contracts and pursuant to various other contracts and regulatory
requirements. At October 31, 2000, performance bonds totaling $93,582
were outstanding.
(12) FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of financial instruments is determined by reference to market
data and other valuation techniques as appropriate. The Company believes the
fair value of its financial instruments, principally cash and cash equivalents,
restricted cash, accounts receivable, other current assets, accounts payable,
and accrued liabilities approximates their recorded values.
The Company believes that the fair value of the Old Notes approximated
$112,200 at October 31, 1999, based on reference to dealer markets and quoted
market prices. The Company was, however, unable to determine the fair value of
the Debentures in fiscal year 1999. The Company believes that the fair value of
the Notes approximated $147,750 at October 31, 2000 based on reference to dealer
markets and global market prices. The fair value of the outstanding Term A Loan
and Term B Loan and revolving credit facility borrowings approximate their
recorded values, respectively, based on the variable rates of these facilities
and currently available terms and conditions for similar debt at October 31,
2000.
(13) CAPITAL STOCK
CONVERTIBLE PREFERRED STOCK
The Company has 2,000 shares of preferred stock, $1.00 par value,
authorized for issuance.
On September 6, 2000, the Company issued, for gross proceeds of $110,000,
1,100 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 (together with its affiliates,
"Ramius"), which acted as placement agent.
57
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(13) CAPITAL STOCK--(CONTINUED)
The Preferred Stock is presently convertible, after adjustment, into the
Company's common stock at a price of $5.56 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.
For the period from the date of issue through October 31, 2000, the Company
issued approximately 32 shares of Series A Convertible Preferred Stock in
connection with payment of the paid-in-kind dividends on such stock and as
partial payment of a placement agent fee. For fiscal 2000, the Company recorded
preferred stock dividends of $1,014, of which $575 was accrued and unpaid at
October 31, 2000. Preferred stock dividends have been deducted in determining
the amount of the net loss available to common stockholders in the consolidated
statements of operations.
COMMON STOCK
The Company has two classes of common stock consisting of Class A Common
Stock and Class B Non-voting Common Stock (Class B Common Stock). All shares of
Class A Common Stock and Class B Common Stock entitle holders to the same rights
and privileges except that the Class B Common Stock is non-voting. Each share of
Class B Common Stock is convertible into one share of Class A Common Stock.
On September 6, 2000, the Company issued warrants (the "September 2000
Warrants") to purchase up to 2,900 shares of the Company's common stock with a
nominal exercise price 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 the September 2000 Warrants, in
connection with their services to the Company in obtaining certain financing
commitments. The Company has recorded the estimated fair value of the September
2000 Warrants at the date of issue of approximately $7,511 as interest expense,
with a corresponding increase to additional paid in capital. On October 5, 2000,
2,900 shares of the Company's common stock were issued upon retirement of the
September 2000 Warrants.
On October 2, 2000, in connection with the acquisition of Scientific
Games, the Company issued warrants (the "October 2000 Warrants") to purchase
up to 250 shares of the Company's common stock to a financial advisor in
connection with their services to the Company in obtaining certain financing
commitments. The October 2000 Warrants are exercisable until October 1, 2004
at a price of $3.58 per share, equal to the fair market value of the
Company's common stock on the date of issue. The estimated fair market value
of the October 2000 Warrants on the date of issue was $305, which was
recorded as an increase to goodwill with a corresponding increase in
additional paid in capital.
58
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(13) CAPITAL STOCK--(CONTINUED)
WARRANTS
At October 31, 2000, the Company had the following warrants outstanding,
after giving effect to adjustments made in accordance with certain anti-dilution
provisions:
EXERCISE
SHARES PRICE EXPIRATION
---------- --------- -----------------
Warrants to purchase Class A Common Stock:
1998 Warrants....................... 2,298 $ 1.69 October 31, 2002
2000 Class A Warrants............... 43 $ 3.32 April 30, 2003
October 2000 Warrants............... 250 $ 3.58 October 1, 2004
----------
Total Class A Common Stock Warrants. 2,591
==========
Warrants to purchase Class B Common Stock 147 $ 3.83 October 30, 2003
==========
(14) STOCK OPTIONS
The Company has four stock option plans under which shares of Class A Common
Stock have been authorized for issuance to employees, officers and directors:
the 1984 Stock Option Plan (the "1984 Plan") - 1,350 shares; the 1992 Equity
Incentive Plan (the "1992 Plan") - 3,000 shares; the 1995 Equity Incentive Plan
(the "1995 Plan") - 4,000 shares: and the 1997 Incentive Compensation Plan, as
amended in April 2000 (the "1997 Plan") - 3,400 shares.
In May 1995, the Company offered holders of stock options with exercise
prices above market value as of May 26, 1995 the right to cancel such options in
exchange for Performance Accelerated Restricted Stock Units (the "PARS"). The
PARS represent deferred shares of Class A Common Stock which vest in 20%
increments on the sixth, seventh, eighth, ninth and tenth anniversaries of the
date of grant, or, in certain circumstances, on an accelerated basis based on
the Company's stock trading at certain per share prices, or at the discretion of
the Board of Directors. Options to purchase 1,976 shares were exchanged for 504
PARS. Additionally, restricted shares and deferred shares with a three year
vesting schedule were granted to certain non-employee directors under the 1992
Plan as follows: a total of 110 deferred shares at a fair market value of
$4.1250 per share were granted in fiscal 1995, a total of 50 deferred shares at
a fair market value of $3.1875 per share were granted in fiscal 1996, a total of
135 deferred shares at a fair market value of $1.3125 per share were granted in
fiscal 1997, a total of 40 restricted shares at a fair market value of $2.4375
per share were granted in fiscal 1998, a total of 40 restricted shares at a fair
market value of $2.000 per share were granted in fiscal 1999 and a total of 40
restricted shares at a fair market value of $2.5625 per share were granted in
fiscal 2000. Accordingly, the Company has recorded compensation expense of $371,
$272 and $264 in fiscal 1998, 1999 and 2000, respectively. Additional
compensation expense aggregating $450 will be charged to expense through fiscal
2002 as the restricted shares become fully vested.
59
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(14) STOCK OPTIONS--(CONTINUED)
Stock options granted under the Company's equity incentive plans are
exercisable at not less than the fair market value of the stock at the date of
grant, and none may be exercised more than 10 years from the date of grant.
Options are generally exercisable in four equal installments on the first,
second, third and fourth anniversaries of the date of grant. The Board of
Directors may, in its discretion, accelerate the exercisability, the lapsing of
restrictions, or the expiration of deferral or vesting period of any award under
the plans. From time to time, the Company grants additional stock options to
individuals outside of the 1992, 1995 and 1997 Plans in recognition of
contributions made to the Company.
Information with respect to the Company's stock options is as follows:
AVERAGE
STOCK OPTIONS SHARES PRICE (1)
------------- ---------- ---------
Outstanding at October 31, 1997...................... 5,769 2.63
Granted........................................... 732 2.65
Canceled.......................................... 397 1.83
Exercised......................................... 10 1.26
---------- ---------
Outstanding at October 31, 1998...................... 6,094 2.69
Granted........................................... 1,860 2.24
Canceled.......................................... 365 2.40
Exercised......................................... 216 1.09
---------- ---------
Outstanding at October 31, 1999...................... 7,373 2.63
---------- ---------
Granted........................................... 1,892 3.44
Canceled.......................................... 237 3.40
Exercised......................................... 377 2.41
---------- ---------
Outstanding at October 31, 2000...................... 8,651 2.80
========== =========
(1) WEIGHTED AVERAGE EXERCISE PRICE.
Summarized information about stock options outstanding and exercisable at
October 31, 2000 is as follows:
OUTSTANDING EXERCISABLE
-------------------------------- -----------------------
EXERCISABLE AVERAGE AVERAGE AVERAGE
PRICE RANGE SHARES LIFE(1) PRICE(2) SHARES PRICE(2)
------------- --------- --------- ---------- --------- ------------
$ 1.00 to 2.00 2,466 6.26 $ 1.33 1,520 $ 1.23
$ 2.01 to 3.00 3,334 6.24 2.65 2,137 2.68
$ 3.01 to 4.00 2,452 7.23 3.49 838 3.46
over $4.00 399 3.65 8.84 337 9.69
--------- ---------
8,651 4,832
========= =========
(1) WEIGHTED AVERAGE CONTRACTUAL LIFE REMAINING IN YEARS.
