<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 27, 2000
REGISTRATION NO. 333-51000
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
AUTOTOTE CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
------------------------
Co-Registrants
See Next Page
------------------------
750 LEXINGTON AVENUE, 25TH FLOOR
NEW YORK, NEW YORK 10022
(212) 754-2233
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)
MARTIN E. SCHLOSS, ESQ.
AUTOTOTE CORPORATION
750 LEXINGTON AVENUE, 25TH FLOOR
NEW YORK, NEW YORK 10022
(212) 754-2233
(Name, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agent For Service)
------------------------
COPIES TO:
PETER G. SMITH, ESQ.
KRAMER LEVIN NAFTALIS & FRANKEL LLP
919 THIRD AVENUE
NEW YORK, NEW YORK 10022
(212) 715-9100
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
------------------------
If any of the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. / /
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / / ____________
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / ____________
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
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<PAGE>
CO-REGISTRANTS
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<CAPTION>
EXACT NAME OF CO-REGISTRANT STATE OR OTHER JURISDICTION OF PRIMARY STANDARD INDUSTRIAL I.R.S. EMPLOYER
AS SPECIFIED IN ITS CHARTER INCORPORATION OR ORGANIZATION CLASSIFICATION CODE NUMBER IDENTIFICATION NO.
------------------------------- ------------------------------ --------------------------- ------------------
<S> <C> <C> <C>
Autotote Lottery Corporation... Delaware 7373 52-1808020
Autotote Enterprises, Inc...... Connecticut 7999 06-1370549
Acra Acquisition Corp.......... New Jersey 7373 51-0383829
Marvin H. Sugarman
Productions, Inc............. New York 4899 13-1951915
Autotote Gaming, Inc........... Nevada 7373 88-0415955
Autotote Keno Corporation...... Nebraska 7373 51-0354751
Autotote Systems, Inc.......... Delaware 7373 51-0354754
Autotote
International, Inc........... Delaware 7373 51-0213540
Autotote Management
Corporation.................. Delaware 7373 51-0354754
Autotote Dominicana Inc........ Delaware 7373 51-0404302
Scientific Games Holdings
Corp......................... Delaware 7373/2759 13-3615274
Scientific Games Inc........... Delaware 7373/2759 58-1943521
Scientific Games
(Greece), Inc................ Delaware 7373/2759 58-2130029
Scientific Games
Acquisition, Inc............. Delaware 7373/2759 58-2105952
Scigames France Inc............ Delaware 7373/2759 58-2391571
Scientific Games Royalty
Corporation.................. Delaware 7373/2759 51-0381259
Scientific Games Finance
Corporation.................. Delaware 7373/2759 51-0381261
</TABLE>
<PAGE>
PROSPECTUS
[LOGO]
AUTOTOTE CORPORATION
OFFER TO EXCHANGE
UP TO ALL $150,000,000 12 1/2% SENIOR SUBORDINATED NOTES DUE 2010, SERIES B FOR
ANY AND ALL OUTSTANDING 12 1/2% SENIOR SUBORDINATED NOTES DUE 2010, SERIES A
This Prospectus and the accompanying Letter of Transmittal relate to the
proposed offer by Autotote Corporation ("Autotote") to exchange up to $150.0
million in aggregate principal amount of new 12 1/2% senior subordinated notes
due 2010, series B, for any and all of its outstanding 12 1/2% senior
subordinated notes due 2010, series A. The new notes, which are referred to as
the "series B notes," will be freely transferable. The outstanding notes, which
are referred to as the "series A notes," have certain transfer restrictions. The
series A notes and the series B notes are collectively referred to as the
"notes."
The material terms of the exchange offer are as follows:
- Autotote will exchange all series A notes that are validly tendered and
not withdrawn prior to the expiration date of the exchange offer. The
exchange offer will expire at 5:00 p.m., New York City time on
, 2001, unless extended.
- You may withdraw tendered series A notes at any time prior to the
expiration of the exchange offer.
- The terms of the series B notes are substantially identical to the terms
of the series A notes, except for certain transfer restrictions and
registration rights relating to the series A notes.
- Autotote believes that there will be no United States federal income tax
consequences to holders of series A notes who exchange series A notes for
series B notes pursuant to the exchange offer, but you should read the
section entitled "Certain U.S. Federal Income Tax Considerations" for more
information.
- Series A notes not exchanged in the exchange offer will remain outstanding
and be entitled to the benefits of the indenture under which they were
issued, but under certain circumstances will not have further exchange or
registration rights.
- Autotote does not intend to apply for listing of the series B notes on any
securities exchange or to arrange for the series B notes to be quoted on
any quotation system.
- Autotote will not receive any proceeds from the exchange offer.
If you wish to accept the exchange offer, you must either deliver the series
A notes to be exchanged, together with the Letter of Transmittal that
accompanies this Prospectus and any other required documentation, to the
exchange agent identified in this Prospectus or effect a tender of your series A
notes by book-entry transfer into the exchange agent's account at The Depository
Trust Company. All deliveries are at your risk. You can find detailed
instructions concerning delivery in the "Exchange Offer" section of this
Prospectus and in the accompanying Letter of Transmittal.
Each broker-dealer that receives series B notes for its own account pursuant
to the exchange offer must acknowledge that it will deliver a prospectus in
connection with any resale of those series B notes. The Letter of Transmittal
states that by so acknowledging and by delivering a prospectus, a broker-dealer
will not be deemed to admit that it is an "underwriter" within the meaning of
the Securities Act of 1933, as amended. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of series B notes received in exchange for series A notes where the
series A notes were acquired by that broker-dealer as a result of market-making
activities or other trading activities. Autotote has agreed that for a period of
one year from the expiration date, it will make this Prospectus available to any
broker-dealer for use in connection with any resale. See "Plan of Distribution."
--------------------------
This investment involves risks. Please read this Prospectus carefully,
including the section entitled "Risk Factors" that begins on page 11 for a
discussion of the risks that you should consider prior to tendering your series
A notes for exchange.
Neither the Securities and Exchange Commission (the "SEC" or the
"Commission") nor any state securities and exchange commission has approved or
disapproved of these notes or passed upon the adequacy or the accuracy of this
Prospectus. Any representation to the contrary is a criminal defense.
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED.
AUTOTOTE MAY NOT SELL THE SERIES B NOTES UNTIL THE REGISTRATION STATEMENT FILED
WITH THE SEC IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THE SERIES B
NOTES AND IS NOT SOLICITING AN OFFER TO BUY THE SERIES B NOTES IN ANY
JURISDICTION WHERE THE OFFER TO SELL IS NOT PERMITTED.
The date of this Prospectus is December , 2000
<PAGE>
TABLE OF CONTENTS
<TABLE>
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Prospectus Summary.......................................... 1
Risk Factors................................................ 11
The Exchange Offer.......................................... 21
Forward-looking Statements.................................. 30
Use of Proceeds............................................. 30
Capitalization.............................................. 31
Selected Historical Consolidated Financial Data............. 42
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 47
Business.................................................... 66
Management.................................................. 87
Certain Transactions........................................ 90
Principal Stockholders...................................... 91
Regulation.................................................. 94
Description of New Senior Credit Facilities................. 104
Description of Notes........................................ 108
Description of Capital Stock................................ 145
Certain U.S. Federal Income Tax Considerations.............. 146
Plan of Distribution........................................ 149
Legal Matters............................................... 149
Independent Public Accountants.............................. 149
Index to Financial Statements............................... F-1
</TABLE>
<PAGE>
AVAILABLE INFORMATION
We have filed a Registration Statement (which term includes any amendments
to the Registration Statement) with the SEC on Form S-4 under the Securities Act
of 1933, as amended (the "Securities Act"), covering the series B notes to be
issued in the exchange offer. This Prospectus, which constitutes a part of the
Registration Statement, does not contain all of the information set forth in the
Registration Statement and the exhibits and schedules thereto, to which
reference is hereby made. Each statement made in this Prospectus referring to a
document filed as an exhibit or schedule to the Registration Statement is not
necessarily complete and is qualified in its entirety by reference to the
exhibit or schedule for a complete statement of its terms and conditions.
We are currently subject to the periodic reporting and other information
requirements of the Securities Exchange Act of 1934, as amended. You may read
and copy any document we file at the following SEC public reference rooms:
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Judiciary Plaza 500 West Madison Street 7 World Trade Center
450 Fifth Street, N.W. 14th Floor Suite 1300
Room 1024 Chicago, Illinois 60661 New York, New York 10048
Washington, D.C. 20549
</TABLE>
You may obtain information on the operation of the public reference room in
Washington, D.C. by calling the SEC at 1-800-SEC-0330.
We also file information electronically with the SEC. Our SEC filings are
available from the SEC's Internet site at http://www.sec.gov, which contains
reports, proxy and information statements, and other information regarding
issuers that file electronically.
Our obligations under the Exchange Act to file periodic reports and other
information with the SEC may be suspended, under certain circumstances, if the
series B notes and our class A common stock are held of record by fewer than 300
holders at the beginning of any fiscal year and are not listed on a national
securities exchange. We have agreed that, whether or not it is required to do so
by the SEC's rules and regulations, for so long as any series B notes remain
outstanding, it will furnish to the holders of those notes and file with the SEC
(unless the SEC will not accept the filing) all annual, quarterly and current
reports that we would be required to file with the SEC pursuant to Section
13(a) or 15(d) of the Exchange Act. In addition, for so long as any series A
notes remain outstanding, we have agreed to make available to any prospective
purchaser of the series A notes or any beneficial owner of the series A notes,
upon request, the information required by 144A(d)(4) under the Securities Act.
This Prospectus discloses certain information to you by referring you to
another document. These documents contain information about us that is not
included in or delivered with this Prospectus. You may request a copy of any
documents referred to you in this Prospectus (including the exhibits to those
documents) at no cost, by writing or calling us at the following address or
telephone number:
Autotote Corporation
750 Lexington Avenue, 25th Floor
New York, New York 10022
(212) 754-2233
Attn: Corporate Secretary
You should rely only on the information provided in this Prospectus. We have
not authorized anyone else to provide you with different information. You should
not assume that the information in this Prospectus is accurate as of any date
other than the date on the front of this Prospectus. Neither the delivery of
this Prospectus or the accompanying Letter of Transmittal, nor any exchange made
i
<PAGE>
pursuant to this prospectus shall under any circumstances create an implication
that the information contained in this Prospectus is correct as of any
subsequent date.
The exchange offer is not being made to, nor will tenders of series A notes
be accepted from, holders of series A notes in any jurisdiction in which the
exchange offer or its acceptance is unlawful.
Our Class A Common Stock is traded on the American Stock Exchange under the
symbol "TTE."
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PROSPECTUS SUMMARY
THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION FROM THIS PROSPECTUS. IT DOES
NOT CONTAIN ALL OF THE INFORMATION THAT IS IMPORTANT TO YOU. WE URGE YOU TO
CAREFULLY READ AND REVIEW THIS ENTIRE PROSPECTUS AND THE OTHER DOCUMENTS TO
WHICH IT REFERS. THROUGHOUT THIS PROSPECTUS, UNLESS THE CONTEXT OTHERWISE
REQUIRES, "WE," "US," OR "OUR" REFER TO AUTOTOTE CORPORATION AND ITS
CONSOLIDATED SUBSIDIARIES ON A PRO FORMA BASIS AFTER GIVING EFFECT TO THE
COMPLETION OF THE SCIENTIFIC GAMES ACQUISITION. "AUTOTOTE" REFERS TO AUTOTOTE
CORPORATION AND ITS CONSOLIDATED SUBSIDIARIES PRIOR TO THE COMPLETION OF THE
SCIENTIFIC GAMES ACQUISITION. "AUTOTOTE CORPORATION" REFERS TO AUTOTOTE
CORPORATION. "SCIENTIFIC GAMES" REFERS TO SCIENTIFIC GAMES HOLDINGS CORP. AND
ITS CONSOLIDATED SUBSIDIARIES PRIOR TO THE COMPLETION OF THE SCIENTIFIC GAMES
ACQUISITION. "SCIENTIFIC GAMES HOLDINGS" REFERS TO SCIENTIFIC GAMES HOLDINGS
CORP. ALL REFERENCES TO A FISCAL YEAR ARE TO OUR FISCAL YEAR THAT ENDS
OCTOBER 31. REFERENCES TO A PRO FORMA LTM PERIOD REFER TO THE LAST TWELVE MONTHS
ENDED JULY 31, 2000 AS TO AUTOTOTE AND THE LAST TWELVE MONTHS ENDED JUNE 30,
2000 AS TO SCIENTIFIC GAMES ON A COMBINED PRO FORMA BASIS, AND REFERENCES TO A
PRO FORMA BALANCE SHEET REFER TO THE BALANCE SHEET OF AUTOTOTE AS OF JULY 31,
2000 AND THE BALANCE SHEET OF SCIENTIFIC GAMES AS OF JUNE 30, 2000 ON A COMBINED
PRO FORMA BASIS.
The information in this Prospectus is not complete and may be changed. We
may not sell or offer these securities until the time the registration statement
filed with the SEC becomes effective. This Prospectus is not an offer to sell
these securities and it is not soliciting an offer to buy these securities in
any state where the offer or sale would be unlawful prior to registration or
qualification under the securities laws of any such state.
As you read this Prospectus, you should also note the following: This
Prospectus contains various references to industry market data and certain
industry forecasts. The industry market data and industry forecasts were
obtained from publicly available information and industry publications. Industry
publications generally state that the information contained therein has been
obtained from sources believed to be reliable, but that the accuracy and
completeness of that information is not guaranteed. Similarly, industry
forecasts, while we believe them to be accurate, have not been independently
verified by us and we do not make any representation as to the accuracy of that
information.
AUTOTOTE CORPORATION
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
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 a combined pro forma basis, for the LTM period we
generated revenues of $447.7 million, operating income of $35.8 million and
EBITDA ("EBITDA", as included herein, represents operating income plus
depreciation and amortization expense) of $86.6 million.
1
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Our headquarters are located at 750 Lexington Avenue, 25th Floor, New York,
New York 10022 and our telephone number is (212) 754-2233.
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<CAPTION>
MARKET PRICE OF AUTOTOTE COMMON STOCK
---------------------------------------------------------------
FISCAL 1998 FISCAL 1999 FISCAL 2000
------------------- ------------------- -------------------
HIGH LOW HIGH LOW HIGH LOW
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
First Quarter..................................... $3.00 $1.88 $2.38 $1.69 $4.69 $2.25
Second Quarter.................................... 2.81 2.25 2.06 1.50 5.31 3.06
Third Quarter..................................... 2.94 2.38 3.38 1.75 4.88 3.00
Fourth Quarter.................................... 2.56 1.25 3.63 2.50 4.75 2.95
</TABLE>
RECENT DEVELOPMENTS
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. The acquisition was completed
through a merger in which Scientific Games became a wholly-owned subsidiary of
Autotote Corporation, at a cost of approximately $308.0 million in aggregate
cash consideration to Scientific Games stockholders, plus related fees and
expenses. The Scientific Games acquisition has been recorded using the purchase
method of accounting, 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
certain related fees and expenses, was completed with funds provided by:
- proceeds from the issuance of $150.0 million principal amount of
Autotote's series A notes;
- $280.0 million of term loan borrowings under the terms of our new senior
credit facilities;
- $2.98 million of borrowings under the new revolving credit facility;
- $4.805 million of cash on hand; and
- $110.0 million of gross proceeds from the sale of new convertible
preferred stock, principally to an affiliated entity of Olivetti S.p.A.
The acquisition of Scientific Games, the sale of the series A notes, the
refinancing of substantially all of the existing debt of both Autotote and
Scientific Games and the sale of $110 million of new convertible preferred stock
are hereinafter sometimes collectively referred to as the "transactions."
At the same time as Autotote entered into the new senior credit facilities,
it repaid outstanding borrowings under its old bank facility. For a more
detailed description of the new senior credit facilities, please read the
section entitled "Description of New Senior Credit Facilities."
On December 21, 2000, Autotote announced results for its fiscal fourth
quarter and year ended October 31, 2000. The results include the operations of
Scientific Games since September 6, 2000 when Autotote acquired it.
Revenues for the fiscal fourth quarter of 2000 were $82.7 million compared
to $59.2 million in the fourth quarter of fiscal 1999. EBITDA (earnings before
interest, taxes, depreciation and amortization) for the quarter before
acquisition and other unusual charges and extraordinary items was $11.9 million
versus $11.8 million in the fiscal fourth quarter of 1999. Net loss before
acquisition and other unusual charges and extraordinary items was $11.3 million
or a loss of $0.31 per diluted share in the fiscal
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fourth quarter of 2000 compared to net income of $346,000 or $0.01 per diluted
share in the fiscal fourth quarter of 1999.
Revenue for fiscal 2000 was $233.3 million compared to $211.1 million in
fiscal 1999. EBITDA before acquisition and other unusual charges and
extraordinary items was $45.6 million in fiscal 2000 versus $40.5 million for
fiscal 1999. Net loss before acquisition and other unusual charges and
extraordinary items was $6.9 million or $0.19 per diluted share compared to net
income of $379,000 or $0.01 per diluted share in fiscal 1999.
Including the acquisition and other unusual charges, and extraordinary
items, EBITDA was $8.1 million in the fiscal fourth quarter of 2000 and the net
loss was $36.4 million or a loss of $0.96 per diluted share. For fiscal 2000,
EBITDA was $41.8 million and the net loss was $32.0 million or $0.87 per diluted
share in fiscal 2000. These results reflect approximately $23.6 million of costs
expensed by Autotote associated with its acquisition of Scientific Games and of
the refinancing the debt of both companies.
Operating results for the fiscal fourth quarter and fiscal year were
impacted by several factors:
- During the fourth quarter there were two plant shutdowns and two
corresponding start-ups in the Scientific Games manufacturing
operation--one each in the UK and United States. The combination of the
interrupted production and unusually high costs (such as overtime and
scrap), coupled with excess costs in their systems business, is estimated
to have had a $5.0 million negative impact on EBITDA in the fourth
quarter. By calendar year end, both production and manufacturing costs had
rebounded to normal levels.
- As planned, Autotote 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 $2.0 million that was expected to
contribute to fiscal 2000 will not begin until 2001.
- Year to year comparisons are impacted by Autotote's unusually strong
pari-mutuel equipment sales to Sisal S.p.A. and the British Totalizator
Board in fiscal 1999 which, as expected, did not continue into the fourth
quarter of fiscal 2000.
- Start up costs for an OTB joint venture in Germany were approximately
$1.0 million.
- The write-off of Autotote's option to purchase Atlantic City Raceway as a
result of the New Jersey legislature's failure to pass the necessary
legislation to allow OTB expansion in that state resulted in a fiscal
fourth quarter charge of approximately $1.1 million.
On September 26, 2000, we announced the signing of a ten year-contract
extension with LEIDSA (Loteria Electronica Internacional Dominicana, S.A.) to
provide on-line lottery services in the Dominican Republic, as authorized by
Loteria Nacional. We have been providing such services to LEIDSA since 1996 in
exchange for a percentage of Handle generated. Our revenues in the Dominican
Republic are currently just over $1.0 million annually and have been increasing
steadily.
We also have been selected by the Maine lottery to provide instant tickets
and an on-line lottery system, beginning July 2001, with an estimated potential
to generate revenues of approximately $45.0 million over the 6-year life of the
contract.
On September 13, 2000, we were selected to enter into a seven-year contract
with the Iowa State lottery. Based on 1999 lottery sales in Iowa of $178.0
million, we believe that the seven-year contact, with option to renew, has the
potential to generate revenues of approximately $40.0 million over the life of
the contract.
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ABOUT THIS TRANSACTION
On August 14, 2000, Autotote sold $150.0 million of the series A notes in a
private offering to Donaldson, Lufkin & Jenrette Securities Corporation and
Lehman Brothers Commercial Inc., collectively referred to as the "initial
purchasers." The series A notes were originally issued on August 14, 2000, in
anticipation of the completion of the pending Scientific Games acquisition, with
the proceeds of the note issuance being held in escrow for the redemption of the
notes if the consummation of the Scientific Games acquisition and other
transactions did not occur. The process was completed and the escrow was
released on September 6, 2000. The notes bear interest at the rate of 12 1/2%
per annum payable semi-annually on each of February 15 and August 15, commencing
February 15, 2001. The notes are senior subordinated, unsecured obligations,
ranking junior to all of our existing and future senior debt including
obligations under the new senior credit facilities. The notes are fully and
unconditionally guaranteed on a senior subordinated basis by all of our wholly-
owned U.S. subsidiaries. Simultaneously with the private offering of the series
A notes, Autotote entered into a Registration Rights Agreement with the initial
purchasers, in which Autotote agreed, among other things, to deliver this
Prospectus to you and to complete the exchange offer on or before January 11,
2001.
Set forth below is a summary of the material terms of the exchange offer:
SUMMARY OF EXCHANGE OFFER
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THE EXCHANGE OFFER........................ We are offering to issue registered series B notes in
exchange for a like principal amount of our outstanding
series A notes. We are offering to issue these series B
notes to satisfy our obligations under the Registration
Rights Agreement we entered into with the initial
purchasers. You may tender your outstanding series A
notes for exchange by following the procedures described
under the heading "The Exchange Offer."
EXPIRATION DATE........................... The exchange offer will expire at 5:00 p.m., New York
City time, on , 2001, unless we extend the
exchange offer.
PROCEDURES FOR TENDERING SERIES A NOTES... If you wish to accept the exchange offer, you must
either (a) complete, sign and date the Letter of
Transmittal, or a facsimile thereof, in accordance with
the instructions contained in this Prospectus and in the
Letter of Transmittal and mail or otherwise deliver the
Letter of Transmittal, or a facsimile thereof, together
with the series A notes to be exchanged, and any other
required documentation, to the exchange agent at the
address set forth in the Letter of Transmittal or
(b) arrange for The Depository Trust Company to transmit
certain required information to the exchange agent for
the exchange offer. Series A notes must be physically
delivered unless a confirmation of a book-entry delivery
of your series A notes has been delivered to the
exchange agent's account at The Bank of New York in a
timely fashion. By executing the Letter of Transmittal,
you will represent to us that, among other things:
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<TABLE>
<S> <C>
- you are acquiring the series B notes in the ordinary
course of business;
- you have no arrangement or understanding with any
person to participate in the distribution of the series
B notes issued to you in the exchange offer; and
- you are not our "affiliate," as defined in Rule 405
under the Securities Act, or, if you are an affiliate,
that you will comply with the registration and
prospectus delivery requirements of the Securities Act
to the extent applicable.
See "The Exchange Offer--How to Tender Series A Notes
for Exchange" and "Plan of Distribution."
GUARANTEED DELIVERY PROCEDURES............ If you wish to tender your series A notes and:
- your series A notes are not immediately available;
- you cannot deliver your series A notes, the Letter of
Transmittal or any other required documents to the
exchange agent prior to the expiration of the exchange
offer; or
- you cannot complete the procedure for book-entry
transfer procedures on a timely basis; you may tender
your series A notes according to the guaranteed
delivery procedures described in this Prospectus. See
"The Exchange Offer--Guaranteed Delivery Procedures."
ACCEPTANCE OF SERIES A NOTES AND DELIVERY
OF SERIES B NOTES....................... Upon satisfaction or waiver of all conditions of the
exchange offer, we will accept for exchange any and all
series A notes that are properly tendered in the
exchange offer prior to 5:00 p.m., New York City time,
on the expiration date. The series B notes issued
pursuant to the exchange offer will be delivered
promptly after acceptance of the series A notes.
WITHDRAWAL RIGHTS......................... You may withdraw any series A notes you tender for
exchange at any time prior to 5:00 p.m., New York City
time, on the expiration date.
THE EXCHANGE AGENT........................ The Bank of New York is the exchange agent. The address
and telephone number of the exchange agent are set forth
in "The Exchange Offer--Exchange Agent."
UNITED STATES FEDERAL INCOME TAX
CONSIDERATIONS.......................... Your exchange of series A notes for series B notes will
not result in any gain or loss to you for federal income
tax purposes. See "Certain U.S. Federal Income Tax
Considerations."
FEES AND EXPENSES......................... We will pay the cash expenses incurred in connection
with the exchange offer.
USE OF PROCEEDS........................... We will not receive any proceeds from the issuance of
the series B notes.
RESALES OF SERIES B NOTES................. Based on certain no-action letters issued by the staff
of the SEC to third parties in connection with
transactions similar to
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<S> <C>
the exchange offer, we believe that you may offer for
resale, resell or otherwise transfer your series B notes
without compliance with the registration and prospectus
delivery requirements of the Securities Act, unless:
- you acquired your series B notes other than in the
ordinary course of your business;
- you are participating, intend to participate or have
an arrangement or understanding with any person to
participate, in a distribution of the series B notes;
or
- you are our "affiliate," as defined in Rule 405 under
the Securities Act.
In any of the foregoing circumstances:
- you will not be able to rely on the interpretations of
the staff of the SEC, in connection with any offer for
resale, resale or other transfer of series B notes;
and
- you must comply with the registration and prospectus
delivery requirements of the Securities Act, or have
an exemption available, in connection with any offer
for resale, resale or other transfer of the series B
notes.
Each broker-dealer that receives series B notes for its
own account in exchange for series A notes, where the
series A notes were acquired by that broker-dealer as a
result of market-making activities or other trading
activities, must acknowledge that it will deliver a
prospectus in connection with any resale of the series B
notes. See "Plan of Distribution."
CONDITIONS TO EXCHANGE OFFER.............. The exchange offer is subject to customary conditions
that we may waive. See "The Exchange Offer--Conditions
to the Exchange Offer" section of this Prospectus.
CONSEQUENCES OF FAILURE TO EXCHANGE....... Series A notes that are not tendered, or that are
tendered and not accepted, will be subject to the
existing transfer restrictions on such notes after the
exchange offer. We will have no further obligation to
register the series A notes. If you do not participate
in the exchange offer, the liquidity of your series A
notes could be adversely affected.
PROCEDURES FOR BENEFICIAL OWNERS.......... If you are the beneficial owner of series A notes
registered in the name of a broker, dealer or other
nominee and you wish to tender your notes, you should
contact the person in whose name your notes are
registered and promptly instruct such person to tender
on your behalf.
</TABLE>
THE SERIES B NOTES
In the exchange offer, you may exchange your series A notes for series B
notes. The form and terms of the series B notes are identical in all material
respects to the form and terms of the outstanding series A notes, except that:
- the offering of the series B notes has been registered under the
Securities Act; and
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- the series B notes will not be subject to transfer restrictions.
Neither the series A notes nor the series B notes will be entitled to
exchange and registration rights after the consummation of the exchange offer.
The series B notes will be issued under and entitled to the benefits of the
indenture that governs the series A notes.
Set forth below is a summary of the material terms of the series B notes:
TERMS OF THE SERIES B NOTES
<TABLE>
<S> <C>
ISSUER.................................... Autotote Corporation
SECURITIES OFFERED........................ $150.0 million in principal amount of 12 1/2% Senior
Subordinated Notes due 2010, Series B.
MATURITY DATE............................. August 15, 2010.
INTEREST.................................. Annual rate: 12 1/2%. Payment frequency: every
commencing February 15, 2001.
GUARANTEES................................ All of our existing wholly-owned U.S. subsidiaries fully
and unconditionally guarantee the series B notes on a
senior subordinated basis. If we do not make payments on
the series B notes when they are due, our guarantors are
required to make those payments. Some of our future
subsidiaries may also guarantee the series B notes under
certain circumstances.
OPTIONAL REDEMPTION....................... We may redeem some or all of the series B notes on or
after August 15, 2005, in whole or in part, at the
redemption prices set forth in "Description of
Notes--Redemption," plus accrued and unpaid interest to
the date of redemption. In addition, on or before
August 15, 2003, we may redeem up to 35% of the series B
notes at 112.5% of the principal amount thereof, plus
accrued and unpaid interest to the date of redemption,
with the net cash proceeds of equity offerings, provided
at least 65% of the original principal amount of the
series B notes remains outstanding immediately after any
such redemption.
CHANGE OF CONTROL......................... Upon a change of control, as defined in "Description of
Notes," we will be required to make an offer to
repurchase all or a portion of the series B notes. The
purchase price will equal 101% of the principal amount
of the series B notes, plus accrued and unpaid interest,
if any, to the date of repurchase. See "Description of
Notes--Change of Control."
RANKING................................... The series B notes and the guarantees will be general
unsecured obligations and will rank:
- junior to all of our and the guarantors' existing and
future senior debt and secured debt, including
obligations under our new senior credit facilities;
- equally with any of our and the guarantors' future
senior subordinated debt;
- senior to any of our and the guarantors' future
subordinated debt; and
</TABLE>
7
<PAGE>
<TABLE>
<S> <C>
- effectively junior to all of the liabilities of our
subsidiaries that have not guaranteed the series B
notes.
At July 31, 2000, assuming the transactions had been
completed at that time, the series B notes would have
ranked junior to approximately $289.1 million of senior
debt (excluding $3.9 million of undrawn letters of
credit) of Autotote Corporation and the guarantor
subsidiaries and would have ranked effectively junior to
$46.6 million of liabilities of our non-guarantor
subsidiaries.
CERTAIN COVENANTS......................... The indenture governing the series B notes contains
covenants that, among other things, limit our ability,
and the ability of certain of our subsidiaries, to:
- incur additional indebtedness;
- pay dividends or distributions or make certain other
restricted payments;
- purchase or redeem capital stock;
- make investments and 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
of our assets;
and
- create certain liens and other encumbrances on our
assets.
These limitations are subject to important exceptions
and qualifications described under "Description of
Notes--Covenants."
RISK FACTORS.............................. You should carefully consider all of the information in
this Prospectus. In particular, you should evaluate the
specific risk factors set forth under "Risk Factors,"
beginning on page 11, for a discussion of certain risks
involved with an investment in the series B notes.
ABSENCE OF A PUBLIC MARKET................ Autotote does not intend to apply for listing of the
series B notes on any securities exchange or to arrange
for the series B notes to be quoted on any quotation
system. No active public market for the series B notes
is currently anticipated. Although we expect the series
B notes to be eligible for trading in the PORTAL Market,
firms, if any, making a market in the series B notes may
cease their market-making at any time. Accordingly, we
can give no assurance as to the liquidity or the trading
market for the series B notes.
</TABLE>
8
<PAGE>
SUMMARY UNAUDITED PRO FORMA FINANCIAL DATA
(IN THOUSANDS)
The table below sets forth for Autotote and Scientific Games summary
unaudited pro forma combined statement of operations data for the fiscal year
ended October 31, 1999 and the nine months ended July 31, 2000, as well as
summary unaudited balance sheet data for Autotote on July 31, 2000 and summary
unaudited pro forma balance sheet data for the combined entities as of July 31,
2000. The information should be read in conjunction with the consolidated
financial statements and notes thereto of Autotote Corporation and Scientific
Games, respectively.
The summary unaudited pro forma condensed combined financial data set forth
below have been derived from the unaudited pro forma condensed combined
financial data included elsewhere herein and give effect to the following:
i) The acquisition of Scientific Games.
ii) The offering of $150,000 principal amount of 12 1/2% Senior
Subordinated Notes due August 15, 2010, Series A.
iii) $280,000 of term loan borrowings under the terms of our new senior
credit facilities. On September 6, 2000, simultaneously with the
consummation of the Scientific Games acquisition, we entered into new senior
secured credit facilities with DLJ Capital Funding, Inc., an affiliate of
Donaldson, Lufkin & Jenrette Securities Corporation and Lehman Commercial
Paper Inc., an affiliate of Lehman Brothers Inc. (collectively, the
"Agents"), and a syndicate of other financial institutions (collectively,
the "Lenders"), under which the Agents and the Lenders agreed to provide new
senior secured credit facilities to us in an aggregate amount of up to
$345,000. The Credit Agreement and the other loan documentation entered into
on September 6, 2000 were amended and restated as of October 6, 2000 but no
material terms were changed (the "New Facility"). See "Description of New
Senior Credit Facilities."
iv) $7,000 of borrowings under the revolving credit facility of our New
Facility.
v) $110,000 of gross proceeds from the sale of our new convertible
preferred stock, $102,000 of which was purchased by an affiliated entity of
Olivetti S.p.A. As a result, the Olivetti group has become our largest
equity investor, owning approximately 32% of our common stock on a fully
converted basis. See "Description of Capital Stock--Convertible Preferred
Stock."
vi) $12,522 cash on hand used to fund a portion of the acquisition.
vii) The application of the net proceeds received from (ii), (iii),
(iv) and (v) including the refinancing of existing indebtedness of Autotote
and Scientific Games.
viii) The fees and expenses associated with the above.
The summary unaudited pro forma combined statement of operations data, other
data and related ratio information, give effect to these transactions as if each
had occurred at the beginning of the periods presented and the summary unaudited
pro forma balance sheet data give effect to these transactions as if each had
occurred on July 31, 2000. The unuadited pro forma financial data do not purport
to represent what our financial position and results of operations would have
been if the
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<PAGE>
transactions listed above had actually occurred as of the dates indicated and
are not intended to project our financial position or results of operations for
any future periods.
<TABLE>
<CAPTION>
PRO FORMA
----------------------------------------
NINE MONTHS
YEAR ENDED ENDED
OCTOBER 31, 1999(1) JULY 31, 2000(2)
-------------------- -----------------
(IN THOUSANDS)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Operating revenues.......................................... $439,811 $328,957
Operating expenses (exclusive of depreciation and
amortization)............................................. 291,987 219,285
-------- --------
Gross profit................................................ 147,824 109,672
Selling, general and administrative expenses................ 55,928 42,786
Special charges............................................. 1,600 2,826
Depreciation and amortization............................... 50,138 38,156
-------- --------
Operating income............................................ 40,158 25,904
Net loss applicable to common stockholders.................. (20,503) (17,515)
OTHER DATA:
Ratio of earnings to fixed charges(3)....................... -- --
</TABLE>
<TABLE>
<CAPTION>
AS OF JULY 31, 2000
--------------------
AUTOTOTE
ACTUAL PRO FORMA
-------- ---------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 3,181 $ 1,955
Working capital............................................. (3,480) 26,113
Total assets................................................ 174,704 644,188
Total debt(4)............................................... 170,759 439,139
Convertible preferred stock(5).............................. -- 106,378
Common stockholders' deficit................................ (43,213) (55,509)
</TABLE>
------------------------
(1) Represents an unaudited pro forma combination of Autotote's fiscal year
ended October 31, 1999 and Scientific Games' twelve months ended September
30, 1999.
(2) Represents an unaudited pro forma combination of Autotote's nine month
period ended July 31, 2000 and Scientific Games' nine month period ended
June 30, 2000.
(3) For purposes of determining the ratio of earnings to fixed charges,
"earnings" consist of loss before income tax expense plus fixed charges,
plus income allocable to minority interests in consolidated entities that
have incurred fixed charges. "Fixed charges" consist of interest expense,
including amortization of deferred finance costs, plus one-third of rental
expense (this portion is considered to be representative of the interest
factor). For the year ended October 31, 1999 and the nine months ended July
31, 2000 unaudited pro forma earnings were insufficient to cover fixed
charges by $9,257 and $11,095, respectively.
(4) Excludes undrawn letters of credit in the amounts of $774 (actual) and
$3,928 (pro forma).
(5) Reflects $110,000 gross proceeds from sale of convertible preferred stock
less $872 in fees paid on behalf of the convertible preferred stockholders
and the $2,750 cash portion of the placement agent fee (and does not reflect
$2,750 convertible preferred stock issued as partial payment of placement
agent fees in lieu of cash).
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<PAGE>
RISK FACTORS
INVESTING IN THE SERIES B NOTES INVOKES RISKS. IN ADDITION TO THE OTHER
INFORMATION SET FORTH IN THIS PROSPECTUS, YOU SHOULD CONSIDER THE FOLLOWING
FACTORS CAREFULLY IN EVALUATING US AND OUR BUSINESS.
SUBSTANTIAL LEVERAGE--OUR SUBSTANTIAL INDEBTEDNESS COULD ADVERSELY AFFECT OUR
BUSINESS AND FINANCIAL CONDITION AND PREVENT US FROM FULFILLING OUR
OBLIGATIONS UNDER THE NOTES
As a result of the transactions, we have a substantial amount of
indebtedness. Assuming that the transactions had completed on July 31, 2000, on
a combined pro forma basis we would have had approximately $439.1 million of
total indebtedness outstanding (excluding $3.9 million of undrawn letters of
credit). On a combined pro forma basis for the LTM period, our interest expense
would have been approximately $50.9 million. Our substantial indebtedness could
have important consequences for you, including the following:
- we may have difficulty borrowing money in the future for working capital,
capital expenditures, potential acquisition opportunities, general
corporate purposes or other purposes;
- 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, capital
expenditures and future business opportunities and may limit our ability
to implement our business strategy;
- we may be more vulnerable to economic downturns and adverse developments
in our business, may be limited in our ability to withstand competitive
pressures and may have reduced flexibility in responding to changing
business, regulatory and economic conditions; and
- fluctuations in market interest rates will affect the cost of our
borrowings to the extent not covered by interest rate hedge agreements
because the interest under our new senior credit facilities is payable at
variable rates.
In addition, we may be able to incur substantial indebtedness in the future.
Subject to specified limitations, the indenture permits us and our restricted
subsidiaries to be able to incur substantial additional indebtedness in the
future, and our new senior credit facilities permit additional borrowings. In
particular, on a pro forma basis as of July 31, 2000, we would have had
approximately $58.0 million of additional borrowing capacity under the revolving
portion of our new senior credit facilities.
DEBT SERVICE REQUIREMENTS--WE MAY NOT BE ABLE TO GENERATE SUFFICIENT CASH FLOW
TO MEET OUR DEBT SERVICE REQUIREMENTS
We cannot assure you that our future cash flows, together with borrowing
under our new revolving credit facility, will be sufficient to meet our debt
obligations and commitments, including the series B notes. Our ability to
generate cash flow from operations sufficient to make scheduled payments on our
debt as they become due will depend on our future performance and our ability to
implement our business strategy successfully. Our performance will be affected
by prevailing economic conditions and financial, business, regulatory and other
factors. Most of these factors are beyond our control. In addition, there can be
no assurance that future borrowings will be available to us under our new
revolving credit facility.
Failure to pay our interest expense or make our principal payments would
result in a default. A payment default, if not waived, would result in
acceleration of our debt, in which case the debt would become immediately due
and payable. If this occurs, we may be forced to reduce or delay capital
expenditures and implementation of our business strategy, sell assets, obtain
additional equity capital or refinance or restructure all or a portion of our
outstanding debt. In the event that we are unable to do so, we may be left
without sufficient liquidity and we may not be able to repay our debt and our
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<PAGE>
secured lenders will be able to foreclose on our assets. We may need to
refinance all or a portion of our indebtedness, including the series B notes and
our new senior credit facilities, on or before maturity. However, we cannot
assure you that we will be able to refinance any of our indebtedness on
commercially reasonable terms or at all.
COVENANT RESTRICTIONS--COVENANT RESTRICTIONS IN THE NEW SENIOR CREDIT FACILITIES
AND THE INDENTURE MAY LIMIT OUR ABILITY TO OPERATE OUR BUSINESS
The new senior credit facilities and the indenture contain, and certain of
our other agreements regarding indebtedness contain, among other things,
covenants that restrict our and our restricted subsidiaries' ability to finance
future operations or capital needs or to engage in other business activities. In
addition, the new senior credit facilities and the indenture restrict, among
other things, our and our restricted subsidiaries' ability to:
- incur additional indebtedness;
- pay dividends or distributions, or make certain other restricted payments;
- purchase or redeem capital stock;
- make investments and 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 of Our assets; and
- create certain liens and other encumbrances on our assets.
In addition, the new senior credit facilities require us to maintain
specified financial ratios and satisfy certain financial condition tests which
may require that we take action to reduce our indebtedness or to act in a manner
contrary to our business objectives. Events beyond our control, including
changes in general economic and business conditions, may affect our ability to
meet those financial ratios and financial condition tests. We cannot assure you
that we will meet those tests or that the lenders will waive any failure to meet
those tests. A breach of any of these covenants would result in a default under
the new senior credit facilities and the indenture. If an event of default under
the new senior credit facilities occurs, the lenders could elect to declare all
amounts outstanding under the new senior credit facilities, together with
accrued interest, to be immediately due and payable. If we were unable to repay
those amounts, the lenders could proceed against the collateral we granted to
them to secure the indebtedness under the new senior credit facilities. See
"Description of New Senior Credit Facilities" and "Description of Notes."
SUBORDINATION--YOUR RIGHT TO RECEIVE PAYMENT ON THE NOTES AND THE GUARANTEES IS
JUNIOR TO ALL OF OUR AND THE GUARANTORS' SENIOR DEBT
The series B notes will be general unsecured obligations, junior in right of
payment to all of our existing and future senior debt, including obligations
under the new senior credit facilities. The series B notes will not be secured
by any of our assets, and as such will be effectively subordinated to any
secured debt that we or our subsidiaries may have now or may incur in the future
to the extent of the value of the assets securing that debt.
Our obligations under the new senior credit facilities are secured by a
first priority pledge of and security interest in the stock of all of our
present and future domestic subsidiaries and by a first priority
12
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pledge of 65% of the stock of all of our present and future foreign
subsidiaries, and substantially all of our assets and the assets of our domestic
subsidiaries.
In the event that we or a guarantor is declared bankrupt, becomes insolvent,
is liquidated or reorganized, defaults on payment under debt that is senior to
the series B notes, or commits a default causing the acceleration of the
maturity of debt, any debt that ranks ahead of the series B notes and the
guarantees will be entitled to be paid in full from our assets or the assets of
the guarantor, as applicable, before any payment may be made with respect to the
series B notes or the affected guarantees. In any of the foregoing events, we
cannot assure you that we would have sufficient assets to pay amounts due on the
series B notes. As a result, holders of the series B notes may receive less,
proportionally, than the holders of debt senior to the series B notes and the
guarantees. The subordination provisions of the indenture also provide that no
payment will be able to be made to you during the continuance of payment
defaults on our senior debt, and payments to you may be suspended for a period
of up to 179 days if a nonpayment default exists under our senior debt.
In addition, the series B notes will be structurally subordinated to all of
the liabilities of any of our subsidiaries that do not guarantee the series B
notes. In the event of a bankruptcy, liquidation or reorganization of any of the
non-guarantor subsidiaries, holders of their indebtedness and their trade
creditors will generally be entitled to payment of their claims from the assets
of those subsidiaries before any assets are made available for distribution to
us. The non-guarantor subsidiaries generated 30% of our pro forma revenues for
the twelve-month period ended July 31, 2000.
At July 31, 2000, assuming the transactions had been completed at that time,
the notes and the guarantees would have ranked junior to approximately $289.1
million of senior debt (excluding $3.9 million of undrawn letters of credit) of
Autotote Corporation and the guarantor subsidiaries and would have ranked
effectively junior to $46.6 million of liabilities of our non-guarantor
subsidiaries. In addition, the indenture governing the series B notes and our
new senior credit facilities permit, subject to specified limitations, the
incurrence of additional debt, some or all of which may be senior debt.
SCIENTIFIC GAMES ACQUISITION--WE MAY NOT SUCCESSFULLY INTEGRATE THE SCIENTIFIC
GAMES OPERATIONS
The Scientific Games acquisition has significantly increased our size and
geographical scope of operations. Our success, and thus our ability to pay
interest and principal on the series B notes, depends in part on our ability to
integrate Autotote and Scientific Games into one combined group and to realize
certain cost reductions and operating synergies from the combination of these
businesses. Our integration strategies, however, are subject to numerous
contingencies, some of which are beyond management's control. These
contingencies include the possibility of adverse general and regional economic
conditions, inadequate production capacity or quality, outdated or incompatible
technologies, an inability to realize anticipated synergies and efficiencies, an
inability to obtain sufficient qualified personnel, competition and changes in
regulation. Moreover, neither Autotote nor Scientific Games has been previously
involved in an acquisition of this size and complexity and, accordingly, no
assurance can be given that our strategies will prove to be effective or that
management's goals will be achieved.
In addition, the acquisition requires additional attention from, and places
substantial demands upon, our senior management, which diverts their attention
from and makes it more difficult for them to manage our business.