(2) WEIGHTED AVERAGE EXERCISE PRICE.
The number of shares and weighted average exercise price per share of
options exercisable at October 31, 1998, 1999, and 2000 were 3,185 shares at
$3.36, 3,859 shares at $3.13, and 4,832 shares at $2.85, respectively. At
October 31, 1998, 1999 and 2000, 3,302 shares, 1,797 shares, and 1,909 shares,
respectively, were available for future grants under the terms of these plans.
Outstanding options expire prior to October 3, 2010 and are exercisable at
prices ranging from $1.06 to $17.00 per share.
60
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(14) STOCK OPTIONS--(CONTINUED)
The Company applies the provisions of Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). This
statement defines a fair value method of accounting for an employee stock option
or similar equity instrument. However, it allows an entity to continue to
measure compensation cost for those instruments using the intrinsic-value-based
method of accounting prescribed by Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees", provided it discloses the effect of
SFAS 123 in footnotes to the financial statements. The Company has chosen to
continue to account for stock-based compensation using the intrinsic value
method. Accordingly, no stock option related compensation expense has been
recognized for its stock-based compensation plans.
Had the Company, however, elected to recognize compensation cost based on
fair value of the stock options at the date of grant under SFAS 123, such costs
would have been recognized ratably over the vesting period of the underlying
instruments and the Company's net income (loss) and net income (loss) per share
would have changed to the pro forma amounts indicated in the table below.
Pro forma net income (loss) and income (loss) per basic and diluted share
for the years ended:
OCTOBER 31,
-------------------------------
1998 1999 2000
--------- -------- ---------
Net income (loss):
As reported.................. $ (15,880) 379 (30,987)
Pro forma.................... (17,605) (1,597) (33,250)
Net income (loss) available to
common stockholders :
As reported.................. $ (15,880) 379 (32,001)
Pro forma.................... (17,605) (1,597) (34,264)
Net income (loss) per basic and diluted share:
As reported.................. (0.44) 0.01 (0.84)
Pro forma.................... (0.49) (0.04) (0.90)
Net income (loss) available to common
stockholders per basic and diluted share:
As reported.................. (0.44) 0.01 (0.87)
Pro forma.................... (0.49) (0.04) (0.93)
The fair value of the options granted was estimated using the Black-Scholes
option-pricing model based on the weighted average market price at date of grant
of $2.65 in fiscal 1998, $2.24 in fiscal 1999 and $3.44 in fiscal 2000 and the
following weighted average assumptions: risk-free interest rate of 4.5% for
fiscal 1998, 5.8% for fiscal 1999 and 6.3% for fiscal 2000; expected option life
of 7.0 years for fiscal 1998, 1999 and 2000; volatility of 75% fiscal 1998, 59%
for 1999 and 55% for fiscal 2000; and no dividend yield in any year. The average
fair values of options granted during fiscal years 1998, 1999 and 2000 were
$1.93, $1.45 and $2.15, respectively.
61
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(15) SERVICE CONTRACT ARRANGEMENTS
Service contracts for pari-mutuel wagering systems in North America
generally cover a five-year period and provide for substantial related services
such as software, maintenance personnel, computer operators and certain
operating supplies. Under such contracts, the Company retains ownership of all
equipment located at the wagering facilities. The service contracts also provide
for certain warranties covering operation of the equipment, machines, display
equipment and central computing equipment. The breach of such warranties could
result in significant liquidated damages. The equipment is placed at customer
facilities under contracts generally providing for revenue based on the greater
of a percentage of total amounts wagered or, if appropriate, a specified
minimum.
Minimum annual payments expected to be received under service contracts in
effect as of October 31, 2000 with specified minimums are as follows: 2001,
$15,594; 2002, $15,811; 2003, $13,306; 2004, $11,715; 2005, $10,134 and
thereafter $2,993.
(16) EXPORT SALES AND MAJOR CUSTOMERS
Sales to foreign customers amounted to, $9,717, $49,939 and $41,389 in
fiscal years 1998, 1999 and 2000, respectively. No single customer represented
more than 10% of revenues in fiscal 1998. In fiscal 1999 and 2000. One customer
in the Lottery Group segment represented $35,969 or 17% and $29,830 or 13% of
revenues, respectively.
(17) PENSION PLANS
The Company has a defined benefit plan for U.S. based union employees.
Retirement benefits under the plan are based upon the number of years of
credited service up to a maximum of thirty years for the majority of the
employees. The Company also has a defined benefit plan for U.K. based employees.
The deined benefit plan for U.K. employees was assumed in connection with the
acquisition of Scientific Games. Retirement benefits under the plan are based on
an average of the employee's compensation over two years preceding retirement or
leave of service. The Company's policy is to fund the minimum contribution
permissible by the respective tax authorities.
In September 2000, the Board of Directors approved the adoption of a
Supplemental Executive Retirement Plan, or "SERP," intended to provide
supplemental retirement benefits for certain senior officers of the Company. The
SERP will provide for retirement benefits according to a formula based on each
participant's years of service with the Company and average rate of
compensation. The SERP had no activity through October 31, 2000.
62
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(17) PENSION PLANS--(CONTINUED)
The net cost for the Company's defined benefit plans consisted of the
following components:
PENSION BENEFITS
---------------------------------
U.S. U.K.
PLAN PLAN
-------------------- -------
1999 2000 2000
------- ------- -------
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year ............................. $ 1,802 1,828 13,772
Service cost ........................................................ 88 104 145
Amendments .......................................................... -- 52 --
Interest cost ....................................................... 116 121 145
Actuarial gain ...................................................... (49) (141) (435)
Benefits paid ....................................................... (129) (56) --
Revaluation loss .................................................... -- -- --
------- ------- -------
Benefit obligation at end of year ................................... 1,828 1,908 13,627
------- ------- -------
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year ...................... 1,600 1,555 14,207
Actual return on plan assets ........................................ (45) (43) (435)
Employer contribution ............................................... 129 178 --
Benefits paid ....................................................... (129) (56) --
------- ------- -------
Fair value of plan assets at end of year ............................ 1,555 1,634 13,772
------- ------- -------
Funded status ....................................................... (273) (274) 145
Unrecognized actuarial loss ......................................... 567 577 275
Unrecognized prior service cost ..................................... 79 118 --
Unrecognized net transition obligation .............................. 35 30 --
------- ------- -------
Net amount recognized ............................................... $ 408 451 420
======= ======= =======
Amounts recognized in the statement of
financial position consist of:
Accrued benefit liability ........................................... $ (681) (725) --
Intangible asset .................................................... 79 118 --
Accumulated other comprehensive income .............................. 602 607 --
Prepaid pension cost ................................................ 408 408 420
------- ------- -------
Net amount recognized ............................................... $ 408 408 420
======= ======= =======
PENSION BENEFITS
---------------------------------------------
U.S. U.K.
PLAN PLAN
------------------------------ ----------
1999 2000 2000
-------------- ------------ ----------
WEIGHTED-AVERAGE ASSUMPTIONS AS OF OCTOBER 31:
Discount rate...................................................... 6.750% 7.000% 6.500%
Expected return on plan assets..................................... 8.000% 8.000% 7.500%
Rate of compensation............................................... None None 4.500%
63
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(17) PENSION PLANS--(CONTINUED)
PENSION BENEFITS
----------------------------------------------
U.S. U.K.
PLAN PLAN
---------------------------------- ---------
1998 1999 2000 2000
----------- ---------- ------- ---------
COMPONENTS OF NET PERIODIC BENEFIT COST:
Service cost................... $ 63 88 104 145
Interest cost.................. 108 116 121 145
Expected return on plan assets. (114) (129) (127) (435)
Net amortization and deferral.. 23 27 37 --
----------- ---------- ------- ---------
Net periodic cost.............. $ 80 102 135 (145)
=========== ========== ======= =========
The accumulated benefit obligation represents the actuarial present value of
benefits based upon the benefit multiplied by the participants' historical years
of service.
The plan assets for the U.S. based plan are invested in insurance company
general accounts guaranteed as to principal. The plan assets for the U.K. based
plan are primarily invested in equity securities.
As required by Financial Accounting Standards Board Statement No. 87 ("SFAS
87"), "Employers' Accounting for Pensions" for pension plans where the
accumulated benefit obligation exceeds the fair value of plan assets, the
Company has recognized in the consolidated balance sheet at October 31, 1999 and
2000 the additional minimum liability of the unfunded accumulated benefit
obligation of $681 and $725, respectively, as a long-term liability, with a
partially offsetting intangible asset and equity adjustment.
In connection with its U.S. based collective bargaining agreements, the
Company participates with other companies in a defined benefit pension plan
covering union employees. Payments made to the multi-employer plan were
approximately, $280, $469 and $479 during the years ended October 31, 1998, 1999
and 2000, respectively.
The Company has a 401K plan covering all U.S. based employees who are not
covered by a collective bargaining agreement. Company contributions to the plan
are at the discretion of the Board of Directors. Pension expense for the years
ended October 31, 1998, 1999 and 2000 amounted to approximately $926, $1,015 and
$1,004, respectively. The Company has a 401K plan for all union employees which
does not provide for Company contributions.
(18) MANAGEMENT INCENTIVE COMPENSATION
The Company has an incentive compensation plan for key management personnel
based on business unit performance, overall performance of the Company and
individual performance. Management incentive compensation expense amounted to
$1,686, $2,000 and $2,532 in fiscal years 1998, 1999 and 2000, respectively.
64
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(19) INCOME TAX EXPENSE
The consolidated income (loss) before income tax expense and extraordinary
item, by domestic and foreign source, is as follows:
YEARS ENDED OCTOBER 31,
------------------------------------------
1998 1999 2000
-------- -------- --------
Domestic ............................ $(14,371) 128 (14,488)
Foreign ............................. (1,188) 428 (2,329)
-------- -------- --------
Consolidated income (loss) before
income tax expense and extraordinary item $(15,559) 556 (16,817)
======== ======== ========
Income tax expense (benefit) consists of:
CURRENT DEFERRED TOTAL
-------- -------- --------
1998- Foreign ...................... $ 1,040 (719) 321
======== ======== ========
1999- Federal ...................... $ (33) (15) (48)
- Foreign ...................... 137 (161) (24)
- State ........................ 249 -- 249
-------- -------- --------
- Total ........................ $ 353 (176) 177
======== ======== ========
2000- Federal ...................... -- -- --
- Foreign ...................... 1,079 143 1,222
- State ........................ 381 -- 381
-------- -------- --------
- Total ........................ $ 1,460 143 1,603
======== ======== ========
Temporary differences between the financial statement carrying amounts and
tax basis of assets and liabilities that give rise to significant portions of
the deferred tax liability (asset) relate to the following:
OCTOBER 31,
------------------------
NET DEFERRED TAX LIABILITY 1999 2000
---------- ---------
Accrued vacation.................................. $ (767) (608)
Inventory......................................... (532) (4,367)
Accrued litigation expenses....................... (612) (602)
Accrued loss on disposition of business........... (600) --
Other accrued liabilities......................... (942) (754)
Reserve for doubtful accounts..................... (959) (773)
---------- ---------
Current deferred tax asset..................... (4,412) (7,104)
---------- ---------
Intangible assets-difference in basis and
amortization periods........................... 1,298 55,937
Property and equipment-differences in basis and
depreciation methods........................... 4,747 12,684
Other, net........................................ 58 --
Interest charge, Domestic International Sales Corp 5,927 6,301
---------- ---------
Noncurrent deferred tax liability, net......... 12,030 74,922
---------- ---------
65
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(19) INCOME TAX EXPENSE --(CONTINUED)
Net operating loss carryforward................... (48,746) (59,163)
Deferred compensation............................. (627) (572)
Partnership investments........................... (354) (978)
Alternative minimum tax credits................... (335) (335)
Research and experimentation credits.............. (34) (9)
---------- ---------
Noncurrent deferred tax asset.................. (50,096) (61,057)
Valuation allowance............................... 44,134 54,073
---------- ---------
Noncurrent deferred tax asset, net............. (5,962) (6,984)
---------- ---------
Noncurrent deferred tax liability.............. 6,068 67,938
---------- ---------
Net deferred tax liability on balance sheet.... 1,656 60,834
========== =========
The aggregate deferred tax assets before valuation allowance at October 31,
1999 and 2000 were $54,508 and $68,161, respectively. The aggregate deferred tax
liabilities at October 31, 1999 and 2000 were $12,030 and $74,922, respectively.
The actual tax expense differs from the "expected" tax expense (computed by
applying the U.S. Federal corporate rate of 34% to income (loss) before income
tax expense and extraordinary item) as follows:
OCTOBER 31,
----------------------------
1998 1999 2000
--------- ------- -------
Computed "expected" tax expense (benefit)............... $ (5,290) 189 (5,718)
Increase (reduction) in income taxes resulting from:
Unused net operating loss............................ 4,788 -- 4,924
Foreign tax differential............................. 725 (201) 2,014
Other, net........................................... 98 189 383
--------- ------- -------
$ 321 177 1,603
========= ======= =======
The Company has regular tax net operating loss carryforwards of
approximately $34,149 that expire in 2009, $40,777 that expire in 2010, $25,406
that expire in 2011, $11,074 that expire in 2012, $10,150 that expire in 2018
and $27,051 that expire in 2020. In connection with the acquisition of
Scientific Games and the concurrent sale of convertible preferred stock, the
Company incurred an ownership change pursuant to Section 382 of the Internal
Revenue Code of 1986. As a result, the availability of tax net operating loss
carryforwards realized by the Company prior to the change in ownership, totaling
approximately $120,000, to offset post acquisition taxable income will be
limited to approximately $7,500 annually, except with respect to any taxable
income, if any, attributable to sales of pre-acquisition assets.
The Company has minimum tax credit carryforwards (which can be carried
forward indefinitely) of approximately $335 and research and experimentation
credit carryforwards of approximately $9. The research and experimentation
credits expire from 2002 to 2003.
The net changes in the valuation allowance for deferred tax assets for the
years ended October 31, 1999 and 2000 were an increase of $2,414 and a decrease
of $9,939, respectively.
66
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(19) INCOME TAX EXPENSE --(CONTINUED)
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
asset will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income,
limitations on the utilization of tax net operating loss carryforwards and tax
planning strategies in making this assessment. Because of tax losses in recent
years, no deferred tax assets have been recorded.
Subsequently recognized tax benefits relating to the valuation allowance for
deferred tax assets as of October 31, 2000 will be allocated as follows:
Income tax benefit that would be reported in the
consolidated statements of operations......................... $ 51,223
Additional capital (benefit from exercise of stock options)... 2,850
-----------
54,073
===========
(20) BUSINESS AND GEOGRAPHIC SEGMENTS
The Company adopted Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information" ("SFAS
131") in fiscal 1999. Business segments are defined by SFAS 131 as components of
an enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker assessing performance
and making operating and capital decisions.
The following tables represent revenues, profits, depreciation and assets by
business and geographic segments for the years ended October 31, 1998, 1999 and
2000. Operating revenues are allocated among geographic segments based on where
the customer is located. The accounting policies of the segments are the same as
those described in the summary of significant accounting policies in Note 1.
Corporate expenses are allocated among business and geographic segments.
Interest expense and other (income) deductions are not allocated to business
segments. Prior year's segment information has been restated to conform to the
requirements of SFAS 131.