RISKS OF ACHIEVEMENT OF COST SAVINGS--WE MAY NOT ACHIEVE ANTICIPATED COST
SAVINGS AND OTHER BENEFITS
Our integration plan for the Scientific Games acquisition contemplates
certain cost savings. In addition, we anticipate other savings as a result of
initiatives previously begun by Scientific Games, principally the closing of the
Gilroy, California printing plant and the transfer of its production capability
to the Alpharetta, Georgia facility. These potential annualized cash cost
savings are described
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in the Notes to the Unaudited Pro Forma Condensed Combined Financial Statement
Data of Autotote and Scientific Games presented elsewhere in this Prospectus.
The potential cost savings are based on analyses completed by members of our
management. These analyses necessarily involve assumptions as to future events,
including successful completion and operation of our expanded printing
operations in Alpharetta, Georgia as well as general business and industry
conditions, costs to operate our business and competitive factors, many of which
are beyond our control and may not materialize. While we believe these analyses
and their underlying assumptions to be reasonable, they are inherently estimates
which are difficult to predict and are necessarily speculative in nature. We
cannot assure you that unforeseen factors will not offset the estimated cost
savings or other components of our integration plan in whole or in part. As a
result, our actual cost savings may vary considerably, or be considerably
delayed, compared to the estimates in this Prospectus.
OPERATING LOSSES--AUTOTOTE HAS A RECENT HISTORY OF OPERATING LOSSES
Autotote, without including Scientific Games, realized a net loss of $17.7
million in fiscal year 1997, and a net loss of $15.9 million in fiscal year
1998, but realized a net profit of $379,000 in fiscal year 1999. While Autotote
has focused its operations on its core businesses and has continued its cost
reduction programs, we can give you no assurance that we will not experience
additional net losses in the future. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
STRUCTURE--OUR COMPANY STRUCTURE MAY AFFECT YOUR INVESTMENT AND OUR ABILITY TO
SERVICE OUR INDEBTEDNESS
We are a holding company, so that all of our assets and operations are
located in our subsidiaries. We must rely on dividends and advances and
transfers of funds from our subsidiaries to generate the funds necessary to meet
our debt service obligations, including payment of principal and interest on the
series B notes. Our subsidiaries' ability to pay such dividends and make such
advances and transfers will be subject to, among other things, applicable law or
contractual restrictions imposed on us by joint venture agreements regulating
the payment of dividends and the terms of the new senior credit facilities.
COMPETITION--WE OPERATE IN A HIGHLY COMPETITIVE INDUSTRY
The instant and on-line lottery business is highly competitive, and our
business faces competition from a number of domestic and foreign instant ticket
manufacturers, on-line lottery system providers and other competitors, some of
whom may have substantially greater financial reserves than we do. Our business
continues to be in a period of intense price-based competition, particularly
from other instant ticket suppliers. The award of contracts by state officials
is influenced by factors including price, the ability to optimize lottery
revenues through game design, technical capability, marketing capability and
applications, the quality, dependability and upgrade capability of the network,
production capacity, the security and integrity of the vendor's production
operations, the experience, financial condition and reputation of the vendor,
and the satisfaction of other requirements and qualifications that lottery
authorities may impose.
The market for pari-mutuel wagering services is also competitive, and
certain of our competitors may have substantially greater financial and other
resources than we do. We compete primarily on the basis of the design,
performance, reliability and pricing of our products as well as customer
service. In addition, the racing industry may experience increased competition
for wagers as new wagering products are developed. Casino gaming and other forms
of legal and illegal gambling also create competition for wagers.
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Our venue management business competes with other forms of entertainment
both in our licensed markets and surrounding areas. Other gaming competitors
operate in our geographic markets and compete for our customers and additional
competitors could be licensed, or existing regulations changed, so as to
adversely affect our competitive position.
Our telecommunications products operations compete with other printing
companies on the basis of price, availability, product features and product
security. There is competition within our class of products and other
technologies to provide the desired functionality. Moreover, the cellular
telephone industry is undergoing significant growth and rapid technology changes
such that other technologies including electronic commerce could impact our
growth opportunities. In addition, changes in the structure of the
telecommunications industry could impact our customer relationships.
In addition, the market for our products is affected by changing technology,
new legislation and evolving industry standards. Our ability to anticipate such
changes and to develop and introduce new and enhanced products on a timely basis
will be a significant factor in our ability to expand, remain competitive,
attract new customers and retain existing contracts.
We can give you no assurance that we will achieve the necessary
technological advances, have the financial resources, introduce new products on
a timely basis or otherwise have the ability to effectively compete in these
markets. See "Business--Competition."
CONTRACTS--WE ARE DEPENDENT ON RENEWABLE CONTRACTS
We are heavily dependent on our long-term contracts, especially with respect
to our lottery and pari-mutuel businesses.
Generally, our lottery contracts are for terms of one to seven years, with
optional renewal periods. Upon the expiration of a lottery contract (including
any extensions thereof), lottery authorities may award new contracts through a
competitive procurement process. There can be no assurance that our current
lottery contracts will be extended or that we will be awarded new lottery
contracts as a result of competitive procurement processes in the future.
Contracts representing over 95% of our annual revenues from instant and on-line
lottery contracts are scheduled to expire or reach optional extension dates
during the next three years.
In addition, lottery contracts to which we are a party frequently contain
exacting implementation schedules and performance requirements. Failure to meet
these schedules and requirements may result in substantial monetary liquidated
damages, as well as possible contract termination. We are required by certain of
our lottery customers to maintain a bonding program. Failure to provide such
bonds would materially and adversely affect our ability to do business in this
area.
Our contracts for the provision of pari-mutuel services are typically for
terms of five years. Contracts accounting for the following percentages of our
annual pari-mutuel revenues are scheduled to expire at the times indicated: 14%
will expire in 2001; 10% will expire in 2002; and 35% will expire in 2003.
In addition, our rights to operate all on-track and off-track pari-mutuel
wagering in The Netherlands under a license granted by the Dutch Ministry of
Agriculture extend through June 30, 2003, and might not be renewed thereafter.
Historically, we have been successful in renewing our largest pari-mutuel
contracts as they have come due for renewal. However, we cannot assure you that
we will be able to renew any or all of our pari-mutuel systems operating
contracts or will be able to enter into new contracts sufficient to replace the
revenue lost from terminated or non-renewed contracts.
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Depending upon, among other things, the amount of revenue we derived
thereunder, the termination, expiration or failure to renew one or more of our
pari-mutuel or lottery contracts could have a material adverse effect on our
business and our ability to repay the series B notes.
GOVERNMENT REGULATION--GOVERNMENT REGULATION MAY HAVE A NEGATIVE IMPACT ON OUR
BUSINESS IN THE FUTURE
In the United States and many other countries, wagering and lotteries must
be expressly authorized by law. Once authorized, the wagering industry and the
ongoing operations of lotteries are subject to extensive and evolving
governmental regulation. We can give you no assurance that the operation of
pari-mutuel wagering facilities, lotteries, video gaming industry machines,
Internet gaming or other forms of wagering or lottery systems will be approved
by additional jurisdictions or that those jurisdictions in which these wagering
and lottery activities are currently permitted will continue to permit such
activities.
We are required to obtain and maintain licenses from various state and local
jurisdictions in order to operate certain aspects of our business. In addition,
jurisdictions generally require us and certain of our employees, directors and
stockholders to submit to background investigations and licensing under
applicable laws and regulations. The failure of such persons to submit to
background checks and provide required disclosure could result in the imposition
of penalties upon such persons. If this occurred, it could jeopardize the award
of contracts to us or provide grounds for termination of existing contracts.
In the past, regulatory requirements for pari-mutuel wagering, lottery and
other gaming activities in the United States were adopted and administered
primarily on the state or local level. In 1996, the United States Congress
passed legislation authorizing a comprehensive study of gaming, including
segments of the gaming industry that we serve. We are unable to predict whether
this study will result in legislation that would impose regulations on gaming
industry operators, or whether such legislation, if any, would have a material
adverse effect on us.
RELIANCE ON THIRD PARTIES--WE RELY ON SUPPLIERS AND CONTRACT MANUFACTURERS
We depend on our suppliers and from time to time contract manufacturers to
provide us with products and components in adequate supply and on a timely basis
and to assemble certain of our wagering systems and component products.
We believe that the availability of products and components is consistent
with the needs of our customers, and that our business is not dependent on any
single supplier or subcontractor. However, the failure of key suppliers and
contract manufacturers to meet our performance specifications, quality standards
or delivery schedules could have a material adverse effect on our operations.
Our production of instant lottery tickets and prepaid phone cards, in
particular, depends upon a continuous supply of raw materials, supplies, power
and natural resources. Our operating results could be adversely affected by an
interruption or cessation in the supply of these materials.
We simulcast live racing events by transmitting audio and/or video signals
from one facility to a satellite for reception by wagering locations across the
country. Our access to satellite service is provided pursuant to long-term
contracts. The technical failure of the satellite through which we transmit
substantially all of our racing events would require us to obtain other
satellite access. We have no assurance of access to such other satellites, or if
available, whether the use of such other satellites could be obtained on
favorable terms or in a timely manner. While satellite failures are infrequent,
the operation of the satellite is outside of our control. We have obtained
insurance to cover any potential loss due to the failure of a satellite.
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FOREIGN MARKETS--OUR FOREIGN OPERATIONS ARE SUBJECT TO UNIQUE RISKS
The Scientific Games acquisition has significantly increased our business in
foreign markets and has subjected us to increased risks customarily associated
with such activities, including:
- currency fluctuations;
- the laws and policies of the United States affecting foreign trade and
investment;
- foreign income taxes on our subsidiaries' earnings that could reduce cash
flow available to meet our required debt service and our other
obligations;
- foreign government validation of contracts;
- political or economic instability;
- the complexity of foreign laws and regulations;
- the impact of foreign labor laws and disputes;
- actions affecting frequency, use and availability of lottery products and
licensing of lotteries for business; and
- other economic, tax and regulatory policies of local governments.
We cannot assure you that we will be able to successfully operate in any
foreign market.
SEASONAL BUSINESS--OUR PARI-MUTUEL SERVICE REVENUES ARE SUBJECT TO SEASONAL AND
WEATHER VARIATIONS
Our pari-mutuel service revenues are subject to seasonal and weather
variations. Although these revenues are generally more predictable than revenues
from equipment sales contracts and are typically based upon a percentage of the
Handle at the facility serviced, as a result of inclement weather during the
winter months, a number of racetracks do not operate and those that do operate
experience missed racing days, which adversely affects the Handle and our
corresponding service revenues. Pari-mutuel service revenues for the first
fiscal quarter and a portion of the second fiscal quarter are generally lower
than other periods of our fiscal year as a result of such seasonal factors.
KEY MANAGEMENT--WE DEPEND HEAVILY ON OUR SENIOR EXECUTIVES
We depend on a small number of senior executives. Our future success will
depend upon, among other things, our ability to keep these executives and to
hire other highly qualified employees at all levels. We compete with other
potential employers for employees, and we may not be successful in hiring and
keeping the executives and other employees that we need. Our loss or inability
to hire key employees could have a material adverse effect on our business,
financial condition and results of operations.
FINANCIAL ARRANGEMENTS AT A CHANGE OF CONTROL--WE MAY NOT HAVE THE ABILITY TO
RAISE THE FUNDS NECESSARY TO FINANCE THE CHANGE OF CONTROL OFFER REQUIRED BY
THE INDENTURE
Upon a change of control (such as, for example, subject to certain
exceptions, the acquisition of a majority of our outstanding voting stock by a
third party), we are required to offer to repurchase all outstanding series B
notes at 101% of the principal amount thereof, plus accrued and unpaid interest,
if any, to the date of repurchase.
The source of funds for any such purchase of series B notes will be our
available cash or cash generated from our subsidiaries' operations or other
sources, including borrowing, sales of assets, sales of equity or funds provided
by a new controlling person. We can give you no assurance that sufficient
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funds will be available at the time of any change of control to make any
required repurchases of series B notes tendered. In addition, the terms of our
new senior credit facilities limit our ability to purchase your series B notes
in those circumstances. Any of our future debt agreements may contain similar
restrictions and provisions. If the holders of the series B notes exercise their
right to require us to repurchase all of the series B notes upon a change of
control, the financial effect of this repurchase could cause a default under our
other debt, even if the change in control itself would not cause a default.
Accordingly, it is possible that we will not have sufficient funds at the time
of the change of control to make the required repurchase of series B notes or
that restrictions in our new senior credit facilities will not allow such
repurchases. See "Description of Notes--Change of Control" and "Description of
New Senior Credit Facilities."
LITIGATION--WE MAY BE SUBJECT TO LIABILITY IN PENDING LITIGATION
Our business subjects us to certain risks of litigation, including potential
allegations that we have not fully performed under our contracts or that goods
or services we supply are defective in some respect. At present, one of our
subsidiaries, Scientific Games Inc., or SGI, which owns a minority interest in
the former operator of the Colombian national lottery, is a party to litigation
arising out of the termination of certain Colombian lottery contracts in 1993.
In litigation pending in Colombia, an agency of the Colombian government
("Ecosalud") has asserted claims against SGI and others for, among other things,
contract penalties, interest and the costs of a bond issued by a Colombian
surety. SGI has been advised by Columbian counsel that it has various defenses
on the merits as well as procedural defenses. In a case brought in U.S. District
Court in Georgia, the Colombian surety sought to recover from SGI sums paid (in
SGI's view, improperly) under its surety bond, plus interest. In September 1999,
the District Court granted summary judgment for the surety in the amount of
approximately $4.6 million (which includes pre-judgement interest at a rate of
38.76% per annum). 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 the surety was
improperly paid because of the default by Ecosalud of its obligations to SGI,
which claims remain the subject of separate litigation in Columbia. Although
Scientific Games management believes that any potential losses in these
proceedings will not result in a material adverse effect, it is not feasible to
predict the final outcome, and there can be no assurance that either or both of
these cases might not be finally resolved adversely to SGI or result in material
liability. See "Business--Legal Proceedings."
INTELLECTUAL PROPERTY--OUR BUSINESS DEPENDS ON THE PROTECTION OF OUR
INTELLECTUAL PROPERTY AND PROPRIETARY INFORMATION
We believe that our success depends, in part, on protecting our intellectual
property in the United States and in foreign countries. Our intellectual
property includes certain patents and trademarks, as well as proprietary or
confidential information that is not subject to patent or similar protection.
Competitors may independently develop similar or superior products, software,
systems or business models. Such independent development may, in the case of our
intellectual property that is not protected by an enforceable patent, result in
a significant diminution in the value of our intellectual property.
We cannot assure you that we will be able to protect our intellectual
property. There is no way to assure that unauthorized third parties will not try
to copy our products, business models or systems or use certain of our
confidential information to develop competing products. Policing unauthorized
use of our technology is difficult and expensive, particularly because of the
global nature of our operations. The laws of other countries may not adequately
protect our intellectual property.
We also cannot assure you that our business activities and products will not
infringe upon the proprietary rights of others, or that other parties will not
assert infringement claims against us. Any such claims and any resulting
litigation, should it occur, could subject us to significant liability for
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damages and could result in invalidation of our proprietary rights, distract
management, and/or require us to enter into costly and burdensome royalty and
licensing agreements. Such royalty and licensing agreements, if required, may
not be available on terms acceptable to us, or may not be available at all. In
the future, we may also need to file lawsuits to defend the validity of our
intellectual property rights and trade secrets, or to determine the validity and
scope of the proprietary rights of others. Such litigation, whether successful
or unsuccessful, could result in substantial costs and diversion of resources.
We also rely on technologies that we license from third parties. We cannot
assure you that these third-party technology licenses will continue to be
available to us on commercially reasonable terms.
We also enter into confidentiality or license agreements with our employees,
consultants and corporate partners, and generally control access to, and the
distribution of, our product designs, documentation and other proprietary
information, as well as the designs, documentation and other information we
license from others. Despite our efforts to protect these proprietary rights,
unauthorized parties may copy, develop independently or otherwise obtain and use
our products or technology.
FRAUDULENT CONVEYANCE MATTERS--THE NOTES AND GUARANTEES MAY NOT BE ENFORCEABLE
BECAUSE OF FRAUDULENT CONVEYANCE LAWS
Our incurrence of indebtedness, such as the series B notes, as well as our
subsidiaries' guarantees, may be subject to review under U.S. federal bankruptcy
law or relevant state fraudulent conveyance laws if a bankruptcy case or lawsuit
is commenced by or on behalf of our or the guarantors' unpaid creditors. Under
these laws, if in such a case or lawsuit a court were to find that, at the time
we or a guarantor incurred indebtedness (including indebtedness represented by
the series B notes or the guarantee of such guarantor),
(1) we, or a guarantor, incurred this indebtedness with the intent of
hindering, delaying or defrauding current or future creditors; or
(2) we, or a guarantor, received less than reasonably equivalent value or
fair consideration for incurring this indebtedness and we or a guarantor,
as the case may be:
- were insolvent or were rendered insolvent by reason of any of the
transactions;
- were engaged, or about to engage, in a business or transaction for
which its remaining assets constituted unreasonably small capital to
carry on its business;
- intended to incur, or believed that it would incur, debts beyond its
ability to pay as these debts matured (as all of the foregoing terms
are defined in or interpreted under the relevant fraudulent transfer or
conveyance statutes); or
- were a defendant in an action for money damages, or had a judgment for
money damages docketed against it (if, in either case, after final
judgment the judgment is unsatisfied),
then such court could avoid the series B notes or such guarantee or subordinate
the amounts owing under the series B notes or such guarantee to our or such
guarantor's presently existing or future indebtedness and take other actions
detrimental to you.
The measure of insolvency for purposes of the foregoing considerations will
vary depending upon the law of the jurisdiction that is being applied in any
such proceeding. Generally, a company would be considered insolvent if, at the
time it incurred the debt or issued the guarantee, either (1) the sum of its
debts (including contingent liabilities) is greater than its assets, at fair
valuation, or (2) the present fair saleable value of its assets is less than the
amount required to pay the probable liability on its total existing debts and
liabilities (including contingent liabilities) as they become absolute and
matured. We
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cannot assure you as to what standards a court would use to determine whether we
were solvent at the relevant time, or whether, whatever standard was used, the
series B notes or guarantees would not be avoided or further subordinated on
another of the grounds set forth above.
We believe that at the time we and the guarantors initially incur the
indebtedness represented by the series B notes and the guarantees, we and the
guarantors will not be insolvent or rendered insolvent by the incurrence, be
lacking sufficient capital to run our businesses effectively, or be unable to
pay obligations on the series B notes and the guarantees as they mature or
become due.
In reaching the foregoing conclusions, we have relied upon our analyses of
internal cash flow projections and estimated values of our assets and
liabilities and of the subsidiary guarantors. We cannot assure you, however,
that a court passing on the same questions would reach the same conclusions.
In addition, the subsidiary guarantors may be subject to the allegation that
since their subsidiary guarantees were incurred for the benefit of the parent
holding company, their obligations under the subsidiary guarantees were incurred
for less than reasonably equivalent value or fair consideration. If a guarantee
is avoided as a fraudulent conveyance or found to be unenforceable for any other
reason, you will not have a claim against that guarantor and will only be a
creditor of ours and any guarantor whose guarantee was not set aside or found to
be unenforceable.
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THE EXCHANGE OFFER
REASONS FOR THE EXCHANGE OFFER
We have commenced the exchange offer to provide holders of series A notes
with an opportunity to acquire series B notes which, unlike the series A notes,
will be freely tradable at all times, subject to any restrictions on transfer
imposed by state "blue sky" laws. On August 14, 2000, we issued and sold the
outstanding series A notes in the aggregate principal amount of $150.0 million
in order to provide the financing for the Scientific Games acquisition; to repay
existing debt of both Autotote and Scientific Games; and to pay related fees and
expenses. We did not register the sale of the series A notes to the initial
purchasers under the Securities Act in reliance upon the exemption provided by
Section 4(2) of the Securities Act. The initial purchasers did not register the
concurrent resale of the series A notes to investors under the Securities Act in
reliance upon the exemptions provided by Rule 144A and Regulation S of the
Securities Act. The initial purchasers subsequently resold or were permitted to
resell the series A notes:
- to qualified institutional buyers in accordance with the provisions of
Rule 144A under the Securities Act;
- to institutional accredited investors in accordance with the provisions of
Rule 501(a) under the Securities Act; and
- outside the United States in accordance with the provisions of Regulation
S under the Securities Act.
In connection with the private offering of the series A notes, we and the
initial purchasers entered into a Registration Rights Agreement dated as of
August 14, 2000 in which we and the guarantors agreed, among other things:
- to file with the SEC, on or before November 13, 2000, a registration
statement relating to an exchange offer for the series A notes or pay an
additional amount to holders of series A notes in the event of a delay in
such filing;
- use our respective commercially reasonable efforts to cause the exchange
offer registration statement to be declared effective under the Securities
Act on or before January 11, 2001;
- upon the effectiveness of the exchange offer registration statement, to
offer the holders of the series A notes the opportunity to exchange their
series A notes in the exchange offer for a like principal amount of series
B notes;
- to keep the exchange offer open for not less than 20 business days or
longer, if required by applicable law, after notice of the exchange offer
is mailed to holders of the series A notes; and
- to use our respective commercially reasonable efforts to consummate the
exchange offer within 30 days from the effective date of the exchange
offer registration statement.
We and the guarantors also agreed, under certain circumstances:
- use our respective commercially reasonable efforts to file a shelf
registration statement relating to the offer and sale of the series A
notes by the holders of the series A notes;
- to use our respective commercially reasonable efforts to cause the shelf
registration statement to be declared effective; and
- to use our respective commercially reasonable efforts to keep the shelf
registration statement effective until at least August 14, 2002 or until
the series A notes covered by the shelf registration statement have been
sold or cease to be outstanding.
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The exchange offer being made by this Prospectus is intended to satisfy our
exchange and registration obligations under the Registration Rights Agreement.
If we fail to fulfill these obligations, you are entitled to receive additional
interest at the rate of $.05 per week per $1,000 in principal amount of series A
notes held by you for each violation of our obligations. The rate will increase
by an additional $.05 per week per $1,000 in principal amount of series A notes
for each subsequent 90-day period during which the additional interest continues
to accrue. The maximum aggregate increase to the interest rate under all
circumstances is $.50 per week per $1,000 in principal amount of series A notes.
After we have cured all defaults of its registration and exchange obligations,
the accrual of additional interest on the series A notes will cease, and the
interest rate for the series A notes will revert to its original rate.
For a more complete understanding of your exchange and registration rights,
please refer to the Registration Rights Agreement, which is included as Exhibit
4.9 to this Prospectus.
TRANSFERABILITY OF THE SERIES B NOTES
Based on certain no-action letters issued by the staff of the SEC to third
parties in connection with transactions similar to the exchange offer, we
believe that you may offer for resale, resell or otherwise transfer any series B
notes without compliance with the registration and prospectus delivery
requirements of the Securities Act, unless:
- you acquire the series B notes other than in the ordinary course of
business;
- you are participating, intend to participate or have an arrangement or
understanding with any person to participate, in a distribution of the
series B notes; or
- you are our "affiliate," as defined in Rule 405 under the Securities Act.
In any of the foregoing circumstances:
- you will not be able to rely on the interpretations of the staff of the
SEC, in connection with any offer for resale, resale or other transfer of
the series B notes; and
- you must comply with the registration and prospectus delivery requirements
of the Securities Act, or have an exemption available, in connection with
any offer for resale, resale or other transfer of the series B notes.
We are not making the exchange offer to, nor will we accept surrenders of
the series A notes from, you if you live in any state in which the exchange
offer would not comply with the applicable securities laws or "blue sky" laws of
that state. However, we will register or qualify the series B notes for offer
and sale under the securities or blue sky laws of those jurisdictions as any
holder of the series A notes may reasonably request and do any and all other
acts necessary or advisable to enable the offer and sale of the series B notes
in those jurisdictions.
Each broker-dealer that receives series B notes for its own account in
exchange for series A notes, where the series A notes were acquired by that
broker-dealer as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of the series B notes. See "Plan of Distribution."
TERMS OF THE EXCHANGE OFFER
The series A notes were issued in a single series of 12 1/2% Senior
Subordinated Notes due 2010. As of the date of this Prospectus, $150.0 million
in aggregate principal amount of the series A notes are outstanding. In the
exchange offer, the series A notes will be exchanged for series B notes.
Upon the terms and subject to the conditions set forth in this Prospectus
and in the accompanying Letter of Transmittal, we will accept all series A notes
validly tendered and not withdrawn prior to the
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expiration date. We may extend the exchange offer to a later date and time. See
"Expiration Date; Extensions; Amendments" below. After authentication of the
series B notes by the trustee under the indenture governing the series B notes,
we will issue and deliver up to $150.0 million aggregate principal amount of the
series B notes in exchange for up to $150.0 million aggregate principal amount
of the series A notes accepted in the exchange offer. Holders may tender some or
all of their series A notes pursuant to the exchange offer in denominations of
$1,000 and integral multiples of $1,000.
The form and terms of the series B notes are identical in all material
respects to the form and terms of the series A notes, except that:
- the offering of the series B notes has been registered under the
Securities Act; and
- the series B notes will not be subject to transfer restrictions.
Neither the series A notes nor the series B notes will be entitled to
exchange and registration rights after the consummation of the exchange offer.
The series B notes will be issued under and entitled to the benefits of the
indenture that governs the series A notes.
In connection with the issuance of the series A notes, we arranged for the
series A notes to be issued and transferable in book-entry form through the
facilities of The Depository Trust Company ("DTC"), acting as a depositary. The
series B notes will also be issuable and transferable in book-entry form through
DTC.
This Prospectus, together with the accompanying Letter of Transmittal, is
initially being sent to all registered holders of the series A notes as of the
close of business on , 2000. The exchange offer of the series A notes
is not conditioned upon any minimum aggregate principal amount being tendered.
However, the exchange offer is subject to certain customary conditions, which
may be waived by us, and to the terms and provisions of the Registration Rights
Agreement. See "Conditions to the Exchange Offer" below.
The exchange agent is The Bank of New York, which also serves as trustee
under the indenture that governs the series B notes.
We will be deemed to have accepted validly tendered series A notes when, as
and if we have given oral or written notice thereof to the exchange agent. The
exchange agent will act as agent of the tendering holders for the purpose of
receiving the series B notes from us and as our agent for the purpose of
delivering the series B notes to those holders. See "Exchange Agent" below.
If any tendered series A notes are not accepted for exchange because of an
invalid tender or the occurrence of certain other events set forth herein,
certificates for the unaccepted series A notes will be returned, at our cost and
expense, to the tendering holder as promptly as practicable after the expiration
of the exchange offer.
Holders who tender series A notes in the exchange offer will not be required
to pay brokerage commissions or fees or, subject to the instructions in the
Letter of Transmittal, transfer taxes with respect to the exchange of the series
A notes pursuant to the exchange offer. We will pay all charges and expenses,
other than certain applicable taxes, in connection with the exchange offer. See
"Solicitation of Tenders; Fees and Expenses" below.
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The exchange offer will expire at 5:00 p.m., New York City time, on
, 2001, unless we extend the exchange offer. We will extend the
exchange offer at any time and from time to time by giving oral or written
notice to the exchange agent and by timely public announcement.
We reserve the right to amend the terms of the exchange offer in any manner.
If any of the conditions set forth below under "Conditions to the Exchange
Offer" has not occurred and has not
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been waived by us, we expressly reserve the right, by giving oral or written
notice to the exchange agent, to:
- delay acceptance of, or refuse to accept, any series A notes not
previously accepted;
- extend the exchange offer; or
- terminate the exchange offer.
If the exchange offer is amended in a manner determined by us to constitute
a material change, we will promptly disclose that amendment in a manner
reasonably calculated to inform the holders of the series A notes of the
amendment, and we will extend the exchange offer to the extent required by law.
If the exchange offer is terminated, federal law requires that we promptly
either exchange or return all series A notes that have been tendered.
We will have no obligation to publish, advise, or otherwise communicate any
delay in acceptance, extension, termination or amendment of the exchange offer
other than by making a timely press release. We may also publicly communicate
these matters in any other appropriate manner of our choosing.
HOW TO TENDER SERIES A NOTES FOR EXCHANGE
Only a registered holder of the series A notes or a DTC participant listed
on a DTC securities position listing with respect to the series A notes may
tender its series A notes in the exchange offer. To tender the series A notes in
the exchange offer:
- registered holders of certificated series A notes must complete, sign and
date the Letter of Transmittal, or a facsimile thereof, in accordance with
the instructions contained in this Prospectus and in the Letter of
Transmittal. The holder should then mail or otherwise deliver the Letter
of Transmittal, or such facsimile, together with the series A notes to be
exchanged and any other required documents, to the exchange agent, at the
address set forth in this Prospectus and in the Letter of Transmittal; or
- holders of the series A notes that are DTC participants may follow the
procedures for book-entry transfer as provided for below under "Book-Entry
Transfer" and in the Letter of Transmittal.
To be effective, a tender must be made prior to the expiration of the
exchange offer.
If your series A notes are registered in the name of a broker, dealer,
commercial bank, trust company or other nominee and you wish to tender the
series A notes in the exchange offer, you should contact the registered holder
promptly and instruct the registered holder to tender on your behalf. If you
tender on your own behalf, you must, prior to completing and executing the
Letter of Transmittal and delivering your series A notes, either make
appropriate arrangements to register ownership of the series A notes in your own
name or obtain a properly completed bond power from the registered holder of the
series A notes. This transfer of record ownership may take considerable time.
Delivery of documents to DTC in accordance with DTC's procedures will NOT
constitute delivery to the exchange agent.
Your tender of the series A notes will constitute a binding agreement
between you, us and the exchange agent in accordance with the terms and subject
to the conditions set forth in this Prospectus and in the Letter of Transmittal.
If you tender less than all of your series A notes, you should fill in the
amount of series A notes being tendered in the specified box on the Letter of
Transmittal. You will be deemed to have tendered the entire amount of the series
A notes which you deliver to the exchange agent unless you indicate otherwise.
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By tendering your series A notes, you will represent to us that, among other
things:
- you are acquiring the series B notes in the ordinary course of your
business;
- you are not participating, do not intend to participate and do not have
any arrangement or understanding with any person to participate, in the
distribution of the series B notes; and
- you are not our "affiliate," as defined in Rule 405 under the Securities
Act, or, if you are our affiliate, that you will comply with the
registration and prospectus delivery requirements of the Securities Act to
the extent applicable.
A Letter of Transmittal of a broker-dealer that receives series B notes for
its own account in exchange for series A notes that were acquired by it as a
result of market-making activities or other trading activities must also include
an acknowledgment that the broker-dealer will deliver a copy of this Prospectus
in connection with any resale of the series B notes. By so acknowledging and by
delivering a prospectus, the broker-dealer will not be deemed to admit that it
is an "underwriter" within the meaning of the Securities Act. See "Plan of
Distribution."
The method of delivery of series A notes and Letters of Transmittal and all
other required documents is at your election and risk. Instead of delivery by
mail, we recommend that you use an overnight or hand delivery service. In all
cases, you should allow sufficient time to ensure timely delivery to the
exchange agent prior to the expiration of the exchange offer. You should not
send the Letter of Transmittal or your series A notes directly to us.
Signatures on a Letter of Transmittal or a notice of withdrawal (described
in "Withdrawal Rights" below), as the case may be, must be guaranteed by a
member firm of a registered national securities exchange or of the National
Association of Securities Dealers, Inc., a commercial bank or trust company
having an office or correspondent in the United States or an "eligible guarantor
institution" within the meaning of Rule 17Ad-15 under the Exchange Act (each, an
"eligible institution"), unless the corresponding series A notes are tendered:
- by a registered holder who has not completed the box entitled "Special
Registration Instructions" or the box entitled "Special Delivery
Instructions" in the Letter of Transmittal; or
- for the account of an eligible institution.
If a Letter of Transmittal is signed by a person other than the registered
holder, the corresponding series A notes must be endorsed or accompanied by
appropriate bond powers which authorize that person to tender the series A notes
on behalf of the registered holder, in either case signed exactly as the name of
the registered holder or holders appears on the series A notes. If a Letter of
Transmittal or any series A notes or bond powers are signed or endorsed by
trustees, executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, those
persons should so indicate when signing the Letter of Transmittal and submit
evidence satisfactory to us of their authority to so act, unless we waive this
requirement.
We will determine all questions as to the validity, form, eligibility,
acceptance and withdrawal of the series A notes. Our determination will be final
and binding. We reserve the absolute right to:
- reject any and all series A notes improperly tendered;
- refuse to accept any series A note if, in our judgment or the judgment of
our counsel, acceptance of the series A note may be deemed unlawful; and
- waive any defects or irregularities or conditions of the exchange offer as
to particular series A notes.
Our interpretation of the terms and conditions of the exchange offer,
including the instructions in the Letter of Transmittal, will be final and
binding on all parties. You must cure any defects or
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irregularities in connection with your tender of the series A notes within the
time that we determine, unless we waive those defects or irregularities.
Although we intend to notify you of defects or irregularities with respect
to your tender of series A notes, neither we, the exchange agent nor any other
person will be under any duty or obligation to do so, and no person will incur
any liability for failure to give you this notification. Your series A notes
will not be validly tendered until you have cured any defects or irregularities
or we have waived those defects or irregularities. If the exchange agent
receives series A notes that we determine are not properly tendered or the
tender of which we otherwise reject, the exchange agent will return those series
A notes to the tendering holder or other person specified in the appropriate
Letter of Transmittal as soon as practicable following the expiration of the
exchange offer.
We reserve the right:
- to purchase or make offers for any series A notes that remain outstanding
after the expiration of the exchange offer;
- to terminate the exchange offer, as set forth in "Conditions to the
Exchange Offer" below; and
- to the extent permitted by applicable law, to purchase series A notes
during the pendency of the exchange offer in the open market, in privately
negotiated transactions or otherwise.
The terms of any of these purchases or offers may differ from the terms of
the exchange offer.
BOOK-ENTRY TRANSFER
The exchange agent will make a request promptly after the date of this
Prospectus to establish accounts with respect to the series A notes at DTC for
the purpose of facilitating the exchange offer. Any financial institution that
is a participant in DTC's system may make book-entry delivery of the series A
notes by causing DTC to transfer those series A notes into the exchange agent's
DTC account in accordance with DTC's procedures for transfer. The exchange for
tendered series A notes will only be made after a timely confirmation of a
book-entry transfer of the series A notes into the exchange agent's account, and
timely receipt by the exchange agent of an Agent's Message, as defined below.
The term "Agent's Message" means a message, transmitted by DTC and received
by the exchange agent and forming part of the confirmation of a book-entry
transfer, which states that DTC has received an express acknowledgment from a
participant in DTC tendering series A notes and that the participant has
received an appropriate Letter of Transmittal and agrees to be bound by the
terms of the Letter of Transmittal, and we may enforce that agreement against
the participant. Delivery of an Agent's Message will also constitute an
acknowledgement from the tendering DTC participant that the representations
contained in the appropriate Letter of Transmittal and described above are true
and correct.
GUARANTEED DELIVERY PROCEDURES
If you wish to tender your series A notes and:
- your series A notes are not immediately available;
- you cannot deliver your series A notes, the Letter of Transmittal or any
other required documents to the exchange agent prior to the expiration of
the exchange offer; or
- you cannot complete the book-entry transfer procedures on a timely basis;
you may effect a tender if:
- your tender is made through an eligible institution;
26
<PAGE>
- prior to the expiration of the exchange offer, the exchange agent receives
from the eligible institution a properly completed and duly executed
Notice of Guaranteed Delivery by facsimile transmittal, overnight courier,
mail or hand delivery; and
- the exchange agent receives certificate(s) representing all tendered
series A notes in proper form for transfer, together with a properly
completed and executed Letter of Transmittal, or a facsimile thereof, and
all other documents required by the Letter of Transmittal, or confirmation
of a book-entry transfer into the exchange agent's account at DTC of the
series A notes delivered electronically, within three business days after
the expiration of the exchange offer.
A Notice of Guaranteed Delivery must state:
- the name and address of the holder;
- if the series A notes will be tendered by their registered holder, the
certificate number or numbers of the series A notes;
- the principal amount of the series A notes tendered;
- that the tender is being made thereby; and
- that the holder guarantees that, within three business days after the
expiration of the exchange offer, a properly completed and executed Letter
of Transmittal or facsimile thereof, together with the certificate(s)
representing the series A notes to be tendered in proper form for transfer
and all other documents required by the Letter of Transmittal, or
confirmation of a book-entry transfer into the exchange agent's account at
DTC of the series A notes delivered electronically, will be deposited by
the eligible institution with the exchange agent.
Forms of the Notice of Guaranteed Delivery will be available from the
exchange agent upon request.
WITHDRAWAL RIGHTS
Except as otherwise provided herein, you may withdraw tenders of your series
A notes at any time prior to the expiration of the exchange offer by delivery of
a written or facsimile transmission notice of withdrawal to the exchange agent
at its address set forth in this Prospectus.
Any notice of withdrawal must:
- specify the name of the person having deposited the series A notes to be
withdrawn;
- identify the series A notes to be withdrawn, including the certificate
numbers or number and principal amount of the series A notes or, in the
case of series A notes transferred by book-entry transfer, the name and
number of the account at DTC to be credited;
- be signed by the depositor of the series A notes in the same manner as the
original signature on the Letter of Transmittal by which the series A
notes were tendered, including any required signature guarantee, or be
accompanied by documents of transfer sufficient to permit the registrar to
register the transfer of the series A notes into the name of the person
withdrawing the tender; and
- specify the name in which any of the series A notes are to be registered,
if different from that of the depositor of the series A notes.
We will determine all questions as to the validity, form and eligibility
(including time of receipt) of any withdrawal notices. Our determination will be
final and binding on all parties. Any series A notes which are withdrawn will be
deemed not to have been validly tendered for purposes of the exchange offer, and
no series B notes will be issued with respect to those series A notes unless
they are validly
27
<PAGE>
retendered. Any series A notes that have been tendered for exchange but are not
accepted for exchange will be returned to the holder thereof without cost to the
holder as soon as practicable after withdrawal, rejection of tender or
termination of the exchange offer. Properly withdrawn series A notes may be
retendered by following one of the procedures described above under "How to
Tender Series A Notes for Exchange" at any time prior to the expiration of the
exchange offer.
CONDITIONS TO THE EXCHANGE OFFER
We are not required to accept for exchange, or to issue series B notes for,
any series A notes, and may terminate or amend the exchange offer before the
acceptance of the series A notes if, in our judgment, any of the following
conditions has occurred:
- the exchange offer, or the making of any exchange by a holder of series A
notes, violates applicable law or the applicable interpretations of the
SEC staff;
- any action or proceeding shall have been instituted or threatened in any
court or by or before any governmental agency or body with respect to the
exchange offer; or
- there has been adopted or enacted any law, statute, rule or regulation
that can reasonably be expected to impair our ability to proceed with the
exchange offer.
See "Expiration Date; Extensions; Amendments" above for a discussion of
possible actions we may take if any of the foregoing conditions occur.
The foregoing conditions are for our sole benefit. We may assert them
regardless of the circumstances giving rise to any of the foregoing conditions
at any time and from time to time. Our failure at any time to exercise any of
the foregoing rights will not be deemed a waiver of any of these rights, and
each right will be considered an ongoing right which we may assert at any time
and from time to time.
EXCHANGE AGENT
The Bank of New York has been appointed as exchange agent for the exchange
offer. Requests for assistance and requests for additional copies of this
Prospectus or of the Letter of Transmittal should be directed to the exchange
agent addressed as follows:
The Bank of New York
101 Barclay Street
Floor 7 East
New York, New York 10286
Attention: , Reorganization Section
SOLICITATION OF TENDERS; FEES AND EXPENSES
We are making the principal solicitation pursuant to the exchange offer by
mail and through the facilities of DTC. Additional solicitations may be made by
our officers, regular employees and our affiliates in person or by telegraph,
telephone, facsimile transmission, electronic communication or similar methods.
We have not retained any dealer-manager in connection with the exchange
offer and will not make any payments to brokers, dealers or other persons
soliciting acceptances of the exchange offer. We will, however, pay the exchange
agent reasonable and customary fees for its services and will reimburse the
exchange agent for its reasonable out-of-pocket costs and expenses incurred in
connection with the exchange offer and will indemnify the exchange agent for all
losses and claims incurred by it as a result of the exchange offer. We may also
pay brokerage houses and other custodians, nominees and fiduciaries the
reasonable out-of-pocket expenses incurred by them in forwarding copies of this
28
<PAGE>
Prospectus, the Letter of Transmittal and related documents to the beneficial
owners of the series A notes and in handling or forwarding tenders for exchange.
We will pay the cash expenses incurred in connection with the exchange
offer, including fees and expenses of the trustee, accounting and legal fees,
including the expense of one counsel designated by the holders of a majority of
the aggregate principal amount of the series A notes, and printing costs.
ACCOUNTING TREATMENT
We will record the series B notes at the same carrying value as the series A
notes, as reflected in our accounting records on the date of the exchange. As a
result, we will not recognize any gain or loss for accounting purposes as a
result of the consummation of the exchange offer. We will amortize the expense
of the exchange offer over the term of the series B notes.
CONSEQUENCES OF A FAILURE TO EXCHANGE SERIES A NOTES
Following consummation of the exchange offer, assuming we have accepted for
exchange all validly tendered series A notes, we will have fulfilled our
exchange and registration obligations under the Registration Rights Agreement.
All untendered series A notes outstanding after consummation of the exchange
offer will continue to be our valid and enforceable debt obligations, subject to
the restrictions on transfer set forth in the indenture governing the notes.
Holders of these series A notes will only be able to offer for sale, sell or
otherwise transfer their untendered series A notes as follows:
- to us, although we have no obligation to purchase untendered series A
notes unless they are called for redemption in accordance with the
provisions of the indenture governing the notes;
- pursuant to a registration statement that has been declared effective
under the Securities Act, although we will have no obligation, and do not
intend, to file any such registration statement;
- for so long as the series A notes are eligible for resale pursuant to
Rule 144A under the Securities Act, to a person reasonably believed to be
a qualified institutional buyer, or QIB, within the meaning of Rule 144A,
that purchases for its own account or for the account of a QIB to whom
notice is given that the transfer is being made in reliance on the
exemption from the registration requirements of the Securities Act
provided by Rule 144A;
- pursuant to offers and sales that occur outside the United States to
foreign persons in transactions complying with the provisions of
Regulation S under the Securities Act; or
- pursuant to any other available exemption from the registration
requirements of the Securities Act.
To the extent that series A notes are tendered and accepted in the exchange
offer, the liquidity of the trading market for untendered series A notes could
be adversely affected.
29
<PAGE>
FORWARD-LOOKING STATEMENTS
Throughout this Prospectus we make "forward-looking statements" within the
meaning of Section 27A of the Securities Act and Section 21E of the Securities
Exchange Act of 1934. Forward-looking statements include the words "may,"
"will," "estimate," "intend," "continue," "believe," "expect" or "anticipate"
and other similar words. The forward-looking statements contained in this
Prospectus are generally located in the material set forth under the headings
"Prospectus Summary," "Risk Factors," "Capitalization," "Management's Discussion
and Analysis of Financial Condition and Results of Operations," "Business," and
"Unaudited Pro Forma Condensed Combined Financial Statement Data of Autotote and
Scientific Games" 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:
- the availability and adequacy of our cash flow to satisfy our obligations,
including payment of the notes and additional funds required to support
capital improvements and development,
- economic, competitive, demographic, business and other conditions in our
local and regional markets,
- changes or developments in the laws, regulations or taxes in the gaming
and lottery industries,
- 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,
- 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,
- the loss of any license or permit, including the failure to obtain an
unconditional renewal of a required gaming license on a timely basis, and
- other factors discussed under "Risk Factors" or elsewhere in this
Prospectus.
You should read this Prospectus completely and with the understanding that
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.
USE OF PROCEEDS
We will not receive any proceeds from the exchange offer. We used the
proceeds of the offering of the series A notes, together with the proceeds of
borrowings under our new senior credit facilities and the proceeds of our new
convertible preferred stock issuance, to acquire Scientific Games, to repay
existing debt of both Autotote and Scientific Games and to pay related fees and
expenses.