YEARS ENDED OCTOBER 31,
----------------------------
BUSINESS SEGMENTS 1998 1999 2000
--------- ------- -------
Service and Sales Revenue
Lottery Group............................ 18,047 49,340 64,380
Pari-mutuel Group........................ $ 88,864 99,174 101,241
Venue Management Group................... 50,525 61,562 61,411
Telecommunications Group................. -- -- 5,989
SJC Video Group.......................... 1,877 1,072 327
--------- ------- -------
$ 159,313 211,148 233,348
========= ======= =======
Gross profit
Lottery Group............................ 5,313 12,672 17,136
Pari-mutuel Group........................ $ 35,317 39,612 40,885
Venue Management Group................... 13,569 15,121 16,785
Telecommunications Group................. -- -- 2,642
SJC Video Group.......................... 459 310 --
--------- ------- -------
$ 54,658 67,715 77,448
========= ======= =======
67
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(20) BUSINESS AND GEOGRAPHIC SEGMENTS--(CONTINUED)
YEARS ENDED OCTOBER 31,
------------------------------
BUSINESS SEGMENTS 1998 1999 2000
--------- ------- -------
Operating income (loss)
Lottery Group............................ 321 7,999 1,186
Pari-mutuel Group........................ $ (6,410) 5,383 5,344
Venue Management Group................... 5,570 5,839 6,859
Telecommunications Group................. -- -- 569
SJC Video Group.......................... (583) (2,473) --
--------- ------- -------
$ (1,102) 16,748 13,958
========= ======= =======
Included in operating income (loss)
Depreciation and amortization
Lottery Group............................ 2,100 2,297 7,746
Pari-mutuel Group........................ $ 23,912 16,386 17,034
Venue Management Group................... 2,633 2,778 2,830
Telecommunications Group................. -- -- 216
SJC Video Group.......................... 844 728 --
--------- ------- -------
$ 29,489 22,189 27,826
========= ======= =======
(Gain) loss on sale/disposition of businesses
Lottery Group............................ (1,184) -- --
SJC Video Group.......................... 1,250 1,600 --
--------- ------- -------
$ 66 1,600 --
========= ======= =======
A reconciliation of total segment operating
income to consolidated income (loss) before
income tax expense and extraordinary item
is as follows:
Total reported segments.................... $ (1,102) 16,748 13,958
Interest expense........................... 15,521 15,941 31,231
Other (income) expense..................... (1,064) 251 (456)
--------- ------- -------
$ (15,559) 556 (16,817)
========= ======= =======
Assets
Lottery Group............................ 17,380 20,348 350,367
Pari-mutuel Group........................ $ 99,946 110,598 227,049
Venue Management Group................... 36,537 34,613 34,207
Telecommunications Group................. -- -- 35,592
SJC Video Group.......................... 2,637 -- --
--------- ------- -------
$ 156,500 165,559 647,215
========= ======= =======
Capital and wagering systems expenditures
Lottery Group............................ 13,312 2,615 11,306
Pari-mutuel Group........................ $ 9,217 10,714 20,851
Venue Management Group................... 1,368 1,492 2,373
Telecommunications Group................. -- -- 516
SJC Video Group.......................... 163 113 --
--------- ------- -------
$ 24,060 14,934 35,046
========= ======= =======
68
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(20) BUSINESS AND GEOGRAPHIC SEGMENTS--(CONTINUED)
YEARS ENDED OCTOBER 31,
-----------------------------
GEOGRAPHIC SEGMENTS 1998 1999 2000
--------- -------- --------
Service and Sales Revenue
North America............................ $ 126,726 135,299 150,899
Italy.................................... 11,298 36,331 29,828
Other ................................... 21,289 39,518 52,621
--------- -------- --------
$ 159,313 211,148 233,348
========= ======== ========
Long-lived assets (excluding identifable
intangibles)
North America............................ $ 73,270 70,576 156,460
Europe................................... 4,252 5,629 8,224
Other.................................... 911 523 21,970
--------- -------- --------
$ 78,433 76,728 186,654
========= ======== ========
(21) SELECTED QUARTERLY FINANCIAL DATA--(UNAUDITED)
Selected quarterly financial data for the years ended October 31, 1999 and
2000 is as follows:
YEAR ENDED OCTOBER 31, 1999
-------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- ------- ------- --------
Total operating revenues...................... $ 45,652 53,079 53,170 59,247
Gross profit.................................. 14,333 16,631 17,631 19,120
Net income (loss)............................. (2,434) 572 1,895 346
Net income (loss) per basic share and diluted
share......................................... $ (0.07) 0.02 0.05 0.01
======== ======= ======= ========
Weighted average number of shares used in
per share calculations:
Basic shares............................. 35,998 36,032 36,169 36,246
Diluted shares........................... 35,998 37,371 38,699 39,465
======== ======= ======= ========
69
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(21) SELECTED QUARTERLY FINANCIAL DATA--(UNAUDITED)--(CONTINUED)
YEAR ENDED OCTOBER 31, 2000
----------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
Total operating revenues...................... $ 49,565 51,061 49,979 82,743
Gross profit.................................. 17,089 18,257 18,252 23,850
Income (loss) before extraordinary items...... 464 2,306 1,661 (22,851)
Extraordinary items- write-off of deferred
finance fees and debt call premium .......... -- -- -- 12,567
-------- -------- -------- --------
Net income (loss)............................. 464 2,306 1,661 (35,418)
Convertible preferred stock dividend.......... -- -- -- 1,014
-------- -------- -------- --------
Net income (loss) available to common
stockholders.................................. $ 464 2,306 1,661 (36,432)
======== ======== ======== ========
Basic and diluted earnings per share:
Basic income (loss) before extraordinary items $ 0.01 0.06 0.05 (0.60)
======== ======== ======== ========
Diluted income (loss) before extraordinary
items......................................... $ 0.01 0.06 0.04 (0.60)
======== ======== ======== ========
Extraordinary items per basic and diluted share $ -- -- -- (0.34)
======== ======== ======== ========
Basic net income (loss)....................... $ 0.01 0.06 0.05 (0.94)
======== ======== ======== ========
Diluted net income (loss)..................... $ 0.01 0.06 0.04 (0.94)
======== ======== ======== ========
Basic income (loss) available to common
stockholders.................................. $ 0.01 0.06 0.05 (0.96)
======== ======== ======== ========
Diluted income (loss) available to common
stockholders.................................. $ 0.01 0.06 0.04 (0.96)
======== ======== ======== ========
Weighted average number of shares used in
per share calculations:
Basic shares............................. 36,388 36,622 36,886 37,809
Diluted shares........................... 40,353 41,878 41,430 37,809
======== ======== ======== ========
(22) UNUSUAL ITEMS AND FOURTH QUARTER RESULTS
In fiscal 1998, the Company recognized unusual charges of $1,500 for
severance and downsizing costs, primarily in the Company's French pari-mutuel
operations, and accelerated the amortization of related goodwill due to the loss
of a major service contract. In addition, in fiscal 1998, the Company reversed
reserves of $1,300 in connection with the collection of receivables previously
reserved due to concerns about their recoverability and for cost savings related
to the refurbishment of certain terminals.
In fiscal 2000, the Company recognized unusual interest expense charges
in the amount of $7,511 attributable to payments, in the form of warrants, to
purchase 2,900 shares of Autotote common stock, to certain financial advisors
in connection with their services in obtaining certain financial commitments
to acquire Scientific Games, $1,200 of additional interest expense as a
result of the required pre-funding of the Notes, and approximately $2,300 of
incremental business integration costs as a result of the Scientific Games
acquisition. The Company also recorded a $1,135 write-off of its option to
purchase the Atlantic City Raceway as a result of the New Jersey
legislature's failure to pass the necessary legislation to allow OTB
expansion in the state and recorded an extraordinary charge of $12,567 in
connection with the payment of the call premium on the Old Notes and the
write-off of deferred financing fees.
70
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(23) LITIGATION
Although the Company is a party to various claims and legal actions
arising in the ordinary course of business, management believes, on the basis
of information presently available to it, that the ultimate disposition of
these matters will not likely have a material adverse effect on the
consolidated financial position or results of operations of the Company.
Autotote's subsidiary, Scientific Games Inc. ("SGI"), owns a minority
interest in Wintech de Colombia S.A. ("Wintech"), which formerly operated the
Colombian national lottery under contract with Empresa Colombiana de Recursos
para la Salud, S.A. ("Ecosalud"), an agency of the Colombian government. The
contract projected that certain levels of lottery ticket sales would be attained
and provided a penalty against Wintech, SGI and the other shareholders of
Wintech of up to $5,000 if such performance levels were not achieved. In
addition, with respect to a further guarantee of performance under the contract
with Ecosalud, SGI delivered to Ecosalud a $4,000 bond issued by a Colombian
surety, Seguros del Estado ("Seguros"). Wintech started the instant lottery in
Colombia, but, due to difficulties beyond its control, including, among other
factors, social and political unrest in Colombia, frequently interrupted
telephone service and power outages, and competition from another lottery being
operated in a province of Colombia in violation of Wintech's exclusive license
from Ecosalud, the projected sales level was not met for the year ended June
1993. On July 1, 1993, Ecosalud adopted resolutions declaring, among other
things, that the contract was in default and asserted various claims for
compensation and penalties against Wintech, SGI and other shareholders of
Wintech. Litigation is pending in Colombia concerning various claims among
Ecosalud, Wintech and SGI, relating to the termination of the contracts with
Ecosalud (the "Colombian Litigation"). Ecosalud's claims in the Colombian
Litigation were for, among other things, realization on the full amount of the
penalty, plus interest and costs of the bond.