30
<PAGE>
CAPITALIZATION
The following table sets forth the actual unaudited capitalization of
Autotote as of July 31, 2000 and the capitalization of Autotote at that date
after giving effect to the acquisition of Scientific Games and certain financing
transactions. You should read this table with the "Unaudited Pro Forma Condensed
Combined Financial Statement Data of Autotote and Scientific Games,"
"Management's Discussion and Analysis of Financial Condition and the Results of
Operations," "Description of New Senior Credit Facilities," and the Consolidated
Financial Statements and the notes thereto of Autotote and Scientific Games
included elsewhere herein.
<TABLE>
<CAPTION>
AS OF JULY 31, 2000
-------------------
AUTOTOTE PRO
ACTUAL FORMA
-------- --------
(IN MILLIONS)
<S> <C> <C>
Cash and cash equivalents................................... $ 3.2 $ 1.9
======= =======
Long-term debt (including current maturities):
Existing senior revolving credit facility................. $ 6.4 $ 0.0
The 2000 term loan........................................ 10.0 0.0
8.87% senior term loan.................................... 7.2 0.0
10 7/8% senior notes...................................... 110.0 0.0
5.5% convertible subordinated debentures.................. 35.0 0.0
Capital leases and other indebtedness..................... 2.1 2.1
New senior credit facilities:
Revolving credit facility (1)........................... 0.0 7.0
Term A loan............................................. 0.0 60.0
Term B loan............................................. 0.0 220.0
12 1/2% senior subordinated notes......................... 0.0 150.0
------- -------
Total Debt............................................ $ 170.7 $ 439.1
------- -------
Stockholders' equity (deficit):
Convertible preferred stock (net of cash portion of
placement agent fee and preferred stockholders' related
fees) (2)............................................... 0.0 106.4
Class A common stock...................................... 0.4 0.4
Additional paid-in capital................................ 151.3 159.1
Accumulated losses........................................ (192.4) (212.5)
Treasury stock, at cost................................... (0.1) (0.1)
Accumulated other comprehensive losses.................... (2.4) (2.4)
------- -------
Total stockholders' equity (deficit).................. $ (43.2) $ 50.9
------- -------
Total capitalization.................................. $ 127.5 $ 490.0
======= =======
</TABLE>
------------------------
(1) Excludes undrawn letters of credit in the amounts of $0.8 million (actual)
and $3.9 million (pro forma).
(2) Reflects $110.0 million gross proceeds from sale of convertible preferred
stock less $.872 million in certain legal and related fees paid on the
behalf of the convertible preferred stockholders and the $2.75 million cash
portion of the placement agent fee (and does not reflect $2.75 million
convertible preferred stock issued as partial payment of placement agent
fees in lieu of cash).
31
<PAGE>
UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENT DATA
OF AUTOTOTE AND SCIENTIFIC GAMES
(IN THOUSANDS)
The unaudited pro forma condensed combined financial statements have been
derived by the application of pro forma adjustments to the combined historical
consolidated financial statements of Autotote and Scientific Games. The
unaudited pro forma condensed combined statement of operations data for the year
ended October 31, 1999, for the nine months ended July 31, 2000 give effect to
the following: (i) the consummation of the Scientific Games acquisition,
(ii) proceeds from the issuance of our $150,000 principal amount of 12 1/2%
Senior Subordinated notes due August 15, 2010, Series A, (iii) initial
borrowings under our new senior credit facilities, (iv) the sale of $110,000 of
convertible preferred stock, and (v) repayment of substantially all of
Autotote's and Scientific Games' existing indebtedness, as if each occurred at
the beginning of the periods presented. The unaudited pro forma condensed
combined balance sheet as of July 31, 2000 gives effect to these transactions as
if each had occurred on that date.
The unaudited pro forma condensed combined financial statements do not
include adjustments to reflect cost savings that we expect to realize following
the Scientific Games acquisition. (See Note 4 of Notes to Pro Forma Condensed
Combined Statements of Operations.) The unaudited pro forma financial data do
not purport to represent what our financial position and results of operations
would have been if these transactions had actually occurred as of the dates
indicated and are not intended to project our financial position or results of
operations for any future period.
The pro forma adjustments related to the purchase price allocation and
financing of the Scientific Games acquisition are preliminary and based on
information obtained to date that is subject to revision as additional
information becomes available. Any such revisions could have a significant
impact on total assets, total liabilities and stockholders' equity, depreciation
and amortization, interest expense and income taxes.
The unaudited pro forma condensed combined financial statements should be
read in conjunction with the historical consolidated financial statements of
Autotote and Scientific Games and related notes.
32
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
YEAR ENDED OCTOBER 31, 1999
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SCIENTIFIC
AUTOTOTE GAMES PRO FORMA
HISTORICAL(1) HISTORICAL(2) ADJUSTMENTS(3) PRO FORMA
------------- ------------- -------------- ---------
<S> <C> <C> <C> <C>
Operating revenues....................... $211,148 $229,188 $ (525)(a) $439,811
Operating expenses (exclusive of
depreciation and amortization)......... 143,433 148,890 (336)(a) 291,987
-------- -------- -------- --------
Gross profit............................. 67,715 80,298 (189)(a) 147,824
Selling, general and administrative
expenses............................... 27,178 29,350 (600)(b) 55,928
Special charges.......................... 1,600 -- -- 1,600
Depreciation and amortization............ 22,189 17,431 10,518 (c)(d) 50,138
-------- -------- -------- --------
Operating income (loss).................. 16,748 33,517 (10,107) 40,158
Interest expense......................... 16,177 682 33,304 (e) 50,163
Other expense............................ 15 64 -- 79
-------- -------- -------- --------
Income (loss) before income tax expense
(benefit).............................. 556 32,771 (43,411) (10,084)
Income tax expense (benefit)............. 177 11,463 (7,986)(f) 3,654
-------- -------- -------- --------
Net income (loss)........................ 379 21,308 (35,425) (13,738)
Preferred stock dividend................. -- -- (6,765)(g) (6,765)
-------- -------- -------- --------
Net income (loss) applicable to common
stockholders........................... $ 379 $ 21,308 $(42,190) $(20,503)
======== ======== ======== ========
Net income (loss) per basic share........ $ 0.01 $ (0.57)
======== ========
Net income (loss) per diluted share...... -- $ (0.57)
======== ========
Weighted average number of shares used in
per share calculation:
Basic share............................ 36,118 36,118
======== ========
Diluted share.......................... 38,343 36,118
======== ========
OTHER DATA:
Ratio of earnings to fixed charges(5).... --
</TABLE>
The accompanying notes are an integral part of this
unaudited pro forma condensed combined statement of operations.
33
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
NINE MONTHS ENDED JULY 31, 2000
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SCIENTIFIC
AUTOTOTE GAMES PRO FORMA
HISTORICAL(1) HISTORICAL(2) ADJUSTMENTS(3) PRO FORMA
------------- ------------- -------------- ---------
<S> <C> <C> <C> <C>
Operating revenues....................... $150,605 $179,782 $ (1,430)(a) $328,957
Operating expenses (exclusive of
depreciation and amortization)......... 97,007 123,078 (800)(a) 219,285
-------- -------- -------- --------
Gross profit............................. 53,598 56,704 (630)(a) 109,672
Selling, general and administrative
expenses............................... 19,909 23,327 (450)(b) 42,786
Special charges.......................... -- 2,826 -- 2,826
Depreciation and amortization............ 15,960 13,514 8,682 (c)(d) 38,156
-------- -------- -------- --------
Operating income (loss).................. 17,729 17,037 (8,862) 25,904
Interest expense......................... 12,850 805 24,008 (e) 37,663
Other expense (income)................... (138) (594) -- (732)
-------- -------- -------- --------
Income (loss) before income tax
expense................................ 5,017 16,826 (32,870) (11,027)
Income tax expense (benefit)............. 586 6,500 (5,672)(f) 1,414
-------- -------- -------- --------
Net income (loss)........................ 4,431 10,326 (27,198) (12,441)
Preferred stock dividend................. -- -- (5,074)(g) (5,074)
-------- -------- -------- --------
Net income (loss) applicable to common
stockholders........................... $ 4,431 $ 10,326 $(32,272) $(17,515)
======== ======== ======== ========
Net income (loss) per basic share........ $ 0.12 $ (0.48)
======== ========
Net income (loss) per diluted share...... $ 0.11 $ (0.48)
======== ========
Weighted average number of shares used in
per share calculation:
Basic share............................ 36,632 36,632
======== ========
Diluted share.......................... 41,250 36,632
======== ========
OTHER DATA:
Ratio of earnings to fixed charges(5).... --
</TABLE>
The accompanying notes are an integral part of this
unaudited pro forma condensed combined statement of operations.
34
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED
COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
1. The historical balances in this column represent the consolidated results of
operations of Autotote for the fiscal year ended October 31, 1999 as
reported in the audited historical consolidated financial statements of
Autotote and the consolidated results of operations for the nine months
ended July 31, 2000 as reported in the unaudited historical consolidated
financial statements of Autotote.
2. The historical balances in this column represent the consolidated results of
operations of Scientific Games for the twelve months ended September 30,
1999 and for the nine months ended June 30, 2000 derived from the unuadited
historical consolidated financial statements of Scientific Games.
3. The pro forma adjustments reflected in the unaudited pro forma condensed
combined statements of operations give effect to the following:
(a) A decrease in operating revenues, operating expenses and gross profit as
a result of conforming Scientific Games' accounting policy with regard to
revenue recognition on prepaid phone cards to that of Autotote.
(b) An elimination of compensation and other amounts payable in respect of
the departure of the Chief Executive Officer of Scientific Games,
including elimination of his participation in the Supplemental Employee
Retirement Plan of Scientific Games, which elimination is directly
attributable to the Scientific Games acquisition.
(c) A decrease in depreciation expense relating to acquired property and
equipment based on estimated useful lives (in years) and appraised
values. The preliminary appraised values of the acquired property and
equipment exceeded the historical net book values of the assets by
approximately $8,131. The following table indicates the components of the
adjustments by asset class and the amount by which current estimates of
average useful lives differ from the average remaining lives in the
depreciation accounts of Scientific Games.
<TABLE>
<CAPTION>
APPROXIMATE
SCIENTIFIC DEPRECIATION EXPENSE
CURRENT GAMES ---------------------------
PRELIMINARY AVERAGE AVERAGE YEAR ENDED NINE MONTHS
ESTIMATED ESTIMATED REMAINING OCTOBER 31, ENDED
FAIR VALUE LIFE LIFE 1999 JULY 31, 2000
----------- --------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Machinery and equipment....... $48,294 8 4 $ 8,567 $ 6,425
Land and buildings............ 16,520 30 16 412 309
Transportation equipment...... 708 3 1 236 177
Furniture and fixtures........ 3,060 5 3 612 459
Leasehold improvements........ 2,437 4 3 609 457
Construction in progress...... 23,559 N/A N/A -- --
------- ------- -------
$94,578 10,436 7,827
======= ======= =======
Scientific Games historical
depreciation expense........ 12,944 10,717
------- -------
Decrease in depreciation
expense..................... $(2,508) $(2,890)
======= =======
</TABLE>
The decrease in depreciation expense is due to Autotote's belief that the
assets acquired will have an average useful life longer than that originally
determined by Scientific Games. The expected asset lives are consistent with the
useful lives Autotote assigns to its other similar assets, when acquired.
35
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED
COMBINED STATEMENTS OF OPERATIONS (CONTINUED)
(IN THOUSANDS)
(d) An increase in amortization expense relating to acquired intangible
assets and goodwill based on estimated lives as follows:
<TABLE>
<CAPTION>
AMORTIZATION EXPENSE
--------------------------
CURRENT NINE MONTHS
PRELIMINARY AVERAGE YEAR ENDED ENDED
ESTIMATED ESTIMATED OCTOBER 31, JULY 31,
FAIR VALUE LIFE 1999 2000
----------- --------- ------------ -----------
<S> <C> <C> <C> <C>
Employee work force...................... $ 7,200 5 $ 1,440 $ 1,080
Internally developed software............ 16,800 4-10 1,920 1,440
Patents.................................. 15,600 15 1,040 780
Customer lists........................... 66,000 20 3,300 2,475
Trade name............................... 32,200 20 1,610 1,208
Goodwill................................. 141,257 20 7,063 5,298
-------- ------- -------
$279,057 16,373 12,281
========
Scientific Games historical intangible
amortization expense................... 3,347 709
------- -------
Increase in amortization expense......... $13,026 $11,572
======= =======
</TABLE>
(e) A net increase in interest expense reflecting borrowings under the new
senior credit facilities, issuance of the 12 1/2% senior subordinated notes,
and amortization of deferred financing costs, is calculated as follows:
<TABLE>
<CAPTION>
INTEREST EXPENSE
--------------------------
NINE MONTHS
YEAR ENDED ENDED
AMOUNT INTEREST OCTOBER 31, JULY 31,
BORROWED RATE 1999 2000
-------- -------- ------------ -----------
<S> <C> <C> <C> <C>
New senior credit facilities:
Term A loan...................................... $ 60,000 9.60% $ 5,760 $ 4,320
Term B loan...................................... 220,000 10.35% 22,770 17,078
Revolving credit facility........................ 7,000 9.60% 672 504
12 1/2% senior subordinated notes.................. 150,000 12.50% 18,750 14,063
Amortization of deferred financing costs........... 2,124 1,591
------- -------
Total new interest expense......................... 50,076 37,556
Existing interest expense on debt being repaid..... 16,772 13,548
------- -------
Increase in interest expense....................... $33,304 $24,008
======= =======
</TABLE>
Interest rates on the components of the new senior credit facilities are
based, at our option, on the prime rate or LIBOR plus a margin as specified.
The effect of a 0.125% change in the assumed interest rate on borrowings
under the new senior credit facilities would result in an approximate $360
change in the pro forma interest expense adjustment on an annual basis.
(f) Income tax benefit resulting from the pro forma decrease in taxable
income. Pro forma tax benefit differs from the expected tax benefit
derived by applying a combined federal and state
36
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED
COMBINED STATEMENTS OF OPERATIONS (CONTINUED)
(IN THOUSANDS)
statutory tax rate of 40% to pro forma loss before income tax benefit
because Autotote and Scientific Games are in a tax loss carryforward
position on a pro forma combined basis and due to limitations in the
deductibility of expenses in foreign tax jurisdictions.
(g) Payment-in-kind dividends at an annual rate of 6% on (i) $110,000 of
convertible preferred stock sold in connection with the repayment of
certain existing indebtedness of Autotote and (ii) $2,750 of convertible
preferred stock issued as partial payment of placement agent fees in lieu
of cash.
4. The pro forma condensed combined statements of operations data do not
reflect the effect of: (i) estimated cost savings as a result of the July
2000 closing of the Gilroy, California manufacturing facility and the
transfer of all printing previously done at the facility to the new
state-of-the-art, 21-unit flexographic printing press in our Alpharetta,
Georgia facility beginning September 2000; and (ii) elimination of estimated
duplicative personnel and corporate costs. Based upon our transition plans,
we estimated that if these expected cost savings had been in effect on
November 1, 1998, they would have had the effect of reducing operating costs
by $8,100 during the year ended October 31, 1999 and by $6,100 for the nine
months ended July 31, 2000.
5. For purposes of determining the ratio of earnings to fixed charges,
"earnings" consist of earnings (loss) before income tax expense (benefit)
plus fixed charges plus income allocable to minority interests in
consolidated entities that have incurred fixed charges. "Fixed charges"
consist of interest expense, including amortization of deferred finance
costs, plus one-third of rental expense (this portion is considered to be
representative of the interest factor). For the year ended October 31, 1999
and the nine months ended July 31, 2000 unaudited pro forma earnings were
insufficient to cover fixed charges by $9,257 and $11,095, respectively.
6. The accompanying pro forma condensed combined statements of operations do
not reflect the following: (i) the write-off of unamortized deferred
financing fees and costs and loss on the tender premium paid with respect to
the extinguishment of Autotote debt in the amount of $12,567; (ii) interest
expense in the amount of approximately $7,530 paid to certain financial
advisors in connection with their services to Autotote in obtaining certain
financing commitments in the form of warrants to acquire up to 2,900 shares
of common stock; (iii) on a preliminary basis, purchase accounting
adjustments in the amount of up to approximately $18,000 which will be
included in goodwill and amortized over a period of 20 years. The effect of
such items will be reflected in the consolidated statements of operations of
Autotote in the periods subsequent to the date of acquisition of Scientific
Games.
37
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF JULY 31, 2000
(IN THOUSANDS)
<TABLE>
<CAPTION>
SCIENTIFIC
AUTOTOTE GAMES PRO FORMA
HISTORICAL(1) HISTORICAL(2) ADJUSTMENTS(3) PRO FORMA
------------- ------------- -------------- ---------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............. $ 3,181 $ 11,296 $ (12,522)(a) $ 1,955
Accounts receivable, net............... 23,645 46,669 (1,955)(b) 68,359
Inventories............................ 8,452 15,648 1,136 (b) 25,236
Other current assets................... 3,933 4,674 1,396 (i) 10,003
-------- -------- --------- --------
Total current assets................. 39,211 78,287 (11,945) 105,553
Property and equipment, net.............. 91,367 86,447 8,131 (c) 185,945
Goodwill, net............................ 3,992 29,819 111,438 (d) 145,249
Operating right, net..................... 13,098 -- -- 13,098
Intangible assets........................ -- -- 137,800 (e) 137,800
Other assets............................. 27,036 18,462 11,045 (f) 56,543
-------- -------- --------- --------
Total assets......................... $174,704 $213,015 $ 256,469 $644,188
======== ======== ========= ========
Current Liabilities:
Current installments of long-term
debt................................. $ 877 $ -- $ 3,300 (g) $ 4,177
Accounts payable and accrued
expenses............................. 41,814 38,582 (5,133)(h) 75,263
-------- -------- --------- --------
Total current liabilities............ 42,691 38,582 (1,833) 79,440
Long-term debt, excluding current
installments........................... 169,882 28,900 236,180 (g) 434,962
Other long-term liabilities.............. 5,344 16,073 57,500 (i) 78,917
-------- -------- --------- --------
Total liabilities.................... 217,917 83,555 291,847 593,319
-------- -------- --------- --------
STOCKHOLDERS' EQUITY (DEFICIT)
Convertible preferred stock.............. -- -- 106,378 (j) 106,378
Common stockholders' equity.............. (43,213) 129,460 (141,756)(k)(l) (55,509)
-------- -------- --------- --------
Total stockholders' equity
(deficit).......................... (43,213) 129,460 (35,378) 50,869
-------- -------- --------- --------
Total liabilities and stockholders'
equity (deficit)................... $174,704 $213,015 $ 256,469 $644,188
======== ======== ========= ========
</TABLE>
The accompanying notes are an integral part of this
unaudited pro forma condensed combined balance sheet.
38
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
(IN THOUSANDS)
1. The historical balances in this column represent the consolidated balance
sheet of Autotote as of July 31, 2000 as reported in the unaudited
historical consolidated financial statements of Autotote.
2. The historical balances in this column represent the consolidated balance
sheet of Scientific Games as of June 30, 2000 as reported in the unaudited
historical consolidated financial statements of Scientific Games.
3. The pro forma adjustments reflected in the unaudited pro forma condensed
combined balance sheet give effect to the following:
(a) The use of $12,522 of Autotote and Scientific Games cash on hand to fund
a portion of the cash required in connection with the acquisition of
Scientific Games and related financing transactions including employee
payments and payments to fund certain retirement and deferred
compensation plans of Scientific Games in the amount of approximately
$8,600 directly attributable to the acquisition.
(b) Decrease in accounts receivable and increase in inventories as a result
of conforming Scientific Games' accounting policy with regard to revenue
recognition on prepaid phone cards to that of Autotote.
(c) Based on preliminary appraisal information, the fair market values of
the acquired property and equipment exceeds the historical net book
values of these assets by $8,131. As a result, this amount has been
reflected as an increase to property and equipment.
(d) The incremental increase in goodwill resulting from the Scientific Games
acquisition is as follows:
<TABLE>
<S> <C>
Cost in excess of the estimated fair value of net assets
acquired.................................................. $141,257
Elimination of historical goodwill, net, of Scientific
Games..................................................... (29,819)
--------
$111,438
========
</TABLE>
On a preliminary basis, purchase accounting adjustments in the amount of
up to approximately $18,000 will be included in goodwill and amortized
over a period of 20 years. The effect of such items will be reflected in
the consolidated balance sheets of Autotote in the periods subsequent to
the date of acquisition of Scientific Games.
(e) Based on preliminary appraisal information, the fair market value of
acquired intangible assets amounts to $137,800.
(f) The incremental increase in other assets as a result of capitalization
of deferred financing fees and costs incurred in connection with the
financing transactions partially offset by the decrease in estimated fair
value of other assets acquired:
<TABLE>
<S> <C>
Payment of deferred financing fees and costs................ $16,530
Elimination of historical financing fees and costs of
Autotote and Scientific Games............................. (3,184)
Decrease in estimated fair value of other assets acquired... (2,301)
=======
$11,045
=======
</TABLE>
39
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET (CONTINUED)
(IN THOUSANDS)
(g) Proceeds from the offering of the senior subordinated notes, series A,
and borrowings under the new senior credit facilities less repayment of
existing debt of Autotote and existing debt of Scientific Games
calculated as follows:
<TABLE>
<S> <C>
Proceeds from 12 1/2% senior subordinated notes............. $ 150,000
Proceeds from new senior credit facilities.................. 287,000
Repayment of existing debt of Autotote...................... (168,620)
Repayment of existing debt of Scientific Games.............. (28,900)
----------
$ 239,480
==========
</TABLE>
The net increase in long-term debt of $239,480 has been classified as
follows
<TABLE>
<S> <C>
Current installments of long-term debt...................... $ 3,300
Long-term debt, excluding current installments.............. 236,180
-------
$239,480
=======
</TABLE>
(h) Incremental increase in estimated fair value of liabilities assumed in
the amount of $2,670 resulting from the Scientific Games acquisition,
including $1,450 recorded pursuant to EITF Issue 95-3, "Recognition of
Liabilities in Connection with a Purchase Business Combination," for
severance estimated to be incurred in the expected elimination of
duplicative personnel, net of repayment of accrued interest in the amount
of $7,587 on existing Autotote debt and $216 on existing Scientific Games
debt.
(i) Increase in non current deferred tax liabilities of $57,500 and current
deferred tax assets of $1,396 as a result of the increase in property and
equipment, the fair value of identifiable intangible assets acquired, and
an increase in the fair value of liabilities assumed and a decrease in
assets acquired in connection with the acquisition of Scientific Games.
(j) Reflects $110,000 of 6% payment-in-kind convertible preferred stock
sold. Proceeds from the issuance were applied to the retirement of
outstanding debt. In connection with the issuance of the convertible
preferred stock, Autotote paid certain legal and related expenses of the
purchasers of convertible preferred stock in the amount of $872, and a
placement agent fee in the amount of 5% of the total gross proceeds
received from the issuance of the convertible preferred stock. The
placement agent fee was paid half in shares of convertible preferred
stock and half in cash. Accordingly, the cash available from the issuance
of the convertible preferred stock and stockholders' equity (deficit) are
each reduced by $3,622. There is no impact on the accompanying pro forma
condensed combined balance sheet for the portion of the fee paid in
shares of convertible preferred stock other than to increase the ultimate
number of issued and outstanding shares of convertible preferred stock.
(k) In connection with the repayment of existing debt of Autotote,
unamortized deferred financing fees and costs were written-off in the
amount of $2,865 associated with this existing debt. The write-off of
such deferred financing fees and costs and the tender premium paid with
respect to existing debt of Autotote in the amount of $9,702 will be
recorded as an extraordinary loss on early extinguishment of debt. There
are no tax benefits recognized on the extraordinary loss because Autotote
and Scientific Games are in a tax loss carryforward position on a pro
forma basis.
40
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET (CONTINUED)
(IN THOUSANDS)
(l) Reflects adjustments to historical stockholders' equity as follows:
<TABLE>
<S> <C>
Elimination of Scientific Games' historical stockholders'
equity.................................................... $ (129,460)
Loss on write-off of deferred financing fees and costs...... (2,899)
Loss on tender premium paid with respect to existing debt of
Autotote.................................................. (9,702)
Fair value of warrants issued for services.................. 305
----------
$ (141,756)
==========
</TABLE>
Upon consummation of the acquisition of Scientific Games and certain
financing transactions, Autotote issued warrants to purchase up to 2,900
shares of common stock to certain financial advisors in connection with
their services to Autotote in obtaining certain financing commitments.
The warrants were exercisable until September 6, 2007 at a nominal price
determined by a formula set forth in the warrant and had an estimated
fair market value at the date of issue of approximately $7,530. The
issuance of the warrants will be recorded as interest expense, with a
corresponding increase to additional paid in capital. Consequently, there
is no net impact to the accompanying pro forma condensed combined balance
sheet as of July 31, 2000. The warrants were retired in exchange for the
issuance of 2,900 shares of common stock as of October 5, 2000.
In connection with the acquisition of Scientific Games, Autotote issued
warrants to purchase up to 250 shares of common stock to certain
financial advisors in connection with their services to Autotote. The
warrants are exercisable until October 2, 2004 at a price equal to the
fair market value of Autotote's common stock on the date of issue. The
estimated fair market value of the warrants was $305 on the date of
issue. The issuance of the warrants will be recorded as an increase to
goodwill with a corresponding increase to additional paid in capital.
41
<PAGE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
AUTOTOTE
The following selected historical consolidated financial data as of and for
each of the five years ended October 31, 1995, 1996, 1997, 1998 and 1999 have
been derived from Autotote's audited consolidated financial statements, which
financial statements have been audited by KPMG LLP, independent auditors. The
selected historical consolidated unaudited financial data set forth below for
the nine-month periods ended July 31, 1999 and 2000 have been derived from, and
are qualified by reference to, Autotote's unaudited consolidated financial
statements included elsewhere herein and include all adjustments, consisting
only of normal recurring adjustments, which management considers necessary for a
fair presentation of Autotote's results for such periods. The consolidated
unaudited financial data for the nine-month period ended July 31, 2000 is not
necessarily indicative of the results to be achieved for the year ending October
31, 2000. The following financial data reflects the acquisition and disposition
of certain businesses during the period 1995 through 1999 and should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations," "Business," and the Consolidated Financial
Statements and the notes thereto included elsewhere herein.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED OCTOBER 31, JULY 31,
---------------------------------------------------- -------------------
1995 1996 1997 1998 1999 1999 2000
-------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Operating revenues....................... $153,184 $176,235 $157,332 $159,313 $211,148 $151,901 $150,605
Operating expenses (exclusive of
Depreciation and amortization)......... 94,230 112,538 95,892 104,655 143,433 103,306 97,007
-------- -------- -------- -------- -------- -------- --------
Gross profit............................. 58,954 63,697 61,440 54,658 67,715 48,595 53,598
Selling, general and administrative
expenses............................... 36,540 31,921 28,444 26,205 27,178 19,854 19,909
(Gain) loss on sale of business.......... -- -- (1,823)(3) 66 (4) 1,600 (5) -- --
Restructuring and asset write-off........ 18,241 (1) (649)(2) -- -- -- -- --
Depreciation and amortization............ 35,463 40,853 36,728 29,489 22,189 16,363 15,960
-------- -------- -------- -------- -------- -------- --------
Operating income (loss).................. (31,290) (8,428) (1,909) (1,102) 16,748 12,378 17,729
-------- -------- -------- -------- -------- -------- --------
Other (income) deductions:
Interest expense....................... 16,362 14,837 14,367 15,521 16,177 12,181 12,850
Other (income) expense................. (436) 8,487 79 (1,064) 15 77 (138)
-------- -------- -------- -------- -------- -------- --------
15,926 23,324 14,446 14,457 16,192 12,258 12,712
-------- -------- -------- -------- -------- -------- --------
Income (loss) before income tax expense
and extraordinary item................. (47,216) (31,752) (16,355) (15,559) 556 120 5,017
Income tax expense....................... 2,673 2,443 906 321 177 87 586
-------- -------- -------- -------- -------- -------- --------
Income (loss) before extraordinary
item................................... (49,889) (34,195) (17,261) (15,880) 379 33 4,431
Extraordinary item....................... -- -- (426) -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Net income (loss)........................ $(49,889) $(34,195) $(17,687) $(15,880) $ 379 $ 33 $ 4,431
======== ======== ======== ======== ======== ======== ========
OTHER DATA:
Ratio of earnings to fixed charges(6).... -- -- -- -- 1.0x 1.0x 1.3x
</TABLE>
<TABLE>
<CAPTION>
AS OF OCTOBER 31, AS OF JULY 31,
---------------------------------------------------- -------------------
1995 1996 1997 1998 1999 1999 2000
-------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................ $ 4,991 $ 5,988 $ 18,207 $ 6,809 $ 5,067 $ 14,465 $ 3,181
Total assets............................. 241,021 196,793 153,541 156,500 165,559 158,069 174,704
Total debt............................... 177,264 169,024 149,857 158,870 157,144 156,488 170,759
Stockholders' equity (deficit)........... 11,857 (20,196) (33,240) (48,638) (48,219) (48,511) (43,213)
</TABLE>
42
<PAGE>
------------------------------
(1) Reflects $18,241 of unusual charges in the fiscal year ended October 31,
1995. These charges are principally the result of the write-off of certain
investments and non-current assets, including $2,750 attributable to
Autotote's Mexican VGM contracts, $2,576 attributable to European wagering
terminals, $1,314 attributable to other assets, $11,601 principally related
to the closure of Autotote's Owings Mills, Maryland lottery support facility
and the manufacturing facility in Ballymahon, Ireland.
(2) Reflects an unusual credit of $649 in the fiscal year ended October 31, 1996
which is a partial reversal of fiscal year 1995 restructuring cost accruals
because of Autotote's decision to continue limited manufacturing of wagering
terminals at its Ireland manufacturing facility.
(3) Reflects $1,823 of unusual income resulting from the gain on sale of
Autotote's Tele Control business.
(4) Reflects $66 of unusual loss resulting from the adjustment of prior sales of
Autotote's Tele Control and CBS businesses for the fiscal year ended October
31, 1998.
(5) Reflects $1,600 of unusual loss resulting from the sale of Autotote's SJC
Video business.
(6) For the purpose of determining the ratio of earnings to fixed charges,
"earnings" consist of earnings (loss) before income tax expense (benefit)
plus fixed charges. "Fixed charges" consist of interest expense, including
amortization of deferred financing costs, plus one-third of rental expense
(this portion is considered to be representative of the interest factor).
For the years ended October 31, 1995, 1996, 1997 and 1998 earnings were
insufficient to cover fixed charges by $47,216, $31,752, $16,355 and
$15,559, respectively.
SCIENTIFIC GAMES
The following selected historical consolidated financial data as of and for
each of the five years ended December 31, 1995, 1996, 1997, 1998 and 1999 have
been derived from the audited consolidated financial statements of Scientific
Games Holdings Corp., which financial statements have been audited by Ernst &
Young LLP, independent auditors. The selected historical consolidated unaudited
financial data set forth below for the six-month periods ended June 30, 1999 and
2000 have been derived from, and are qualified by reference to, Scientific
Games' unaudited financial statements included elsewhere herein and include all
adjustments, consisting only of normal recurring adjustments, which Scientific
Games' management considers necessary for a fair presentation of Scientific
Games' results for such periods. The consolidated unaudited financial data for
the six-month period ended June 30, 2000 is not necessarily indicative of the
results to be achieved for the year ending December 31, 2000. The following
financial data reflects the acquisition of certain businesses during the period
1995 through 1999 and should be read in conjunction with "Management's
Discussion and Analysis of Financial
43
<PAGE>
Condition and Results of Operations," "Business," and the Consolidated Financial
Statements and the notes thereto included elsewhere herein.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
---------------------------------------------------- -------------------
1995 1996 1997 1998 1999 1999 2000
-------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues................................. $149,240 $146,620 $197,456 $213,800 $228,573 $109,790 $120,511
Cost of revenues......................... 88,276 90,442 124,718 138,630 148,826 69,294 82,616
-------- -------- -------- -------- -------- -------- --------
Gross profit............................. 60,964 56,178 72,738 75,170 79,747 40,496 37,895
-------- -------- -------- -------- -------- -------- --------
Selling, general and administrative
expenses............................... 14,778 17,494 25,653 26,518 29,031 14,357 16,058
Pull-tab business write-off/ plant
closure................................ -- -- 3,376 (1) -- -- -- 2,826 (3)
In-process technology write-off.......... -- -- 10,102 (2) -- -- -- --
Depreciation and amortization............ 8,817 9,133 13,229 16,330 18,024 8,894 9,424
-------- -------- -------- -------- -------- -------- --------
Total costs and expenses................. 23,595 26,627 52,360 42,848 47,055 23,251 28,308
-------- -------- -------- -------- -------- -------- --------
Income from operations................... 37,369 29,551 20,378 32,322 32,692 17,245 9,587
Other deductions (income):
Interest expense....................... 289 153 911 1,353 588 402 622
Other (income) expense................. (631) (1,665) (861) (651) (371) 134 38
-------- -------- -------- -------- -------- -------- --------
Income before income taxes............... 37,711 31,063 20,328 31,620 32,475 16,709 8,927
Income tax expense....................... 15,283 12,337 11,356 12,211 11,987 6,273 3,278
-------- -------- -------- -------- -------- -------- --------
Net income............................... $ 22,428 $ 18,726 $ 8,972 $ 19,409 $ 20,488 $ 10,436 $ 5,649
======== ======== ======== ======== ======== ======== ========
OTHER DATA:
Ratio of earning to fixed charges(4)..... 51.4x 41.6x 13.1x 14.8x 17.9x 17.3x 8.1x
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF JUNE 30,
---------------------------------------------------- -------------------
1995 1996 1997 1998 1999 1999 2000
-------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................ $ 26,413 $ 6,252 $ 2,843 $ 9,270 $ 14,775 $ 13,732 $ 11,296
Total assets............................. 110,186 127,529 164,410 179,633 203,633 193,404 213,015
Long-term debt, including current
portion................................ -- 3,984 30,624 12,482 23,547 13,678 28,900
Common stockholders' equity.............. 94,580 93,789 98,127 111,906 123,542 122,129 129,460
</TABLE>
------------------------------
(1) Reflects $3,376 of unusual charges principally the result of the write-off
and disposition of assets of Scientific Games' discontinued charity pull-tab
ticket business.
(2) Reflects $10,102 of unusual charges principally the result of the one-time
write-off of in-process research and development costs acquired with the
acquisition of Tele Control, an Austrian on-line lottery and transaction
processing company.
(3) Reflects $2,826 of unusual charges reflecting the consolidation of instant
ticket printing operations by expanding the Alpharetta, Georgia facility and
closing the instant ticket printing operation in Gilroy, California. The
costs consist of severance, stay incentives, lease termination and asset
write-downs. Production at the plant ceased at the end of July 2000.
(4) For the purpose of determining the ratio of earnings to fixed charges,
"earnings" consist of earnings before income tax expense plus fixed charges
plus income allocable to minority interest in consolidated entities that
have incurred fixed charges. "Fixed charges" consist of interest expense,
including amortization of deferred financing costs plus one-third of rental
expense (this portion is considered to be representative of the interest
factor).
44
<PAGE>
SUPPLEMENTARY FINANCIAL DATA OF AUTOTOTE CORPORATION
(UNAUDITED, IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31, 1998
---------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER(1) QUARTER QUARTER(2)
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Total operating revenues............................. $34,431 $36,215 $38,795 $49,872
Gross profit....................................... 12,933 13,946 13,170 14,609
Net loss........................................... (5,194) (2,066) (4,413) (4,207)
Net loss per basic and diluted share............... $ (0.15) $ (0.06) $ (0.12) $ (0.12)
======= ======= ======= =======
Weighted average number of shares used in per share
calculation:
Basic.............................................. 35,389 35,504 35,916 35,941
======= ======= ======= =======
Diluted............................................ 35,389 35,504 35,916 35,941
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31, 1999
----------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER(3) QUARTER(3) QUARTER(3) QUARTER(3)(4)
---------- ---------- ---------- -------------
<S> <C> <C> <C> <C>
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 and diluted share... $ (0.07) $ 0.02 $ 0.05 $ 0.01
======= ======= ======= =======
Weighted average number of shares used in per
share calculation:
Basic........................................... 35,998 36,032 36,169 36,246
======= ======= ======= =======
Diluted......................................... 35,998 37,371 38,699 39,465
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31, 2000
-----------------------------------------
FIRST SECOND THIRD
QUARTER QUARTER QUARTER
-------- -------- --------
<S> <C> <C> <C> <C>
Total operating revenues............................ $49,565 $51,061 $49,979
Gross profit...................................... 17,089 18,257 18,252
Net income........................................ 464 2,306 1,661
Net income per basic share........................ 0.01 0.06 0.05
======= ======= =======
Net income per diluted share...................... $ 0.01 $ 0.06 $ 0.04
======= ======= =======
Weighted average number of shares used in per share
calculation:
Basic............................................. 36,388 36,622 36,886
======= ======= =======
Diluted........................................... 40,352 41,878 41,430
======= ======= =======
</TABLE>
The acompanying notes are an integral part of this schedule of supplemntary
financial data.
(1) In the second quarter of fiscal year ended October 31, 1998, the Company
reversed reserves of $1,300 in connection with the collection of receivables
previously reserved due to concerns about their recoverability and cost
savings related to the refurbishment of certain terminals, and a $684 gain
resulted from the adjustment of prior sales of the Company's Tele Control
business.
45
<PAGE>
(2) In the fourth quarter of Autotote's fiscal year ended October 31, 1998,
non-recurring charges of $1,500 were recorded primarily related to the
scale-down and restructuring of Autotote's operations in France, including
termination fees and severance pay, and a $750 loss resulted from the
adjustment of prior sales of Autotote's CBS business.
(3) Effective November 1, 1998 Autotote lengthened the depreciable lives of
pari-mutuel terminals from seven to ten years as a result of the renewal of
a number of key service contracts and the realized equipment durability. The
change in the depreciable lives of pari-mutuel terminals resulted in an
approximate $1,100 improvement in net income (loss) and a $0.03 improvement
in net income (loss) per basic and diluted share in each of the four
quarters of fiscal 1999.
(4) In the fourth quarter of fiscal year ended October 31, 1999, a $1,600 loss
resulted from the sale of Autotote's SJC Video business.
46
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW--COMBINED OPERATIONS
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. 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.
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 (which included Tele Control,
Autotote's European on-line lottery business, prior to its sale to Scientific
Games in April 1997), 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.
Scientific Games has historically operated in two business segments: Instant
Ticket and Related Services and Systems. The Instant Tickets and Related
Services segment has historically included ticket design and manufacturing as
well as value-added services provided through its branded Cooperative Service
Program, including game design, sales and marketing support, inventory
management and warehousing and fulfillment services. Further, Scientific Games
has historically included its sales of prepaid phone cards in its Instant Ticket
and Related Services Segment. In its Systems segment, Scientific Games has
historically included the supply of transaction processing software for the
accounting and validation of both instant ticket accounting 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. This segment has also included software and hardware and support
service for sports betting and credit card processing systems.
Upon consummation of the Scientific Games acquisition, we reorganized our
operations to utilize four business segments: Lottery Group, Pari-Mutuel Group,
Venue Management Group and Telecommunications Products Group.
Upon completion of the reorganization of our operations, our Lottery Group
will consist of two product lines: Instant Tickets and Related Services ("ITRS")
and Lottery Systems. ITRS will be comprised of Scientific Games' historical
Instant Ticket and Related Services segment, excluding the
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manufacturing and sale of prepaid phone cards. Lottery Systems will be comprised
of Autotote's historical Lottery Operations segment as well as Scientific Games'
historical Systems segment.
Our Pari-Mutuel Group and Venue Management Group will be comprised of the
same businesses historically reported in Autotote's Pari-mutuel Operations and
Venue Management Operations segments, respectively. Our Telecommunications
Products Group will be comprised of the prepaid cellular phone cards business
which was historically part of Scientific Games' Instant Ticket and Related
Services segment.
AUTOTOTE
BACKGROUND
Autotote operates primarily in three business segments, Pari-mutuel
Operations, Venue Management Operations and Lottery Operations. Pari-mutuel
Operations include all aspects of Autotote's pari-mutuel service business, which
encompass Autotote's 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. Venue
Management Operations include the Connecticut off-track betting operations and
Autotote's Dutch on-track and off-track betting operations. Lottery Operations
include both domestic and international lottery service operations (which
included Tele Control, Autotote's European on-line lottery business, prior to
its sale to Scientific Games in April 1997), as well as sales of lottery systems
and equipment. In the second quarter of fiscal 2000, Autotote completed the sale
of its SJC Video business which it had previously reported as a separate
business segment.
Autotote is the leading provider of pari-mutuel wagering systems to the
North American racing industry and is also a leading provider of such systems
worldwide. Autotote owns and operates the Connecticut OTB, is the exclusive
licensed operator of all pari-mutuel wagering in The Netherlands and is one of
the leading providers of simulcasting services to the racing industry in the
United States and Europe. Additionally, Autotote provides technologically
advanced video gaming machines to the North American racing industry for use at
racetracks. Autotote also provides lottery systems and services to four states
in the United States, Barbados and the Dominican Republic, and provides lottery
equipment internationally.
Historically, Autotote's revenues have been derived from two principal
sources: service revenues and sales revenues. Service revenues are earned
pursuant to multi-year contracts to provide wagering systems and other services,
which are typically based on a percentage of Handle and/or daily or monthly
fees; or are derived from wagering by customers at facilities owned or leased by
Autotote. Sales revenues are derived from sales contracts for wagering
equipment, services and software. 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
revenues usually reflect a limited number of large transactions which do not
recur on an annual basis, but which historically have given rise to additional
terminal and systems software sales to existing customers. Consequently,
revenues and operating results can vary substantially from period to period as a
result of the timing of revenue recognition for major equipment sales.
In addition, Autotote's operating results may vary significantly from period
to period depending on the addition or disposition of business units in each
period. The acquisition of the German pari-mutuel service business in fiscal
1999, and the Dutch pari-mutuel venue management business in fiscal 1998, which
were accounted for as purchases, and the sale of the European lottery business
in fiscal 1997, all affect the comparability of operations from period to period
(see Note 3 to Autotote's Consolidated Financial Statements).
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Autotote's fiscal year ends on October 31. References in this section to
"fiscal 2000," "fiscal 1999," "fiscal 1998" and "fiscal 1997" are to the fiscal
years ending October 31, 2000, October 31, 1999, October 31, 1998 and October
31, 1997, respectively.
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED OCTOBER 31, JULY 31,
------------------------------ -------------------
1997 1998 1999 1999 2000
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
PARI-MUTUEL OPERATIONS
Operating Revenues:
Service revenue........................ $ 73,524 $ 74,171 $ 75,788 $ 55,548 $ 59,539
Sales revenue.......................... 14,866 14,693 23,386 13,534 13,986
-------- -------- -------- -------- --------
Total Revenue...................... $ 88,390 $ 88,864 $ 99,174 $ 69,082 $ 73,525
======== ======== ======== ======== ========
Gross Profit (excluding depreciation and
amortization).......................... 37,823 35,317 39,612 27,761 31,579
VENUE MANAGEMENT OPERATIONS
Operating Revenues:
Service revenue........................ $ 43,732 $ 50,525 $ 61,562 $ 46,023 $ 46,208
======== ======== ======== ======== ========
Gross Profit (excluding depreciation and
amortization).......................... 12,903 13,569 15,121 11,500 12,840
LOTTERY OPERATIONS
Operating Revenues:
Service revenue........................ $ 13,629 $ 9,217 $ 10,238 $ 7,437 $ 9,384
Sales revenue.......................... 9,477 8,830 39,102 28,759 21,161
-------- -------- -------- -------- --------
Total Revenue...................... $ 23,106 $ 18,047 $ 49,340 $ 36,196 $ 30,545
======== ======== ======== ======== ========
Gross Profit (excluding depreciation and
amortization).......................... 9,731 5,313 12,672 9,268 9,179
SJC VIDEO
Operating Revenues:
Service revenue........................ $ 2,104 $ 1,877 $ 1,072 $ 600 $ 327
======== ======== ======== ======== ========
Gross Profit (excluding depreciation and
amortization).......................... 983 459 310 66 --
AUTOTOTE TOTAL
Operating Revenues:
Service revenue........................ $132,989 $135,790 $148,660 $109,608 $115,458
Sales revenue.......................... 24,343 23,523 62,488 42,293 35,147
-------- -------- -------- -------- --------
Total Revenue...................... $157,332 $159,313 $211,148 $151,901 $150,605
======== ======== ======== ======== ========
Gross Profit (excluding depreciation and
amortization).......................... $ 61,440 $ 54,658 $ 67,715 $ 48,595 $ 53,598
======== ======== ======== ======== ========
</TABLE>
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NINE MONTHS ENDED JULY 31, 2000 COMPARED TO NINE MONTHS ENDED JULY 31, 1999
REVENUE ANALYSIS
Pari-mutuel Operations service revenues of $59.5 million for the first nine
months of fiscal 2000 improved $4.0 million or 7% from the first nine months of
the prior year. This improvement primarily reflects $4.1 million in revenues
from the German operations that were acquired in the fourth quarter of fiscal
1999 and improved revenues in Autotote's North American pari-mutuel operations,
NASRIN-TM- service operations and Ireland pari-mutuel services. These increases
were partially offset by lower service revenues in the French operations and
lower service revenues in North American simulcasting operations. Pari-mutuel
Operations sales revenues increased by $0.5 million to $14.0 million in the
first nine months of fiscal 2000 due to the sales of terminals to Autotote's
international customers, primarily in Italy and Chile.
Venue Management Operations service revenues of $46.2 million for the first
nine months of fiscal 2000 increased $0.2 million over the service revenues of
the first nine months of the prior year. Handle-related revenue increases of 3%
in the Connecticut OTB operations, were partly offset by the impact of foreign
exchange on the reported Dutch operations revenues.
Lottery Operations service revenues in the first nine months of fiscal 2000
of $9.4 million improved $1.9 million from the first nine months of the prior
year due to the April 1999 launch of the Montana lottery and the July 2000
launches of the Vermont and New Hampshire lotteries. The $7.6 million decrease
in equipment sales to $21.2 million in the first nine months of fiscal 2000 is
primarily attributable to the April 1999 Montana lottery equipment sale and
fewer terminal sales as compared to the fiscal 1999 period, primarily for use in
Italy.
GROSS PROFIT ANALYSIS
Pari-mutuel Operations gross profit of $31.6 million or 43% of total
revenues, increased from gross profit of $27.8 million or 40% in the same period
last year. Higher gross profit on improved Handle, primarily in the German and
North American pari-mutuel operations, higher NASRIN-TM- service revenues and
increased equipment sales, were partially offset by a decrease in gross profit
due to lower Handle in the French pari-mutuel operations, lower satellite time
sales, and higher satellite service fees due to a credit received in fiscal 1999
from our satellite provider as a result of a service interruption.
Venue Management gross profit was $12.8 million or 28% of service revenue in
the first nine months of fiscal 2000, an increase over the gross profit of $11.5
million or 25% of service revenue in the first nine months of fiscal 1999. This
improvement primarily reflects higher Handle-related revenues and cost savings
in the Connecticut OTB operations.
Lottery Operations gross profit of $9.2 million or 30% of total revenues,
decreased from gross profit of $9.3 million or 26% of total revenues in the same
period last year. Higher gross profit on improved service revenue due to the
three new lottery service contracts and improved equipment sales gross margins
due to the mix of products sold, were more than offset by a decrease in gross
profit due to the lower volume of domestic and international equipment sales.
EXPENSE ANALYSIS
Selling, general and administrative expenses including software development
costs were comparable at $19.9 million for the first nine months of fiscal 2000
and fiscal 1999. Higher expenses due to increased operating levels in the North
American and German pari-mutual operations and the Montana lottery which began
in April 1999, and the Vermont and New Hampshire lotteries which began in July
2000, were offset by cost reductions in NASRIN-TM- and France, and the absence
of the SJC Video business.
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Depreciation and amortization expenses decreased $0.4 million or 2% to $16.0
million in the first nine months of fiscal 2000. Depreciation expense decreased
$0.1 million, primarily due to the full depreciation of certain assets in prior
periods and the absence of the SJC Video business. Amortization expense
decreased $0.3 million as a result of the full amortization of intangible assets
associated with the North American simulcasting operations.
Interest expense increased $0.7 million to $12.9 million in the first nine
months of fiscal 2000 as a result of an increase in average outstanding
borrowings during the period.
INCOME TAXES
Income tax expense was $0.6 million in the first nine months of fiscal 2000,
as compared to $0.1 million in the first nine months of fiscal 1999. Income tax
expense principally reflects federal alternative minimum tax, foreign and state
income taxes.
FISCAL 1999 COMPARED TO FISCAL 1998
REVENUE ANALYSIS
Revenues increased 32.5% or $51.8 million to $211.1 million in fiscal 1999
from $159.3 million in fiscal 1998.
Pari-mutuel Operations services revenues of $75.8 million in fiscal 1999
improved $1.6 million or 2.2% from the prior year. This improvement primarily
reflects revenues from the new NASRIN-TM- operations 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,
EXTREME-TM- terminals to the Horse Race Totalisator Board and Max 3000 terminals
to other international customers.
Venue Management Operations service revenues of $61.6 million in fiscal 1999
improved $11.0 million or 21.8% from the prior year. This improvement primarily
reflects revenues from the Dutch 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 Operations service revenues increased $1.0 million in fiscal 1999 to
$10.2 million primarily due to the April 1999 launch of the Montana lottery.
Lottery equipment sales revenues increased to $39.1 million in fiscal 1999 from
$8.8 million in fiscal 1998. This increase is primarily attributable to the
fiscal 1999 sales of approximately 10,600 EXTREMA-TM- terminals for use in the
Sisal
Sport Italia S.p.A. lottery operations, and the March 1999 delivery of a
central system, terminals and communications equipment to the Montana Lottery.
SJC Video service revenues decreased $0.8 million in fiscal 1999 to $1.1
million due to changes in customer preference from video production to film.
GROSS PROFIT ANALYSIS
The total gross profit earned, exclusive of depreciation and amortization,
of $67.7 million in fiscal 1999 increased by $13.1 million, or 23.9%, from
fiscal 1998.
Gross profits earned by the Pari-mutuel Operations of $39.6 million in
fiscal 1999 increased $4.3 million from $35.3 million in fiscal 1998,
principally due to higher profits in North American pari-mutuel service
operations, sales of EXTREMA-TM- terminals to the Horse Race Totalisator Board,
sales of Max 3000 terminals to other international customers, and a full year of
NASRIN-TM- operations. These
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gross profit increases were partially offset by lower profit in the French
pari-mutuel operations due to the loss of a service contract in fiscal 1998.
Gross profits earned by the Venue Management Operations of $15.1 million in
fiscal 1999 increased $1.5 million from $13.6 million in fiscal 1998,
principally due to the growth in Handle in the Connecticut OTB operations.
Gross profits earned by the Lottery Operations of $12.7 million for fiscal
1999 increased $7.4 million from $5.3 million in fiscal 1998, primarily due to
sales of EXTREMA-TM- terminals for use in the Sisal Sport Italia S.p.A. lottery
operations and the March 1999 delivery of a central system, terminals and
communications equipment to the Montana Lottery.
Gross profit as a percent of revenues in Autotote's services businesses was
33% in fiscal 1999 compared to 35% in fiscal 1998, reflecting, primarily, lower
margins on the Dutch operations that were acquired in July of fiscal 1998,
partially offset by improved earnings in OTB operations and a full year of
NASRIN-TM- operations. Gross profit as a percent of equipment sales was 30% in
fiscal 1999, a decrease from the gross profit percent of 33% in fiscal 1998 as a
result of a change in the mix of equipment and systems sold.
EXPENSE ANALYSIS
Selling, general and administrative expenses include marketing, sales,
administrative, engineering and software development, finance, legal and other
expenses. Selling, general and administrative expenses increased $1.0 million or
4% to $27.2 million in fiscal 1999 from $26.2 million in fiscal 1998. This
increase is primarily the result of the inclusion of The Netherlands operations
acquired in July 1998 and lower expenses reported in fiscal 1998 resulting from
the collection of receivables previously reserved due to concerns about their
recoverability.
Depreciation and amortization expenses decreased $7.3 million or 25% to
$22.2 million in fiscal 1999 from $29.5 million in fiscal 1998. Depreciation
decreased by $5.2 million primarily due to the lengthening of depreciable lives
of pari-mutuel terminals from seven to ten years effective November 1, 1998, as
the result of the renewal of a number of service contracts and realized
equipment durability. Additionally, in fiscal 1998, we completed the
installation of new lottery terminals for the Connecticut State Lottery under a
contract with an initial five-year term plus five one-year options to extend the
contract through May 2008. Based on industry practice of lottery contracts and
our historical relationship with the Connecticut State Lottery for the past ten
years, we are depreciating the terminals and installation costs on a
straight-line method over their estimated useful lives of 10 years. Amortization
expenses decreased by $2.1 million primarily as a result of the full
amortization of certain intangible assets in fiscal 1998.
Interest expense of $15.9 million in fiscal 1999 increased $0.4 million from
fiscal 1998 as a result of borrowings in connection with the fiscal 1998
installation of the Connecticut lottery terminals.
Other expense of $0.3 million in fiscal 1999 consisted 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.
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INCOME TAXES
Income tax expense was $0.2 million in fiscal 1999 compared to $0.3 million
in fiscal 1998. Income tax expense principally reflects state taxes on
Connecticut OTB operations and foreign taxes in fiscal 1999, and foreign taxes
in fiscal 1998, since no tax benefit has been recognized on domestic operating
losses.
FISCAL 1998 COMPARED TO FISCAL 1997
REVENUE ANALYSIS
Revenues increased 1.3% or $2.0 million to $159.3 million in the fiscal year
ended October 31, 1998 from $157.3 million in the fiscal year ended October 31,
1997.
Pari-mutuel Operations service revenues of $74.2 million for fiscal 1998
increased $0.7 million or 1% from $73.5 million in the prior year. This
improvement primarily reflects growth in Handle in the North American
pari-mutuel operations as a result of the addition of six new North American
racetracks and OTB sites, full card simulcasting at three North American
racetrack customers, an increase in the number of VGM machines, and the addition
of the new German simulcasting business.
These increases were mostly offset by lower revenues in the North American
simulcasting operations due to lower ad hoc sales of satellite time following
the reduction in number and realignment of leased transponders due to the
failure of the Galaxy IV satellite, and by the loss of a service contract in
Autotote's French operations. Sales revenue, primarily consisting of export
sales, were $14.7 million in fiscal 1998, comparable to sales revenues of $14.9
million in the prior year.
Venue Management Operations service revenues of $50.5 million for fiscal
1998 increased $6.8 million or 15.5% from $43.7 million in the prior year. This
improvement includes $4.8 million from the Dutch operations, which were acquired
in July 1998, and revenue increases of $3.8 million as a result of growth in
Handle in the Connecticut OTB operations.
Lottery Operations service revenues decreased $4.4 million from $13.6
million in fiscal 1997 to $9.2 million in fiscal 1998, primarily because of the
sale of the European lottery business in April 1997. Sales revenues decreased
$0.7 million from $9.5 million in fiscal 1997 to $8.8 million in fiscal 1998.
This decrease is primarily attributable to the non-recurring sale of terminals
to the Israel lottery in fiscal 1997, partially offset by the sale in fiscal
1998 of Terminals for use in Italy in the Sisal Sport Italia S.p.A. lottery
operations.
SJC Video service revenues decreased $0.2 million reflecting a change in the
mix of video contracts.
GROSS PROFIT ANALYSIS
Total gross profits earned, exclusive of depreciation and amortization,
decreased $6.7 million or 11% to $54.7 million in fiscal 1998 from $61.4 million
in fiscal 1997.
Gross profits earned by the Pari-mutuel Operations of $35.3 million in
fiscal 1998 decreased $2.5 million from $37.8 million in fiscal 1997,
principally due to lower profit on Autotote's French pari-mutuel operations,
primarily as a result of the loss of an operations service contract and the
resulting costs arising from the termination of 14 employees and the resizing of
the business to better serve the reduced French market. Also contributing to the
decline in gross margin were the lost profits from the sales of excess
transponder time as a result of the decrease in leased and available
transponders, coupled with higher transponder leased costs following the failure
of the Galaxy IV satellite in May 1998, lower margins in the European
pari-mutuel operations as a result of efforts to start-up and expand business
opportunities, and start-up costs for the new NASRIN-TM- business. These
decreases were partially offset by the improved profitability at the North
American pari-mutuel operations.
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Gross profits earned by the Venue Management Operations of $13.6 million in
fiscal 1998 improved $0.7 million over fiscal 1997 profits of $12.9 million as a
result of the addition of the Dutch operations in July 1998, and the growth in
Handle in the Connecticut OTB operations.
Gross profits earned by the Lottery Operations of $5.3 million for fiscal
1998, decreased by $4.4 million from $9.7 million in fiscal 1997. This decline
is attributable to a $3.3 million decline in European lottery gross profits due
to the sale of this business unit in April 1997, coupled with lower domestic
lottery margins as the result of the installation of the new Connecticut lottery
terminals and lower margins on equipment sales, reflecting a change in the mix
of products sold in each period.
Gross profits as a percent of revenues in our services businesses were
approximately 35% for fiscal 1998, or 4% below margins earned in fiscal 1997,
reflecting lower margins on the recently acquired business in The Netherlands,
higher transponder lease costs in simulcasting, lower margins in the European
pari-mutuel operations as a result of efforts to start-up and expand business
opportunities, extra costs incurred in connection with the Connecticut lottery
installation, and start-up costs for the NASRIN-TM- operations. Gross profits as
a percent of equipment sales were 33% for fiscal 1998, compared to gross profits
on such sales of 37% in fiscal 1997. The decrease is due to the sale of the
European lottery business in 1997, coupled with the lower margins on fiscal 1998
equipment sales reflecting the change in mix of products sold in each period.
EXPENSE ANALYSIS
Selling, general and administrative expenses decreased $2.2 million or 8% to
$26.2 million in fiscal 1998 from $28.4 million in fiscal 1997, partially
reflecting the absence of expenses for businesses sold in fiscal 1997. Excluding
businesses sold, selling, general and administrative expenses decreased 6% or
$1.8 million as a result of lower bad debt and legal expenses arising from the
collection of receivables previously reserved as doubtful due to concerns about
their recoverability, and cost savings programs in Europe. Partially offsetting
these decreases were the added expenses of the Dutch operations acquired in July
1998 and the expense of completing the test phase and initial rollout of the
NASRIN-TM- communication network.
Depreciation and amortization expenses decreased $7.2 million or 20% to
$29.5 million in fiscal 1998 compared to $36.7 million in fiscal 1997.
Approximately $3.0 million of the decrease is attributable to the absence of
expenses related to the businesses sold in fiscal 1997. Excluding businesses
sold, depreciation and amortization expenses decreased $4.2 million or 11% as a
result of the full amortization of certain intangible assets and lower
depreciation on North American pari-mutuel assets and lottery assets in fiscal
1998. These decreases were partially offset by the accelerated amortization of
deferred transponder costs as a result of the Galaxy IV satellite failure and
accelerated amortization of goodwill in the French operations resulting from the
loss of a major service contract.
Interest expense was $15.5 million in fiscal 1998 compared to $14.4 million
in fiscal 1997. The $1.1 million increase reflects higher borrowing levels to
finance the installation of the new Connecticut lottery terminals and higher
interest rates.
INCOME TAXES
Income tax expense was $0.3 million in fiscal 1998 compared to $0.9 million
in fiscal 1997. Income tax expense principally reflects foreign tax expense,
since no U.S. Federal tax benefit has been recognized on domestic operating
losses. The decrease in income tax expense principally reflects the sale of the
European lottery business.
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EXTRAORDINARY ITEMS
In connection with the issuance of the 10 7/8 % senior notes due 2004 in the
third quarter of fiscal 1997, and the subsequent repayment of all amounts
outstanding under the previously existing bank credit facilities (see Notes 8
and 9 to Autotote's Consolidated Financial Statements), Autotote wrote off $1.4
million of deferred financing fees associated with the facilities. Autotote also
used a portion of the net proceeds from the offering of such senior notes to
repurchase $5.0 million of its subordinated debentures for $4.1 million,
resulting in a $0.9 million gain on the early retirement of this debt. There
were no tax benefits recognized on the net extraordinary loss because Autotote
is currently in a tax loss carryforward position.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities," as
amended. SFAS 133, as amended, standardizes the accounting for derivative
instruments, including certain derivative instruments embedded in other
contracts. Under the standard, entities are required to carry all derivative
instruments in the statement of financial position at fair value. SFAS 133, as
amended, is effective beginning in the first quarter of our fiscal year ending
October 31, 2001. Autotote does not believe that the adoption of SFAS 133, as
amended, will have a significant impact on its consolidated financial
statements.
EURO CONVERSION
In connection with the January 1, 1999 conversion by eleven member states of
the European Union to a common currency, the "euro," Autotote has evaluated the
implications of the conversion and expect that such conversion will not have a
material impact on our consolidated financial statements.
FINANCIAL INSTRUMENTS AND RISKS AND UNCERTAINTIES
Autotote does not consider the fair value of all financial instruments to be
materially different from their carrying value at year-end. See Note 11 to the
Consolidated Financial Statements for information regarding fair value of
financial instruments.
At October 31, 1999 substantially all of Autotote's long-term debt consisted
of fixed rate instruments.
Autotote's cash and cash equivalents and investments are in high-quality
securities placed with a wide array of financial institutions with high credit
ratings. This investment policy limits our exposure to concentration of credit
risks.
Autotote's products and services are sold to a diverse group of customers
throughout the world. As such, Autotote is subject to certain risks and
uncertainties as a result of changes in general economic conditions, sources of
supply, competition, foreign exchange rates, tax reform, litigation and
regulatory developments. The diversity and breadth of 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 its customer base, Autotote believes that it is not exposed to
concentration of credit risks. These risks are further minimized by placing
credit limits, ongoing monitoring of customers' account balances, and assessment
of the customers' financial strengths.
55
<PAGE>
SCIENTIFIC GAMES
BACKGROUND
Scientific Games revenues are generated primarily from sales of our products
and services to governmentally operated or sanctioned lotteries worldwide and,
to a lesser extent, non-lottery related entities both in the United States and
worldwide. We categorize our sales into two main segments: (1) Instant Ticket
and Related Services and (2) Systems.
In the Instant Ticket and Related Services segment, we primarily supply game
design, sales and marketing support, instant ticket manufacturing and delivery,
inventory management and distribution, and retailer telemarketing and field
services to our customers. In addition, this segment includes promotional
instant tickets and pull-tab tickets that we sell to both lottery and
non-lottery customers and prepaid phone cards sold to telecommunications
companies.
In the Systems segment, Scientific Games primarily supplies transaction
processing software that accommodates instant ticket accounting and validation
and online lottery games, point-of-sale terminal hardware which connects to
these systems, central site computers and communication hardware which run these
systems, and ongoing support and maintenance services for these products. This
segment also includes software, hardware and support for sports betting and
credit card processing systems for non-lottery customers. In addition,
Cooperative Services contracts are referred to in various places in this
Prospectus. Cooperative Services is the branded marketing name that Scientific
Games gives to customer contracts where it provides some combination of products
and services offered in Instant Tickets and Related Services segment and the
Systems segment.
Instant Tickets and Related Services revenues are generally based on a price
per thousand tickets delivered or based upon a percentage of the lottery's sales
to the public over a contract period. System revenues may be based on a fixed
price for the product or service or based upon a percentage of the lottery's
sales to the public over a contract period.
Scientific Games' operating results may vary significantly from period to
period. Scientific Games' revenues and capital expenditures may be difficult to
forecast because Scientific Games' sales cycles may vary and depend upon factors
such as the size and timing of awarded contracts, changes in customer budgets,
ticket inventory position, lottery retail sales and general economic conditions.
Contracts with governmental entities operating newly authorized instant
lotteries tend to generate higher levels of sales in the initial months. All of
Scientific Games' domestic lottery contracts currently are with jurisdictions
whose lotteries have been in operation at least one year. Scientific Games'
operating results may be affected by the working capital requirements associated
with preparing facilities and equipment, establishing a distribution system and
printing tickets for recently awarded contracts, and by the amount of time
elapsing before the receipt and/or recognition of revenues from the sale of
lottery tickets. Operating results may also be affected by the utilization of
overtime labor costs and ability to smoothly integrate new and/or upgraded
production equipment with existing production operations. Lottery revenues and
particular product sales to lotteries may vary in a quarter causing fluctuations
in revenue from quarter to quarter. Additionally, circumstances encountered in
international markets, including the substantial amount of time involved in
bidding on an international contract, the evaluation of such bid and the
resultant contract award or rejection may vary significantly from that
originally anticipated when the bid is prepared. All of these factors may make
it difficult to forecast revenues and expenditures related to our operations
over extended periods and may result in fluctuations in our quarterly financial
results.
During 1999, in the Instant Ticket and Related Services segment, Scientific
Games had 12 U.S. contracts subject to extensions or scheduled to expire. With
respect to the foregoing contracts, Scientific Games received 11 contract
extensions and was the successful bidder on a contract re-bid with an existing
customer.
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Results with respect to contracts previously held by competitors in 1999 is
as follows: Scientific Games was awarded an instant ticket contract by the Texas
Lottery Commission. Under this contract, Scientific Games will provide instant
tickets and related services for a three-year period. Scientific Games was
awarded an instant ticket telemarketing and distribution services contract by
the New York State Lottery. This contract began in January 2000 and runs through
March 2002. Scientific Games was also awarded a two-year backup contract for
instant tickets and related services by the Idaho Lottery.
During the year Scientific Games lost its backup contract with the Wisconsin
Lottery to a competitor. Internationally, Scientific Games received the
following contracts in 1999: a new three-year contract to supply instant tickets
and related services to An Post National Lottery Corporation, the operator of
the national lottery in Ireland, and a new one-year contract to provide instant
tickets to the lottery in Spain with three optional one-year extensions. During
the fiscal year ended 1999 Scientific Games experienced an increase in sales of
telephone cards to various international telecommunication companies as compared
to fiscal year ended 1998. In its Systems segment, during 1999 Scientific Games
signed a contract with the Western Canada Lottery Corp. to provide an on-line
game management control system and related services. Scientific Games also
completed the connection of seven German lotteries to its SGI-Net system for the
express purpose of supporting the Oddset sports game. Oddset is an on-line game
in which players can wager weekly on national and international soccer matches.
Scientific Games' business is highly competitive and continues to be in a
period of intense price-based competition, particularly from other instant
ticket suppliers. Many of the lottery contracts awarded or re-awarded in 1999
(and the orders thereunder) have certain lower equivalent prices than Instant
charged in the previous contracts. To the extent such contracts contain lower
equivalent prices, Scientific Games' profit margins may be adversely affected.
The impact of lower equivalent prices in certain contracts may be offset, in
part, by other factors, including higher order levels from new and existing
customers, increased production efficiencies, consolidation of production
operations, introduction of new equipment (as discussed in "--Recent
Developments" below) and other savings associated with economies of scale.
Scientific Games cannot predict with certainty either the continued duration or
extent of such pricing factors or our ability to offset such factors either in
whole or in part. The current period of price based competition and the
resulting cycle of lower customer pricing has existed for approximately three
years.
RECENT DEVELOPMENTS
On January 25, 2000, Scientific Games announced that it had been awarded a
three-year contract to provide instant tickets and related services to the
Washington State Lottery. The award includes one-year extension options. On
February 7, 2000, Scientific Games announced that it had been awarded a new
Scratch Games Services contract to provide instant tickets, distribution and
related services, including research, tel-sell support and packaging and
distribution to the Colorado Lottery. The award is for a four-year term with a
one-year extension option. On July 17, 2000, Scientific Games announced that it
was awarded new three-year contracts, each with two one-year extension options,
to provide instant tickets to the West Virginia Lottery and the South Dakota
Lottery. The Colorado Lottery, South Dakota Lottery, Washington State Lottery
and West Virginia Lottery had combined retail sales equivalent to 4% of the
total U.S. instant ticket market in 1999.
The Kentucky Lottery Corporation Board also has exercised an option to
extend and has amended its existing contract printing to provide for the
statewide sale of instant lottery ticket probability games using "Player's
Choice-TM-" probability tickets. The agreement also calls for Scientific Games
to install 1,000 SciScan Technology-Registered Trademark- validation terminals
at lottery retailers across Kentucky. In addition, on July 17, 2000, Scientific
Games announced that the New York State Lottery and Illinois Lottery had each
exercised one-year extension options under their respect instant ticket
contracts. Those two states had combined retail sales equivalent to 10% of the
total U.S. instant ticket market in 1999. The New
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Mexico Lotteries also exercised a one-year extension under their Instant Ticket
and Related Services contract.
Additionally, Scientific Games has recently been awarded a new two-year
secondary supply contract, with an option for three additional one-year
extensions, to provide Instant Ticket and Related Services to the Minnesota
Lottery.
As previously discussed, Scientific Games is consolidating printing
operations in its Georgia facility and ceased its instant ticket printing
operation in Gilroy, California at the end of July 2000 thereby replacing aging
equipment with new state-of-the-art printing equipment and technology that
should result in significant cost savings. Scientific Games estimates that the
combination of the efficiencies from a new press and the consolidation into one
printing facility will reduce its total production costs by approximately $5.1
million per year. The aggregate cost of this consolidation is estimated to be
approximately $16.3 million, of which $6.0 million was expended in 1999 and $8.4
million was expended in the first half of 2000. The balance of such cost is
expected to be expended by December 2000, when the new facility is expected to
be fully operational. In addition, the closure costs for the Gilroy facility
were approximately $2.8 million, including approximately $2.2 million in
restructuring costs as defined by Emerging Issues Task Force 94-3 and other
costs. The restructuring costs primarily include the cost of involuntary
employee severance and separation benefits and lease termination payments. The
other costs of approximately $0.6 million primarily includes incentive pay to
retain certain employees until the plant is closed.
RESULTS OF OPERATIONS
SIX-MONTH PERIOD ENDED JUNE 30, 2000 COMPARED TO SIX-MONTH PERIOD ENDED
JUNE 30, 1999.
Revenues for the six-month period ended June 30, 2000 increased $10.7
million, or 9.8%, over the revenues for the six-month period ended June 30,
1999. The increase was primarily due to increased Instant Tickets and Related
Services revenues of approximately $20.0 million, which represented a 24.0%
increase for the segment. This increase was mostly due to a $15.1 million
increase in sales of international prepaid telephone cards, which represented a
228% increase over the same period last year for this product. Partially
offsetting the increase for the period was a $9.2 million decrease in revenues
from the Systems segment due to lower sales of new systems to international
customers. Instant Ticket and Related Services revenues accounted for
approximately 85.5% and 75.7% of our total revenues for the three-month periods
ended June 30, 2000 and 1999, respectively.
On a comparative basis, gross margin decreased $2.6 million, or 6.4%, while
gross margin as a percentage of revenues decreased to 31.4% from 36.9% for the
six-month periods ended June 30, 2000 and 1999, respectively. The margin
decrease expressed in dollars was primarily due to the decreased sales volumes
in the Systems segment. The percentage margin decline was mainly attributable to
lower equivalent sales prices charged on certain instant ticket lottery
contracts awarded or extended and the decrease in Systems sales, offset in part
by continued efficiency improvements and additional sales of prepaid telephone
cards. The lower equivalent sales prices were a result of competitive pricing
pressures in the lottery industry.
Selling, general and administrative (SG&A) expenses increased $1.7 million,
or 11.8%, for the six-month period ended June 30, 2000 over the same period of
1999. SG&A expenses increased as a percentage of revenues to 13.3% from 13.1%.
The increase was due primarily to severance costs related to a management
re-organization and higher selling, general and administrative expenses required
to support increased sales activity in new and existing markets, including
prepaid telephone cards.
Depreciation and amortization expense increased for the six-month period
ended June 30, 2000 by $530,000, or 6.0%, over the comparable period of 1999 due
primarily to additional depreciation
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expenses from capital expenditures to support the growth in prepaid telephone
demand and for new Instant Ticket and Related Services operations.
The Gilroy closure costs of $2.8 million recorded during the year are for
the planned closure of our instant ticket manufacturing facility in Gilroy,
California. This closure resulted from our decision to consolidate U.S. based
production in our Alpharetta, Georgia facility, which is being expanded to
accommodate a state-of-the-art printing press. Once the new press is
operational, we believe the facility consolidation and equipment upgrade will
produce cost savings as well as increase our production capabilities.
Interest income for the six-month period ended June 30, 2000 increased
$89,000, or 31.9%, compared to the six-month period ended June 30, 1999. The
increase was attributable to higher average cash and cash equivalents balances
in the current period than in the same comparable period of 1999.
Gain/(loss) on foreign currency for the six-month period ended June 30, 2000
resulted in a loss of $308,000 compared with a gain of $273,000 for the same
period in 1999. The loss primarily resulted from the negative exchange rate
effect of the strengthening U.S. dollar on certain assets denominated in foreign
currency.
Interest expense for the six-month period ended June 30, 2000 increased
$220,000 from the six-month period ended June 30, 1999. The increase was
primarily due to an increase in the average balance outstanding under one of our
credit facilities compared to the prior period.
The effective income tax rate for the six-month ended June 30, 2000 was
36.7% as compared to 37.5% for the six-month period ended June 30, 1999. The
lower effective tax rate was primarily the result of adjustments to tax
liabilities, due to the favorable resolution of certain contingencies.
As a result of the foregoing, net income for the six-month period ended June
30, 2000 was $5.6 million compared to $10.4 million for the period ended June
30, 1999. The decrease in net income of $4.8 million was primarily due to the
one-time plant closing costs, the severance costs, the decrease in Systems sales
and competitive pricing pressures discussed above. Net income without the
one-time plant closing and severance costs would have been $7.8 million.
Earnings per common share (diluted) for the six-month period ended June 30,
2000 were $0.49 compared to $0.87 for the comparable period in 1999. The
decrease in earnings per common share was primarily due to the one-time plant
closing costs, the severance costs, the decrease in Systems sales and
competitive pricing pressures. Partially offsetting the decrease was a reduction
in the weighted average number of common equivalent shares outstanding,
resulting from our repurchase of shares of our common stock during 1999.
Earnings per common share without the one-time plant closing and severance costs
would have been $.68.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Revenues for the year ended December 31, 1999 increased $14.7 million or
6.9% over the revenues for the year ended December 31, 1998. The increase was
primarily due to increased Instant Tickets and Related Services revenues of
approximately $12.7 million, which represented a 7.5% increase for the segment.
This increase was due to a $16.6 million increase in sales of international
prepaid telephone cards, which was a 375% increase in sales of this product over
the previous year. Partially offsetting the segment's increase in revenue was a
$3.9 million decrease in other product revenues due primarily to lower
international instant ticket sales volumes and continued lower equivalent sales
prices as a result of competitive pricing pressures as discussed above and in
Scientific Games' SEC periodic reports. The remainder of the increase in total
revenues of $2.1 million came from the Systems segment and was due primarily to
implementation of new international customer contracts obtained during the past
two years. Instant Ticket and Related Services revenues accounted for
approximately 79.3% of Scientific Games' gross revenues in 1999 versus 78.8% in
1998. Total
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international revenues based on the customers' country of domicile accounted for
approximately 38.1% of Scientific Games' gross revenues in 1999 versus 35.4% for
1998.
On a comparative basis, gross margin increased $4.6 million or 6.1% while
gross margin as a percentage of revenues decreased to 35.2% from 34.9% for the
years ended December 31, 1999 and 1998, respectively. The dollar margin increase
was primarily due to the increase sales volumes of prepaid telephone cards. The
percentage margin decline was mainly attributable to Instant Ticket and Related
Services contracts awarded or extended having lower equivalent sales prices than
charged in previous contracts and lower instant ticket export sales, offset in
part by continued efficiency improvements in instant ticket and prepaid
telephone card manufacturing.
Selling, general and administrative ("SG&A") expenses increased $2.5 million
for the year ended December 31, 1999 over the same period of 1998. SG&A expenses
increased as a percentage of revenues to 12.7% from 12.4%. The increase was due
primarily to the full year operation of the French joint venture formed in
December 1998 and additional expenses required to support increased sales
activity in new and existing markets, including prepaid telephone cards.
Depreciation and amortization expenses increased for the year ended December
31, 1999 by $1.7 million over the comparable period of 1998. The increase was
due primarily to the full year operation of the French joint venture, the
acceleration of depreciation of equipment to be disposed of earlier than
originally anticipated and the charges associated with the closure of the Gilroy
California printing facility in July 2000.
Operating income for the year ended December 31, 1999 increased $370,000 or
1.1% from the year ended December 31, 1998. The increase was attributable to the
same reasons as noted above.
Interest income for the year ended December 31, 1999 increased by $18,000
from the year ended December 31, 1998. The increase was attributable to higher
average cash and cash equivalents balances during the same comparable periods.
Other income for the year ended December 31, 1999 decreased $184,000
compared to the year ended December 31, 1998. The decrease was mainly due to net
losses incurred in the disposition of assets.
Scientific Games experienced a net gain of $437,000 on foreign currency in
the year ended December 31, 1999 compared to a loss of approximately $65,000 in
the year ended December 31, 1998. The gains primarily resulted from fluctuations
in exchange rates on non-U.S. dollar currency holdings.
Interest expense for the year ended December 31, 1999 decreased
approximately $765,000 from the year ended December 31, 1998. The decrease was
mainly attributable to the decrease in the average balance outstanding under the
Scientific Games' existing bank credit agreement compared to the prior period.
Also contributing to the decrease was the transfer of a portion of the Company's
debt to borrowings with lower interest rates.
The effective tax rate for the year ended December 31, 1999 was 36.9% as
compared to 38.6% for the year ended December 31, 1998. The lower effective tax
rate for the year was primarily a result of an increased level of foreign,
federal and state tax credits and adjustments to tax liabilities.
Net income was $20.5 million for the year ended December 31, 1999 compared
to $19.4 million for the year ended December 31, 1998.
Earnings per common share (diluted) for the year ended December 31, 1999
were $1.72 cents per share compared to $1.58 for the comparable period in 1998.
The increase in earnings per common share was primarily due to the increase in
earnings and a decrease in the weighted-average number of common equivalent
shares outstanding. The weighted-average number of diluted shares outstanding
decreased from 12.3 million in 1998 to 11.9 million in 1999.
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YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Revenues for the year ended December 31, 1998 increased $16.3 million or
8.3% over the revenues for the year ended December 31, 1997. The increase was
primarily due to additional Systems revenues of approximately $20.1 million.
Contributing to this increase was a full year of operations for the Scientific
Games' Tele Control Kommunikations und Computersysteme A.G. subsidiary ("SG
Austria") which was acquired in April 1997 and sales to new international
customers, including La Francaise des Jeux, operator of the French National
Lottery, and Praxa Limited, prime contractor to the Golden Casket Lottery
Corporation in Australia. The increase in revenues was partially offset by a
decline of $4.0 million in Instant Ticket and Related Services revenues which
was primarily attributable to lower international sales volumes and continued
lower equivalent sales prices as a result of competitive pricing pressures as
discussed above and in Scientific Games' prior periodic reports. Instant Ticket
and Related Services revenues accounted for approximately 78.8% of Scientific
Games' gross revenues in 1998 versus 87.4% in 1997. Total international revenues
based on the customer's country of domicile accounted for approximately 35.4% of
Scientific Games' gross revenues in 1998 versus 33.5% for 1997.
Gross margins decreased to 35.2% for the year ended December 31, 1998 from
36.8% for the year ended December 31, 1997. The margin decline was mainly
attributable to Instant Ticket and Related Services contracts awarded or
re-awarded having lower equivalent sales prices than charged in previous
contracts and lower international sales volumes, partially offset by continued
efficiency improvements in domestic instant ticket manufacturing. Also partially
offsetting the decline was the full year ownership of SG Austria and the new
Systems sales discussed previously.
Selling, general and administrative ("SG&A") expenses increased $865,000 for
the year ended December 31, 1998 over the same period of 1997. SG&A expenses
decreased as a percentage of revenues to 12.4% from 13.0%. The dollar increase
was primarily attributable to a full year ownership of SG Austria, additional
expenses related to the joint venture with La Francaise des Jeux, an increase in
international sales efforts, including the expanded activities of a sales branch
in South Africa, and sales efforts related to The Daily Race Game-TM- joint
venture with Telecom Productions Inc., which was introduced in 1998.
Depreciation and amortization expenses increased for the year ended December
31, 1998 by $3.1 million over the comparable period of 1997. The increase was
due primarily to the full year ownership of SG Austria and additional SciScan
Technology-Registered Trademark- terminals placed in services during the second
half of 1997 and the beginning of 1998.
During 1997, Scientific Games recognized a one-time write-off of $10.1
million for in-process technology acquired in connection with the April 15, 1997
acquisition of SG Austria. In addition, in July 1997 Scientific Games
discontinued its charity pull-tab ticket business line that was produced and
distributed by its then named subsidiary GameTec Inc. ("GameTec"). In October
1997, Scientific Games sold substantially all of the assets of GameTec to
International Gamco, Inc. ("Gamco"). Scientific Games also entered into a three
year extendible marketing agreement with Gamco in 1997 to provide marketing and
related services to state lotteries for pull-tab tickets printed by Gamco.
Scientific Games continues to provide pull-tab tickets to its lottery customers
through such marketing agreement. A one-time write-off of $3.4 million (pre-tax)
was recognized in the year ended December 31, 1997 for losses from the
disposition of the assets of its pull-tab ticket business line. Scientific Games
did not have similar write-offs in 1998.
Operating income for the year ended December 31, 1998 increased $11.9
million or 58.6% from the year ended December 31, 1997. The increase was
primarily attributable to the pull-tab business and in-process technology
one-time write-offs in 1997 as discussed previously and additional Systems sales
during 1998. Partially offsetting the operating income increase was a decline in
operating income in the Instant Ticket and Related Services segment due mainly
to pricing pressures discussed previously.
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Interest income for the year ended December 31, 1998 increased by
approximately $130,000 from the comparable year ended December 31, 1997. The
increase was mainly due to the interest related to an employee benefit plan,
which was offset by a comparable charge to compensation expense.
Scientific Games experienced a net loss of $65,000 on foreign currency in
the year ended December 31, 1998 compared to a gain of approximately $507,000 in
the year ended December 31, 1997. The losses primarily resulted from
fluctuations in exchange rates on non-U.S. dollar currency holdings. The 1997
gains were primarily attributable to gains on the hedging of the purchase price
of SG Austria as well as net gains on non-U.S. dollar transactions in the normal
course of business.
Interest expense for the year ended December 31, 1998 increased
approximately $442,000 from the year ended December 31, 1997. The increase in
interest expense resulted from higher average borrowings under Scientific Games'
credit facilities for year ended December 31, 1998.
The effective tax rate for the year ended December 31, 1998 was 38.6% as
compared to 55.9% for the year ended December 31, 1997. The higher than normal
effective tax rate for 1997 was primarily a result of a one-time write-off of
$10.1 million for in-process technology.
Net income was $19.4 million for the year ended December 31, 1998 compared
to $9.0 million for the year ended December 31, 1997. The increase in net income
of $10.4 million was primarily due to the one-time write-offs in 1997 for the
pull-tab business and in-process technology. Comparative net income excluding
these one-time write-off's decreased by $1.7 million in 1998.
Earnings per common share (diluted) for the year ended December 31, 1998
were $1.58 cents per share compared to $0.72 for the comparable period in 1997.
The increase in earnings per share was primarily due to the one-time write-offs
in 1997 as discussed above. Earnings per common share (diluted) for the year
ended December 31, 1997, excluding the one-time write-offs, would have been
$1.70. The decrease in earnings per share, excluding the write-offs, was
partially offset by a reduction in the weighted average number of common
equivalent shares outstanding resulting from the lower average stock price in
1998 and the related effects on dilutive stock options. The weighted average
number of diluted shares outstanding decreased from 12.4 million in 1997 to 12.3
million in 1998.
INFLATION, CHANGING PRICES, FOREIGN CURRENCY FLUCTUATIONS AND MARKET RISK
Scientific Games believes that inflation has not had an abnormal or
unanticipated effect on its operations. Inflationary pressures would be
significant to the business if raw materials used for its instant lottery ticket
production are significantly affected. Available supply from the paper industry
tends to fluctuate, and prices may be affected by supply. During Scientific
Games' fiscal year ended December 31, 1999, inflation was not a significant
factor in the results of operations, which were not impacted by significant
pricing changes in costs, except for personnel related expenditures.
In certain limited cases, Scientific Games' contracts with customers contain
provisions to adjust for inflation on an annual basis, but Scientific Games
cannot be assured that this adjustment would cover raw material price increases.
While Scientific Games has long-term and generally satisfactory relationships
with most of its suppliers, it is believed alternative sources to meet raw
material needs are available.
Scientific Games manages foreign currency exchange risks on a global basis
by one or more of the following: (i) securing payment from 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 foreign operations
is incurred in the local currencies.
Scientific Games may, from time to time, enter into foreign currency
exchange or other contracts to hedge the risk associated with certain firm sales
commitments, certain anticipated revenue streams
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and certain assets and liabilities denominated in foreign currencies. Scientific
Games does not engage in currency speculation. Assets and liabilities of foreign
operations are translated from the local currency at the end of the fiscal
period. Translation gains and losses of foreign operations that use local
currencies as the functional currency are accumulated and reported as a separate
component of shareholders' equity. Revenues and expenses are translated at
average month exchange rates for the month. Translation gains and losses arising
from exchange rate fluctuations on transactions denominated in a currency other
than the local functional currency are included in our results of operations.
To the extent Scientific Games does not hedge its foreign currency exchange
risk, such transactions may have the effect of reducing or increasing the amount
of revenue recorded in dollars or which is actually repatriated to the United
States. Conversely, by entering into hedging contracts, Scientific Games may, in
exchange for minimizing the risk of potential losses associated with foreign
currency translations, also thereby necessarily minimize the potential for
additional gain associated with foreign currency translation. While Scientific
Games has always been able to enter into foreign currency exchange hedging
transactions when it sought such arrangements, no assurances can be given that
the ability to enter into such transaction will not be adversely affected in the
future by one or more of the following: (i) doing business in a country with
limitations on the expatriation of earnings or other governmental regulations,
(ii) doing business in a country for which there is only limited international
interest in the provision of hedging arrangements by financial institutions, and
(iii) the inability to procure hedging agreements as the result of some
financial crisis associated with that country or which has otherwise affected
the interest of financial institutions in entering into hedging transactions in
general.
LIQUIDITY, CAPITAL RESOURCES AND WORKING CAPITAL DEFICIENCY
AUTOTOTE BEFORE THE CONSUMMATION OF THE TRANSACTIONS
At July 31, 2000, Autotote's available cash and borrowing capacity totaled
$21.0 million compared to $29.0 million at October 31, 1999. Net cash provided
by operating activities decreased by $7.1 million to $19.0 million for the nine
months ended July 31, 2000 from $26.1 million in the nine months ended July 31,
1999. A $4.4 million increase in net income was offset by a $11.4 million
decrease in changes in operating assets and liabilities, primarily decreases in
accounts payable and other current liabilities and increases in accounts
receivable and inventory. In the first nine months of fiscal 2000, Autotote
utilized $19.0 million of cash provided by operating activities, $17.4 million
of long-term borrowings, $1.5 million in proceeds from stock sales, and $1.9
million of available cash, to invest $27.7 million principally in capital and
contract expenditures in connection with the January 2000 start-up of the
Monmouth/Meadowlands service contract and the July 2000 start-ups of the Vermont
and New Hampshire state lotteries. Autotote also invested $8.2 million in
software systems development and other assets, and used $3.6 million to reduce
other long-term loans.
Autotote had $17.8 million of borrowing availability under its old credit
facility at July 31, 2000. At September 6, 2000 following consummation of the
Scientific Games acquisition and related financing transactions, Autotote had
$62 million of borrowing availability under its new senior credit facilities.
Autotote believes that its cash resources, anticipated cash flows from
operations and borrowing availability under the new senior credit facilities
will provide sufficient liquidity to meet scheduled interest payments and
anticipated capital expenditures during the next twelve months.