The Colombian surety, Seguros, paid $2,400 to Ecosalud under its $4,000
bond, and made demand upon SGI for that amount under the indemnity agreement
between the surety and SGI. SGI declined to make or authorize any such payment
and notified the surety that any payment in response to Ecosalud's demand on the
bond was at the surety's risk. On April 2, 1998, Seguros brought suit against
SGI in the District Court for the Northern District of Georgia, Atlanta Division
seeking $2,400 for sums paid by Seguros to Ecosalud under the surety bond on
November 1, 1994, plus interest at the Colombian bank rate of interest.
On September 29, 1999, the District Court denied various motions of SGI,
including a motion to dismiss, based on the Colombian statute of limitations of
two years, and granted Seguros' motion for summary judgment, which was filed on
May 6, 1998, and entered judgment for Seguros in the amount of $2,400 or the
equivalent in Colombian pesos as of the judgment date, plus pre-judgment
interest at a rate of 38.76% per annum, equivalent to approximately $4,600. SGI
has appealed the District Court's order and judgment and posted a $7,000 appeal
bond. SGI continues to believe that it has meritorious defenses, including that
the amount paid by Seguros was improperly paid because of the default by
Ecosalud of its obligations to SGI, which claims remain the subject of separate
litigation in Colombia.
SGI has been advised by Colombian counsel that SGI has various legal
defenses to Ecosalud's claims which we intend to vigorously pursue. SGI also has
certain cross indemnities and undertakings from the two other privately held
shareholders of Wintech for their respective shares of any liability to
Ecosalud. That obligation is secured in part by a $1,500 confirmed letter of
credit in favor of SGI. No assurance can be given that the other shareholders of
Wintech will, or have sufficient assets, to honor their indemnity undertakings
to SGI when the claims by Ecosalud against SGI and Wintech are finally resolved,
in the event such claims result in any final liability.
Although it is not possible to determine the ultimate outcome of the
appeal of the order and judgment granted to Seguros or the outcome of any
litigation in Colombia, management, believes that any potential losses will
not have a material adverse effect on the consolidated financial position or
results of operations.
71
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(24) FINANCIAL INFORMATION FOR GUARANTOR SUBSIDIARIES AND NON-GUARANTOR
SUBSIDIARIES
The Company conducts substantially all of its business through its domestic
and foreign subsidiaries. The Notes and Facility issued on September 6, 2000 in
connection with the acquisition of Scientific Games are jointly and severally
guaranteed by substantially all of the Company's wholly owned domestic
subsidiaries (the "Guarantor Subsidiaries").
Presented below is condensed consolidating financial information for (i)
Autotote Corporation (the "Parent Company") which includes the activities of
Autotote Management Corporation, (ii) the Guarantor Subsidiaries and (iii) the
wholly owned foreign subsidiaries and the non-wholly owned domestic and foreign
subsidiaries (the "Non-Guarantor Subsidiaries") as of October 31, 1999 and
October 31, 2000 and for the fiscal years ended October 31, 1998, 1999 and 2000.
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.
72
AUTOTOTE CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
OCTOBER 31, 1999
(IN THOUSANDS)
Parent Guarantor Non-Guarantor Eliminating
Company Subsidiaries Subsidiaries Entries Consolidated
--------- ------------ ------------- ----------- ------------
ASSETS
Cash and cash equivalents .................... $ 1,598 506 2,963 -- 5,067
Accounts receivable, net ..................... -- 21,083 4,672 -- 25,755
Other current assets ......................... 30 14,143 4,017 (464) 17,726
Property and equipment, net .................. 298 66,973 9,708 (251) 76,728
Investment in subsidiaries ................... 58,214 -- -- (58,214) --
Goodwill ..................................... 198 353 4,686 -- 5,237
Other assets ................................. 6,199 30,385 659 (2,197) 35,046
--------- --------- --------- --------- ---------
Total assets ............................. $ 66,537 133,443 26,705 (61,126) 165,559
========= ========= ========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities .......................... $ 12,219 29,546 10,922 (672) 52,015
Current installments of long-term debt ....... 1,250 2,429 574 -- 4,253
Long-term debt, excluding current
installments .............................. 145,000 6,627 1,264 -- 152,891
Other non-current liabilities ................ 2,193 1,233 1,766 (573) 4,619
Intercompany balances ........................ (45,906) 43,214 1,942 750 --
Stockholders' equity (deficit) ............... (48,219) 50,394 10,237 (60,631) (48,219)
--------- --------- --------- --------- ---------
Total liabilities and stockholders'
equity (deficit) ........................ $ 66,537 133,443 26,705 (61,126) 165,559
========= ========= ========= ========= =========
AUTOTOTE CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
OCTOBER 31, 2000
(IN THOUSANDS)
Parent Guarantor Non-Guarantor Eliminating
Company Subsidiaries Subsidiaries Entries Consolidated
--------- ------------ ------------- ----------- ------------
ASSETS
Cash and cash equivalents .................... $ 379 7,791 7,137 1 15,308
Accounts receivable, net ..................... -- 40,699 18,180 (4,616) 54,263
Other current assets ......................... 531 33,352 9,407 (434) 42,856
Property and equipment, net .................. 2,020 151,536 33,937 (839) 186,654
Investment in subsidiaries ................... 193,740 -- -- (193,740) --
Goodwill ..................................... 191 145,549 10,817 -- 156,557
Intangible assets ............................ -- 110,432 22,287 -- 132,719
Other assets ................................. 20,516 79,756 997 (42,411) 58,858
--------- --------- --------- --------- ---------
Total assets ............................. $ 217,377 569,115 102,762 (242,039) 647,215
========= ========= ========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities .......................... $ 20,503 60,097 24,195 (4,048) 100,747
Current installments of long-term debt ....... 5,256 7 560 -- 5,823
Long-term debt, excluding current installments 437,490 (212) 4,997 (4,264) 438,011
Other non-current liabilities ................ 3,222 59,682 22,237 (16,826) 68,315
Intercompany balances ........................ (283,857) 258,203 26,138 (484) --
Stockholders' equity (deficit) ............... 34,763 191,338 24,635 (216,417) 34,319
--------- --------- --------- --------- ---------
Total liabilities and stockholders'
equity (deficit) ....................... $ 217,377 569,115 102,762 (242,039) 647,215
========= ========= ========= ========= =========
73
AUTOTOTE CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED STATEMENT OF OPERATIONS
YEAR ENDED OCTOBER 31, 1998
(IN THOUSANDS)
Parent Guarantor Non-Guarantor Eliminating
Company Subsidiaries Subsidiaries Entries Consolidated
--------- ------------ ------------- ----------- ------------
Operating revenues ......................... $ -- 140,327 30,247 (11,261) 159,313
Operating expenses ......................... -- 92,086 23,191 (10,622) 104,655
-------- -------- -------- -------- --------
Gross profit ............................ -- 48,241 7,056 (639) 54,658
-------- -------- -------- -------- --------
Selling, general and administrative expenses 9,179 13,247 3,779 -- 26,205
Gain on sale/disposition of business ....... 66 -- -- -- 66
Depreciation and amortization .............. 140 25,674 3,963 (288) 29,489
-------- -------- -------- -------- --------
Operating income (loss) ................. (9,385) 9,320 (686) (351) (1,102)
Interest expense ........................... 14,985 340 274 (78) 15,521
Other (income) deductions .................. (610) (110) (422) 78 (1,064)
-------- -------- -------- -------- --------
Income (loss) before equity in income of
subsidiaries and income taxes .......... (23,760) 9,090 (538) (351) (15,559)
Equity in income of subsidiaries ........... 8,055 -- -- (8,055) --
Income tax expense ......................... 175 53 93 -- 321
-------- -------- -------- -------- --------