At July 31, 2000, Autotote's current liabilities exceeded current assets by
$3.5 million, an improvement of $4.2 million from October 31, 1999. The
improvement results principally from a $9.3 million reduction in current assets,
offset by a $13.6 million reduction in current liabilities, which included the
classification of substantially all debt as long term. The classification of
debt as long-term
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is the result of the debt refinancing which was done in connection with the
September 6, 2000 acquisition of Scientific Games.
SCIENTIFIC GAMES BEFORE THE CONSUMMATION OF THE TRANSACTIONS
The Scientific Games' cash and cash equivalents balance decreased by
approximately $3.5 million during the six-month period ended June 30, 2000.
For the six-month period ended June 30, 2000, net cash provided by operating
activities increased by $2.6 million to $13.2 million from $10.6 million for the
comparable period in 1999. The primary contributions to cash from operating
activities during the period were net income and depreciation and amortization.
Net cash used in investing activities for the six-month period ended June
30, 2000 increased to $21.8 million from $5.8 million for the same period in the
prior year. These investments were mostly in property and equipment for our
Alpharetta, Georgia and Leeds, England operations and primarily related to
consolidation and expansion projects that were begun in 1999 and which will
continue through the fourth quarter of 2000.
Scientific Games's financing activities generated cash of $5.9 million for
the six-month period ended June 30, 2000 compared to $1.5 million in the
six-month period ended June 30, 1999. As a result of a net increase in
borrowings for anticipated future capital expenditure requirements during the
current quarter, the balance outstanding under one of our credit facilities at
June 30, 2000 was $28.9 million.
COMBINED LIQUIDITY AND CAPITAL RESOURCES OF AUTOTOTE AND SCIENTIFIC GAMES
In order to finance the Scientific Games acquisition and refinance certain
existing indebtedness, we conducted a series of financings in addition to the
sale of the series A notes. As a result, our capital structure changed
significantly and, among other things, we are a much more leveraged company. As
a result of the transactions, on a pro forma basis at July 31, 2000 we have
total indebtedness outstanding of approximately $439.1 million (excluding $3.9
million of undrawn letters of credit) as of July 31, 2000. See "Risk
Factors--Substantial Leverage," "--Debt Service Requirements" and "--Covenant
Restrictions." 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 new senior credit facilities in the aggregate principal amount of
$345.0 million, comprised of (1) a six-year senior term A loan of up to $60.0
million, (2) a seven-year senior term B loan of up to $220.0 million, and (3) a
six-year revolving credit facility of up to $65.0 million. We incurred the
entire $280.0 million of the term loan facilities in connection with the
consummation of the Scientific Games acquisition. See "Description of New Senior
Credit Facilities" 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 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
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shares in redemption of the warrants issued to our financial advisors. See
"Description of Capital Stock" for a more detailed description of the new
convertible preferred stock.
Autotote spent $27.7 million for wagering systems and capital expenditures
for the nine-month period ended July 31, 2000, 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 its communications
infrastructure. Scientific Games spent $22.3 million on capital expenditures in
the six-month period ended June 30, 2000, including $8.4 million to expand and
add printing equipment to its Alpharetta, Georgia facilities and $8.4 million to
consolidate its manufacturing facilities and expand prepaid phone card capacity
in the U.K. We currently expect that we will spend approximately $76.0 million
in wagering systems and capital expenditures on a pro forma combined basis for
fiscal year 2000, of which approximately $12.0 million will be for ongoing
maintenance.
Based on our current level of operations and the 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
maturity. 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. From time to time there have been in
the past, and there are likely to be in the future, inquiries from and/or
preliminary discussions with third parties regarding potential dispositions of
portions of our business or potential acquisitions of other businesses, or both.
At present, we have no agreement or understanding, and no substantive
discussions are ongoing, regarding any such transaction. There can be no
assurance as to whether any such transaction will or will not occur, or as to
the terms thereof, or as to the effect any such transaction might have on our
liquidity and capital resources or results of operations, or other business and
financial data included in this Prospectus. See "Risk Factors--Debt Service
Requirements."
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BUSINESS
OVERVIEW
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 a combined pro forma basis, for the pro forma LTM
period we generated revenues of $447.7 million, operating income of $35.8
million and EBITDA of $86.6 million.
On September 6, 2000, Autotote acquired Scientific Games for approximately
$308.0 million in aggregate cash consideration to Scientific Games stockholders.
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. We believe the combination should
result in significant revenue enhancement and operating synergies by (1)
creating the broadest and most integrated product line in the lottery industry,
which will enable us to provide "one-stop shopping" to lottery customers (who
typically offer both on-line and instant ticket games); (2) increasing our
market scale and scope, which should enhance our ability to compete for domestic
and international lottery contracts and pursue our Internet strategy; and (3)
reducing duplicative marketing costs and general corporate overhead and
expenses.
In conjunction with the Scientific Games acquisition and the repayment of
substantially all of the existing debt of both companies, we issued $110.0
million of new convertible preferred stock, $102.0 million of which was
purchased by an affiliated entity of Olivetti S.p.A. As a result the Olivetti
group became our largest equity investor, owning approximately 32% of our common
stock on a fully converted basis. Olivetti's affiliated entities include Telecom
Italia S.p.A., one of the world's largest telecommunications service providers,
as well as Lottomatica S.p.A., which manages the Italian national lottery and
provides lottery operation services in other countries. We believe that the
expertise and international presence of Olivetti and its affiliated entities can
be particularly valuable to us as we attempt to pursue international growth
opportunities.
With the combined operations of Autotote and Scientific Games, we are
engaged primarily in the following businesses:
- LOTTERY GROUP (53% of pro forma LTM revenue, 22% of pro forma LTM
operating income and 45% of pro forma LTM EBITDA). 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
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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 LTM 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 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 State 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 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.
- PARI-MUTUEL GROUP (25% of pro forma LTM revenue, 26% of pro forma LTM
operating income and 29% of pro forma LTM EBIDTA]) 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.
- VENUE MANAGEMENT GROUP (14% of pro forma LTM revenue, 21% of pro forma LTM
operating income and 12% pro forma LTM EBITDA) 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
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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.
- TELECOMMUNICATIONS PRODUCTS GROUP (8% of pro forma LTM revenue, 31% of pro
forma LTM operating income and 14% of pro forma LTM EBITDA) 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 expect to participate in the anticipated continued
growth in the cellular market (which in Europe alone is projected to grow
from approximately 154 million cellular subscribers in 1999 to
approximately 304 million cellular subscribers by 2003), and we expect the
number of prepaid phone card users to grow faster than traditional
cellular subscribers. We are investing approximately $25.0 million in our
U.K. operations, including approximately $9.0 million to 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 the six
months ended June 30, 2000, we generated $20.0 million of revenue in this
segment compared to $6.7 million for the comparable period in 1999.
RECENT DEVELOPMENTS
On December 21, 2000, Autotote announced results for its fiscal fourth
quarter and year ended October 31, 2000. The results include the operations of
Scientific Games since September 6, 2000 when Autotote acquired it.
Revenues for the fiscal fourth quarter of 2000 were $82.7 million compared
to $59.2 million in the fourth quarter of fiscal 1999. EBITDA (earnings before
interest, taxes, depreciation and amortization) for the quarter before
acquisition and other unusual charges and extraordinary items was $11.9 million
versus $11.8 million in the fiscal fourth quarter of 1999. Net loss before
acquisition and other unusual charges and extraordinary items was $11.3 million
or a loss of $0.31 per diluted share in the fiscal fourth quarter of 2000
compared to net income of $346,000 or $0.01 per diluted share in the fiscal
fourth quarter of 1999.
Revenue for fiscal 2000 was $233.3 million compared to $211.1 million in
fiscal 1999. EBITDA before acquisition and other unusual charges and
extraordinary items was $45.6 million in fiscal 2000 versus $40.5 million for
fiscal 1999. Net loss before acquisition and other unusual charges and
extraordinary items was $6.9 million or $0.19 per diluted share compared to net
income of $379,000 or $0.01 per diluted share in fiscal 1999.
Including the acquisition and other unusual charges, and extraordinary
items, EBITDA was $8.1 million in the fiscal fourth quarter of 2000 and the net
loss was $36.4 million or a loss of $0.96 per diluted share. For fiscal 2000,
EBITDA was $41.8 million and the net loss was $32.0 million or $0.87 per diluted
share in fiscal 2000. These results reflect approximately $23.6 million of costs
expensed by Autotote associated with its acquisition of Scientific Games and of
the refinancing the debt of both companies.
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Operating results for the fiscal fourth quarter and fiscal year were
impacted by several factors:
- During the fourth quarter there were two plant shutdowns and two
corresponding start-ups in the Scientific Games manufacturing
operation--one each in the UK and United States. The combination of the
interrupted production and unusually high costs (such as overtime and
scrap), coupled with excess costs in their systems business, is estimated
to have had a $5.0 million negative impact on EBITDA in the fourth
quarter. By calendar year end, both production and manufacturing costs had
rebounded to normal levels.
- As planned, Autotote 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 $2.0 million that was expected to
contribute to fiscal 2000 will not begin until 2001.
- Year to year comparisons are impacted by Autotote's unusually strong
pari-mutuel equipment sales to Sisal S.p.A. and the British Totalizator
Board in fiscal 1999 which, as expected, did not continue into the fourth
quarter of fiscal 2000.
- Start up costs for an OTB joint venture in Germany were approximately
$1.0 million.
- The write-off of Autotote's option to purchase Atlantic City Raceway as a
result of the New Jersey legislature's failure to pass the necessary
legislation to allow OTB expansion in that state resulted in a fiscal
fourth quarter charge of approximately $1.1 million.
On September 26, 2000, we announced the signing of a ten year-contract
extension with LEIDSA (Loteria Electronica Internacional Dominicana, S.A.) to
provide on-line lottery services in the Dominican Republic, as authorized by
Loteria Nacional. We have been providing such services to LEIDSA since 1996 in
exchange for a percentage of Handle generated. Our revenues in the Dominican
Republic are currently just over $1.0 million annually and have been increasing
steadily.
We also have been selected by the Maine lottery to provide instant tickets
and an on-line lottery system, beginning July 2001, with an estimated potential
to generate revenues of approximately $45.0 million over the 6-year life of the
contract.
On September 13, 2000, we were selected to enter into a seven-year contract
with the Iowa State lottery. Based on 1999 lottery sales in Iowa of $178.0
million, we believe that the seven-year contact, with option to renew, has the
potential to generate revenues of approximately $40.0 million over the life of
the contract.
On August 2, 2000, Autotote entered into a contract with the Turkey Jockey
Klub (TJK) of Istanbul for the sale of a fully integrated Alpha central computer
system featuring Autotote Eclipse-TM- software together with 2,500 MAX-TM- 2000,
STAN and walkabout terminals and the related network communications equipment.
The total sales price of the system is expected to exceed $11.0 million. The
contract also provides for ongoing maintenance and support services to be
provided by Autotote at the election of TJK for a period of ten years, from
which we may receive revenues totaling up to approximately $10.0 million.
COMPETITIVE STRENGTHS
LEADING MARKET POSITIONS. We are the world's leading provider of instant
lottery tickets and related services. In 1999, we enjoyed a 68% share of total
U.S. instant lottery ticket retail sales. We are also the leading supplier of
pari-mutuel wagering systems worldwide and processed approximately 65% of the
estimated $20.0 billion of Handle in North America during 1999. In addition, we
are a leading provider of prepaid phone cards in Europe. We attribute our
leadership positions in each of these businesses primarily to our technological
expertise, well-established customer relationships, high levels
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of customer service, low-cost manufacturing capabilities and ability to offer a
broad array of products and value-added services.
SUBSTANTIAL RECURRING REVENUE. We typically provide our pari-mutuel,
lottery and venue management services pursuant to long-term contracts. Our
pari-mutuel and lottery system contracts typically run for five years, and our
domestic instant ticket contracts typically run for one to five years, and, in
each case, generally contain additional renewal options that have usually been
exercised. Subject to our compliance with certain licensing and operational
requirements, we own the Connecticut OTB system operations in perpetuity and our
contract to operate The Netherlands OTBs runs until 2003. As a result of our
contractual arrangements and the relative historic stability of the markets we
serve, we believe that revenues from these sources are recurring. In addition,
we have long-standing relationships with our international instant ticket
customers. Collectively, these contracts and customers generated 76% of our pro
forma LTM revenue, 55% of our pro forma LTM operating income and 84% of our pro
forma LTM EBITDA.
BROADEST PRODUCT LINE. We believe that we offer our customers the broadest
array of lottery and pari-mutuel capabilities.
- We believe our lottery group is the only fully integrated competitor in
the lottery market providing instant tickets, lottery systems and a
cooperative services program. We offer both traditional instant tickets
and our recently introduced secure probability tickets, as well as on-
line systems and secure instant ticket validation systems and terminals,
both in the U.S. and internationally. We also offer our value-added
Cooperative Services Program which allows lottery authorities to outsource
many of the game design, sales, marketing, training, fulfillment and
inventory management aspects of their lottery operations.
- Our pari-mutuel group offers the broadest array of technologically
advanced computerized wagering systems and related equipment to
racetracks, including teller-operated and self-service terminals,
hand-held and mobile wireless terminals, interactive voice response
systems and telephone account wagering products. We also provide
telecommunications and simulcasting services, which include broadcasting
live video racing events via satellite to more than 200 racetracks and
1,100 OTBs, and we operate NASRIN-TM-, a national voice/data
telecommunications network that serves more than 50 racetracks. In
addition, we are a participant in a joint venture which has developed the
TrackPlay-TM- Internet-based interactive wagering product, which
incorporates video streaming and handicapping data and will be available,
to the extent permitted by law, both to our racetrack customers and
through the venues we operate.
ESTABLISHED PARI-MUTUEL WAGERING NETWORKS. We have invested over $150.0
million since 1993 to develop, build and install state-of-the-art pari-mutuel
wagering and communications networks and simulcasting systems throughout North
America and internationally. This investment includes over 25,000 wagering
terminals installed at our customer locations throughout North America at a
total original cost of approximately $80.0 million. Our networks have led the
industry in providing technological support for the trend toward remote wagering
by linking multiple racetracks, OTBs, and regional networks of racetracks and
OTBs to one another via dedicated, high-speed communications channels, using
sophisticated centralized processing centers to efficiently provide services for
the entire network, thereby substantially increasing wagering opportunities at
every participating location. Our networks provide a competitive advantage by
enabling us to spread the cost of our terminals and centralized processing
centers among many customers. A competitor seeking to provide substitute
services to an individual customer would incur significant expenditures for the
necessary terminals, and would need a substantial base of existing customers
over which to spread processing costs in order to provide such services on a
cost-effective basis.
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SUPERIOR TECHNOLOGY. We believe that we are the technology leader in our
core businesses, contributing to our leading positions in the markets we serve.
- In our instant ticket business, we believe that we are the technology
leader in the development of new products. We are the first company to
successfully commercialize secure probability tickets, which had not been
viable until the recent introduction of our patented Winner's Choice-TM-
ticket format, which has an electronic circuit printed in the ticket to
facilitate secure validation. Our proprietary SciScan
Technology-Registered Trademark- terminals can read and securely validate
our probability tickets as well as validate the bar codes of traditional
instant tickets. We believe that our integrated probability ticket
validation technologies are more secure than those offered by the limited
number of competitors in this market.
- Our on-line lottery systems were recently upgraded and utilize the latest
system development technologies. Our systems have received the highest
technical evaluations in recent lottery procurements.
- In our pari-mutuel group, we believe that we are the technological leader
in computerized wagering systems and related equipment. Our recently
upgraded Eclipse-TM- pari-mutuel wagering software supports our regional
networking strategy of using fewer central processing "hubs." Our
sophisticated line of wagering terminals was the first to offer the
versatility of teller operation and self-service capabilities in the same
unit, and also includes innovative hand-held mobile terminals and other
dedicated self-service units. We have also added our own Internet-based
account wagering service to our range of advanced phone betting and
interactive voice response wagering products, all of which enable
end-users to wager from remote locations and expand the distribution
channels for pari-mutuel wagering.
- In our prepaid phone card business, we believe that our lottery-based
security procedures and technology give us a substantial advantage over
our competition. Our leadership in security technology is important to our
large telecommunication services customers, who place their brand names on
phone cards and bear the risks of access number theft and activation
problems.
BUSINESS STRATEGY
DEVELOP PROBABILITY TICKETS MARKET. Our strategy is to aggressively develop
U.S. and international markets for probability tickets. We believe we will
benefit from the higher margins we realize on sales of probability tickets, and
indirectly increase our lottery systems business because validation of our
probability tickets requires our proprietary SciScan Technology-Registered
Trademark- terminals. In markets where we have introduced probability game
tickets, total instant ticket sales have initially grown by up to 15% without
the benefit of mass media advertising (although there can be no assurance that
such growth will be sustained or will be experienced in all markets). We have
installed or are installing, in seven jurisdictions worldwide, more than 26,000
SciScan Technology-Registered Trademark- terminals capable of validating
probability tickets. We are also including our probability tickets and secure
validation technologies as part of our on-line systems bids and, when requested,
as part of the on-line systems bids of other vendors, and incorporating these
tickets and associated systems in our cooperative services agreements. In
addition to new terminal installations in the U.S. and abroad, we believe that
there are over 130,000 existing on-line lottery terminals in the U.S. which
present potential SciScan Technology-Registered Trademark- upgrade
opportunities.
DEVELOP INTERNET CAPABILITIES. Internet wagering is permitted in many
jurisdictions outside the U.S. and a number of U.S. jurisdictions are
considering laws relating to interstate and intrastate Internet wagering.
Several states already have existing regulations enabling intrastate Internet
wagering. Our strategy is to build our Internet wagering business
internationally and to rapidly take advantage of opportunities in the U.S. as
they become available. We are developing Internet pari-mutuel wagering services
for international and selected intrastate markets, and believe this technology
could be adapted
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for the lottery industry to enable Internet wagering for on-line and instant
lotteries. An increase in Internet or other interactive wagering would allow us
to benefit from: (1) profits from Handle wagered on our proprietary web site as
a venue operator; (2) fees based on Handle, wagered on our customers' web sites,
that flow through our pari-mutuel systems; and (3) the higher fees we would
derive from Handle wagered on our customers' web sites for which we provide the
Internet platform.
PURSUE INTERNATIONAL GROWTH OPPORTUNITIES. We believe that significant
growth opportunities for all our product and service lines exist in
international markets. Our largest equity investor is an affiliated entity of
Olivetti S.p.A. Olivetti's affiliated entities include Telecom Italia S.p.A.,
one of the world's largest telecommunications services providers with a
substantial presence in Europe and South America. Telecom Italia is estimated to
have purchased 150 million phone cards in 1999. Another of Olivetti's affiliated
entities is Lottomatica S.p.A., which manages the Italian national lottery, owns
22,000 terminals in 15,000 betting shops throughout Italy, and provides lottery
operation services in other countries. We believe that the expertise and
international presence of Olivetti and its affiliated entities can be
particularly valuable to us as we attempt to pursue international growth
opportunities. We will seek to increase our share of the high-margin European
prepaid cellular phone card market by pursuing new telecommunications customers
such as Telecom Italia, and develop prepaid phone card sales in South America,
East Asia and other rapidly growing cellular phone markets. In addition, we also
plan to introduce instant tickets to new international markets, including
established on-line markets such as Spain, and increase penetration of existing
international instant ticket markets. We also plan to pursue lottery ticket and
systems business from newly introduced national lotteries, as well as lotteries
that have recently converted from off-line to on-line operations in East Asia
and elsewhere. We will seek to expand our sales coverage in South America and
Europe to offer our complete line of products, and also plan to continue moving
beyond international pari-mutuel sales into pari-mutuel services and venue
management as the international market for those services matures.
DEVELOP ADDITIONAL VENUES. We will seek to expand our venue management
business. We believe that we are the only company to successfully privatize a
government-operated off-track betting system and that this experience, together
with our expertise in pari-mutuel technology and related services, gives us a
significant competitive advantage as we pursue the rights to operate other
state-run or private OTB networks or racetracks both in the U.S. and
internationally. We anticipate that new domestic legislation, European
opportunities and potential future acquisitions will provide opportunities for
continued growth in this area. Pending legislation in New Jersey may allow OTBs
and account wagering, and we are negotiating for an extension of our option to
purchase the Atlantic City Racetrack. In Germany, our joint venture will operate
up to 2,500 OTBs as the racing industry expands wagering into sports bars and
restaurants.
SELECTIVELY EXPAND ON-LINE LOTTERY BUSINESS. We believe our leadership
position in the instant ticket lottery business positions us to leverage our
long-term customer relationships with state lottery authorities to increase our
share of the on-line lottery market and emphasize the one-stop shopping
opportunities we can offer to lottery customers. Prior to the acquisition of
Scientific Games, Autotote was awarded four of the last seven domestic on-line
lottery contracts on which it bid. Over the next three years, seven on-line
contracts currently held by our competitors, representing approximately 21% of
1999 U.S. on-line retail lottery revenues, will be up for renewal in competitive
bidding processes. During that period, only one of our own existing on-line
lottery contracts will be subject to renewal.
IMPLEMENT COST SAVINGS INITIATIVES. We have closed our instant ticket
manufacturing facility in Gilroy, California and have added state-of-the-art
printing equipment to our facility in Alpharetta, Georgia which began production
on August 16, 2000. The expansion of the Alpharetta facility represents an
investment of approximately $16.3 million, of which $6.0 million was spent in
1999 and $8.4 million was spent in the first six months of 2000, and the balance
of which is expected to be expended by December 2000. This investment will
increase annual production capacity by
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approximately 3.5 billion tickets while generating annual cost savings estimated
at $5.1 million based on 1999 volume levels. We are also in the process of
investing approximately $25.0 million, of which $8.3 million was expended in
1999 and $8.4 million was expended through the first six months of 2000, to
close two small plants and complete construction of a new printing facility in
the United Kingdom to serve anticipated growth in the European phone card
business. We expect this to substantially lower our unit production costs for
phone cards. In addition, we believe the Scientific Games acquisition will
enable us to eliminate duplicative administrative, executive staff and marketing
expenses and save at least $2.0 million annually in corporate overhead on an
adjusted pro forma combined basis.
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
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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 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. We believe that the further growth of cellular
phone penetration will expand the prepaid phone card business. 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. Because card
access number theft is common, the security of the card is critical. Phone cards
are expected to grow to 41% of the fast growing global cellular phone market by
2003. The number of cellular subscribers in Europe was 154 million in 1999 and
is projected to grow to 199 million in 2000, 239 million in 2001, 273 million in
2002 and 304 million in 2003.
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
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
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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 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
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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 purchased SciScan Technology-Registered Trademark- terminals
from us and continues to receive ongoing 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-Registered Trademark- terminals and bid SciScan Technology-Registered
Trademark- 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.
The lottery systems segment includes the sale of standalone terminals for
lottery applications. This includes the EXTREMA-TM- on-line lottery terminals
and SciScan Technology-Registered Trademark- 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 Technology-Registered Trademark- 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. Utilizing
optical bar code technology, SciScan Technology-Registered Trademark- terminals
can be operated standalone or attached to an on-line lottery terminal to
validate traditional instant tickets 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 Technology-Registered
Trademark-.
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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 November 28, 2000 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.
<TABLE>
<CAPTION>
1999 INSTANT
TICKET/ON-
LINE RETAIL COMMENCEMENT
SALES DATE OF EXPIRATION DATE CURRENT
(DOLLARS CURRENT OF CURRENT RENEWAL OPTIONS
STATE/DISTRICT IN MILLIONS) CONTRACT CONTRACT REMAINING TYPE OF CONTRACT
-------------- ------------ -------------- --------------- --------------------- -----------------
<S> <C> <C> <C> <C> <C>
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(1)............... 19.7 July 1995 December 2000 none 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 April 2003 none ITRS
Idaho..................... 56.9 October 1999 October 2001 2 one-year ITRS(2)
Illinois.................. 549.4 July 1996 June 2001 1 one-year ITRS
Indiana................... 337.1 December 1997 December 2001 none ITRS
Kentucky(4)............... 252.4 October 1997 October 2002 none ITRS and Systems
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 January 2000 January 2002 3 one-year ITRS(2)
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 2000 1 one-year ITRS
New Mexico................ 58.2 March 1997 March 2001 2 one-year ITRS(2)
New York(3)............... 937.5 April 1996 April 2001 none ITRS
New York(3)............... 2,634.0 January 2000 March 2002 none ITRS and Systems
Oregon.................... 143.7 April 1998 April 2001 3 one-year ITRS(2)
Pennsylvania.............. 457.0 April 1997 April 2002 5 one-year ITRS
Rhode Island.............. 59.5 April 1998 April 2001 2 one-year ITRS(2)
South Dakota.............. 13.1 June 2000 June 2003 2 one-year ITRS
Texas..................... 1,426.0 March 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(4)
Washington................ 261.3 February 2000 February 2003 3 one-year ITRS
W. Virginia............... 77.0 May 2000 June 2003 2 one-year ITRS
</TABLE>
------------------------------
(1) 2 year contract awarded with 3 one-year renewals executed
(2) Secondary supplier
(3) There are separate contracts for the supply of instant tickets and the
supply of warehousing, distribution, telemarketing and systems.
(4) Support of previously sold lottery system; fee not based on Handle
ITRS = Instant Ticket and Related Services
Systems = Instant ticket validation systems
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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.
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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
htat 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 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
- 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.
- 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
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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.
- 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-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.
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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. We are planning to add additional
outlets by the end of fiscal 2000. 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 expect to participate in the
anticipated continued growth in the cellular market (which in Europe alone is
projected to grow from approximately 154 million cellular subscribers in 1999 to
approximately 304 million cellular subscribers by 2003), and we expect the
number of prepaid phone card users to grow faster than traditional cellular
subscribers. We are investing approximately $25 million in our U.K. operations,
including approximately $9 million to 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 the six months ended June 30, 2000, we
generated $20.0 million of revenue in this segment compared to $6.7 million for
the comparable period in 1999.
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
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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 enabling new distribution channels. These opportunities occur
infrequently and may be subject to public procurement bidding requirements.
TELECOMMUNICATIONS PRODUCTS GROUP
We currently have contracts with customers representing approximately 25% of
our telecommunications products revenues for the first half of calendar year
2000. 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-Registered,
SciScan Technology-Registered Trademark-, PROBE-Registered Trademark-,
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EXTREMA-TM-, SGI-NET-TM-, ECLIPSE-TM-, SAM-Registered Trademark-, MAX-TM-, TINY
TIM-Registered Trademark- 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
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.
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
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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. 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
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
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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.
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 September 30, 2000, we employed approximately 2,550 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.
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PROPERTIES
The following is a list of facilities that we use in the operation of our
business.
<TABLE>
<CAPTION>
BUSINESS LOCATION SQUARE FEET OWNED/LEASED PURPOSED
-------- --------------------------- ----------- ------------- --------------------------------
<S> <C> <C> <C> <C>
Corporate................... New York, NY 12,000 Leased Corporate Headquarters
Pari-Mutuel................. Newark, DE 45,000 Leased Administration, operations and
manufacturing
Gelsenkirchen, Germany 2,000 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
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
</TABLE>
------------------------------
(1) We have expanded the Alpharetta, Georgia facility by 60,000 square feet to
accommodate additional manufacturing and office space. The new facilities
resulting from this expansion are expected to be fully operational by
December 2000.
LEGAL PROCEEDINGS
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 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.
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SGI has been advised by Colombian counsel that SGI has various legal
defenses to Ecosalud's claims. 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.
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. 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.
On April 2, 1998, Seguros brought suit against SGI in the District Court for
the Northern District of Georgia, Atlanta Division, Civil Action No.
1:98-CV-968-CAM 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. SGI filed a motion to dismiss based on the Colombian statute of
limitations of two years and, alternatively, sought that the case be dismissed
on other grounds. Seguros filed a motion for summary judgment with the Court on
May 6, 1998 seeking summary judgment on its claim in the amount of $2.4 million,
plus interest.
On September 29, 1999, the District Court denied various motions of SGI,
including a motion to dismiss, granted Seguros' motion for summary judgment, 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.
In addition to vigorously prosecuting its appeal of the District Court's
order and judgment, SGI continues to vigorously defend the Colombian Litigation
and has been advised by Columbian counsel that SGI has various defenses on the
merits as well as procedural defenses to the litigation (which it has asserted).
Nevertheless, 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. While it is not feasible to predict or determine the final outcome of
these proceedings, management, based on the knowledge of the related facts and
circumstances, believes that any potential losses will not result in a
materially adverse effect on our financial position, results of operations,
liquidity or capital resources.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Certain information concerning Autotote Corporation's directors and
executive officers is set forth below:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- -------- ------------------------------------------------------------
<S> <C> <C>
A. Lorne Weil.................. 54 Chairman of the Board, President and Chief Executive
Officer(1)(4)
Larry J. Lawrence.............. 58 Vice Chairman of the Board(1)(2)(3)
Sir Brian G. Wolfson........... 65 Director(2)
Alan J. Zakon.................. 64 Director(1)(3)(4)
DeWayne E. Laird............... 52 Vice President, Chief Financial Officer and Controller
Gerald Lawrence................ 61 Executive Vice President
Martin E. Schloss.............. 54 Vice President, General Counsel and Secretary
William G. Malloy.............. 54 Director
Peter A. Cohen................. 54 Director(1)
Colin J. O'Brien............... 62 Director(2)
Luciano La Noce................ 51 Director(2)(3)(4)
Michael S. Immordino........... 39 Director
Roberto Sgambati............... 45 Director
William J. Huntley............. 51 President, Scientific Games Systems Division
Cliff O. Bickell............... 57 President, Printed Products Division of Scientific Games
</TABLE>
------------------------
(1) Member of Executive Committee
(2) Member of Audit Committee
(3) Member of Compensation Committee
(4) Member of Nominating Committee
All of our directors hold office until the next annual meeting of
stockholders and thereafter until their successors have been elected and
qualified. Our officers hold office for an indefinite term, subject to the
discretion of our Board of Directors.
Following consummation of the transactions, we expanded our Board of
Directors from five members to ten members. We entered into a consulting
agreement with William G. Malloy, the former Chairman, President and Chief
Executive Officer of Scientific Games, effective upon the closing of the
Scientific Games acquisition, which provided for, among other things,
Mr. Malloy's appointment to our Board, and resignation from his positions with
Scientific Games. In addition, the holders of our new convertible preferred
stock have the right to designate four members of our Board (or a lesser number
in the event that their ownership level declines). The purchasers of the
convertible preferred stock have designated as directors Messrs. Peter Cohen,
Luciano La Noce, Roberto Sgambati and Michael Immordino.
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.
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MR. LARRY J. LAWRENCE has been an Autotote director since December 1989 and
Vice Chairman of the Board since August 1997. Mr. Lawrence is co-founder and
since 1985 has been managing partner of Lawrence Venture Partners, the general
partner of Lawrence, Tyrrell, Ortale & Smith, a private equity fund manager. He
has been managing partner of LTOS II Partners, the general partner of Lawrence,
Tyrrell, Ortale & Smith II, since 1990 and has been the general partner of
Allegra Partners III, L.P., the general partner of Allegra Capital Partners III,
L.P., since May 1995 and has been managing partner of Allegra Partners IV, L.P.,
the general partner of Capital Partners IV, L.P., since January 2000.
Mr. Lawrence served as a director of Autotote Systems, Incorporated until we
acquired it in 1989. Mr. Lawrence is currently a director of several private
companies.
SIR BRIAN G. WOLFSON has been an Autotote director since 1988. Sir Brian
served as Vice Chairman of our Board of Directors from May 1995 to August 1997
and Acting President and Chief Executive Officer from June 1991 to October 1991.
Sir Brian served as Chairman from 1987 to May 1995, and as Deputy Chairman from
May 1995 to September 1995, of Wembley plc, a United Kingdom corporation. Sir
Brian is currently Chairman of the Board of Fruit of the Loom, Inc. and a
director of Playboy Enterprises, Inc.
MR. ALAN J. ZAKON has been an Autotote director since 1993 and Chairman of
the Executive Committee of the Board since August 1997. Mr. Zakon served as Vice
Chairman of Autotote's Board of Directors from May 1995 to August 1997.
Mr. Zakon served as a managing director of Bankers Trust Corporation from 1989
to April 1995, and as Chairman of the Strategic Policy Committee of Bankers
Trust Corporation from 1989 to 1990. Mr. Zakon served as Chairman of the Board
of Boston Consulting Group from 1986 until 1989. Mr. Zakon is currently a
director of MicroFinancial Inc. and Arkansas Best Corporation.
MR. COLIN J. O'BRIEN has been an Autotote director since September 2000.
Mr. O'Brien joined Xerox Corporation in 1992 as a Vice President and President
of the newly formed Document Production Systems Division. In 1996 Mr. O'Brien
became the Chief Executive Officer of Xerox's New Enterprise Board. Mr. O'Brien
is currently the Executive Chairman of XESystems, Inc. In 1986, Mr. O'Brien
formed an investment company with E.M. Warburg Pincus & Co. Inc., making a
number of acquisitions in defense electronics. Prior to that time, Colin O'Brien
served as Chief Executive of Times Fiber Communications, Inc. and President of
General Instrument's cable television operations. He has held management
positions with Union Carbide in both Canada and Europe. Mr. O'Brien is a member
of the Board of Directors of Document Sciences Corporation and several privately
held companies.
MR. WILLIAM G. MALLOY has been an Autotote director since September 2000.
Mr. Malloy served as President and Chief Executive Officer of Scientific Games
(since 1990) and a Director and Chairman of the Board of Scientific Games (since
1991) until the acquisition of Scientific Games by Autotote on September 6,
2000. Mr. Malloy previously served as Vice President, Treasurer and Chief
Financial Officer of Scientific Games. He joined Scientific Games in 1987 when
he transferred from the corporate staff of Bally Manufacturing Company.
Mr. Malloy has over twenty-five years of experience in the coin-operated
amusement and gaming industry. Mr. Malloy currently serves on the Board of
Directors of MDI Entertainment, Inc.
MR. PETER A. COHEN has been an Autotote director since September 2000.
Mr. Cohen is a principal of Ramius Capital Group, LLC, a private investment
firm. From November 1992 until May 1994, Mr. Cohen was Vice Chairman and a
director of Republic New York Corporation, as well as a member of its management
executive committee. Mr. Cohen was also the Chairman of Republic New York
Corporation's wholly-owned subsidiary, Republic New York Securities Corporation.
From February 1990 to November 1992, Mr. Cohen was a private investor and an
advisor to several industrial and financial companies. From 1983 to 1990,
Mr. Cohen was Chairman of the Board and Chief Executive Officer of Shearson
Lehman Brothers. Over his career, Mr. Cohen has served on a number of corporate,
industry
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and philanthropic boards, including The New York Stock Exchange, The American
Express Company, The Federal Reserve Capital Market Advisory Board, The
Depository Trust Company, Olivetti S.p.A., Ohio State University Foundation and
The New York City Opera. Mr. Cohen currently serves as a director of
Presidential Life Corporation, The Mount Sinai-NYU Medical Center and Health
System and Telecom Italia S.p.A.
MR. LUCIANO LA NOCE has been an Autotote director since September 2000.
Mr. La Noce is the Chief Financial Officer and Director of Corporate Finance of
Olivetti S.p.A. in Ivrea, Italy. He is also a member of the Board of Directors
of Lottomatica, S.p.A., Olivetti Lexikon S.p.A., Olivetti Systems Technology
Corporation, Olteco Fin and Olivetti International S.A., as well as managing
director of Texnost International N.V. Mr. La Noce has served as a managing
director of Tecnosti International Finance N.V., Olivetti International N.V. and
Olivetti Holdings BV. He is a former director of Olteco Fin, Hughes Olivetti
Telecom Ltd., Hughes Olivetti Telecom N.V., Omnitel Pronto Italia, Infostrada
S.p.A., Olivetti Finanziaria Industriale S.p.A., Olivetti International
(Service) S.A., CIR Services S.A., Sasib S.p.A., Rejna S.p.A., Gruppo Editoriale
l'Espresso, Medinvest Ltd, and CIR International S.A. Before joining Olivetti,
Mr. La Noce was the deputy general manager in charge of finance at CIR S.p.A.
With a background in banking, Mr. La Noce has been an officer at Continental
Bank, Chase Manhattan Bank and Banca Nazionale del Lavoro (BNL).
MR. MICHAEL S. IMMORDINO has been an Autotote director since September 2000.
Mr. Immordino is currently a partner in the London office of the worldwide law
firm of Latham & Watkins. Prior to joining Latham & Watkins, Mr. Immordino was a
partner in the firm of Rogers & Wells. He was formerly associated with the law
firm of Wilkie Farr & Gallagher in New York.
MR. ROBERTO SGAMBATI has been an Autotote director since September 2000.
Mr. Sgambati is the Chief Financial Officer of Lottomatica S.p.A. Prior to
joining Lottomatica, he was an associate director of investment banking at
Mediocredito Centrale, an investment bank owned by the Italian Treasury. He also
served as the head of corporate finance for Barclays Bank in Italy and was
employed by PriceWaterhouse in Rome, Milan and London.
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.
Mr. Huntley is 51 years old. In September, 2000, after the Scientific Games
acquisition, Mr. Huntley was named President of Scientific Games' Systems
division.
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. 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. 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. 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
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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. CLIFF O. BICKELL became President-Printed Products Division of
Scientific Games Inc. in September, 2000 after Scientific Games acquisition.
Having joined Scientific Games in 1995, he previously served as Vice President,
Treasurer and Chief Financial Officer. 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.
COMPENSATION OF DIRECTORS AND OFFICERS
Certain other information concerning the compensation paid to, or earned by,
our President and Chief Executive Officer, our four most highly compensated
executive officers and our directors, including information concerning cash and
non-cash compensation for our fiscal years ended 1997, 1998 and 1999, as well as
certain information regarding employment agreements we have entered into with
such persons, is set forth in our Definitive Proxy Statement filed with the
Securities and Exchange Commission on February 25, 2000.
Since the date of that Definitive Proxy Statement, we have entered into an
amendment to our employment agreement with A. Lorne Weil, effective as of
September 1, 2000, which increased his annual salary to $750,000 and provided
for his participation in the proposed Supplemental Executive Retirement Plan, or
"SERP" recently authorized to be implemented by the Board (including provision
for a lump sum payment to Mr. Weil in lieu of potential benefits under the SERP
under certain specified circumstances).
CERTAIN TRANSACTIONS
Mr. William G. Malloy, is a party to a consulting agreement with us under
which Mr. Malloy resigned as an officer and director of Scientific Games, became
our consultant for a term of two years, will be nominated as a director during
the term of his consulting agreement and will receive cash compensation of
$16,667 per month as well as certain other benefits, including certain life,
medical and other benefits. Mr. Malloy also received other payments, including a
lump sum payment of $2.0 million in lieu of estimated and potential benefits
under the Scientific Games Supplemental Executive Retirement Plan and $200,000
for the extension of the coverage of his non-compete and other restrictive
agreements to cover Autotote in addition to Scientific Games.
Peter A. Cohen, who became a director upon consummation of the transactions
is a principal of Ramius Capital Group, LLC. In connection with the issuance of
the convertible preferred stock we agreed to pay Ramius, as placement agent, a
fee in the amount of 5% of the total gross proceeds received from the issuance
of the convertible preferred stock. The fee was paid one half in cash and one
half in convertible preferred stock. As of October 2, 2000, in connection with
the acquisition of Scientific Games, we issued to Ramius a warrant to purchase
an additional 250,000 shares of Autotote common stock at a price of $3.58 per
share (the closing price of our common stock on October 2, 2000), expiring
October 2, 2004, and otherwise on terms substantially similar to those of the
warrants previously issued to affiliates of Donaldson Lufkin & Jenrette
Securities Corporation and Lehman Brothers Inc.
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PRINCIPAL STOCKHOLDERS
The following table sets forth certain information as to the security
ownership of those persons known to us to be the beneficial owners of more than
five percent of our outstanding common stock, each of our directors, each of our
executive officers, and all of our directors and executive officers as a group,
as of October 31, 2000. Except as otherwise indicated, the stockholders listed
in the table below have sole voting and investment power with respect to the
shares indicated.
SHARES OF CLASS A COMMON STOCK
<TABLE>
<CAPTION>
NAME NUMBER(1) PERCENT(1)
---- ---------- ----------
<S> <C> <C>
Cirmatica Gaming S.A. (an affiliated entity of Olivetti 19,861,330(2) 33.22%
S.p.A.)...................................................
Rambla de Catalunya 16, 4E2a
Barcelona, Spain 08007
Oaktree Capital Management, LLC............................. 6,369,300(3) 15.95%
333 South Grand Avenue
Los Angeles, CA 90071
Donaldson, Lufkin & Jenrette Securities Corporation......... 2,340,000(4) 5.86%
277 Park Avenue
New York, NY 10172
Ramius Capital Group, LLC................................... 2,080,659(5) 5.03%
666 Third Avenue
New York, NY 10017
A. Lorne Weil............................................... 3,475,167(6) 8.12%
c/o Autotote Corporation
750 Lexington Avenue, 25th Floor
New York, New York 10022
Larry J. Lawrence........................................... 2,577,888(7) 6.34%
c/o Allegra Partners
515 Madison Avenue, 29th Floor
New York, New York 10022
Peter A. Cohen.............................................. 2,080,659(8) 5.03%
c/o Ramius Capital Group, LLC
666 Third Avenue
New York, NY 10017
Michael S. Immordino........................................ -0- *
Luciano La Noce............................................. -0- *
William G. Malloy........................................... -0- *
Colin J. O'Brien............................................ 10,000 *
Roberto Sgambati............................................ -0- *
Sir Brian G. Wolfson........................................ 260,000(9) *
Alan J. Zakon............................................... 1,440,031(10) 3.55%
Cliff O. Bickell............................................ -0- *
William J. Huntley.......................................... 258,828(11) *
DeWayne E. Laird............................................ 175,250(12) *
</TABLE>
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<TABLE>
<CAPTION>
NAME NUMBER(1) PERCENT(1)
---- ---------- ----------
<S> <C> <C>
Gerald Lawrence............................................. 331,750(13) *
Martin E. Schloss........................................... 312,000(14) *
All directors and executive officers as a group (consisting 10,921,573(15) 23.31%
of 15 persons)(6)(7)(8)(9)(10)(12)(13)(14)................
</TABLE>
------------------------
* Represents less than 1% of the outstanding shares of Common Stock.
(1) Beneficial ownership has been determined in accordance with Rule 13d-3 under
the Securities Exchange Act of 1934, as amended. Owners of options,
warrants, the new series of preferred stock or other convertible securities
exercisable or convertible within 60 days are deemed to be the beneficial
owners of the securities which may be acquired. The percentage of
outstanding securities reported for each person assumes that only such
person has exercised or converted such person's options, warrants, preferred
stock or other convertible securities.
(2) Includes 18,055,755 shares issuable upon conversion of preferred stock held
by Cirmatica Gaming S.A. ("Cirmatica"), representing 31.14% of our
outstanding Common Stock. Also includes (a) 361,115 shares issuable upon
conversion of preferred stock held by Olivetti International S.A.
("Olivetti"), (b) 722,230 shares issuable upon conversion of preferred stock
held by The Oak Fund ("Oak") and (c) 722,230 shares issuable upon conversion
of preferred stock held by Peconic Fund Ltd ("Peconic"), all of which shares
are subject to a voting agreement between Cirmatica, Olivetti, Oak and
Peconic. Pursuant to such agreement, Cirmatica has the power to direct the
voting of all of such shares with respect to designating and electing the
persons who the holders of the preferred stock have the right to elect to
our Board of Directors pursuant to such shares certificate of designations.
In addition, the voting agreement provides that Olivetti has agreed to vote
all of its shares as directed by Cirmatica on all matters.
(3) Based on a Form 13F filed with the SEC on November 13, 2000 for the quarter
ended September 30, 2000.
(4) Consists of 2,320,000 shares issued in redemption of a warrant and 20,000
shares indicated as owned on a Form 13F filed with the SEC on November 14,
2000 for the quarter ended September 30, 2000.
(5) Includes 172,600 shares, 496,529 shares issuable upon conversion of
preferred stock and 250,000 shares issuable upon exercise of a warrant held
by Ramius Securities, LLC ("Ramius Securities"). Also includes the shares
held by Peconic (see footnote 2) and 439,300 shares held by certain third
parties. Ramius Securities is investment advisor to Peconic, and Ramius
Capital Group, LLC ("Ramius Capital") is investment advisor to the third
parties. Ramius Capital, as the parent company of Ramius Securities and the
investment advisor to the third parties, may be deemed to beneficially own
all of the shares held by Ramius Securities, Peconic and the third parties.
Ramius Capital disclaims beneficial ownership of such securities.
(6) Includes (a) 1,903,500 shares issuable upon exercise of stock options and
(b) 982,605 shares issuable upon exercise of a warrant. Also includes 26,945
shares held (for Mr. Weil's deferred compensation account) by a grantor
trust established in connection with Autotote's Deferred Compensation Plan.
Excludes 216,644 shares, and 98,146 shares issuable upon exercise of a
warrant, held by The Lorne Weil 1989 Trust, John Novogrod, Trustee (the
"Weil Trust"). Mr. Weil disclaims beneficial ownership of the securities
held by the Weil Trust.
(7) Includes (a) 175,000 shares issuable upon exercise of a stock option and
(b) 594,914 shares issuable upon exercise of a warrant.
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(8) Solely for purposes of disclosure in this table with respect to beneficial
ownership by directors, such as Mr. Cohen, includes all of the shares
referred to in footnote 5 above, as to which Mr. Cohen disclaims beneficial
ownership. Mr. Cohen is one of three managing members of C4S & Co., LLC, the
managing member of Ramius Capital, and, accordingly, may be deemed to
beneficially own the shares which may be deemed to be beneficially owned by
Ramius Capital.
(9) Includes (a) 120,000 shares issuable upon exercise of stock options and
(b) 25,000 shares held by Millco Limited as nominee.
(10) Includes (a) 170,000 shares issuable upon exercise of stock options and
(b) 491,881 shares issuable upon exercise of a warrant.
(11) Includes 234,750 shares issuable upon exercise of stock options.
(12) Includes 173,750 shares issuable upon exercise of stock options.
(13) Includes 320,750 shares issuable upon exercise of stock options.
(14) Includes 297,000 shares issuable upon exercise of stock options.
(15) Includes (a) 3,394,750 shares issuable upon exercise of stock options, (b)
2,319,400 shares issuable upon exercise of warrants and (c) 1,218,759 shares
issuable upon conversion of preferred stock.
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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. We are unable to predict whether such legislation would impose
regulations on gaming industry operators, including us, or whether such
legislation, if any, would have a material adverse effect on us. 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.
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 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.
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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 makes 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
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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 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. Pending legislation in
the United States Congress may, if enacted, also subject these operations to
regulation by states in which patrons reside. We are unable to predict whether
such legislation will be enacted or the effect on our telephone wagering
operations. 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
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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.
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
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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-Registered Trademark- 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.
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
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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 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
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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 Corporation's corporate charter, bylaws,
management, policies or operations of the Registered Corporation, or any of its
gaming affiliates, or any other action
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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
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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.
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
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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.
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DESCRIPTION OF NEW SENIOR CREDIT FACILITIES
On September 6, 2000, simultaneously with the consummation of the Scientific
Games acquisition, we entered into new senior secured credit facilities with DLJ
Capital Funding, Inc., an affiliate of Donaldson, Lufkin & Jenrette Securities
Corporation and Lehman Commercial Paper Inc., an affiliate of Lehman Brothers
Inc. (collectively, the "agents"), under which the agents and the lenders (as
defined below) agreed to provide new senior secured credit facilities to us in
an aggregate amount of up to $345.0 million. The credit agreement and the other
loan documentation entered into on September 6, 2000 were amended and restated
as of October 6, 2000 without change in the material terms (such documentation,
the "loan documents"), and thereafter certain other financial institutions
joined the credit agreement by executing an assignment agreement (collectively
with the agents, the "lenders"). For a full understanding of the terms of the
new senior credit facilities it is necessary to read the amended and restated
credit agreement (the "credit agreement") and the other loan documents, however,
the description below summarizes the principal terms:
THE FACILITIES. The new senior credit facilities provide for (i) a six-year
revolving loan of up to $65.0 million, subject to the satisfaction of certain
conditions set forth in the credit agreement and the provisions of the indenture
governing the notes, at the mutual discretion of Autotote and DLJ Capital
Funding, Inc., we may make one request that the revolving credit facility be
increased by up to $35.0 million; (ii) a six year term A loan in the principal
amount of up to $60.0 million; and (iii) a seven-year term B loan in the
principal amount of up to $220.0 million.
REVOLVING CREDIT FACILITY. A portion of the revolving loan commitment can
be used to fund swing line loans in an amount not to exceed $10.0 million and an
amount, not to exceed $25.0 million, is available for the issuance of commercial
letters of credit for the purchase of materials, goods and services and standby
letters of credit for certain business purposes.
INTEREST RATES. At our option, the interest rates per annum applicable to
the revolving credit facility, term A loan and term B loan will be a fluctuating
rate of interest determined by reference to (a) the London Interbank Offered
Rate, or LIBOR, plus the applicable margin, or (b) the greater of the prime rate
and the rate which is 1/2 of 1% in excess of the rates on overnight Federal
funds transactions as published by the Federal Reserve Bank of New York, or base
rate, plus the applicable margin. The (a) Applicable Base Rate Margin means, at
any date of determination, (i) with respect to term B loans, 3.00% per annum,
and (ii) with respect to term A loans and revolving loans, a percentage per
annum as set forth below opposite the applicable Consolidated Leverage Ratio
calculated on a pro forma basis:
<TABLE>
<CAPTION>
CONSOLIDATED LEVERAGE RATIO APPLICABLE BASE RATE MARGIN
--------------------------- ---------------------------
<S> <C>
greater than or equal to 5.00:1.00.......................... 2.50%
less than 5.00:1.00 but greater than or equal to
4.50:1.00................................................. 2.25%
less than 4.50:1.00 but greater than or equal to
4.00:1.00................................................. 2.00%
less than 4.00:1.00 but greater than or equal to
3.50:1.00................................................. 1.75%
less than 3.50:1.00 but greater than or equal to
3.00:1.00................................................. 1.50%
less than 3.00:1.00......................................... 1.25%
</TABLE>
; and (b) the Applicable LIBO Rate Margin means, at any date of
determination, (i) with respect to term B loans, 4.25% per annum, and (ii) with
respect to term A loans and revolving loans, a
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percentage per annum as set forth below opposite the applicable Consolidated
Leverage Ratio calculated on a pro forma basis:
<TABLE>
<CAPTION>
CONSOLIDATED LEVERAGE RATIO APPLICABLE LIBO RATE MARGIN
--------------------------- ---------------------------
<S> <C>
greater than or equal to 5.00:1.00.......................... 3.75%
less than 5.00:1.00 but greater than or equal to
4.50:1.00................................................. 3.50%
less than 4.50:1.00 but greater than or equal to
4.00:1.00................................................. 3.25%
less than 4.00:1.00 but greater than or equal to
3.50:1.00................................................. 3.00%
less than 3.50:1.00 but greater than or equal to
3.00:1.00................................................. 2.75%
less than 3.00:1.00......................................... 2.50%
</TABLE>
; PROVIDED that until we deliver the first Margin Determination Certificate
to DLJ Capital Funding, Inc. pursuant to subsection 6.1 (xviii) of the credit
agreement after the six-month anniversary of the closing date, the Applicable
Base Rate Margin and the Applicable LIBO Rate Margin for term A loans and
revolving loans shall be 2.25% and 3.50% per annum respectively.
We cannot have more than ten LIBOR loans outstanding at one time.
AMORTIZATION. The term loans mature in quarterly installments. The term A
loan has aggregate annual amortization payments as a percentage of the initial
principal amount of 5.0% in the first year after closing, 10.0% in the second
year after closing, 15.0% in the third year after closing, 20.0% in the fourth
year after closing and 25.0% in each of the fifth and sixth years after closing.
The term B loan has aggregate annual amortization payments as a percentage of
the initial principal amount of 1.0% in each of the first through sixth years
after closing and 94.0% in the seventh year after closing.
USE OF PROCEEDS. (i) If unpaid from cash in hand, proceeds of the senior
subordinated notes or convertible preferred stock, the proceeds of the term
loans shall be applied by us to pay certain acquisition financing requirements
on the closing date; (ii) after the application of the proceeds of the term
loans, then approximately $3.0 million of the proceeds of the revolving loans
and any swing line loans may be applied to pay any remaining acquisition
financing requirements to be paid on the closing date and the remaining proceeds
of the revolving loans and swing line loans will be applied by us for working
capital and general corporate purposes, which may include the making of interest
payments on the loans, certain permitted acquisitions, the payment of any
remaining acquisition financing requirements to be paid after the closing date,
the making of intercompany loans to any of our subsidiaries in accordance with
subsection 7.1(iv) of the credit agreement for their own working capital
purposes, and letters of credit may be issued for defined purposes.
FEES. We must pay certain fees under the new senior credit facilities as
follows:
- COMMITMENT FEES: A commitment fee, payable quarterly, on the unused
portion of the revolving credit facility equal to (x) the average of the
daily excess of the revolving loan facility over the total utilization of
revolving loans (but not including any outstanding swing line loans)
MULTIPLIED BY (y) the applicable Commitment Fee Percentage, being, a
percentage per annum as set forth below opposite the applicable
Consolidated Leverage Ratio calculated on a pro forma basis:
<TABLE>
<CAPTION>
COMMITMENT FEE
CONSOLIDATED LEVERAGE RATIO PERCENTAGE
--------------------------- --------------
<S> <C>
greater than or............................................. 0.50%
equal to 3.50:1.00 less than 3.50:1.00...................... 0.375%
</TABLE>
; PROVIDED that until the delivery of the first Margin Determination
Certificate the Commitment Fee Percentage shall be 0.50% per annum.
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- LETTER OF CREDIT FEES. (i)With respect to each letter of credit, (a) a
fronting fee, payable directly to the applicable issuing lender for its
own account, equal to the greater of (x) $500 and (y) 0.25% per annum of
the daily amount available to be drawn under such letter of credit and
(b) a letter of credit fee equal to (x) the Applicable LIBO Rate Margin
for revolving loans (as defined above) MULTIPLIED BY (y) the daily maximum
amount available from time to time to be drawn under such letter of
credit, each such fronting fee or letter of credit fee to be payable
quarterly in arrears; and (ii) with respect to the issuance, amendment or
transfer of each letter of credit and each payment of a drawing made
thereunder (without duplication of the fees payable under clause
(i) above), documentary and processing charges payable directly to the
applicable issuing lender.
- OTHER FEES. Such other fees in the amounts and at the times separately
agreed upon between Autotote and DLJ Capital Funding, Inc.
We also paid up-front arrangement fees and we are required to pay annual
administrative agency fees.
COLLATERAL. The new senior credit facilities are secured by a first
priority lien in favor of the lenders (subject to customary exceptions) on: (i)
substantially all of our property and assets and substantially all of the
property and assets of our subsidiaries, other than foreign subsidiaries; (ii)
all capital stock (or similar equity interests) of all of our direct and
indirect subsidiaries, provided that no more than 65% of the capital stock (or
similar equity interests) of our foreign subsidiaries directly held by us or one
of our non-foreign subsidiaries is required to be pledged and no capital stock
(or similar equity interests) of our foreign subsidiaries held by our foreign
subsidiaries is required to be pledged; and (iii) all intercompany notes.
GUARANTEES. The new senior credit facilities are guaranteed on a senior
secured basis by all of our direct and indirect wholly-owned domestic
subsidiaries.
COVENANTS. The loan documents contain a number of covenants that, among
other things, restrict our ability to:
- incur additional indebtedness;
- grant liens;
- make investments or joint ventures;
- become liable with respect to certain contingent obligations;
- merge or consolidate with other companies;
- change the nature of its business;
- dispose of assets;
- make certain restricted payments; and
- engage in transactions with affiliates.
In addition, the loan documents limit capital expenditures and computer
software and systems expenditures to specified maximum amounts each year during
the term of the new senior credit facilities. We are also required to meet
certain financial covenants, including a fixed charge ratio, a consolidated
leverage ratio and an interest coverage ratio and to maintain minimum
consolidated net worth.
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EVENTS OF DEFAULT. The new senior credit facilities contain customary
events of default, including events of default relating to:
- non-payment of principal, interest or fees;
- violation of covenants;
- inaccuracy of representations and warranties;
- defaults on other indebtedness;
- certain events of bankruptcy or insolvency; and
- change in control.
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DESCRIPTION OF NOTES
The series A notes were, and the series B notes will be, issued under an
indenture, dated as of August 14, 2000, by and among Autotote, the guarantors
and The Bank of New York, as trustee. The terms of the series B notes are
identical in all material respects to the series A notes, except that the series
B notes have been registered under the Securities Act, and, therefore, will not
bear legends restricting their transfer and will not contain certain provisions
providing for an increase in the interest rate on the series A notes under
certain circumstances relating to the Registration Rights Agreement, which
provisions will terminate upon consummation of the exchange offer. The following
summary of certain provisions of the indenture is not complete and is qualified
in its entirety by reference to the Trust Indenture Act of 1939 and the
indenture. A copy of the indenture has been filed as an exhibit to the
Registration Statement of which this Prospectus is a part. The definitions of
certain capitalized terms used in the following summary are set forth below
under "--Definitions." For purposes of this section, references to "Autotote"
include only Autotote Corporation and not its subsidiaries. Unless the context
otherwise requires, references to notes shall include the series B notes.
The series A notes were, and the series B notes will be, issued in fully
registered form only, without coupons, in denominations of $1,000 and integral
multiples thereof. Initially, the trustee will act as paying agent and registrar
for the notes. The notes may be registered or transferred and exchanged at the
offices of the registrar, which initially will be the trustee's corporate trust
office. Autotote may change any paying agent and registrar without notice to
holders of the notes. Autotote will pay principal and premium, if any, on the
notes at the trustee's corporate trust office in New York, New York. At
Autotote's option, interest may be paid at the trustee's corporate trust office
in New York, New York or by check mailed to the registered address of holders.
PRINCIPAL, MATURITY AND INTEREST
The notes are limited in aggregate principal amount to $150.0 million and
will mature on August 15, 2010. Interest on the notes will accrue at the rate of
12 1/2% per annum and will be payable semi-annually in cash on each February 15
and August 15, commencing on February 15, 2001, to the persons who are
registered holders at the close of business on the February 1 and August 1
immediately preceding the applicable interest payment date. Interest on the
notes will accrue from the most recent date to which interest has been paid or,
if no interest has been paid, from the date of issuance.
REDEMPTION
OPTIONAL REDEMPTION. The notes will be redeemable, at Autotote's option, in
whole at any time or in part from time to time, on and after August 15, 2005,
upon not less than 30 nor more than 60 days' notice, at the following redemption
prices (expressed as percentages of the principal amount thereof) if redeemed
during the twelve-month period commencing on August 15 of the year set forth
below, plus, in each case, accrued and unpaid interest to the date of
redemption:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
2005........................................................ 106.250%
2006........................................................ 104.167%
2007........................................................ 102.083%
2008 and thereafter......................................... 100.000%
</TABLE>
OPTIONAL REDEMPTION UPON EQUITY OFFERING. At any time, or from time to
time, on or prior to August 15, 2003, Autotote may, at its option, use the net
cash proceeds of one or more Equity Offerings to redeem up to 35% of the
original principal amount of the notes at a redemption price equal to 112.5% of
the principal amount thereof, plus accrued and unpaid interest to the date of
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redemption; PROVIDED, HOWEVER, that at least 65% of the original principal
amount of notes remains outstanding immediately after any such redemption.
SELECTION AND NOTICE
In case of a partial redemption, selection of the notes or portions thereof
for redemption shall be made by the trustee by lot, PRO RATA or in such manner
as it shall deem appropriate and fair and in such manner as complies with any
applicable requirements of the principal national securities exchange, if any,
on which the notes are listed; PROVIDED, HOWEVER, that if a partial redemption
is made with the proceeds of an Equity Offering, selection of the notes or
portion thereof for redemption shall be made by the trustee only on a PRO RATA
basis, unless such method is otherwise prohibited. Notes may be redeemed in part
in multiples of $1,000 principal amount only. Notice of redemption will be sent,
by first class mail, postage prepaid, at least 30 days and not more than 60 days
prior to the date fixed for redemption to each holder whose notes are to be
redeemed at the last address for such holder then shown on the registry books.
In order to effect a redemption with the proceeds of an Equity Offering,
Autotote shall make such redemption not more than 120 days after the
consummation of any such Equity Offering. If any note is to be redeemed in part
only, the notice of redemption that relates to such note shall state the portion
of the principal amount thereof to be redeemed. A new note in principal amount
equal to the unredeemed portion thereof will be issued in the name of the holder
thereof upon cancellation of the original note. On and after any redemption
date, interest will cease to accrue on the notes or parts thereof called for
redemption as long as Autotote has deposited with the paying agent funds in
satisfaction of the redemption price pursuant to the indenture.
SUBORDINATION
The payment of principal of and premium, interest and liquidated damages, if
any, on the notes will be subordinated in right of payment, as set forth in the
indenture, to the prior payment in full of all Senior Debt, whether outstanding
on the Issue Date or thereafter incurred. The indenture permits the incurrence
of additional Senior Debt in the future.
Upon any distribution to creditors of Autotote in a liquidation or
dissolution of Autotote or in a bankruptcy, reorganization, insolvency,
receivership or similar proceeding relating to
Autotote or its property, an assignment for the benefit of creditors or any
marshaling of the assets and liabilities of Autotote, the holders of Senior Debt
will be entitled to receive payment in full of all Obligations due with respect
to such Senior Debt, including interest after the commencement of any such
proceeding at the rate specified in the applicable Senior Debt, before the
holders of notes will be entitled to receive any payment with respect to the
notes, and until the Obligations with respect to Senior Debt are paid in full,
any distribution to which the holders of notes would be entitled shall be made
to the holders of Senior Debt (except that holders of notes may receive and
retain (a) Permitted Junior Securities, (b) payments made from the trust
described under "--Defeasance" and (c) payments made from the escrow account or
from letters of credit issued to the trustee to support Autotote's potential
obligation to make a special mandatory redemption of the notes).
Autotote may not make any payments on the notes (except that holders of
notes may receive and retain (a) payments made from the trust described under
"--Defeasance" and (b) payments made from the escrow account or from letters of
credit issued to the trustee to support Autotote's potential obligation to make
a special mandatory redemption of the notes) if:
- a default in the payment of the principal of or premium, if any, or
interest on Designated Senior Debt occurs and is continuing beyond any
applicable period of grace; or
- any other default occurs and is continuing with respect to Designated
Senior Debt that permits holders of the Designated Senior Debt to which
such default relates to accelerate its maturity
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and the trustee receives a payment blockage notice of such other default
from (1) the holders of any Designated Senior Debt (with a copy to
Autotote) or (2) directly from Autotote.
Payments on the notes shall be resumed
- in the case of a payment default, upon the date on which such default is
cured or waived; and
- in case of a nonpayment default, the earlier of the date on which such
nonpayment default is cured or waived or 179 days after the date on which
the applicable notice is received by the trustee, unless the maturity of
any Designated Senior Debt has been accelerated. No new period of payment
blockage may be commenced unless and until 360 days have elapsed since the
date of receipt by the trustee of the payment blockage notice.
No nonpayment default that existed or was continuing on the date of delivery
of any payment blockage notice to the trustee shall be, or be made, the basis
for a subsequent payment blockage notice.
The indenture further requires that Autotote promptly notify holders of
Senior Debt if payment of the notes is accelerated because of an Event of
Default.
As a result of the subordination provisions described above, in the event of
liquidation or insolvency, holders of notes may recover less ratably than
creditors of Autotote who are holders of Senior Debt. On a pro forma basis at
July 31, 2000, after giving effect to the Transactions, the aggregate principal
amount of Senior Debt outstanding would have been approximately $289.1 million
(excluding approximately $3.9 million of undrawn letters of credit). In
addition, the notes would have ranked effectively junior to $46.6 million of
liabilities of the non-guarantor subsidiaries of Autotote and Scientific Games.
The indenture limits, subject to certain financial tests, the amount of
additional Indebtedness, including Senior Debt, that Autotote and its
subsidiaries can incur. See "--Covenants--Limitation on Incurrence of
Indebtedness."
GUARANTEES
The notes and Autotote's performance of its obligations thereunder and under
the indenture, including the payment of principal with respect to the notes, are
guaranteed on a senior subordinated basis, jointly and severally, by all of
Autotote's wholly-owned domestic subsidiaries.
The guarantees are subordinated to Guarantor Senior Debt on the same basis
as the notes are subordinated to Senior Debt. The obligations of each guarantor
are limited to the maximum amount which, after giving effect to all other
contingent and fixed liabilities of such guarantor and after giving effect to
any collections from or payments made by or on behalf of any other guarantor in
respect of the obligations of such other guarantor under its guarantee or
pursuant to its contribution obligations under the indenture, will result in the
obligations of such guarantor under the guarantee not constituting a fraudulent
conveyance or fraudulent transfer under federal or state law. Each guarantor
that makes a payment or distribution under a guarantee shall be entitled to a
contribution from each other guarantor in an amount PRO RATA, based on the net
assets of each guarantor, determined in accordance with GAAP.
Each guarantor may consolidate with or merge into or sell its assets to
Autotote or another guarantor without limitation, or with other persons upon the
terms and conditions set forth in the indenture. See "--Covenants--Merger,
Consolidation and Sale of Assets." In the event all of the Capital Stock of a
guarantor is sold or otherwise disposed of, by merger or otherwise, by Autotote
or any of its subsidiaries and the sale or disposition is otherwise in
compliance with the provisions set forth in "--Covenants--Limitation on Asset
Sales," the guarantor's guarantee will be released and such guarantor shall be
relieved of all of its obligations and duties under the indenture and the notes.
A guarantor's guarantee will also be released and such guarantor will also be
released from all obligations
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and duties under the indenture and the notes if such guarantor (1) is released
from any and all guarantees of Indebtedness of Autotote and (2) has no other
outstanding Indebtedness other than Indebtedness which could be incurred by a
Restricted Subsidiary that is not a guarantor of the notes on the date of the
proposed release of such guarantor's guarantee.
CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each holder will have the right
to require that Autotote repurchase all or a portion of such holder's notes, at
a purchase price equal to 101% of the principal amount thereof, plus accrued and
unpaid interest, if any, to the date of repurchase.
Prior to the mailing of the notice described in the next paragraph below,
but in any event within 30 days following any Change of Control, Autotote
covenants to
(a) repay in full and terminate all commitments under Indebtedness under
the New Credit Agreement and all other Senior Debt, the terms of
which require repayment upon a Change of Control or offer to repay in
full, and terminate all commitments under all Indebtedness under the
New Credit Agreement and all other such Senior Debt and to repay the
Indebtedness owed to each lender which has accepted such offer, or
(b) obtain the requisite consents under the New Credit Agreement and all
such other Senior Debt to permit the purchase of the notes as
provided below.
Autotote shall first comply with the covenant in the immediately preceding
sentence before it shall be required to repurchase notes pursuant to the
provisions described below. Autotote's failure to comply with this covenant
shall constitute an Event of Default described in clause (3) and not in clause
(2) under "Events of Default" below.
Within 30 days following the date upon which the Change of Control occurred,
Autotote must send, by first class mail, a notice to each holder, with a copy to
the trustee, which notice shall govern the terms of the Change of Control offer
to purchase (the "Change of Control Offer"). Such notice shall state, among
other things, the payment date, which must be no earlier than 30 days nor later
than 45 days from the date such notice is mailed, other than as may be required
by law. Holders electing to have a note repurchased pursuant to a Change of
Control Offer will be required to surrender the note, with the form entitled
"Option of Holder to Elect Purchase" on the reverse of the note completed, to
the paying agent at the address specified in the notice prior to the close of
business on the third business day prior to the Change of Control payment date.
If a Change of Control Offer is made, there can be no assurance that
Autotote will have available funds sufficient to pay the Change of Control
purchase price for all the notes that might be delivered by holders seeking to
accept the Change of Control Offer. In the event Autotote is required to
repurchase outstanding notes pursuant to a Change of Control Offer, Autotote
expects that it would seek third party financing to the extent it does not have
available funds to meet its repurchase obligations. However, there can be no
assurance that Autotote would be able to obtain such financing. In addition, the
terms of Autotote's new senior credit facilities limit the ability to purchase
notes upon a Change of Control. Any of Autotote's future debt agreements may
contain similar restrictions and provisions. If the holders of the notes
exercise their right to require Autotote to repurchase all of the notes upon a
Change of Control, the financial effect of this repurchase could cause a default
under Autotote's other debt, even if the Change of Control itself would not
cause a default. Accordingly, it is possible that Autotote will not have
sufficient funds at the time of the Change of Control to make the required
repurchase of notes or that restrictions in Autotote's new senior credit
facilities will not allow such repurchases.
Autotote will comply with the requirements of Rule 14e-1 under the Exchange
Act and any other securities laws and regulations thereunder to the extent such
laws and regulations are applicable in
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connection with the repurchase of notes pursuant to a Change of Control Offer.
To the extent that the provisions of any securities laws or regulations conflict
with the "Change of Control" provisions of the indenture, Autotote shall comply
with the applicable securities laws and regulations and shall not be deemed to
have breached its obligations under the "Change of Control" provisions of the
indenture by virtue thereof.
COVENANTS
LIMITATION ON RESTRICTED PAYMENTS. Autotote will not, and will not cause or
permit any of its Restricted Subsidiaries to, directly or indirectly,
(a) declare or pay any dividend or make any distribution (other than
dividends or distributions payable in Qualified Capital Stock of
Autotote or in warrants, rights or options (other than debt
securities or Disqualified Capital Stock) to acquire Qualified
Capital Stock of Autotote) on or in respect of shares of Autotote's
Capital Stock to holders of such Capital Stock,
(b) purchase, redeem or otherwise acquire or retire for value any Capital
Stock of Autotote or any warrants, rights or options (other than debt
securities or Disqualified Capital Stock) to purchase or acquire
shares of any class of such Capital Stock, other than the exchange of
such Capital Stock, warrants, rights or options for Qualified Capital
Stock and/or for warrants, rights or options (other than debt
securities or Disqualified Capital Stock) to acquire Qualified
Capital Stock, or
(c) make any Restricted Investment (other than Permitted Investments)
(each of the foregoing actions set forth in clauses (a), (b) and (c) being
referred to as a "Restricted Payment"), if at the time of such Restricted
Payment, or immediately after giving effect thereto,
(1) a Default or an Event of Default shall have occurred and be continuing,
(2) Autotote is not able to incur at least $1.00 of additional Indebtedness
(other than Permitted Indebtedness) in compliance with the "Limitation on
Incurrence of Additional Indebtedness" covenant,
(3) the aggregate amount of Restricted Payments made subsequent to the Issue
Date (without duplication and excluding Restricted Payments permitted by
clauses (2)(a), (4) and (5) of the following paragraph) shall exceed the
sum of
(x) 50% of the cumulative Consolidated Net Income, or if cumulative
Consolidated Net Income shall be a loss, minus 100% of such loss, of
Autotote earned subsequent to November 1, 2000 and on or prior to the
last day of the most recent fiscal quarter for which financial statements
are available and have been delivered to the trustee as provided under
"Additional Information," treating such period as a single accounting
period, plus
(y) 100% of the aggregate net cash proceeds in excess of $35 million
received by Autotote from any person (other than a subsidiary of
Autotote) from the issuance and sale subsequent to the Acquisition
Closing Date and on or prior to the date the Restricted Payment occurs of
Qualified Capital Stock, or in respect of warrants, rights or options
(other than debt securities or Disqualified Capital Stock) to acquire
Qualified Capital Stock, including Qualified Capital Stock issued upon
the conversion of convertible Indebtedness; PROVIDED that for the
purposes of this clause (y), the retirement and cancellation of
Autotote's 5.5% Convertible Subordinated Debentures due 2001 in exchange
for the issuance of Additional Capital Stock shall be deemed to
constitute net cash proceeds from the issuance and sale of Qualified
Capital Stock to the extent of the aggregate principal amount of
Autotote's 5.5% Convertible Subordinated Debentures due 2001 so retired
and canceled, plus
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(z) with respect to Restricted Investments made after the Issue Date,
the net reduction of such Restricted Investments as a result of (without
duplication with respect to any item below as among such items or any
item listed in clause (3) of the next paragraph)
(a) any disposition of any such Restricted Investments sold or otherwise
liquidated or repaid, to the extent of the net cash proceeds received
by Autotote or a Restricted Subsidiary,
(b) cash dividends or repayments of loans or advances in cash to Autotote
or any Restricted Subsidiary or, to the extent that a guarantee
issued by Autotote or a Restricted Subsidiary constitutes a
Restricted Investment, the release of such guarantee, or
(c) a person becoming a Restricted Subsidiary, to the extent of
Autotote's portion (proportionate to Autotote's equity interest in
such person) of the fair market value of the net assets of such
person;
PROVIDED, THAT in no event shall the net reduction in Restricted Investments
attributable to any particular Restricted Investment exceed the amount of such
Restricted Investment on the date originally made; provided, further, that any
net reduction in Restricted Investments pursuant to this clause (z) shall only
be included in the calculation required by clause (3) above to the extent that
such net reduction in Restricted Investments is not included in Autotote's
Consolidated Net Income.
Notwithstanding the foregoing, the provisions set forth in the immediately
preceding paragraph shall not prohibit
(1) the payment of any dividend or distribution or the redemption of any
securities within 60 days after the date of declaration of such dividend
or distribution or the giving of formal notice by Autotote of such
redemption, if the dividend or distribution would have been permitted on
the date of declaration or the redemption would have been permitted on
the date of the giving of the formal notice thereof;
(2) so long as no Default or Event of Default shall have occurred and be
continuing, the acquisition of any shares of Capital Stock of Autotote or
the making of a Restricted Investment, either
(a) in exchange for shares of Qualified Capital Stock and/or warrants,
rights or options (other than debt securities or Disqualified Capital
Stock) to acquire Qualified Capital Stock, or
(b) through the application of the net proceeds of a substantially
concurrent sale for cash (other than to a subsidiary of Autotote) of
shares of Qualified Capital Stock and/or warrants, rights or options
(other than debt securities or Disqualified Capital Stock) to acquire
Qualified Capital Stock;
(3) so long as no Default or Event of Default shall have occurred and be
continuing, any other Restricted Payment by Autotote; PROVIDED, HOWEVER,
that the aggregate amount of cash expended by Autotote pursuant to this
clause (3) does not exceed $5 million plus, to the extent that any
Restricted Payment made pursuant to this clause (3) is in the form of a
Restricted Investment, the net reduction of such Restricted Investments
as a result of (without duplication with respect to any item below as
among such items or any item listed in clause (3)(z) of the previous
paragraph)
(a) any disposition of any such Restricted Investments sold or otherwise
liquidated or repaid, to the extent of the net cash proceeds received
by Autotote or a Restricted Subsidiary,
(b) cash dividends or repayments of loans or advances in cash to Autotote
or any Restricted Subsidiary or, to the extent that a guarantee
issued by Autotote or a Restricted Subsidiary constitutes a
Restricted Investment, the release of such guarantee, or
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(c) a person becoming a Restricted Subsidiary, to the extent of
Autotote's portion (proportionate to Autotote's equity interest in
such person) of the fair market value of the net assets of such
person;
PROVIDED, THAT in no event shall the net reduction in Restricted Investments
attributable to any particular Restricted Investment exceed the amount of such
Restricted Investment on the date originally made; PROVIDED, FURTHER, that any
net reduction in Restricted Investments pursuant to this clause (3) shall only
be included in the calculation required by this clause (3) to the extent that
such net reduction in Restricted Investments is not included in Autotote's
Consolidated Net
Income;
(4) the repurchase of any Capital Stock of Autotote or any warrants, rights
or options to purchase or acquire shares of any such Capital Stock deemed
to occur upon the exercise of stock options to acquire Qualified Capital
Stock or other similar arrangements to acquire Qualified Capital Stock if
such repurchased Capital Stock or warrants, rights or options to acquire
shares of any such Capital Stock represent a portion of the exercise
price thereof; and
(5) the acquisition of Restricted Investments of Scientific Games
outstanding on the Acquisition Closing Date upon consummation of the
Scientific Games acquisition in connection therewith.
In determining the aggregate amount of Restricted Payments made subsequent
to the Issue Date in accordance with clause (3) of the immediately preceding
paragraph, amounts expended (to the extent such expenditure is in the form of
cash) pursuant to clauses (1), (2)(b) and (3) of this paragraph shall be
included in such calculation.
LIMITATION ON INCURRENCE OF ADDITIONAL INDEBTEDNESS. Autotote will not, and
will not permit any of its Restricted Subsidiaries to, incur any Indebtedness,
other than Permitted Indebtedness; PROVIDED, HOWEVER, that if no Default or
Event of Default shall have occurred and be continuing at the time or as a
consequence of the incurrence of any such Indebtedness, Autotote or any
guarantor may incur Indebtedness if on the date of the incurrence of such
Indebtedness, after giving effect to the incurrence thereof, the Consolidated
Fixed Charge Coverage Ratio of Autotote is equal to or greater than 2.0 to 1.0
prior to August 15, 2002 and 2.25 to 1.0 thereafter.
Neither Autotote nor any guarantor will, directly or indirectly, in any
event incur any Indebtedness which, by its terms or by the terms of any
agreement governing such Indebtedness, is both subordinated pursuant to its
terms in right of payment to any other Indebtedness of Autotote or such
guarantor, as the case may be, and senior in right of payment to the notes or
any such guarantor's guarantee, as the case may be.
LIMITATIONS ON TRANSACTIONS WITH AFFILIATES. Autotote will not, and will
not permit any of its Restricted Subsidiaries to, directly or indirectly, enter
into or permit to exist any transaction or series of related transactions with
any of its Affiliates (an "Affiliate Transaction"), other than
(x) Affiliate Transactions permitted under the next paragraph and
(y) Affiliate Transactions on terms that are no less favorable to
Autotote or such Restricted Subsidiary than those that might reasonably
have been obtained in a comparable transaction at such time on an
arm's-length basis from a person that is not an Affiliate;
PROVIDED, HOWEVER, that for a transaction or series of related transactions
with an aggregate value of $2 million or more
(1) such determination shall be made in good faith by a majority of the
disinterested members of the Board of the Directors of Autotote or
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(2) the board of directors of Autotote shall have received an opinion from
an independent nationally recognized investment banking firm selected by
Autotote, that such transaction or series of related transactions is on
terms which are fair, from a financial point of view, to Autotote or such
Restricted Subsidiary;
and PROVIDED, FURTHER, that for a transaction or series of related transactions
with an aggregate value of $10 million or more,
(1) such determination shall be made in good faith by a majority of the
disinterested members of the board of directors of Autotote and
(2) the board of directors of Autotote shall have received an opinion from
an independent nationally recognized investment banking firm selected by
Autotote, that such transaction or series of related transactions is on
terms which are fair, from a financial point of view, to Autotote or such
Restricted Subsidiary.
The foregoing restrictions shall not apply to
(1) reasonable fees and compensation paid to, and indemnity provided on
behalf of, officers, directors, employees or consultants of Autotote or
any subsidiary as determined in good faith by Autotote's board of
directors or senior management;
(2) transactions between or among Autotote and any of its Restricted
Subsidiaries so long as no portion of the minority interest in such
Restricted Subsidiary is owned by an Affiliate of Autotote (other than a
Wholly-Owned Subsidiary of Autotote or directors or officers of such
subsidiary that hold stock of such subsidiary to the extent that local
law requires a resident of such jurisdiction to own stock of such
company) or between or among such Restricted Subsidiaries; PROVIDED such
transactions are not otherwise prohibited by the indenture;
(3) any agreement as in effect as of the Issue Date or any amendment thereto
or any transaction contemplated thereby (including pursuant to any
amendment thereto) or in any replacement agreement thereto so long as any
such amendment or replacement agreement is not more disadvantageous to
the holders in any material respect than the original agreement as in
effect on the Issue Date;
(4) Permitted Investments and Restricted Payments permitted by the
indenture;
(5) commercially reasonable transactions between Autotote or a Restricted
Subsidiary and any Joint Venture in the ordinary course of business that
have been determined by the board of directors of Autotote to comply with
clause (y) of the first paragraph above; and
(6) any agreement of Scientific Games or its subsidiaries as in effect on
the Acquisition Closing Date or any amendment thereto or any transaction
contemplated thereby (including pursuant to any amendment thereto) or in
any replacement agreement thereto so long as any such amendment or
replacement agreement is not more disadvantageous to the holders in any
material respect than the original agreement as in effect on the
Acquisition Closing Date.
LIMITATION ON LIENS. Autotote will not, and will not permit any of its
Restricted Subsidiaries to, directly or indirectly, create, incur, assume or
suffer to exist any Lien securing Indebtedness (other than Permitted Liens) upon
any property or asset now owned or hereafter acquired by them, or any income or
profits therefrom, or assign or convey any right to receive income therefrom;
PROVIDED, HOWEVER, that in addition to creating Permitted Liens on their
properties or assets, Autotote and any of its Restricted Subsidiaries may create
any Lien securing Indebtedness upon any of their properties or assets
(including, but not limited to, any Capital Stock of its subsidiaries) if the
notes are equally and ratably secured.
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LIMITATION ON DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING
SUBSIDIARIES. Autotote will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly, create or otherwise cause or permit to
exist or become effective any consensual encumbrance or restriction on the
ability of any Restricted Subsidiary to
(a) pay dividends or make any other distributions on or in respect of its
Capital Stock;
(b) make loans or advances to or pay any Indebtedness or other obligation
owed to Autotote or any other Restricted Subsidiary of Autotote; or
(c) transfer any of its property or assets to Autotote or any other
Restricted Subsidiary of Autotote,
except for such encumbrances or restrictions existing under or by reason of:
(1) applicable law and agreements with governmental authorities with respect
to assets located in their jurisdiction,
(2) the notes, the indenture or any guarantee thereof,
(3) (A) customary provisions restricting (1) the subletting or assignment of
any lease or (2) the transfer of copyrighted or patented materials,
(B) provisions in agreements that restrict the assignment of such
agreements or rights thereunder or (C) provisions of a customary nature
contained in the terms of Capital Stock restricting the payment of
dividends and the making of distributions on Capital Stock,
(4) any agreement or instrument governing Acquired Indebtedness, which
encumbrance or restriction is not applicable to any person, or the
properties or assets of any person, other than (a) the person or the
properties or assets of the person so acquired (including the Capital
Stock of such person), or (b) any Restricted Subsidiary having no assets
other than (i) the person or the properties or assets of the person so
acquired (including the Capital Stock of such person) and (ii) other
assets having a fair market value not in excess of $50,000, and, in each
case, the monetary proceeds thereof,
(5) any agreement or instrument governing Senior Debt or Guarantor Senior
Debt, including the New Credit Agreement,
(6) any agreement or instrument governing Indebtedness incurred pursuant to
clause (9), (13) or (16) of the definition of Permitted Indebtedness,
(7) restrictions on the transfer of assets subject to any Lien permitted
under the indenture,
(8) restrictions imposed by any agreement to sell assets not in violation of
the indenture to any person pending the closing of such sale,
(9) customary rights of first refusal with respect to Autotote's and its
Restricted Subsidiaries' interests in their respective Restricted
Subsidiaries and joint ventures,
(10) Indebtedness of a person that was a Restricted Subsidiary at the time
of incurrence and the incurrence of which Indebtedness is permitted by
the provisions described under "--Limitation on Incurrence of Additional
Indebtedness"; PROVIDED that such encumbrances and restrictions apply
only to such Restricted Subsidiary and its assets; and PROVIDED, FURTHER,
that the board of directors of Autotote has determined in good faith, at
the time of creation of each such encumbrance or restriction, that such
encumbrances and restrictions would not singly or in the aggregate have a
materially adverse effect on the holders of the notes,
(11) the subordination of any Indebtedness owed by Autotote or any of its
Restricted Subsidiaries to Autotote or any other Restricted Subsidiary to
any other Indebtedness of Autotote or any
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of its Restricted Subsidiaries; PROVIDED (A) such other Indebtedness is
permitted under the indenture and (B) the board of directors of Autotote
has determined in good faith, at the time of creation of each such
encumbrance or restriction, that such encumbrances and restrictions would
not singly or in the aggregate have a materially adverse effect on the
holders of the notes, or
(12) an agreement effecting a refinancing, replacement or substitution of
Indebtedness issued, assumed or incurred pursuant to an agreement
referred to in clauses (2), (4) and (5) above or any other agreement
evidencing Indebtedness permitted under the indenture; PROVIDED, HOWEVER,
that the provisions relating to such encumbrance or restriction contained
in any such refinancing, replacement or substitution agreement or any
such other agreement are not less favorable to Autotote in any material
respect as determined by the board of directors of Autotote than the
provisions of the Indebtedness being refinanced.
LIMITATION ON PREFERRED STOCK OF RESTRICTED SUBSIDIARIES. Autotote will not
permit any of its Restricted Subsidiaries that are not guarantors of the notes
to issue any Preferred Stock (other than to Autotote or to a Wholly-owned
Restricted Subsidiary of Autotote) or permit any person (other than Autotote or
a Wholly-owned Restricted Subsidiary of Autotote) to own any Preferred Stock of
any Restricted Subsidiary of Autotote that is not a guarantor of the notes.
MERGER, CONSOLIDATION AND SALE OF ASSETS. Autotote will not, in a single
transaction or series of related transactions, consolidate or merge with or into
any person, or sell, assign, transfer, lease, convey or otherwise dispose of (or
cause or permit any Restricted Subsidiary of Autotote to sell, assign, transfer,
lease, convey or otherwise dispose of) all or substantially all of Autotote's
assets (determined on a consolidated basis for Autotote and its Restricted
Subsidiaries) whether as an entirety or substantially as an entirety to any
person unless:
(1) either (A) Autotote or a Restricted Subsidiary of Autotote shall be the
surviving or continuing corporation or (B) the person, if other than
Autotote or a Restricted Subsidiary of Autotote, formed by such
consolidation or into which Autotote is merged or the person which
acquires by sale, assignment, transfer, lease, conveyance or other
disposition of all or substantially all of Autotote's assets determined
on a consolidated basis for Autotote and its Restricted Subsidiaries (the
"Surviving Entity") (x) shall be a corporation organized and validly
existing under the laws of the United States or any State thereof or the
District of Columbia and (y) shall expressly assume, by supplemental
indenture, in form satisfactory to the trustee, executed and delivered to
the trustee, the due and punctual payment of the principal of and
premium, if any, and interest on all of the notes and the performance of
every covenant of the notes, the indenture and the registration rights
agreement on the part of Autotote to be performed or observed;
(2) immediately after giving effect to such transaction and the assumption
contemplated by clause (1) (B) (y) above, including giving effect to any
Indebtedness and Acquired Indebtedness incurred or anticipated to be
incurred in connection with or in respect of such transaction, Autotote
or such Surviving Entity, as the case may be, (1) shall have a
Consolidated Net Worth equal to or greater than the Consolidated Net
Worth of Autotote immediately prior to such transaction and (2) shall be
able to incur at least $1.00 of additional Indebtedness, other than
Permitted Indebtedness, pursuant to the "--Limitation on Incurrence of
Additional Indebtedness" covenant;
(3) immediately before and immediately after giving effect to such
transaction and the assumption contemplated by clause (1) (B) (y) above,
including, without limitation, giving effect to any Indebtedness and
Acquired Indebtedness incurred or anticipated to be incurred and any Lien
granted in connection with or in respect of the transaction, no Default
or Event of Default shall have occurred and be continuing; and
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(4) Autotote or the Surviving Entity shall have delivered to the trustee an
officers' certificate and an opinion of counsel, each stating that such
consolidation, merger, sale, assignment, transfer, lease, conveyance or
other disposition and, if a supplemental indenture is required in
connection with such transaction, such supplemental indenture shall
comply with the applicable provisions of the indenture and that all
conditions precedent in the indenture relating to the execution of such
supplemental indenture have been satisfied.