Net income (loss) .......................... $(15,880) 9,037 (631) (8,406) (15,880)
======== ======== ======== ======== ========
AUTOTOTE CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED STATEMENT OF OPERATIONS
YEAR ENDED OCTOBER 31, 1999
(IN THOUSANDS)
Parent Guarantor Non-Guarantor Eliminating
Company Subsidiaries Subsidiaries Entries Consolidated
--------- ------------ ------------- ----------- ------------
Operating revenues ......................... $ -- 181,387 48,660 (18,899) 211,148
Operating expenses ......................... -- 119,324 42,994 (18,885) 143,433
-------- -------- -------- -------- --------
Gross profit ............................ -- 62,063 5,666 (14) 67,715
Selling, general and administrative expenses 9,170 13,515 4,511 (18) 27,178
Loss on sale/disposition of businesses .... -- 1,600 -- -- 1,600
Depreciation and amortization .............. 196 18,981 3,115 (103) 22,189
-------- -------- -------- -------- --------
Operating income (loss) ................. (9,366) 27,967 (1,960) 107 16,748
Interest expense ........................... 15,129 883 401 (236) 16,177
Other (income) deductions .................. (2,075) (690) 36 2,744 15
-------- -------- -------- -------- --------
Income (loss) before equity in income of
subsidiaries, and income taxes ......... (22,420) 27,774 (2,397) (2,401) 556
Equity in income of subsidiaries ........... 23,031 -- -- (23,031) --
Income tax expense (benefit) ............... 232 252 (307) -- 177
-------- -------- -------- -------- --------
Net income (loss) .......................... $ 379 27,522 (2,090) (25,432) 379
======== ======== ======== ======== ========
74
AUTOTOTE CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED STATEMENT OF OPERATIONS
YEAR ENDED OCTOBER 31, 2000
(IN THOUSANDS)
Parent Guarantor Non-Guarantor Eliminating
Company Subsidiaries Subsidiaries Entries Consolidated
--------- ------------ ------------- ----------- ------------
Operating revenues ........................... $ -- 186,408 60,286 (13,346) 233,348
Operating expenses ........................... -- 122,400 46,766 (13,266) 155,900
-------- -------- -------- -------- --------
Gross profit .............................. -- 64,008 13,520 (80) 77,448
Selling, general and administrative expenses . 13,572 16,186 5,917 (11) 35,664
Loss on sale/disposition of businesses ....... -- -- -- -- --
Depreciation and amortization ................ 291 23,210 4,428 (103) 27,826
-------- -------- -------- -------- --------
Operating income (loss) ................... (13,863) 24,612 3,175 34 13,958
Interest expense ............................. 30,535 531 1,037 (872) 31,231
Other (income) deductions .................... (1,000) (275) (198) 1,017 (456)
-------- -------- -------- -------- --------
Income (loss) before equity in income of
subsidiaries, and income taxes ............ (43,398) 24,356 2,336 (111) (16,817)
-------- -------- -------- -------- --------
Equity in income of subsidiaries ............. 25,195 -- -- (25,195) --
Income tax expense (benefit) ................. -- 812 791 -- 1,603
-------- -------- -------- -------- --------
Net income (loss) before extraordinary items . (18,203) 23,544 1,545 (25,306) (18,420)
-------- -------- -------- -------- --------
Extraordinary items:
Write-off of deferred financing fees and
expenses, net of gain on early retirement
of debt ................................. 12,522 45 -- -- 12,567
-------- -------- -------- -------- --------
Net income (loss) ............................ $(30,725) 23,499 1,545 (25,306) (30,987)
======== ======== ======== ======== ========
75
AUTOTOTE CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED STATEMENT OF CASH FLOWS
YEAR ENDED OCTOBER 31, 1998
(IN THOUSANDS)
Parent Guarantor Non-Guarantor Eliminating
Company Subsidiaries Subsidiaries Entries Consolidated
--------- ------------ ------------- ----------- ------------
Net income (loss) .......................... $(15,880) 9,037 (631) (8,406) (15,880)
Depreciation and amortization ........... 140 25,674 3,963 (288) 29,489
Equity in income of subsidiaries ........ (8,055) -- -- 8,055 --
Loss on sale/disposition of businesses .. 66 -- -- -- 66
Other non-cash adjustments .............. 1,234 (77) (414) -- 743
Changes in working capital .............. (1,957) (4,404) (51) 154 (6,258)
-------- -------- -------- -------- --------
Net cash provided by (used in) operating
activities ................................. (24,452) 30,230 2,867 (485) 8,160
-------- -------- -------- -------- --------
Cash flows from investing activities:
Capital and wagering systems expenditures (316) (21,620) (2,557) 433 (24,060)
Cash acquired with business acquisition . -- -- 2,177 -- 2,177
Other assets and investments ............ (973) (6,059) (479) 171 (7,340)
-------- -------- -------- -------- --------
Net cash provided by (used in) investing
activities .............................. (1,289) (27,679) (859) 604 (29,223)
-------- -------- -------- -------- --------
Cash flows from financing activities:
Net proceeds from issuance of long
term-debt ............................. -- 12,084 (25) -- 12,059
Payments on long-term debt .............. -- (2,774) (310) 12 (3,072)
Other, principally intercompany balances 12,208 (11,930) 274 (36) 516
-------- -------- -------- -------- --------
Net cash provided by (used in) financing
activities ................................. 12,208 (2,620) (61) (24) 9,503
-------- -------- -------- -------- --------
Effect of exchange rate changes on cash .... 5 1 251 (95) 162
-------- -------- -------- -------- --------
Increase/(decrease) in cash and cash
equivalents ................................ (13,528) (68) 2,198 -- (11,398)
Cash and cash equivalents, beginning of year 15,582 328 2,297 -- 18,207
-------- -------- -------- -------- --------
Cash and cash equivalents, end of year ..... $ 2,054 260 4,495 -- 6,809
======== ======== ======== ======== ========
76
AUTOTOTE CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED STATEMENT OF CASH FLOWS
YEAR ENDED OCTOBER 31, 1999
(IN THOUSANDS)
Parent Guarantor Non-Guarantor Eliminating
Company Subsidiaries Subsidiaries Entries Consolidated
--------- ------------ ------------- ----------- ------------
Net income (loss) ........................... $ 379 27,522 (2,090) (25,432) 379
Depreciation and amortization ............ 196 18,981 3,115 (103) 22,189
Equity in income of subsidiaries ......... (23,031) -- -- 23,031 --
Loss on sale/disposition of businesses ... -- 1,600 -- -- 1,600
Other non-cash adjustments ............... 1,081 109 25 -- 1,215
Changes in working capital ............... (235) 924 568 (91) 1,166
-------- -------- -------- -------- --------
Net cash provided by (used in) operating
activities .................................. (21,610) 49,136 1,618 (2,595) 26,549
-------- -------- -------- -------- --------
Cash flows from investing activities:
Capital and wagering systems expenditures (41) (11,835) (3,054) (4) (14,934)
Business acquisition, net of cash acquired (512) -- (2,333) 512 (2,333)
Other assets and investments ............. (631) (6,559) (699) (387) (8,276)
-------- -------- -------- -------- --------
Net cash provided by (used in) investing
activities .................................. (1,184) (18,394) (6,086) 121 (25,543)
-------- -------- -------- -------- --------
Cash flows from financing activities:
Net proceeds from issuance of long
term-debt ............................. -- 60 26 (86) --
Payments on long-term debt ............... -- (2,739) (514) 99 (3,154)
Other, principally intercompany balances . 22,286 (27,450) 3,141 2,260 237
-------- -------- -------- -------- --------
Net cash provided by (used in) financing
activities .................................. 22,286 (30,129) 2,653 2,273 (2,917)
-------- -------- -------- -------- --------
Effect of exchange rate changes on cash ..... 52 (367) 283 201 169
-------- -------- -------- -------- --------
Increase/(decrease) in cash and cash
equivalents ................................. (456) 246 (1,532) -- (1,742)
Cash and cash equivalents, beginning of year 2,054 260 4,495 -- 6,809
-------- -------- -------- -------- --------
Cash and cash equivalents, end of year ...... $ 1,598 506 2,963 -- 5,067
======== ======== ======== ======== ========
77
AUTOTOTE CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED STATEMENT OF CASH FLOWS
YEAR ENDED OCTOBER 31, 2000
(IN THOUSANDS)
Parent Guarantor Non-Guarantor Eliminating
Company Subsidiaries Subsidiaries Entries Consolidated
--------- ------------ ------------- ----------- ------------
Net income (loss) ............................ $ (30,725) 23,499 1,545 (25,306) (30,987)
Depreciation and amortization ............. 291 23,210 4,428 (103) 27,826
Equity in income of subsidiaries .......... (25,195) -- -- 25,195 --
Loss on sale/disposition of businesses .... -- 411 3 -- 414
Non-cash interest expense ................. 7,511 -- -- -- 7,511
Other non-cash adjustments ................ 15,553 (230) 211 -- 15,534
Changes in working capital ................ 7,208 3,323 (5,455) 34 5,110
--------- --------- --------- --------- ---------
Net cash provided by (used in) operating
activities ................................... (25,357) 50,213 732 (180) 25,408
--------- --------- --------- --------- ---------
Cash flows from investing activities:
Capital and wagering systems expenditures . (1,863) (27,581) (5,715) 113 (35,046)
Business acquisition, net of cash acquired (111,305) (215,091) 73 10,081 (316,242)
Proceeds from sale of business and assets
disposals ............................... -- 100 245 -- 345
Other assets and investments .............. (240,221) 230,282 4,945 (1,546) (6,540)
--------- --------- --------- --------- ---------
Net cash provided by (used in) investing
activities ................................... (353,389) (12,290) (452) 8,648 (357,483)
--------- --------- --------- --------- ---------
Cash flows from financing activities:
Net borrowing under lines of credit ....... 11,250 -- -- -- 11,250
proceeds from issuance of long term-debt .. 441,501 -- 1,043 (22) 442,522
Payments on long-term debt ................ (165,957) (34,301) (1,104) -- (201,362)
Net Proceeds from Stock Issue ............. 107,525 (547) 993 (479) 107,492
Payment of finance fees ................... (16,792) -- -- -- (16,792)
--------- --------- --------- --------- ---------
Net cash provided by (used in) financing
activities ................................... 377,527 34,848 932 (501) 343,110
--------- --------- --------- --------- ---------
Effect of exchange rate changes on cash ...... -- 370 (1,228) 64 (794)
--------- --------- --------- --------- ---------
Increase/(decrease) in cash and cash
equivalents .................................. (1,219) 3,445 (16) 8,031 10,241
Cash and cash equivalents, beginning of year . 1,598 4,346 7,153 (8,030) 5,067
--------- --------- --------- --------- ---------
Cash and cash equivalents, end of year ....... $ 379 7,791 7,137 1 15,308
========= ========= ========= ========= =========
78
SCHEDULE II
AUTOTOTE CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
THREE YEARS ENDED OCTOBER 31, 2000
(IN THOUSANDS)
ADDITIONS
-------------------
CHARGED
BALANCE TO BALANCE
AT COSTS AT
BEGINNING AND END OF
OF PERIOD EXPENSES OTHER DEDUCTIONS(1) PERIOD
--------- -------- ------ ------------- --------
YEAR ENDED OCTOBER 31, 1998
Allowance for doubtful accounts..... $ 1,976 888 -- 1,053 1,811
Reserve for inventory obsolescence.. $ 2,238 296 50 247 2,337
YEAR ENDED OCTOBER 31, 1999
Allowance for doubtful accounts..... $ 1,811 1,140 -- 162 2,789
Reserve for inventory obsolescence.. $ 2,337 221 -- 712 1,846
YEAR ENDED OCTOBER 31, 2000
Allowance for doubtful accounts..... $ 2,789 2,077 -- 558 4,308
Reserve for inventory obsolescence.. $ 1,846 31 -- 311 1,566
(1) Amounts written off.
79
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE MATTERS
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information relating to directors of the Company and information relating
to disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
incorporated herein by reference to the Company's proxy statement in connection
with the year 2001 Annual Meeting of Stockholders under the caption "Election of
Directors." Information relating to executive officers of the Company is
included in Part I of this Form 10-K as permitted in General Instruction [G3].
ITEM 11. EXECUTIVE COMPENSATION
Information relating to executive compensation under the caption
"Executive Compensation; Certain Arrangements," in the Company's proxy statement
in connection with the year 2001 Annual Meeting of Stockholders is incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information relating to security ownership of certain beneficial owners
and management under the caption, "Security Ownership" in the Company's proxy
statement in connection with the year 2001 Annual Meeting of Stockholders is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information under the caption "Certain Arrangements Between the Company
and its Directors and Officers" in the Company's proxy statement in connection
with the year 2001 Annual Meeting of Stockholders is incorporated herein by
reference.
80
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements--See Index to Consolidated Financial Statements
attached hereto, page 39.
2. Financial Statements Schedule--See Index to Consolidated Financial
Statements attached hereto, page 39.
3. Exhibits--The following is a list of exhibits:
EXHIBIT
NUMBER DESCRIPTION
- --------- -----------
2 Agreement and Plan of Merger, dated as of May 18, 2000, among
Autotote Corporation, ATX Enterprises, Inc. and Scientific Games
Holdings Corp. (Incorporated by reference to Exhibit 2 to the
Company's Current Report on Form 8-K filed on May 26, 2000.)
3.(i)(a) Certificate of Incorporation of the Company, as amended through
June 29, 1995. (Incorporated by reference to Exhibit 3.1 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
July 31, 1995.)
3.(i)(b) 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. (Incorporated by reference
to Exhibit 3.3 to the Company's Quarterly Report on Form 10-Q for
the quarter ended July 31, 2000 (the "July 2000 10-Q").)
3.(ii) Amended and Restated Bylaws of the Company. (+)
4.1 Indenture, dated as of August 14, 2000, among the Company, the
Subsidiary Guarantors and The Bank of New York, as Trustee,
relating to the 12 1/2% senior subordinated notes due 2010 (the
"Series A 12 1/2% Senior Notes"). (Incorporated by reference to
Exhibit 4.6 to the Company's July 2000 10-Q.)
4.2 Form of Series A 12 1/2% Senior Notes. (Incorporated by reference
to Exhibit A to Exhibit 4.6 to the Company's July 2000 10-Q.)
4.3 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 Series A 12 1/2% Senior Notes. (Incorporated
by reference to Exhibit 4.8 to the Company's July 2000 10-Q.)
4.4 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. (Incorporated
by reference as Exhibit 4.9 to the Company's July 2000 10-Q.)
10.2 Purchase Agreement among the Company, Autotote Enterprises, Inc.,
and the State of Connecticut, Division of Special Revenue, dated
June 30, 1993. (Incorporated by reference to Exhibit 2.1 to the
Company's Current Report on Form 8-K dated July 1, 1993.)
10.3 Agreement between the Company and Elettronica Ingegneria Sistemi
dated February 19, 1998. (Incorporated by reference to Exhibit
10.28 to the Company's Quarterly Report on Form 10-Q for the
quarter ended April 30, 1998 (the "April 1998 10-Q").)
10.4 General Agreement between the Company and Sisal Sport Italia SpA
dated February 19, 1998. (Incorporated by reference to Exhibit
10.29 to the Company's April 1998 10-Q.)
10.5 Agreement between Autotote Corporation and Stichting Hippo Toto
dated June 29, 1998 relating to purchase of Autotote Nederland
B.V. (Incorporated by reference to Exhibit 10.31 to the Company's
Quarterly Report on Form 10-Q for the quarter ended July 31,
1998.)
81
10.6 Instant Ticket and Associated Products and Services Agreement dated
May 4, 1993 by and between Georgia Lottery Corporation and
Scientific Games Inc. (Incorporated by reference to Scientific Games
Holding Corp.'s Registration Statement (No. 33-75168) filed on
February 11, 1994.)
10.7 Instant Lottery Tickets Supply Agreement between Thomas De La Rue
Limited, Scientific Games Inc. and Camelot Group plc, dated June 15,
1995. (Incorporated by reference to Scientific Games Holding Corp.'s
Quarterly Report on Form 10-Q for the quarter ended September 30,
1995. Portions of this Exhibit deemed confidential by Scientific
Games Holdings Corp. have been omitted.)
10.8 Supply Agreement for Instant Lottery Computer Management System
between La Francais Des Jeux and Scientific Games Inc.