For purposes of the foregoing, the transfer, by lease, assignment, sale or
otherwise, in a single transaction or series of transactions, of all or
substantially all of the properties or assets of one or more Restricted
Subsidiaries of Autotote, other than to a Wholly-owned Subsidiary that is a
guarantor, the Capital Stock of which constitutes all or substantially all of
the properties and assets of Autotote, shall be deemed to be the transfer of all
or substantially all of the properties and assets of Autotote.
The indenture provides that upon any consolidation, combination or merger or
any transfer of all or substantially all of the assets of Autotote in accordance
with the foregoing, in which Autotote is not the continuing corporation, the
successor person formed by such consolidation or into which Autotote is merged
or to which such conveyance, lease or transfer is made shall succeed to, and be
substituted for, and may exercise every right and power of, Autotote under the
indenture and the notes with the same effect as if such surviving entity had
been named as such and Autotote shall be relieved of all of its obligations and
duties under the indenture and the notes.
Each guarantor, other than any guarantor whose guarantee is to be released
in accordance with the terms of the guarantee and the indenture, will not, and
Autotote will not cause or permit any guarantor to, consolidate with or merge
with or into any person other than Autotote or any other guarantor unless:
(1) the entity formed by or surviving any such consolidation or merger, if
other than the guarantor, or to which such sale, lease, conveyance or
other disposition shall have been made is a corporation organized and
existing under the laws of the United States or any State thereof or the
District of Columbia;
(2) such entity assumes by supplemental indenture all of the obligations of
the guarantor on the guarantee;
(3) immediately after giving effect to such transaction, no Default or Event
of Default shall have occurred and be continuing; and
(4) immediately after giving effect to such transaction and the use of any
net proceeds therefrom on a pro forma basis, Autotote could satisfy the
provisions of clause (2) of the first paragraph of this covenant.
Any merger or consolidation of a guarantor with and into Autotote, with
Autotote being the surviving entity, or another guarantor that is a Wholly-owned
Restricted Subsidiary of Autotote need not comply with this covenant.
LIMITATION ON ASSET SALES. Autotote will not, and will not permit any of
its Restricted Subsidiaries to, consummate an Asset Sale unless:
(1) Autotote or the applicable Restricted Subsidiary, as the case may be,
receives consideration at the time of such Asset Sale at least equal to
the fair market value of the assets sold or otherwise disposed of, as
determined in good faith by Autotote's board of directors;
(2) at least 75% of the consideration received by Autotote or such
Restricted Subsidiary exclusive of indemnities, as the case may be, from
such Asset Sale shall be cash or Cash Equivalents and is received at the
time of such disposition; PROVIDED that the amount of (a) any liabilities
of Autotote or any such Restricted Subsidiary, as shown on Autotote's or
such Restricted
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Subsidiary's most recent balance sheet, that are assumed by the
transferee of any such assets, (b) any notes or other obligations
received by Autotote or any such Restricted Subsidiary from such
transferee that are converted by Autotote or such Restricted Subsidiary
into cash or Cash Equivalents within 60 days of the time of such
disposition, to the extent of the cash or Cash Equivalents received and
(c) any Designated Non-cash Consideration received by Autotote or any of
its Restricted Subsidiaries in such Asset Sale having an aggregate fair
market value, taken together with all other Designated Non-cash
Consideration received pursuant to this clause (c), not to exceed $5
million, with the fair market value of each item of Designated Non-cash
Consideration being measured at the time received and without giving
effect to subsequent changes in value, shall be deemed to be cash for the
purposes of this clause (2); and
(3) upon the consummation of an Asset Sale, Autotote shall apply directly or
through a Restricted Subsidiary, or cause such Restricted Subsidiary to
apply, the Net Cash Proceeds relating to such Asset Sale within 360 days
of receipt thereof either (A) to repay Senior Debt (and in the case of
any Indebtedness outstanding under a revolving credit facility, to
permanently reduce the amounts that may be reborrowed thereunder by an
equivalent amount), with the Net Cash Proceeds received in respect
thereof, (B) to reinvest in Productive Assets, or (C) a combination of
prepayment, reduction and investment permitted by the foregoing clauses
(3)(A) and (3)(B);
PROVIDED that the 75% limitation referred to above shall not apply to any sale,
transfer or other disposition of assets in which the cash portion of the
consideration received therefor is equal to or greater than what the after-tax
net proceeds would have been had such transaction complied with the
aforementioned 75% limitation. On the 361st day after an Asset Sale or such
earlier date, if any, as the board of directors of Autotote or of such
Restricted Subsidiary determines not to apply the Net Cash Proceeds relating to
such Asset Sale as set forth in clauses (3)(A), (3)(B) and (3)(C) of the
preceding sentence (each, a "Net Proceeds Offer Trigger Date"), such aggregate
amount of Net Cash Proceeds which have not been so applied on or before such Net
Proceeds Offer Trigger Date as permitted in clauses (3)(A), (3)(B) and
(3)(C) of the preceding sentence (each, a "Net Proceeds Offer Amount") shall be
applied by Autotote to make an offer to repurchase (the "Net Proceeds Offer") on
a date (the "Net Proceeds Offer Payment Date") not less than 30 nor more than 45
days following the applicable Net Proceeds Offer Trigger Date, from all holders
on a pro rata basis that amount of notes equal to the Net Proceeds Offer Amount
multiplied by a fraction, the numerator of which is the aggregate principal
amount of notes then outstanding and the denominator of which is the sum of the
aggregate principal amount of notes and Pari Passu Indebtedness then outstanding
(the "Pro Rata Share"), at a price equal to 100% of the principal amount of the
notes to be repurchased, plus accrued interest to the date of repurchase.
Notwithstanding the foregoing, if a Net Proceeds Offer Amount is less than
$10 million, the application of the Net Cash Proceeds constituting such Net
Proceeds Offer Amount to a Net Proceeds Offer may be deferred until such time as
such Net Proceeds Offer Amount plus the aggregate amount of all Net Proceeds
Offer Amounts arising subsequent to the Net Proceeds Offer Trigger Date relating
to such initial Net Proceeds Offer Amount from all Asset Sales by Autotote and
its Restricted Subsidiaries aggregates at least $10 million, at which time
Autotote shall apply all Net Cash Proceeds constituting all Net Proceeds Offer
Amounts that have been so deferred to make a Net Proceeds Offer, the first date
the aggregate of all such deferred Net Proceeds Offer Amounts is equal to $10
million or more being deemed to be a Net Proceeds Offer Trigger Date. To the
extent that the aggregate purchase price of notes tendered pursuant to any Net
Proceeds Offer is less than the Pro Rata Share, Autotote or any guarantor may
use such amount for general corporate purposes. Upon completion of any Net
Proceeds Offer, the Net Proceeds Offer Amount shall be reset to zero.
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The New Credit Agreement restricts the ability of Autotote to repurchase the
notes. Accordingly, if required to make a Net Proceeds Offer, Autotote would
need the consent of the lenders under the New Credit Agreement. The failure of
Autotote to make a required Net Proceeds Offer and repurchase notes subject
thereto would be an Event of Default.
Notwithstanding the first two paragraphs of this covenant, Autotote and its
Restricted Subsidiaries will be permitted to consummate an Asset Sale without
complying with such paragraphs to the extent
(1) at least 75% of the consideration for such Asset Sale constitutes
Productive Assets and
(2) such Asset Sale is for fair market value, as determined in good faith by
Autotote's board of directors; PROVIDED that the fair market value of any
consideration not constituting Productive Assets received by Autotote or
any of its Restricted Subsidiaries in connection with any Asset Sale
permitted to be consummated under this paragraph shall constitute Net
Cash Proceeds subject to the provisions of the first two paragraphs of
this covenant.
In the event of the transfer of substantially all, but not all, of the
property and assets of Autotote and its Restricted Subsidiaries as an entirety
to a person in a transaction permitted under the "--Merger, Consolidation and
Sale of Assets" covenant, the successor corporation shall be deemed to have sold
the properties and assets of Autotote and its Restricted Subsidiaries not so
transferred for purposes of this covenant, and shall comply with the provisions
of this covenant with respect to such deemed sale as if it were an Asset Sale.
In addition, the fair market value of such properties and assets of Autotote or
its Restricted Subsidiaries deemed to be sold shall be deemed to be Net Cash
Proceeds for purposes of this covenant.
Notice of a Net Proceeds Offer will be mailed to the holders as shown on the
register of holders not less than 30 days nor more than 60 days before the
payment date for the Net Proceeds Offer, with a copy to the trustee, and shall
comply with the procedures set forth in the indenture. Upon receiving notice of
the Net Proceeds Offer, holders may elect to tender their notes in whole or in
part in integral multiples of $1,000 principal amount at maturity in exchange
for cash. To the extent holders properly tender notes in an amount exceeding the
Net Proceeds Offer Amount, notes of tendering holders will be repurchased on a
PRO RATA basis (based on amounts tendered). A Net Proceeds Offer shall remain
open for a period of 20 Business Days or such longer period as may be required
by law.
If an offer is made to repurchase the notes pursuant to a Net Proceeds
Offer, Autotote will and will cause its Restricted Subsidiaries to comply with
all tender offer rules under state and federal securities laws, including, but
not limited to, Section 14(e) under the Exchange Act and Rule 14e-1 thereunder,
to the extent applicable to such offer.
LIMITATION OF GUARANTEES BY RESTRICTED SUBSIDIARIES. Autotote will not
permit any Restricted Subsidiary that is not a guarantor, directly or
indirectly, by way of the pledge of any intercompany note or otherwise, to
assume, guarantee or in any other manner become liable with respect to any
Indebtedness of Autotote, other than
(A) Indebtedness incurred in reliance on clauses (12) (to the extent
the Indebtedness being refinanced, modified, replaced, renewed, restated,
refunded, deferred, extended, substituted, supplemented, reissued or
resold was permitted to be guaranteed by Restricted Subsidiaries) and
(13) of the definition of Permitted Indebtedness or under Currency
Agreements in reliance on clause (5) of the definition of Permitted
Indebtedness, or
(B) Interest Swap Obligations incurred in reliance on clause (4) of
the definition of Permitted Indebtedness,
unless, in any such case
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(a) such Restricted Subsidiary has executed and delivered or executes and
delivers a supplemental indenture to the indenture, providing a
guarantee of payment of the notes by such Restricted Subsidiary in
the form required by the indenture and
(b) if such assumption, guarantee or other liability of such Restricted
Subsidiary is provided in respect of Indebtedness that is expressly
subordinated to the notes, the guarantee or other instrument provided
by such Restricted Subsidiary in respect of such subordinate
Indebtedness shall be similarly subordinated to the guarantee of the
notes.
Any guarantee of the notes by a Restricted Subsidiary shall provide by its
terms that it shall be automatically and unconditionally released and
discharged, without any further action required on the part of the trustee or
any holder, upon:
(1) the unconditional release of such Restricted Subsidiary from its
liability in respect of the Indebtedness in connection with which such
guarantee of the notes was executed and delivered pursuant to the
preceding paragraph; or
(2) any sale or other disposition (by merger or otherwise) to any person
which is not a Restricted Subsidiary of Autotote, of all of Autotote's
Capital Stock in, or all or substantially all of the assets of, such
Restricted Subsidiary; PROVIDED, HOWEVER, that
(a) such sale or disposition of such Capital Stock or assets is otherwise
in compliance with the terms of the indenture and
(b) such assumption, guarantee or other liability of such Restricted
Subsidiary has been released by the holders of the other Indebtedness
so guaranteed.
LIMITATION ON SALE AND LEASEBACK TRANSACTIONS. Autotote will not, and will
not permit any Restricted Subsidiary to, enter into any Sale and Leaseback
Transaction; PROVIDED that Autotote and any guarantor may enter into a Sale and
Leaseback Transaction if
(1) Autotote or such guarantor could have
(a) incurred Indebtedness in an amount equal to the Attributable Debt
relating to such Sale and Leaseback Transaction pursuant to the
"--Limitation on Incurrence of Additional Indebtedness" covenant and
(b) incurred a Lien to secure such Indebtedness pursuant to the
"--Limitation on Liens" covenant,
(2) the gross cash proceeds of such Sale and Leaseback Transaction are at
least equal to the fair market value, as determined in good faith by the
board of directors and set forth in an Officers' Certificate delivered to
the trustee, of the property that is the subject of such Sale and
Leaseback Transaction and
(3) the transfer of assets in such Sale and Leaseback Transaction is
permitted by, and Autotote or the applicable guarantor applies the
proceeds of such transaction with, the "--Limitation on Asset Sales"
covenant.
EVENTS OF DEFAULT
The following events are defined in the indenture as "Events of Default":
(1) the failure to pay interest on any notes when the same becomes due and
payable and the default continues for a period of 30 days; or
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(2) the failure to pay the principal on any notes, when such principal
becomes due and payable, at maturity, upon redemption or otherwise,
including the failure to make a payment to repurchase notes tendered
pursuant to a Change of Control Offer or a Net Proceeds Offer; or
(3) a default in the observance or performance of any other covenant or
agreement contained in the indenture which default continues for a period
of 45 days after Autotote receives written notice specifying the default,
and demanding that such default be remedied, from the trustee or the
holders of at least 25% of the outstanding principal amount of the notes;
or
(4) the failure to pay at final maturity, giving effect to any extensions
thereof, the principal amount of any Indebtedness of Autotote or any
Restricted Subsidiary of Autotote that is a Significant Subsidiary, other
than intercompany Indebtedness, and such failure continues for a period
of 20 days or more, or the acceleration of the final stated maturity of
any such Indebtedness, which acceleration is not rescinded, annulled or
otherwise cured within 20 days of receipt by Autotote or such Restricted
Subsidiary of notice of any such acceleration, if, in either case, the
aggregate principal amount of such Indebtedness, together with the
principal amount of any other such Indebtedness in default for failure to
pay principal at final maturity or which has been accelerated, in each
case with respect to which the 20-day period described above has passed,
aggregates $10 million or more at any time; or
(5) one or more judgments in an aggregate amount in excess of $10 million
shall have been rendered against Autotote or any of its Restricted
Subsidiaries that is a Significant Subsidiary and such judgments remain
undischarged, unpaid or unstayed for a period of 60 days after such
judgment or judgments become final and non-appealable; or
(6) certain events of bankruptcy affecting Autotote or any of its Restricted
Subsidiaries that is a Significant Subsidiary; or
(7) any of the guarantees ceases to be in full force and effect or any of
the guarantees is held in a judicial proceeding to be null and void and
unenforceable or any of the guarantees is found to be invalid by a final
judgment or order that is not appealable or any of the guarantors denies
its liability under its guarantee, other than by reason of a release of a
guarantor in accordance with the terms of the indenture; or
(8) following the consummation of the Scientific Games acquisition and the
Transactions to be consummated concurrently therewith, Autotote fails to
issue Additional Capital Stock for net cash proceeds of at least $35
million on or before August 15, 2001; PROVIDED that for the purposes of
this clause (8), the retirement and cancellation of Autotote's 5.5%
Convertible Subordinated Debentures due 2001 in exchange for the issuance
of Additional Capital Stock shall be deemed to constitute net cash
proceeds from the issuance and sale of Additional Capital Stock to the
extent of the aggregate principal amount of Autotote's 5.5% Convertible
Subordinated Debentures due 2001 so retired and canceled; or
(9) the failure to deposit funds into the escrow account pursuant to the
terms of the escrow agreement or to obtain irrevocable letters of credit
in favor of the trustee, when the same is so required to be deposited or
obtained, and the default continues for a period of 10 days.
During the continuance of any Event of Default specified in the indenture
(other than an Event of Default with respect to bankruptcy proceedings of
Autotote), the trustee or the holders of at least 25% in principal amount of
outstanding notes may declare the principal of and accrued interest on all the
notes to be due and payable by notice in writing to Autotote and the trustee
specifying the respective Event of Default and that it is a "notice of
acceleration", and the same shall become immediately due and payable. If an
Event of Default with respect to bankruptcy proceedings of Autotote occurs and
is continuing, then such amount shall IPSO FACTO become and be immediately due
and payable without any declaration or other act on the part of the trustee or
any holder of notes.
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The indenture provides that, at any time after a declaration of acceleration
with respect to the notes as described in the preceding paragraph, the holders
of a majority in principal amount of the notes may rescind and cancel such
declaration and its consequences
(1) if the rescission would not conflict with any judgment or decree,
(2) if all existing Events of Default have been cured or waived except
nonpayment of principal or interest that has become due solely because of
the acceleration,
(3) to the extent the payment of such interest is lawful, interest on
overdue installments of interest and overdue principal, which has become
due otherwise than by such declaration of acceleration, has been paid,
(4) if Autotote has paid the trustee its reasonable compensation and
reimbursed the trustee for its reasonable expenses, disbursements and
advances and
(5) in the event of the cure or waiver of an Event of Default of the type
described in clause (6) of the description above of Events of Default,
the trustee shall have received an Officers' Certificate and an Opinion
of Counsel that such Event of Default has been cured or waived. The
holders of a majority in principal amount of the notes may waive any
existing Default or Event of Default under the indenture, and its
consequences, except a default in the payment of the principal of or
interest on any notes.
DEFEASANCE
The indenture will cease to be of further effect as to all outstanding
notes, except as to (1) rights of registration of transfer, substitution and
exchange of notes, (2) rights of holders to receive payments of principal of,
premium, if any, and interest on the notes and any other rights of the holders
with respect to such amounts, (3) the rights, obligations and immunities of the
trustee under the indenture and (4) certain other specified provisions in the
indenture (the foregoing exceptions (1) through (4) are collectively referred to
as the "Reserved Rights") if:
(a) Autotote irrevocably deposits, or causes to be deposited, with the
trustee, in trust for the benefit of the holders pursuant to an
irrevocable trust and security agreement in form and substance
reasonably satisfactory to the trustee (1) U.S. Legal Tender,
(2) U.S. Government Obligations or (3) a combination thereof, in an
amount sufficient after payment of all Federal, state and local taxes
or other charges or assessments in respect thereof payable by the
trustee, which through the payment of interest and principal will
provide, not later than one day before the due date of payment in
respect of the notes, U.S. Legal Tender in an amount which, in the
opinion of a nationally recognized firm of independent certified
public accountants expressed in a written certification thereof in
form and substance reasonably satisfactory to the trustee, delivered
to the trustee, is sufficient to pay the principal of, premium, if
any, and interest on the notes then outstanding on the dates on which
any such payments are due and payable in accordance with the terms of
the indenture and of the notes; PROVIDED, HOWEVER, that (1) the
trustee of the irrevocable trust shall have been irrevocably
instructed to pay such money or the proceeds of such U.S. Government
Obligations to the trustee; and (2) the trustee shall have been
irrevocably instructed to apply such money or the proceeds of such
U.S. Government Obligations to the payment of said principal and
interest with respect to the notes;
(b) Autotote shall have delivered to the trustee an Opinion of Counsel
from independent counsel reasonably satisfactory to the trustee or a
tax ruling from the Internal Revenue Service to the effect that the
holders will not recognize income, gain or loss for Federal income
tax purposes as a result of such deposit and defeasance and will be
subject to
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Federal income tax in the same amounts and in the same manner and at
the same times as would have been the case if such deposit and
defeasance had not occurred;
(c) Autotote shall have delivered to the trustee an Opinion of Counsel to
the effect that after the 91st day following the deposit, such money
or the proceeds of such U.S. Government Obligations will not be
subject to the effect of any applicable bankruptcy, insolvency,
reorganization or similar laws affecting creditors' rights generally;
and
(d) Autotote has delivered to the trustee an Officers' Certificate and an
opinion of Counsel each in form and substance reasonably satisfactory
to the trustee, each stating that all conditions precedent relating
to the satisfaction and discharge of the indenture have been complied
with.
In addition, Autotote may terminate all of its obligations under the
indenture, except as to certain of the Reserved Rights, when (1) all outstanding
notes theretofore authenticated have been delivered to the trustee for
cancellation and Autotote has paid or caused to be paid all sums payable under
the indenture by Autotote or (2) Autotote has called for redemption pursuant to
the indenture all of the notes under arrangements satisfactory to the trustee,
the amounts described in clause (a) above have been deposited as described
therein, the conditions in clauses (1) and (2) of the proviso to such clause
(a) have been satisfied and the certificate and opinion described in clause
(d) above have been delivered. Notwithstanding the foregoing, the Opinions of
Counsel required by clauses (b) and (c) above need not be delivered if all notes
not theretofore delivered to the trustee for cancellation (1) have become due
and payable, (2) will become due and payable on the maturity date within one
year or (3) are to be called for redemption within one year under arrangements
satisfactory to the trustee for the giving of notice of redemption by the
trustee in the name, and at the expense, of Autotote. In addition, Autotote may
at its option and at any time elect to terminate its obligations with respect to
certain covenants that are set forth in the indenture, some of which are
described under "--Covenants" above.
MODIFICATION OF THE INDENTURE
From time to time, Autotote and the trustee, without the consent of the
holders of the notes, may amend the indenture, the notes or the escrow agreement
for certain specified purposes, including curing ambiguities, defects or
inconsistencies, so long as such change does not, in the opinion of the trustee,
adversely affect the rights of any of the holders in any material respect. In
formulating its opinion on such matters, the trustee will be entitled to rely on
such evidence as it deems appropriate, including, without limitation, solely on
an Opinion of Counsel. Other modifications and amendments of the indenture, the
notes or the escrow agreement may be made with the consent of the holders of a
majority in principal amount of the then outstanding notes issued under the
indenture, except that, without the consent of each holder of the notes affected
thereby, no amendment may:
(1) reduce the amount of notes whose holders must consent to an amendment;
(2) reduce the rate of or change or have the effect of changing the time for
payment of interest, including defaulted interest, on any notes;
(3) reduce the principal of or change or have the effect of changing the
fixed maturity of any notes, or change the date on which any notes may be
subject to redemption, or reduce the redemption price therefor;
(4) make any notes payable in money other than that stated in the notes;
(5) make any change in provisions of the indenture protecting the right of
each holder of a note to receive payment of principal of and interest on
such note on or after the due date thereof or to bring suit to enforce
such payment, or permitting holders of a majority in principal
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amount of a class of notes to waive Defaults or Events of Default (other
than Defaults or Events of Default with respect to the payment of
principal of or interest on the notes);
(6) adversely affect the ranking of the notes or the guarantees; or
(7) make any change to the provisions of the indenture or the escrow
agreement relating to the special mandatory redemption which would
adversely affect the rights of any of the holders of the notes.
In addition, following the occurrence of a Change of Control or an Asset
Sale (if the Company is obligated to make and consummate a Net Proceeds Offer as
a result of such Asset Sale), as the case may be, without the consent of holders
of at least 75% of the outstanding aggregate principal amount of notes, an
amendment or waiver may not make any change to Autotote's obligations to make
and consummate the required Change of Control Offer or Net Proceeds Offer, as
the case may be, or modify any of the provisions or definitions with respect
thereto.
ADDITIONAL INFORMATION
The indenture provides that Autotote promptly will deliver to the trustee,
but in any event no later than 15 days after the filing of the same with the
SEC, copies of the quarterly and annual reports and of the information,
documents and other reports, if any, which Autotote is required to file with the
SEC pursuant to Section 13 or 15(d) of the Exchange Act. The indenture further
provides that, notwithstanding that Autotote may not be subject to the reporting
requirements of Section 13 or 15(d) of the Exchange Act, Autotote will file with
the SEC, to the extent permitted, and provide the trustee and holders with such
annual reports and such information, documents and other reports specified in
Sections 13 and 15(d) of the Exchange Act. Autotote will also comply with the
other provisions of TIA Section 314(a).
GOVERNING LAW
The indenture provides that it and the notes will be governed by, and
construed in accordance with, the laws of the State of New York but without
giving effect to applicable principles of conflicts of law to the extent that
the application of the law of another jurisdiction would be required thereby.
THE TRUSTEE
The indenture provides that, except during the continuance of an Event of
Default, the trustee will perform only such duties as are specifically set forth
in the indenture. During the existence of an Event of Default, the trustee will
exercise such rights and powers vested in it by the indenture, and use the same
degree of care and skill in its exercise as a prudent man would exercise or use
under the circumstances in the conduct of his own affairs.
The indenture and the provisions of the TIA contain certain limitations on
the rights of the trustee, should it become a creditor of Autotote, to obtain
payments of claims in certain cases or to realize on certain property received
in respect of any such claim as security or otherwise. Subject to the TIA, the
trustee will be permitted to engage in other transactions; PROVIDED, HOWEVER,
that if the trustee acquires any conflicting interest as described in the TIA,
it must eliminate such conflict or resign.
BOOK-ENTRY, DELIVERY AND FORM
The series B notes initially will be in the form of one or more registered
Global Note without interest coupons (collectively, the "Global Note"). Upon
issuance, the Global Note will be deposited with the trustee, as custodian for
The Depository Trust Company ("DTC"), in New York, New York, and registered in
the name of DTC or its nominee, for credit to the accounts of DTC's direct and
indirect participants (as described below).
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Transfer of beneficial interests in any Global Note will be subject to the
applicable rules and procedures of DTC and its direct or indirect participants
(including, if applicable, those of Euroclear and Clearstream), which may change
from time to time.
The Global Note may be transferred, in whole and not in part, only to
another nominee of DTC or to a successor of DTC or its nominee in certain
limited circumstances. Beneficial interests in the Global Note may be exchanged
for notes in certificated form in certain limited circumstances. See
"--Transfers of Interests in a Global Note for Certificated Notes."
Initially, the trustee will act as paying agent and registrar. The notes may
be presented for registration of transfer and exchange at the offices of the
registrar.
DEPOSITARY PROCEDURES
DTC has advised us that DTC is a limited-purpose trust company created to
hold securities for its participating organizations (collectively, the "direct
participants") and to facilitate the clearance and settlement of transactions in
those securities between direct participants through electronic book-entry
changes in accounts of direct participants. The direct participants include
securities brokers and dealers (including the initial purchasers), banks, trust
companies, clearing corporations and certain other organizations, including
Euroclear and Clearstream. Access to DTC's system is also available to other
entities that clear through or maintain a direct or indirect custodial
relationship with a direct participant (collectively, the "indirect
participants"). DTC may hold securities beneficially owned by other persons only
through the direct participants or indirect participants and such other persons'
ownership interests and transfer of ownership interests will be recorded only on
the records of the direct participants and/or indirect participants, and not on
the records maintained by DTC.
DTC has also advised us that, pursuant to DTC's procedures,
- upon deposit of the Global Note, DTC will credit the accounts of the
direct participants designated by the initial purchasers with portions of
the principal amount of the Global Note allocated by the initial
purchasers to such direct participants, and
- DTC will maintain records of the ownership interests of such direct
participants in the Global Note and the transfer of ownership interests by
and between direct participants.
DTC will not maintain records of the ownership interests of, or the transfer
of ownership interests by and between, indirect participants or other owners of
beneficial interests in the Global Note. Direct participants and indirect
participants must maintain their own records of the ownership interests of and
the transfer of ownership interests by and between, indirect participants and
other owners of beneficial interests in the Global Note.
The laws of some states require that certain persons take physical delivery
in definitive, certificated form, of securities that they own. This may limit or
curtail the ability to transfer beneficial interests in the Global Note to such
persons. Because DTC can act only on behalf of direct participants, which in
turn act on behalf of indirect participants and others, the ability of a person
having a beneficial interest in the Global Note to pledge such interest to
persons or entities that are not direct participants in DTC, or otherwise to
take actions in respect of such interests, may be affected by the lack of
physical certificates evidencing such interests. For certain other restrictions
on the transferability of the notes see "--Transfers of Interests in a Global
Note for Certificated Notes."
EXCEPT AS DESCRIBED IN "--TRANSFERS OF INTERESTS IN A GLOBAL NOTE FOR
CERTIFICATED NOTES," OWNERS OF BENEFICIAL INTERESTS IN A GLOBAL NOTE WILL NOT
HAVE NOTES REGISTERED IN THEIR NAMES, WILL NOT RECEIVE PHYSICAL DELIVERY OF
NOTES IN CERTIFICATED FORM AND WILL NOT BE CONSIDERED THE REGISTERED OWNERS OR
HOLDERS THEREOF UNDER THE INDENTURE FOR ANY PURPOSE.
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Under the terms of the indenture, we and the trustee will treat the persons
in whose names the notes are registered (including notes represented by the
Global Note) as the owners thereof for the purpose of receiving payments and for
any and all other purposes whatsoever. Payments in respect of the principal,
premium, if any, liquidated damages, if any, and interest on a Global Note
registered in the name of DTC or its nominee will be payable by the trustee to
DTC or its nominee as the registered holder under the indenture. Consequently,
neither we, the trustee nor any agent of ours or the trustee has or will have
any responsibility or liability for
- any aspect of DTC's records or any direct participant's or indirect
participant's records relating to or payments made on account of
beneficial ownership interests in a Global Note or for maintaining,
supervising or reviewing any of DTC's records or any direct participant's
or indirect participant's records relating to the beneficial ownership
interests in such Global Note, or
- any other matter relating to the actions and practices of DTC or any of
its direct participants or indirect participants.
DTC has advised us that its current payment practice (for payments of
principal, interest and the like) with respect to securities such as the notes
is to credit the accounts of the relevant direct participants with such payment
on the payment date in amounts proportionate to such direct participants'
respective ownership interests in a Global Note as shown on DTC's records.
Payments by direct participants and indirect participants to the beneficial
owners of the notes will be governed by standing instructions and customary
practices between them and will not be the responsibility of DTC, the trustee or
us. Neither we nor the trustee will be liable for any delay by DTC or its direct
participants or indirect participants in identifying the beneficial owners of
the notes, and we and the trustee may conclusively rely on and will be protected
in relying on instructions from DTC or its nominee as the registered owner of
the notes for all purposes.
The Global Note will trade in DTC's Same-Day Funds Settlement System and,
therefore, transfers between direct participants in DTC will be effected in
accordance with DTC's procedures and will be settled in immediately available
funds. Transfers between indirect participants (other than indirect participants
who hold an interest in the notes through Euroclear or Clearstream) who hold an
interest through a direct participant will be effected in accordance with the
procedures of such direct participant but generally will settle in immediately
available funds. Transfers between and among indirect participants who hold
interests in the notes through Euroclear and Clearstream will be effected in the
ordinary way in accordance with their respective rules and operating procedures.
Subject to compliance with the transfer restrictions applicable to the notes
described herein, cross-market transfers between direct participants in DTC, on
the one hand, and indirect participants who hold interests in the notes through
Euroclear and Clearstream, on the other hand, will be effected by Euroclear and
Clearstream's respective nominees through DTC in accordance with DTC's rules on
behalf of Euroclear and Clearstream; PROVIDED, HOWEVER, delivery of instructions
relating to cross-market transactions must be made directly to Euroclear or
Clearstream, as the case may be, by the counterparty in accordance with the
rules and procedures of Euroclear or Clearstream and within their established
deadlines (Brussels time for Euroclear and U.K. time for Clearstream). Indirect
participants who hold interests in the notes through Euroclear and Clearstream
may not deliver instructions directly to Euroclear's or Clearstream's nominee.
Euroclear or Clearstream will, if the transaction meets its settlement
requirements, deliver instructions to its nominee to deliver or receive
interests on Euroclear's or Clearstream's behalf in the relevant Global Note in
DTC, and make or receive payment in accordance with normal procedures for
same-day fund settlement applicable to DTC.
Because of time zone differences, the securities accounts of an indirect
participant who holds an interest in the notes through Euroclear or Clearstream
purchasing an interest in a Global Note from a direct participant in DTC will be
credited, and any such crediting will be reported to Euroclear or Clearstream
during the European business day immediately following the settlement date of
DTC in
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New York. Although recorded in DTC's accounting records as of DTC's settlement
date in New York, Euroclear and Clearstream customers will not have access to
the cash amount credited to their accounts as a result of a sale of an interest
in the Global Note to a DTC participant until the European business day for
Euroclear or Clearstream immediately following DTC's settlement date.
DTC has advised us that it will take any action permitted to be taken by a
holder of notes only at the direction of one or more direct participants to
whose account interests in the Global Note are credited and only in respect of
such portion of the aggregate principal amount of the notes as to which such
direct participant or direct participants has or have given direction. However,
if there is an Event of Default under the notes, DTC reserves the right to
exchange the Global Note (without the direction of one or more of its direct
participants) for legended notes in certificated form, and to distribute such
certificated forms of notes to its direct participants. See "--Transfers of
Interests in the Global Note for Certificated Notes."
None of us, the initial purchasers or the trustee will have any
responsibility for the performance by DTC, Euroclear or Clearstream or their
respective direct participants and indirect participants of their respective
obligations under the rules and procedures governing any of their operations.
The information in this section concerning DTC, Euroclear and Clearstream
and their book-entry systems has been obtained from sources that we believe to
be reliable, but we take no responsibility for the accuracy thereof.
TRANSFERS OF INTERESTS IN A GLOBAL NOTE FOR CERTIFICATED NOTES
An entire Global Note may be exchanged for definitive notes in registered,
certificated form without interest coupons ("Certificated Notes") if:
DTC (x) notifies us that it is unwilling or unable to continue as depositary
for the Global Note and we thereupon fail to appoint a successor depositary
within 90 days or (y) has ceased to be a clearing agency registered under the
Securities Exchange Act of 1934, as amended;
we, at our option, notify the trustee in writing that we elect to cause the
issuance of Certificated Notes; or
there shall have occurred and be continuing a Default or an Event of Default
with respect to the notes.
In any such case, we will notify the trustee in writing that, upon surrender
by the direct participants and indirect participants of their interest in a
Global Note, Certificated Notes will be issued to each person that such direct
participants and indirect participants and the DTC identify as being the
beneficial owner of the related notes.
Beneficial interests in a Global Note held by any direct participant or
indirect participant may be exchanged for Certificated Notes upon request to
DTC, by such direct participant (for itself or on behalf of an indirect
participant), to the trustee in accordance with customary DTC procedures.
Certificated Notes delivered in exchange for any beneficial interest in a Global
Note will be registered in the names, and issued in any approved denominations,
requested by DTC on behalf of such direct participants or indirect participants
(in accordance with DTC's customary procedures).
Neither we nor the trustee will be liable for any delay by the holder of a
Global Note or DTC in identifying the beneficial owners of notes, and we and the
trustee may conclusively rely on, and will be protected in relying on,
instructions from the holder of a Global Note or DTC for all purposes.
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SAME-DAY SETTLEMENT AND PAYMENT
The indenture requires that payments in respect of the notes represented by
a Global Note (including principal, premium, if any, interest and liquidated
damages, if any) be made by wire transfer of immediately available same-day
funds to the accounts specified by the holder of interests in a Global Note.
With respect to Certificated Notes, we will make all payments of principal,
premium, if any, interest and liquidated damages, if any, by wire transfer of
immediately available same-day funds to the accounts specified by the holders
thereof or, if no such account is specified, by mailing a check to each such
holder's registered address. We expect that secondary trading in the
Certificated Notes will also be settled in immediately available funds.
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
indenture. Reference is made to the indenture for the full definition of all
such terms, as well as any other terms used herein for which no definition is
provided.
"ACQUIRED INDEBTEDNESS" means Indebtedness of a person or any of its
Restricted Subsidiaries existing at the time such person becomes a Restricted
Subsidiary of Autotote or at the time it merges or consolidates with Autotote or
any of its subsidiaries or is assumed in connection with the acquisition of
assets from such person and not incurred by such person in connection with, or
in anticipation or contemplation of, such person becoming a Restricted
Subsidiary of Autotote or such acquisition, merger or consolidation.
"ACQUISITION CLOSING DATE" means the date upon which the consummation of the
Scientific Games acquisition occurs.
"ADDITIONAL CAPITAL STOCK" means (1) the Olivetti Preferred Stock issued on
or about the Acquisition Closing Date and (2) any other Qualified Capital Stock
(including Olivetti Preferred Stock) having terms not materially less favorable
to Autotote than the Olivetti Preferred Stock as determined by the board of
directors of Autotote in good faith.
An "Affiliate" of a person means a person who directly or indirectly through
one or more intermediaries controls, or is controlled by, or is under common
control with, such person; PROVIDED, HOWEVER, that with respect to Autotote the
term Affiliate shall not include Autotote or any subsidiary of Autotote so long
as no Affiliate of Autotote has any direct or indirect interest therein, except
through Autotote or its subsidiaries. The term "control" means the possession,
directly or indirectly, of the power to direct or cause the direction of the
management and policies of a person, whether through the ownership of voting
securities, by contract or otherwise.
"ASSET ACQUISITION" means
(a) an Investment by Autotote or any Restricted Subsidiary of Autotote in
any other person pursuant to which such person shall become a
Restricted Subsidiary of Autotote or any Restricted Subsidiary of
Autotote, or shall be merged with or into Autotote or any Restricted
Subsidiary of Autotote, or
(b) the acquisition by Autotote or any Restricted Subsidiary of Autotote
of the assets of any person which constitute all or substantially all
of the assets of such person, any division or line of business of
such person or any other properties or assets of such person other
than in the ordinary course of business.
"ASSET SALE" means any direct or indirect sale, conveyance, transfer, lease
(other than operating leases entered into in the ordinary course of business),
assignment or other transfer for value by Autotote or any of its Restricted
Subsidiaries, including any Sale and Leaseback Transaction that does
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not give rise to a Capitalized Lease Obligation, to any person other than
Autotote or a Restricted Subsidiary of Autotote of
(a) any Capital Stock of any Restricted Subsidiary of Autotote; or
(b) any other property or assets, other than cash or Cash Equivalents, of
Autotote or any Restricted Subsidiary of Autotote other than in the
ordinary course of business;
PROVIDED, HOWEVER, that Asset Sales shall not include
(1) a transaction or series of related transactions for which Autotote or
its Restricted Subsidiaries receive aggregate consideration, exclusive of
indemnities, of less than $1 million,
(2) the sale of accounts receivable,
(3) the sale, lease, conveyance, disposition or other transfer of assets in
the ordinary course of business,
(4) the sale, lease, conveyance, disposition or other transfer of all or
substantially all of the assets of Autotote and its Restricted
Subsidiaries or any guarantor as permitted under "--Merger, Consolidation
and Sale of Assets,"
(5) sales, transfers or other dispositions of assets resulting from the
creation, incurrence or assumption of (but not any foreclosure with
respect to) any Lien not prohibited by the provisions described under
"--Limitation on Liens,"
(6) sales, transfers or other dispositions of assets in a transaction
constituting a Permitted Investment or a Restricted Payment permitted by
the provisions described under "--Limitation on Restricted Payments," and
(7) the grant of licenses to third parties in respect of intellectual
property in the ordinary course of business of Autotote or any of its
Restricted Subsidiaries.
"ATTRIBUTABLE DEBT" in respect of a sale and leaseback transaction
consummated subsequent to the Issue Date means, at the time of determination,
the present value, discounted at the rate of interest implicit in such
transaction, determined in accordance with GAAP, of the obligation of the lessee
for net rental payments during the remaining term of the lease included in such
sale and leaseback transaction, including any period for which such lease has
been extended or may, at the option of the lessor, be extended.
"CAPITAL STOCK" means (1) with respect to any person that is a corporation,
any and all shares, interests, participations or other equivalents, however
designated, of corporate stock, including each class of common stock and
preferred stock of such person and (2) with respect to any person that is not a
corporation, any and all partnership or other equity interests of such other
person.
"CAPITALIZED LEASE OBLIGATIONS" means, as to any person, the obligations of
such person under a lease that are required to be classified and accounted for
as capital lease obligations under GAAP and, for purposes of this definition,
the amount of such obligations at any date shall be the capitalized amount of
such obligations at such date, determined in accordance with GAAP.
"CASH EQUIVALENTS" means
(1) marketable direct obligations issued by, or unconditionally guaranteed
by, the United States Government or issued by any agency thereof and
backed by the full faith and credit of the United States, in each case
maturing within one year from the date of acquisition thereof;
(2) marketable direct obligations issued by any state of the United States
of America or any political subdivision of any such state or any public
instrumentality thereof maturing within
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one year from the date of acquisition thereof and, at the time of
acquisition, having one of the two highest ratings obtainable from either
S&P or Moody's;
(3) commercial paper maturing no more than one year from the date of
creation thereof and, at the time of acquisition, having a rating of at
least A-1 from S&P or at least P-1 from Moody's;
(4) certificates of deposit or bankers' acceptances (or, with respect to
foreign banks, similar instruments) maturing within one year from the
date of acquisition thereof issued by any bank organized under the laws
of the United States of America or any state thereof or the District of
Columbia or any U.S. branch of a foreign bank having at the date of
acquisition thereof combined capital and surplus of not less than $250
million;
(5) repurchase obligations with a term of not more than seven days for
underlying securities of the types described in clause (1) above entered
into with any bank meeting the qualifications specified in clause
(4) above; and
(6) investments in money market funds which invest substantially all their
assets in securities of the types described in clauses (1) through
(5) above.
"CHANGE OF CONTROL" means the occurrence of one or more of the following
events:
(1) any sale, lease, exchange or other transfer, in one transaction or a
series of related transactions, of all or substantially all of the assets
of Autotote to any person or group of related persons for purposes of
Section 13(d) of the Exchange Act (a "Group") (whether or not otherwise
in compliance with the provisions of the indenture), other than a
Permitted Holder or Holders;
(2) the approval by the holders of Capital Stock of Autotote of any plan or
proposal for the liquidation or dissolution of Autotote (whether or not
otherwise in compliance with the provisions of the indenture);
(3) any person or Group, other than a Permitted Holder or Holders shall
become the owner, directly or indirectly, beneficially, of shares
representing more than 50% of the aggregate voting power represented by
the issued and outstanding Capital Stock of Autotote entitled under
ordinary circumstances to elect a majority of the directors of Autotote;
or
(4) the replacement of a majority of the board of directors of Autotote over
a two-year period from the directors who constituted the board of
directors at the beginning of such period, and such replacement shall not
have been approved by a vote of at least a majority of the board of
directors then still in office who either were members of the board of
directors at the beginning of such period or whose election as a member
of the board of directors was previously so approved.
"CONSOLIDATED EBITDA" means, with respect to any person, for any period, the
sum (without duplication) of
(1) Consolidated Net Income,
(2) to the extent Consolidated Net Income has been reduced thereby, all
losses (x) from Asset Sales or abandonments or reserves relating thereto,
all items classified as extraordinary losses and all income taxes of such
person and its Restricted Subsidiaries paid or accrued in accordance with
GAAP for such period (other than income taxes attributable to
extraordinary gains or losses) and (y) resulting from plant closure costs
arising out of the closure of Scientific Games' printing facility in
Gilroy, California,
(3) Consolidated Interest Expense and
(4) Consolidated Non-cash Charges.
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"CONSOLIDATED FIXED CHARGE COVERAGE RATIO" means, with respect to any
person, the ratio of Consolidated EBITDA of such person during the four full
fiscal quarters (the "Four Quarter Period") ending on or prior to the date of
the transaction giving rise to the need to calculate the Consolidated Fixed
Charge Coverage Ratio (the "Transaction Date") to Consolidated Fixed Charges of
such person for the Four Quarter Period. In addition to and without limitation
of the foregoing, for purposes of this definition, "Consolidated EBITDA" and
"Consolidated Fixed Charges" shall be calculated after giving effect on a PRO
FORMA basis for the period of such calculation to
(1) the incurrence or repayment of any Indebtedness of such person or any of
its Restricted Subsidiaries (and the application of the proceeds thereof)
giving rise to the need to make such calculation and any incurrence or
repayment or retirement of other Indebtedness (and the application of the
proceeds thereof) at any time subsequent to the last day of the Four
Quarter Period and on or prior to the Transaction Date (other than the
incurrence or repayment of Indebtedness in the ordinary course of
business for working capital purposes pursuant to working capital
facilities), as if such incurrence or repayment, as the case may be (and
the application of the proceeds thereof), occurred on the first day of
the Four Quarter Period and
(2) any Asset Sales or Asset Acquisitions (including, without limitation,
any Asset Acquisition giving rise to the need to make such calculation as
a result of such person or one of its Restricted Subsidiaries (including
any person who becomes a Restricted Subsidiary as a result of the Asset
Acquisition) incurring, assuming or otherwise being liable for Acquired
Indebtedness and also including any Consolidated EBITDA (including any
PRO FORMA expense and cost reductions calculated on a basis consistent
with Regulation S-X under the Securities Act) attributable to the assets
which are the subject of the Asset Acquisition or Asset Sale during the
Four Quarter Period) occurring during the Four Quarter Period or at any
time subsequent to the last day of the Four Quarter Period and on or
prior to the Transaction Date, as if such Asset Sale or Asset Acquisition
(including the incurrence, assumption or liability for any such
Indebtedness or Acquired Indebtedness) occurred on the first day of the
Four Quarter Period.