(Incorporated by reference to Exhibit 10.53 to Scientific Games
Holding Corp.'s Quarterly Report on Form 10-Q for the quarter
ended June 30, 1999. Portions of this Exhibit deemed confidential
by Scientific Games Holdings Corp. have been omitted.)
10.9 Agreement of Purchase and Sale, dated January 19, 1996, between
Autotote Systems, Inc. and Fusco Properties, L.P. (Incorporated by
reference to Exhibit 10.42 to the Company's Annual Report on Form
10-K/A for the fiscal year ended October 31, 1995 (the "1995
10-K/A").)
10.10 Lease Agreement, dated as of January 19, 1996, between Fusco
Properties, L.P. and Autotote Systems, Inc. (Incorporated by
reference to Exhibit 10.43 to the Company's 1995 10-K/A.)
10.11 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 Series A Convertible Preferred Stock. (Incorporated
by reference to Exhibit 10.38 to the Company's July 2000 10-Q.)
10.12 1984 Stock Option Plan, as amended. (Incorporated by reference to
Exhibit 4.1 to the Company's Registration Statement on Form S-8
(Registration No. 33-46594) which became effective on March 20,
1992.) *
10.13 1992 Equity Incentive Plan, as amended and restated. (Incorporated
by reference to Exhibit 10.33 to the Company's Annual Report on
Form 10-K for the fiscal year ended October 31, 1998 (the "1998
10-K").)*
10.14 1995 Equity Incentive Plan, as amended. (Incorporated by reference
to Exhibit 10.14 to the Company's Annual Report on Form 10-K for
the fiscal year ended October 31, 1997.)*
10.15 1997 Incentive Compensation Plan as amended. (+)*
10.16 Form of Option dated March 3, 1992 issued to A. Lorne Weil.
(Incorporated by reference to Exhibit 10.45 to the Company's Annual
Report on Form 10-K for the fiscal year ended October 31, 1992 (the
"1992 10-K").)*
10.17 Employment Agreement effective November 1, 1997 between A. Lorne
Weil and Autotote Corporation (the "Weil Employment Agreement").
(Incorporated by reference to Exhibit 10.26 to the Company's
Quarterly Report on Form 10-Q for the quarter ended January 31,
1998.)*
10.18 Amendment dated September 10, 1998 to the Weil Employment Agreement.
(Incorporated by reference to Exhibit 10.27 to the Company's 1998
10-K.)*
10.19 Amendment dated September 1, 2000 to the Weil employment Agreement. (+)*
10.20 Form of Change in Control Agreement effective November 1, 1997
between Autotote Corporation and certain officers. (Incorporated
by reference to Exhibit 10.27 to the Company's April 1998 10-Q.)*
10.21 Letter Agreement dated January 11, 2001 between Autotote Corporation
and DeWayne Laird. (+)*
10.22 Letter Agreement dated January 11, 2001 between Autotote Corporation
and Martin Schloss. (+)*
82
10.23 The Autotote Corporation Key Executive Deferred Compensation Plan,
as amended. (+) *
10.24 Amended and Restated 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 October 6, 2000. (+)
10.25 Amended and Restated Security Agreement among the Company, the
Subsidiary Guarantors and the Administrative Agent, dated as of
October 6, 2000. (+)
10.26 Warrant Registration Rights Agreement among the Company, Donaldson,
Lufkin & Jenrette Securities Corporation and LBI Group Inc. dated as
of September 6, 2000. (Incorporated by reference to Exhibit 10.41 to
the Company's July 2000 10-Q.)*
10.27 Form of Employment and Severance Benefit Agreement, entered into
between Scientific Games Inc. and certain employees effective
September 6, 2000. (Incorporated by reference to Exhibit 10.42 to
the Company's July 2000 10-Q.)*
10.28 Form of Consulting Agreement by and between the Company and
William G. Malloy, dated May 18, 2000 and effective September 6,
2000. (Incorporated by reference to Exhibit 10.43 to the Company's
July 2000 10-Q.)*
21.1 List of Subsidiaries. (+)
23 Consent of KPMG LLP. (+)
27 Financial Data Schedule
99.1 Warrant to Purchase Class B Nonvoting Common Stock of Autotote
Corporation dated October 30, 1992 issued to various lenders.
(Incorporated by reference to Exhibit 10.34 to the Company's 1992
10-K.)
99.2 Warrant Agreement dated as of September 14, 1995 (the "1995
Warrant Agreement"). (Incorporated by reference to Exhibit 99.8 to
the Company's Registration Statement on Form S-4/A (Registration
No. 333-34465) which became effective on September 12, 1997 (the
"1997 S-4/A").)
99.3 Amendment dated January 29, 1997 to the 1995 Warrant Agreement.
(Incorporated by reference to Exhibit 99.10 to the Company's 1997
S-4/A.)
99.4 Form of Amended and Restated Warrant issued November 2, 1998 to
Certain Members of Management and Several Employees. (Incorporated
by reference to Exhibit 10.36 to the Company's Form 10-K for the
fiscal year ended October 31, 1999.)
99.5 Form of Warrant issued to Donaldson, Lufkin & Jenrette Securities
Corporation and LBI Group Inc. (Incorporated by reference to
Exhibit 99.11 to the Company's July 2000 10-Q.)
(+) Filed herewith.
* Includes management contracts and compensation plans and arrangements.
(b) Reports on Form 8-K
Current reports on Form 8-K were filed on September 21, 2000 regarding
the pro forma financials related to the acquisition of Scientific Games
Holding Corp. and certain related matters, and on December 29, 2000
regarding the determination by the Company to change its fiscal year
from the year ending October 31 to a calendar year, beginning with the
year ending December 31, 2001.
83
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
AUTOTOTE CORPORATION
Dated: January 29, 2001
By: /s/ A. LORNE WEIL
-----------------------------------
A. Lorne Weil, Chairman of Board,
President and Chief Executive Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES INDICATED ON JANUARY 28, 2000.
SIGNATURE TITLE DATE
- ------------------------------------ -------------------------- ----------------
Chairman of the Board,
/s/ A. LORNE WEIL President and Chief January 29, 2001
--------------------------- Executive Officer, and
A. LORNE WEIL Director (principal
executive officer)
Vice President and Chief
/s/ DEWAYNE E. LAIRD Financial Officer January 29, 2001
--------------------------- (principal financial and
DEWAYNE E. LAIRD accounting officer)
/s/ LARRY J. LAWRENCE Director January 29, 2001
---------------------------
LARRY J. LAWRENCE
/s/ SIR BRIAN G. WOLFSON Director January 29, 2001
---------------------------
SIR BRIAN G. WOLFSON
/s/ ALAN J. ZAKON Director January 29, 2001
---------------------------
ALAN J. ZAKON
/s/ WILLIAM G. MALLOY Director January 29, 2001
---------------------------
WILLIAM G. MALLOY
/s/ PETER A. COHEN Director January 29, 2001
---------------------------
PETER A. COHEN
/s/ COLIN J. O'BRIEN Director January 29, 2001
---------------------------
COLIN J. O'BRIEN
/s/ LUCIANO LA NOCE Director January 29, 2001
---------------------------
LUCIANO LA NOCE
/s/ MICHAEL S. IMMORDINO Director January 29,2001
---------------------------
MICHAEL S. IMMORDINO
/s/ ROBERTO SGAMBATI Director January 29, 2001
---------------------------
ROBERTO SGAMBATI
84
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION PAGE
- ----------- -------------------------------------------------------- ----------
3.(ii) Amended and Restated Bylaws of the Company.
10.15 1997 Incentive Compensation Plan as amended.
10.19 Amendment dated September 1, 2000 to the Weil employment
Agreement.
10.21 Letter Agreement dated January 11, 2001 between Autotote
Corporation and DeWayne Laird.
10.22 Letter Agreement dated January 11, 2001 between Autotote
Corporation and Martin Schloss.
10.23 The Autotote Corporation Key Executive Deferred
Compensation Plan, as amended.
10.24 Amended and Restated 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 October 6, 2000.
10.25 Amended and Restated Security Agreement among the Company, the
Subsidiary Guarantors and the Administrative Agent, dated as of
October 6, 2000
21.1 List of Subsidiaries.
23 Consent of KPMG LLP.
27 Financial Data Schedule.
85