If such person or any of its Restricted Subsidiaries directly or indirectly
guarantees Indebtedness of a third person, the preceding sentence shall give
effect to the incurrence of such guaranteed Indebtedness as if such person or
any Restricted Subsidiary of such person had directly incurred or otherwise
assumed such guaranteed Indebtedness. Furthermore, in calculating "Consolidated
Fixed Charges" for purposes of determining the denominator (but not the
numerator) of this "Consolidated Fixed Charge Coverage Ratio,"
(1) interest on outstanding Indebtedness determined on a fluctuating basis
as of the Transaction Date and which will continue to be so determined
thereafter shall be deemed to have accrued at a fixed rate per annum
equal to the rate of interest on such Indebtedness in effect on the
Transaction Date;
(2) if interest on any Indebtedness actually incurred on the Transaction
Date may optionally be determined at an interest rate based upon a factor
of a prime or similar rate, a eurocurrency interbank offered rate, or
other rates, then the interest rate in effect on the Transaction Date
will be deemed to have been in effect during the Four Quarter Period; and
(3) notwithstanding clause (1) above, interest on Indebtedness determined on
a fluctuating basis, to the extent such interest is covered by agreements
relating to Interest Swap Obligations, shall be deemed to accrue at the
rate per annum resulting after giving effect to the operation of such
agreements.
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"CONSOLIDATED FIXED CHARGES" means, with respect to any person for any
period, the sum, without duplication, of
(1) Consolidated Interest Expense, plus
(2) the product of
(x) the amount of all dividend payments on any series of Preferred
Stock of such person (other than dividends paid in Qualified Capital
Stock) paid, accrued or scheduled to be paid or accrued during such
period times
(y) a fraction, the numerator of which is one and the denominator of
which is one minus the then current effective consolidated Federal, state
and local tax rate of such person expressed as a decimal.
"CONSOLIDATED INTEREST EXPENSE" means, with respect to any person for any
period, the sum of, without duplication,
(1) the aggregate of all cash and non-cash interest expense with respect to
all outstanding Indebtedness of such person and its Restricted
Subsidiaries, including the net costs associated with Interest Swap
Obligations, capitalized interest, and imputed interest with respect to
Attributable Debt (but excluding (a) the write-off of deferred financing
costs associated with the Transactions and (b) the amortization of
deferred financing charges associated with the issuance of the notes and
the New Credit Agreement or other Indebtedness outstanding on the Issue
Date or refinanced in connection with the Transactions), for such period
determined on a consolidated basis in conformity with GAAP; and
(2) the interest component of Capitalized Lease Obligations paid, accrued
and/or scheduled to be paid or accrued by such person and its Restricted
Subsidiaries during such period as determined on a consolidated basis in
accordance with GAAP.
"CONSOLIDATED NET INCOME" means, with respect to any person for any period,
the aggregate net income (or loss) of such person and its Restricted
Subsidiaries for such period on a consolidated basis, determined in accordance
with GAAP; PROVIDED, HOWEVER, that there shall be excluded therefrom
(a) after tax gains but not losses from Asset Sales (without regard to
the $1 million threshold in clause (1) of the definition of Asset
Sales) or abandonments or reserves relating thereto,
(b) items classified as extraordinary gains but not losses, and the
related tax effects according to GAAP,
(c) the net income (or loss) of any person acquired in a pooling of
interests transaction accrued prior to the date it becomes a
subsidiary of such first person or is merged or consolidated with it
or any subsidiary,
(d) the net income of any Restricted Subsidiary to the extent that the
declaration of dividends or similar distributions by that subsidiary
of that income is restricted by contract, operation of law or
otherwise,
(e) the net loss of any person, other than a Restricted Subsidiary of
Autotote,
(f) the net income of any person, other than a Restricted Subsidiary, in
which such person has an interest, except to the extent of cash
dividends or distributions paid to such person or a Restricted
Subsidiary of such person,
(g) gains from retirement of debt, and
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(h) amounts attributable to dividends paid in respect of Qualified
Capital Stock to the extent such dividends are paid in shares of
Qualified Capital Stock.
"CONSOLIDATED NET WORTH" of any person means the consolidated stockholders'
equity of such person, determined on a consolidated basis in accordance with
GAAP less (to the extent otherwise included in accordance with GAAP) amounts
attributable to Disqualified Capital Stock.
"CONSOLIDATED NON-CASH CHARGES" means, with respect to any person for any
period, the aggregate depreciation, amortization and other non-cash expenses of
such person and its Restricted Subsidiaries reducing Consolidated Net Income of
such person and its Restricted Subsidiaries for such period, determined on a
consolidated basis in accordance with GAAP (excluding any such charges
constituting an extraordinary item or loss or any such charge which requires an
accrual of or a reserve for cash charges for any future period).
"CURRENCY AGREEMENT" means any foreign exchange contract, currency swap
agreement or other similar agreement or arrangement designed to protect Autotote
or any Restricted Subsidiary against fluctuations in currency values.
"DEFAULT" means an event or condition the occurrence of which is, or with
the lapse of time or the giving of notice or both would be, an Event of Default.
"DESIGNATED NON-CASH CONSIDERATION" means the fair market value of non-cash
consideration received by Autotote or one of its Restricted Subsidiaries in
connection with an Asset Sale that is so designated as Designated Non-cash
Consideration pursuant to an officers' certificate executed by the principal
executive officer and the principal financial officer of Autotote or such
Restricted Subsidiary.
"DESIGNATED SENIOR DEBT" means (1) any Indebtedness outstanding under the
New Credit Agreement and (2) any other Senior Debt permitted under this
indenture the principal amount of which is $25 million or more and that has been
designated by Autotote as Designated Senior Debt in the instrument creating such
Indebtedness.
"DISQUALIFIED CAPITAL STOCK" means any Capital Stock which, by its terms (or
by the terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event (other than an event which
would constitute a Change of Control), matures (excluding any maturity as the
result of an optional redemption by the issuer thereof) or is mandatorily
redeemable, pursuant to a sinking fund obligation or otherwise, or is redeemable
at the sole option of the holder thereof (except, in each case, upon the
occurrence of a Change of Control), in whole or in part, on or prior to the
final maturity date of the notes.
"EQUITY OFFERING" means any private or public offering of Qualified Capital
Stock of Autotote.
"FAIR MARKET VALUE" or "FAIR VALUE" means, with respect to any asset or
property, the price which could be negotiated in an arm's-length free market
transaction, for cash, between a willing seller and a willing buyer, neither of
whom is under pressure or compulsion to complete the transaction. Fair market
value shall be determined by the board of directors of Autotote acting
reasonably and in good faith and shall be evidenced by a board resolution
delivered to the trustee.
"GAAP" is defined to mean generally accepted accounting principles in the
United States of America as in effect as of the Issue Date, including, without
limitation, those set forth in the opinions and pronouncements of the Accounting
Principles Board of the American Institute of Certified Public Accountants and
statements and pronouncements of the Financial Accounting Standards Board or in
such other statements by such other entity as approved by a significant segment
of the accounting profession.
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"GUARANTOR SENIOR DEBT" means the principal of, premium, if any, and
interest (including any interest accruing subsequent to the filing of a petition
of bankruptcy at the rate provided for in the documentation with respect
thereto, whether or not such interest is an allowed claim under applicable law)
on any Indebtedness of any guarantor of the notes, whether outstanding on the
Issue Date or thereafter created, incurred or assumed, unless, in the case of
any particular Indebtedness, the instrument creating or evidencing the same or
pursuant to which the same is outstanding expressly provides that such
Indebtedness shall not be senior in right of payment to the guarantee of the
notes. Without limiting the generality of the foregoing, "Guarantor Senior Debt"
shall also include the principal of, premium, if any, interest (including any
interest accruing subsequent to the filing of a petition of bankruptcy at the
rate provided for in the documentation with respect thereto, whether or not such
interest is an allowed claim under applicable law) on, and all other amounts
owing in respect of, all monetary obligations (including guarantees thereof) of
every nature of any guarantor of the notes under the New Credit Agreement,
including, without limitation, obligations to pay principal and interest,
reimbursement obligations under letters of credit, fees, expenses and
indemnities. "Guarantor Senior Debt" shall not include
(1) Indebtedness evidenced by a guarantee of the notes;
(2) any Indebtedness of such guarantor of the notes owing to Autotote or to
a subsidiary of Autotote;
(3) Indebtedness to, or guaranteed on behalf of, any director, officer or
employee of Autotote or any subsidiary of Autotote or Affiliate of
Autotote (including, without limitation, amounts owed for compensation);
(4) trade payables and other current liabilities arising in the ordinary
course of business in connection with obtaining goods, materials or
services;
(5) Indebtedness represented by Disqualified Stock;
(6) any liability for federal, state, local or other taxes owed or owing by
such guarantor of the notes;
(7) that portion of any Indebtedness incurred in violation of the indenture;
(8) any Indebtedness which is, by its express terms, subordinated in right
of payment to any other Indebtedness of such guarantor of the notes; and
(9) any Indebtedness which, when incurred and without respect to any other
election under Section 1111(b) of Title 11, United States Code, is
without recourse to such guarantor of the notes.
"INCUR" means, with respect to any Indebtedness, to, directly or indirectly,
create, incur, assume, guarantee, acquire, become liable, contingently or
otherwise with respect to, or otherwise become responsible for payment of such
Indebtedness.
"INDEBTEDNESS" means with respect to any person, without duplication,
(1) the principal amount of all obligations of such person for borrowed
money,
(2) the principal amount of all obligations of such person evidenced by
bonds, debentures, notes or other similar instruments,
(3) all Capitalized Lease Obligations of such person,
(4) all obligations of such person to pay the deferred purchase price of
property, all conditional sale obligations and all obligations under any
title retention agreement (but excluding accounts payable and other
current liabilities arising in the ordinary course of business),
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(5) all obligations of such person for the reimbursement of any obligor on
any letter of credit or banker's acceptance,
(6) guarantees and other contingent obligations of such person in respect of
Indebtedness referred to in clauses (1) through (5) above and clause
(8) below,
(7) all Indebtedness of any other person of the type referred to in clauses
(1) through (6) above which are secured by any Lien on any property or
asset of such person, the amount of such obligation being deemed to be
the lesser of the fair market value at such date of any asset subject to
any Lien securing the Indebtedness of others and the amount of the
Indebtedness secured,
(8) all obligations under currency agreements relating to currency swap
agreements and interest swap agreements of such person, and
(9) all Disqualified Capital Stock issued by such person with the amount of
Indebtedness represented by such Disqualified Capital Stock being equal
to the greater of its voluntary or involuntary liquidation preference and
its maximum fixed repurchase price, but excluding accrued dividends, if
any.
For purposes hereof, (1) the "maximum fixed repurchase price" of any
Disqualified Capital Stock which does not have a fixed repurchase price shall be
calculated in accordance with the terms of such Disqualified Capital Stock as if
such Disqualified Capital Stock were purchased on any date on which Indebtedness
shall be required to be determined pursuant to the indenture, and if such price
is based upon, or measured by, the fair market value of such Disqualified
Capital Stock, such fair market value shall be determined reasonably and in good
faith by the board of directors of the issuer of such Disqualified Capital
Stock, and (2) accrual of interest, accretion or amortization of original issue
discount, the payment of interest on any Indebtedness in the form of additional
Indebtedness with the same terms, and the payment of dividends on Disqualified
Capital Stock in the form of additional shares of the same class of Disqualified
Capital Stock will not be deemed to be an incurrence of Indebtedness or an
issuance of Disqualified Capital Stock for purposes of the "--Limitation on
Incurrence of Additional Indebtedness" covenant. The amount of Indebtedness of
any person at any date shall be the amount of all unconditional obligations
described above, as such amount would be reflected on a balance sheet prepared
in accordance with GAAP, and the maximum liability at such date of such person
for any contingent obligations described above.
"INTEREST SWAP OBLIGATIONS" means the obligations of any person, pursuant to
any arrangement with any other person, whereby, directly or indirectly, such
person is entitled to receive from time to time periodic payments calculated by
applying either a floating or a fixed rate of interest on a stated notional
amount in exchange for periodic payments made by such other person calculated by
applying a fixed or a floating rate of interest on the same notional amount.
"INVESTMENT" means, with respect to any person, any direct or indirect loan
or other extension of credit (including, without limitation, a guarantee) or
capital contribution to (by means of any transfer of cash or other property to
others or any payment for property or services for the account or use of
others), or any purchase or acquisition by such person of any Capital Stock,
bonds, notes, debentures or other securities or evidences of Indebtedness issued
by, any person. "Investment" shall exclude extensions of trade credit by
Autotote and its subsidiaries on commercially reasonable terms. For the purposes
of the "--Limitation on Restricted Payments" covenant,
(1) "Investment" shall include and be valued at the fair market value of the
net assets of any Restricted Subsidiary at the time that such Restricted
Subsidiary is designated an Unrestricted Subsidiary and
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(2) the amount of any Investment shall be the original cost of such
Investment plus the cost of all additional Investments by Autotote or any
of its Restricted Subsidiaries, without any adjustments for increases or
decreases in value, or write-ups, write-downs or write-offs with respect
to such Investment, reduced by the payment of dividends or distributions
(including tax sharing payments) in connection with such Investment or
any other amounts received in respect of such Investment.
If Autotote or any Restricted Subsidiary sells or otherwise disposes of any
Capital Stock of any Restricted Subsidiary such that, after giving effect to any
such sale or disposition, such person is no longer a Restricted Subsidiary,
Autotote shall be deemed to have made an Investment on the date of any such sale
or disposition equal to the fair market value of the Capital Stock of such
subsidiary not sold or disposed.
"ISSUE DATE" means the original date of issuance of the series A notes.
"JOINT VENTURE" means any person (other than a subsidiary of Autotote)
engaged in a Related Business with respect to which at least 35% of such
person's outstanding Capital Stock is owned directly or indirectly by Autotote.
"LIEN" means any lien, mortgage, deed of trust, pledge, security interest,
charge or encumbrance of any kind (including any conditional sale or other title
retention agreement, any lease in the nature thereof and any agreement to give
any security interest).
"MOODY'S" means Moody's Investor Service, Inc. and its successors.
"NET CASH PROCEEDS" means, with respect to any Asset Sale, the proceeds in
the form of cash or Cash Equivalents including payments in respect of deferred
payment obligations when received in the form of cash or Cash Equivalents (other
than the portion of any such deferred payment constituting interest) received by
Autotote or any of its Restricted Subsidiaries from such Asset Sale net of
(a) all out-of-pocket expenses and fees relating to such Asset Sale
(including, without limitation, legal, accounting and investment
banking fees and sales commissions),
(b) taxes paid or payable after taking into account any reduction in
consolidated tax liability due to available tax credits or deductions
and any tax sharing arrangements,
(c) the amounts of
(x) any repayments of debt secured, directly or indirectly, by Liens
on the assets which are the subject of such Asset Sale and
(y) any repayments of debt associated with such assets which is due
by reason of such Asset Sale (I.E., such disposition is permitted by the
terms of the instruments evidencing or applicable to such debt, or by the
terms of a consent granted thereunder, on the condition the proceeds (or
portion thereof) of such disposition be applied to such debt), and other
fees, expenses and other expenditures, in each case, reasonably incurred
as a consequence of such repayment of debt (whether or not such fees,
expenses or expenditures are then due and payable or made, as the case
may be);
(d) any portion of cash proceeds which Autotote determines in good faith
should be reserved for post-closing adjustments, it being understood
and agreed that on the day that all such post-closing adjustments
have been determined, the amount (if any) by which the reserved
amount in respect of such Asset Sale exceeds the actual post-closing
adjustments payable by Autotote or any of its Restricted Subsidiaries
shall constitute Net Cash Proceeds on such date;
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(e) all amounts deemed appropriate by Autotote (as evidenced by a signed
certificate of the Chief Financial Officer of Autotote delivered to
the trustee) to be provided as a reserve, in accordance with GAAP
("GAAP Reserves"), against any liabilities associated with such
assets which are the subject of such Asset Sale;
(f) all foreign, federal, state and local taxes payable (including taxes
reasonably estimated to the payable) in connection with or as a
result of such Asset Sale; and
(g) with respect to Asset Sales by Restricted Subsidiaries of Autotote,
the portion of such cash payments attributable to persons holding a
minority interest in such Restricted Subsidiary.
Notwithstanding the foregoing, Net Cash Proceeds shall not include proceeds
received in a foreign jurisdiction from an Asset Sale of an asset located
outside the United States to the extent
(1) such proceeds cannot under applicable law be transferred to the United
States or
(2) such transfer would result (in the good faith determination of the board
of directors of Autotote set forth in a Board Resolution) in a foreign
tax liability that would be materially greater than if such Asset Sale
occurred in the United States;
PROVIDED that if, as, and to the extent that any of such proceeds may lawfully
be in the case of clause (1) or are in the case of clause (2) transferred to the
United States, such proceeds shall be deemed to be cash payments that are
subject to the terms of this definition of Net Cash Proceeds.
"NEW CREDIT AGREEMENT" means the Credit Agreement to be dated on or about
the Acquisition Closing Date between Autotote and the lenders thereto including
all related notes, collateral documents and guarantees in each case as such
agreements may be amended (including any amendment and restatement thereof),
supplemented or otherwise modified from time to time, including any agreement
extending the maturity of, increasing the total commitment under, refinancing,
replacing or otherwise restructuring (including adding subsidiaries of Autotote
as additional borrowers or guarantors thereunder) all or any portion of the
Indebtedness under such agreement or any successor or replacement agreement and
whether by the same or any other agent, lender or group of lenders.
"OBLIGATIONS" means, with respect to any Indebtedness, all principal,
interest, premiums, penalties, fees, indemnities, expenses (including legal fees
and expenses), reimbursement obligations and other liabilities payable to the
holder of such Indebtedness under the documentation governing such Indebtedness.
"OLIVETTI LETTER AGREEMENT" means the Letter Agreement, dated as of May 18,
2000, between Olivetti S.p.A. and Autotote.
"OLIVETTI PREFERRED STOCK" means up to $112.8 million aggregate liquidation
preference of Autotote's Series A Convertible Preferred Stock or any other
Qualified Capital Stock issued pursuant to or in satisfaction of (1) the
commitments under the Olivetti Letter Agreement and the Letter Agreement, dated
as of May 18, 2000, between Tote Holdings, L.P. and Autotote Corporation, and
(2) fees and expenses payable to Ramius Capital Group, LLC in connection with
the issuance of Olivetti Preferred Stock contemplated by the agreements set
forth in the foregoing clause (1).
"PARI PASSU INDEBTEDNESS" means any Indebtedness of Autotote or a guarantor
of the notes ranking PARI PASSU with the notes or a guarantee of the notes, as
the case may be, that the obligor thereon is required to offer to repurchase or
repay on a permanent basis in connection with an Asset Sale.
"PERMITTED HOLDERS" means Olivetti S.p.A. and its Affiliates.
"PERMITTED INDEBTEDNESS" means, without duplication,
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(1) the notes and the guarantees thereof and the exchange notes and
guarantees thereof,
(2) Indebtedness incurred pursuant to the New Credit Agreement in an
aggregate principal amount at any time outstanding not to exceed $345
million reduced by any required permanent repayments (which are
accompanied by a corresponding permanent commitment reduction) thereunder
(excluding any such required permanent repayment and corresponding
permanent commitment reduction to the extent refinanced at the time of
payment under a replaced New Credit Agreement) and less the amount of any
prepayment made with the proceeds of an Asset Sale in accordance with the
"----Limitation on Asset Sales" covenant,
(3) other Indebtedness of Autotote and its subsidiaries outstanding on the
Acquisition Closing Date,
(4) Interest Swap Obligations of Autotote or any of its subsidiaries
covering
Indebtedness of Autotote or any of its subsidiaries; PROVIDED, HOWEVER,
that any Indebtedness to which any such Interest Swap Obligations
correspond is otherwise permitted to be incurred under the indenture;
PROVIDED, FURTHER, that such Interest Swap Obligations are entered into,
in the judgment of Autotote, to protect Autotote or any of its
subsidiaries from fluctuation in interest rates on their respective
outstanding Indebtedness,
(5) Indebtedness under Currency Agreements,
(6) Intercompany Indebtedness owed by Autotote to any Wholly-owned
Restricted Subsidiary of Autotote or by any Restricted Subsidiary of
Autotote to Autotote or any Wholly-owned Restricted Subsidiary of
Autotote for so long as such Indebtedness is held by Autotote or a
Wholly-owned Restricted Subsidiary of Autotote in each case subject to no
Lien held by a person other than Autotote or a Wholly-owned Restricted
Subsidiary of Autotote; PROVIDED, HOWEVER, that if as of any date any
person other than Autotote or a Wholly-owned Restricted Subsidiary of
Autotote owns or holds any such Indebtedness or holds a Lien in respect
of such Indebtedness, such date shall be deemed the incurrence of
Indebtedness not constituting Permitted Indebtedness by the issuer of
such Indebtedness under this clause (6),
(7) Acquired Indebtedness to the extent Autotote could have incurred such
Indebtedness in accordance with the "--Limitation on Incurrence of
Additional Indebtedness" covenant on the date such Indebtedness became
Acquired Indebtedness,
(8) (A) guarantees by Restricted Subsidiaries pursuant to the "--Limitation
of Guarantees by Restricted Subsidiaries" covenant or guarantees by
Restricted Subsidiaries of Indebtedness of other Restricted Subsidiaries
to the extent that such Indebtedness is otherwise permitted under the
indenture and (B) guarantees by Autotote of its Wholly-owned Restricted
Subsidiaries' Indebtedness; PROVIDED that such Indebtedness is permitted
to be incurred under the indenture,
(9) Indebtedness incurred by Autotote or any Restricted Subsidiary in
connection with the purchase or improvement of property (real or
personal) or equipment or other capital expenditures in the ordinary
course of business, in aggregate not to exceed $15 million in any fiscal
year of Autotote,
(10) Indebtedness of Autotote or any Restricted Subsidiary evidenced by
Capitalized Lease Obligations not to exceed $15 million principal amount
at any one time outstanding,
(11) guarantees, letters of credit and indemnity agreements relating to
performance and surety bonds incurred in the ordinary course of business,
(12) any refinancing, modification, replacement, renewal, restatement,
refunding, deferral, extension, substitution, supplement, reissuance or
resale of existing or future Indebtedness
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incurred in accordance with the "--Limitation on Incurrence of Additional
Indebtedness" covenant (other than pursuant to clause (2), (6), (9),
(10), (11), (13), (14) or (15) of this definition), including any
additional Indebtedness incurred to pay premiums required by the
instruments governing such existing or future Indebtedness as in effect
at the time of issuance thereof ("Required Premiums") and fees in
connection therewith; PROVIDED, HOWEVER, that any such event shall not
(1) result in an increase in the aggregate principal amount of Permitted
Indebtedness (except to the extent such increase is a result of a
simultaneous incurrence of additional Indebtedness (A) to pay Required
Premiums and related fees or (B) otherwise permitted to be incurred under
the indenture) of Autotote and its subsidiaries and (2) create
Indebtedness with a Weighted Average Life to Maturity at the time such
Indebtedness is incurred that is less than the Weighted Average Life to
Maturity at such time of the Indebtedness being refinanced, modified,
replaced, renewed, restated, refunded, deferred, extended, substituted,
supplemented, reissued or resold,
(13) additional Indebtedness of Autotote or any Restricted Subsidiary in an
aggregate principal amount not to exceed $20 million at any one time
outstanding (which amount may, but need not, be incurred in whole or in
part under the New Credit Agreement),
(14) Indebtedness of Autotote or any Restricted Subsidiary in respect of the
contingent deferred purchase price of any acquired property (including
Capital Stock) not to exceed $15 million in aggregate principal amount at
any one time outstanding,
(15) the guarantee of Indebtedness of Joint Ventures to the extent permitted
by clause (12) of the definition of Permitted Investments, and
(16) after the Acquisition Closing Date, Indebtedness of a Restricted
Subsidiary, not to exceed $20 million in aggregate principal amount
incurred to finance the costs associated with construction of a printing
facility in the United Kingdom, the acquisition of assets related to such
facility, and fees and expenses relating to such financing; PROVIDED that
Autotote applies, or causes a Restricted Subsidiary to apply, an amount
equal to the net cash proceeds from the Indebtedness incurred under this
clause (16) to the permanent reduction of Indebtedness (including, in the
case of any Indebtedness outstanding under a revolving credit facility,
the permanent reduction of amounts that may be reborrowed thereunder by
an equivalent amount).
"PERMITTED INVESTMENTS" means
(1) Investments by Autotote or any Restricted Subsidiary of Autotote in, or
for the benefit of, any Restricted Subsidiary of Autotote (whether
existing on the Issue Date or created thereafter and including
Investments in any person, if after giving effect to such Investment,
such person would be a Restricted Subsidiary of Autotote or such person
is merged, consolidated or amalgamated with or into, or transfers or
conveys all or substantially all of its assets to, or is liquidated into,
Autotote or a Restricted Subsidiary of Autotote) and Investments in, or
for the benefit of, Autotote by any Restricted Subsidiary of Autotote;
(2) cash and Cash Equivalents;
(3) Investments existing on the Issue Date;
(4) Investments in securities of trade creditors or customers received
pursuant to any plan of reorganization or similar arrangement upon the
bankruptcy or insolvency of such trade creditors or customers or in
settlement of or other resolution of claims or disputes, and in each
case, extensions, modifications and remands thereof;
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(5) so long as no Default or Event of Default has occurred and is
continuing, loans and advances in the ordinary course of business by
Autotote and its Restricted Subsidiaries to their respective employees
not to exceed $2.5 million at any one time outstanding;
(6) so long as no Default or Event of Default has occurred and is
continuing, additional Investments in a person or persons principally
engaged in a Related Business not to exceed $30 million at any one time
outstanding;
(7) Investments received by Autotote or its Restricted Subsidiaries as
consideration for asset sales, including Asset Sales; PROVIDED, HOWEVER,
in the case of an Asset Sale, such Asset Sale is effected in compliance
with the "--Limitation on Asset Sales" covenant;
(8) Currency Agreements and Interest Swap Obligations entered into in the
ordinary course of Autotote's or its Restricted Subsidiaries' business
and otherwise in compliance with the indenture;
(9) Guarantees by Autotote or any of its Restricted Subsidiaries of
Indebtedness or other obligations otherwise permitted to be incurred by
Autotote or any of its Restricted Subsidiaries under the indenture;
(10) so long as no Default or Event of Default has occurred and is
continuing, Investments in Joint Ventures not to exceed $10 million at
any one time outstanding;
(11) any Investments received in exchange for the issuance of Qualified
Capital Stock of Autotote or any warrants, rights or options to purchase
or acquire shares of any such Qualified Capital Stock;
(12) so long as no Default or Event of Default has occurred and is
continuing, the guarantee by Autotote of Indebtedness of Joint Ventures
not to exceed $10 million in aggregate principal amount at any one time
outstanding; and
(13) so long as no Default or Event of Default has occurred and is
continuing, loans to William G. Malloy required to be made by Autotote
pursuant to the Consulting Agreement made as of May 18, 2000 between
Autotote and William G. Malloy.
"PERMITTED JUNIOR SECURITIES" means
(1) Qualified Capital Stock of Autotote or any guarantor; or
(2) debt securities that are subordinated to (a) all Senior Debt or
Guarantor Senior Debt and (b) any debt securities issued in exchange for
Senior Debt or Guarantor Senior Debt to substantially the same extent as,
or to a greater extent than, the notes and the guarantees of the notes
are subordinated to Senior Debt and Guarantor Senior Debt, respectively,
under the indenture.
"PERMITTED LIENS" means
(1) Liens securing Indebtedness consisting of Capitalized Lease Obligations;
(2) Liens securing any Senior Debt or Guarantor Senior Debt, including liens
securing the New Credit Agreement;
(3) Liens on property existing at the time of acquisition thereof by
Autotote or a Restricted Subsidiary; PROVIDED that such Liens were in
existence prior to the contemplation of such acquisition;
(4) Liens at any time outstanding with respect to assets of Autotote and its
Restricted Subsidiaries, the fair market value of which at the time the
Lien was imposed does not exceed $1 million;
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(5) Liens securing Indebtedness incurred pursuant to clauses (9), (11), (13)
or (14) of the definition of Permitted Indebtedness;
(6) Liens securing Indebtedness incurred pursuant to clause (16) of the
definition of Permitted Indebtedness; and
(7) Liens created to replace Liens described in clause (3) or (6) above to
the extent that such Liens do not extend beyond the originally encumbered
property (other than improvements thereto or thereon, attachments and
other modifications reasonably required to maintain such property) and
are not otherwise materially less favorable to Autotote and its
Restricted Subsidiaries than the Liens being replaced, as determined by
the board of directors of Autotote in good faith.
"PREFERRED STOCK" of any person means any Capital Stock of such person that
has preferential rights to any other Capital Stock of such person with respect
to dividends or redemptions or upon liquidation.
"PRO FORMA" means, with respect to any calculation made or required to be
made pursuant to the terms of the indenture, a calculation in accordance with
Article II of Regulation S-X under the Securities Act.
"PRODUCTIVE ASSETS" means assets of a kind used or usable in the businesses
of Autotote and its Restricted Subsidiaries as conducted on the date of the
relevant Asset Sale or in a Related Business (including Capital Stock in any
such businesses or Related Business and licenses or similar rights to operate);
PROVIDED, HOWEVER, that accounts receivable acquired as part of an acquisition
of assets of a kind used or usable in such businesses shall be deemed to be
Productive Assets.
"QUALIFIED CAPITAL STOCK" means any stock that is not Disqualified Capital
Stock.
"RELATED BUSINESS" means the businesses of Autotote and its Restricted
Subsidiaries as conducted on the Issue Date and similar, complementary or
related businesses or reasonable extensions, developments or expansions thereof.
"RESTRICTED INVESTMENT" means an Investment other than a Permitted
Investment.
"RESTRICTED SUBSIDIARY" of any person means any subsidiary of such person
which at the time of determination is not an Unrestricted Subsidiary.
"S&P" means Standard & Poor's, A division of the McGraw-Hill Companies, and
its successors.
"SALE AND LEASEBACK TRANSACTION" means any direct or indirect arrangement
with any person or to which any such person is a party, providing for the
leasing to Autotote or a Restricted Subsidiary of any property, whether owned by
Autotote or any Restricted Subsidiary at the Issue Date or later acquired, which
has been or is to be sold or transferred by Autotote or such Restricted
Subsidiary to such person or to any other person from whom funds have been or
are to be advanced by such person on the security of such Property; PROVIDED,
HOWEVER, that a Sale and Leaseback Transaction shall not include a transaction
or series of related transactions for which Autotote or its Restricted
Subsidiaries receive aggregate consideration (exclusive of indemnities) of less
than $1,000,000 (a "De Minimis Transaction") so long as the aggregate
consideration (exclusive of indemnities) received by Autotote or its Restricted
Subsidiaries from all De Minimis Transactions does not exceed an aggregate of
$10,000,000.
"SENIOR DEBT" means the principal of, premium, if any, and interest
(including any interest accruing subsequent to the filing of a petition of
bankruptcy at the rate provided for in the documentation with respect thereto,
whether or not such interest is an allowed claim under applicable law) on any
Indebtedness of Autotote, whether outstanding on the Issue Date or thereafter
created, incurred or
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assumed, unless, in the case of any particular Indebtedness, the instrument
creating or evidencing the same or pursuant to which the same is outstanding
expressly provides that such Indebtedness shall not be senior in right of
payment to the notes. Without limiting the generality of the foregoing, "Senior
Debt" shall also include the principal of, premium, if any, interest (including
any interest accruing subsequent to the filing of a petition of bankruptcy at
the rate provided for in the documentation with respect thereto, whether or not
such interest is an allowed claim under applicable law) on, and all other
amounts owing in respect of, all monetary obligations (including guarantees
thereof) of every nature of Autotote under the New Credit Agreement, including,
without limitation, obligations to pay principal and interest, reimbursement
obligations under letters of credit, fees, expenses and indemnities. "Senior
Debt" shall not include
(1) Indebtedness evidenced by the notes;
(2) any Indebtedness of Autotote to a subsidiary of Autotote;
(3) Indebtedness to, or guaranteed on behalf of, any director, officer or
employee of Autotote or any subsidiary of Autotote or Affiliate of
Autotote (including, without limitation, amounts owed for compensation);
(4) trade payables and other current liabilities arising in the ordinary
course of business in connection with obtaining goods, materials or
services;
(5) Indebtedness represented by Disqualified Stock;
(6) any liability for federal, state, local or other taxes owed or owing by
Autotote;
(7) that portion of any Indebtedness incurred in violation of the indenture;
(8) any Indebtedness which is, by its express terms, subordinated in right
of payment to any other Indebtedness of Autotote; and
(9) any Indebtedness which, when incurred and without respect to any other
election under Section 1111(b) of Title 11, United States Code, is
without recourse to Autotote.
"SIGNIFICANT SUBSIDIARY" shall have the meaning set forth in Rule 1.02(w) of
Regulation S-X under the Securities Act.
"TRANSACTIONS" means (1) the acquisition of Scientific Games pursuant to the
Agreement and Plan of Merger, dated as of May 18, 2000, by and among Autotote
Corporation, ATX Enterprises Inc. and Scientific Games Holdings Corp., (2) the
execution and delivery of the New Credit Agreement and the anticipated borrowing
of approximately $280 million thereunder in connection with the consummation of
the Scientific Games acquisition, (3) the issuance of Olivetti Preferred Stock
for aggregate net cash proceeds of approximately $110 million, (4) the issuance
of Olivetti Preferred Stock to Affiliates of Ramius Capital Group, LLC in
satisfaction of up to $5.5 million of fees and expenses payable in connection
with the issuance and sale of the Olivetti Preferred Stock, and (5) the
application of approximately $213 million to the repayment of existing
Indebtedness of Autotote and Scientific Games.
"UNRESTRICTED SUBSIDIARY" of any person means
(1) any subsidiary of such person that at the time of determination shall be
or continue to be designated an Unrestricted Subsidiary by the board of
directors of such person in the manner provided below; and
(2) any subsidiary of an Unrestricted Subsidiary.
The board of directors may designate any subsidiary (including any newly
acquired or newly formed subsidiary) to be an Unrestricted Subsidiary unless
such subsidiary owns any Capital Stock of,
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or owns or holds any Lien on any property of, Autotote or any other subsidiary
of Autotote that is not a subsidiary of the subsidiary to be so designated;
PROVIDED, HOWEVER, that
(x) Autotote certifies to the trustee that such designation complies
with the "--Limitation on Restricted Payments" covenant and
(y) each subsidiary to be so designated and each of its subsidiaries
has not at the time of designation, and does not thereafter, create,
incur, issue, assume, guarantee or otherwise become directly or
indirectly liable with respect to any Indebtedness pursuant to which the
lender has recourse to any of the assets of Autotote or any of its
Restricted Subsidiaries except to the extent permitted by the provisions
of the "--Limitation on Incurrence of Additional Indebtedness" covenant
and the "--Limitation on Restricted Payments" covenant.
The board of directors may designate any Unrestricted Subsidiary to be a
Restricted Subsidiary only if
(x) immediately after giving effect to such designation, Autotote is
able to incur at least $1.00 of additional Indebtedness (other than
Permitted Indebtedness) in compliance with the "--Limitation on
Incurrence of Additional Indebtedness" covenant and
(y) immediately before and immediately after giving effect to such
designation, no Default or Event of Default shall have occurred and be
continuing.
Any such designation by the board of directors shall be evidenced to the
trustee by promptly filing with the trustee a copy of the resolution giving
effect to such designation and an Officers' Certificate certifying that such
designation complied with the foregoing provisions.
"WEIGHTED AVERAGE LIFE TO MATURITY" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing
(a) the then outstanding aggregate principal amount of such Indebtedness
into
(b) the sum of the total of the products obtained by multiplying
(1) the amount of each then remaining installment, sinking fund, serial
maturity or other required payment of principal, including payment at
final maturity, in respect thereof, by
(2) the number of years (calculated to the nearest one-twelfth) which will
elapse between such date and the making of such payment.
"WHOLLY-OWNED RESTRICTED SUBSIDIARY" of any person means any Restricted
Subsidiary of such person of which all the outstanding voting securities (other
than directors' qualifying shares) are owned by such person or any Wholly-owned
Restricted Subsidiary of such person.
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DESCRIPTION OF CAPITAL STOCK
CONVERTIBLE PREFERRED STOCK
As of September 6, 2000, we sold $75 million of our new class of Series A
Convertible Preferred Stock, of which approximately 93% was sold to Cirmatica
S.A. and Olivetti International S.A., affiliated entities of Olivetti, S.p.A.,
in order to refinance Autotote's outstanding public senior notes and sold an
additional $35 million of convertible preferred stock to the same purchasers,
the proceeds of which were applied to retire Autotote's outstanding convertible
debentures. The convertible preferred stock is governed by a Certificate of
Designation filed on September 6, 2000 with the Secretary of State of Delaware.
In addition, Autotote and the purchasers of the convertible preferred stock
entered into a shareholders agreement dated as of September 6, 2000 with respect
to certain voting matters, rights of first refusal, registration rights and
other matters.
Some of the key terms of the convertible preferred stock are as follows:
- The convertible preferred stock ranks senior to all future preferred stock
and all existing and future common equity.
- The convertible preferred stock pays dividends at a rate equal to 6% per
annum, which will be payable quarterly in-kind until the ninth dividend
payment, at which time we may elect to pay such dividends in cash, and may
also have certain rights to participate in common stock dividends, if any,
on an as-converted basis.
- The holders of the convertible preferred stock will vote as a class to
elect four directors out of a Board of ten directors.
- The holders of convertible preferred stock are entitled to vote along with
the common stock, on an as-converted basis, on all matters on which common
stockholders are entitled to vote.
- Majority consent of the holders of convertible preferred stock will be
required for actions such as increasing the size of the Board, issuing new
classes of stock and amending the terms of the convertible preferred
stock.
- If we fail to comply with certain of our obligations, then as long as such
failure continues the Board shall be increased to 13 members, and the
holders of convertible preferred stock, voting as a class, can elect the
three new directors.
- The convertible preferred stock is redeemable, in whole but not in part,
at our option at any time at least three years after issuance at a
purchase price of 105% of the outstanding issue amount plus accrued and
unpaid dividends, subject to certain requirements.
- The convertible preferred stock will automatically convert into common
stock after five years from the date of issuance at the conversion price
then in effect.
- The holders of convertible preferred stock will initially be able to
convert the convertible preferred stock into common stock at any time at
the adjusted conversion price of $5.56 per share, subject to potential
adjustment for certain dilutive issuances of our common stock and further
subject to reset to no less than $5.00 per share based on possible future
common stock market price minimums.
- The holders of convertible preferred stock will be entitled to pro rata
rights of first refusal in connection with new equity issuances.
- The holders of convertible preferred stock are subject for a period of
time to maximum limitations on their purchase of additional stock.
- The holders of convertible preferred stock will have certain rights to
request that shares of common stock issued on conversion of their
convertible preferred stock be registered under the Securities Act.
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CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS
The following is a general discussion of anticipated U.S. federal income tax
consequences of the ownership and disposition of the notes and the exchange of
series A notes for series B notes pursuant to the exchange offer. This summary
is based upon laws, regulations, rulings and decisions currently in effect, all
of which are subject to change at any time, possibly with retroactive effect.
Moreover, it deals only with purchasers who hold notes as "capital assets"
within the meaning of Section 1221 of the U.S. Internal Revenue Code of 1986, as
amended, and does not purport to deal with persons in special tax situations,
such as financial institutions, insurance companies, regulated investment
companies, tax-exempt investors, dealers in securities or currencies, U.S.
expatriates, persons holding notes as a hedge against currency risk or as a
position in a "straddle," "hedge," "conversion" or another integrated
transaction for tax purposes or U.S. Holders, as defined below, whose functional
currency is not the U.S. dollar. Further, this discussion does not address the
consequences under U.S. federal estate or gift tax laws or the laws of any U.S.
state or locality.
Holders of series A notes are urged to consult their own tax advisors
concerning the consequences, in their particular circumstances, of the ownership
and disposition of the notes and the exchange of the series A notes for series B
notes pursuant to the exchange offer under the U.S. federal tax laws and the
laws of any relevant state, local or non-U.S. taxing jurisdiction.
As used in this section, the term "U.S. Holder" means a beneficial owner of
notes that is, for U.S. federal income tax purposes:
- a citizen or resident of the United States,
- a corporation, partnership or other entity, other than a trust, created or
organized in or under the laws of the United States or of any political
subdivision thereof, other than a partnership that is not treated as a
U.S. person under any applicable U.S. Treasury regulations,
- an estate whose income is subject to U.S. federal income tax regardless of
its source, or
- a trust (x) if, in general, a court within the United States is able to
exercise primary jurisdiction over its administration and one or more U.S.
persons have authority to control all of its substantial decisions or
(y) that has a valid election in effect under applicable U.S. Treasury
regulations to be treated as a U.S. person.
As used in this section, the term "non-U.S. Holder" means a beneficial owner
of notes that is not a U.S. Holder for U.S. federal income tax purposes.
THE EXCHANGE OFFER
An exchange of series A notes for series B notes pursuant to the exchange
offer should not be treated as an exchange or other taxable event for United
States federal income tax purposes. Accordingly, there should be no United
States federal income tax consequences to holders of series A notes who exchange
series A notes for series B notes pursuant to the exchange offer, and any holder
should have the same adjusted tax basis and holding period in the series B notes
as it had in the series A notes immediately before the exchange.
U.S. HOLDERS
INTEREST AND DISPOSITION GENERALLY
The gross amount of interest paid on the notes will be taxable as ordinary
income for U.S. federal income tax purposes when received or accrued by a U.S.
Holder in accordance with such U.S. Holder's method of tax accounting.
147
<PAGE>
Upon the sale, redemption or other taxable disposition of a note, a U.S.
Holder will recognize capital gain or loss equal to the difference between the
amount realized (excluding any amount attributable to accrued interest, which
will be taxable as ordinary interest income as described above, or accrued
market discount, which is discussed below) and the U.S. Holder's tax basis in
the notes, which is generally the U.S. Holder's cost. Such gain or loss will be
long-term capital gain or loss if the notes are held for more than one year. The
deductibility of capital losses is subject to certain limitations.
Special rules apply to notes acquired at a market discount or premium, which
are discussed below.
BOND PREMIUM
If a U.S. Holder purchased notes for an amount in excess of the amount
payable at the maturity date of the notes, the U.S. Holder may deduct such
excess as amortizable bond premium over the term of the notes under a
yield-to-maturity formula. The deduction is available only if an election is
made by the purchaser or if such purchaser has an election in effect. This
election is revocable only with the consent of the Internal Revenue Service and
applies to all obligations owned or subsequently acquired by the U.S. Holder.
The U.S. Holder's adjusted tax basis in the notes will be reduced to the extent
of the deduction of amortizable bond premium. The amortizable bond premium is
treated as an offset to interest income on the notes rather than as a separate
deduction item.
MARKET DISCOUNT
A U.S. Holder that acquires notes, other than in an original issue, at a
market discount (other than market discount that is less than 1/4 of 1% of the
stated redemption price of the notes at maturity multiplied by the number of
remaining complete years to maturity) must include as ordinary income upon a
subsequent disposition, redemption or gift of the notes, the lesser of:
- the gain realized upon the disposition or redemption or, in the case of a
gift, the appreciation in the notes, and
- the portion of the market discount which accrued on a straight line basis,
or, if the U.S. Holder so elects, on a constant interest rate basis, while
the notes were held by such U.S. Holder.
For these purposes, market discount means the excess, if any, of the stated
redemption price at maturity of the notes (i.e., their principal amount) over
the U.S. Holder's tax basis in such notes immediately after their acquisition by
the U.S. Holder. A U.S. Holder may elect to include accrued market discount in
income currently, which would increase the U.S. Holder's basis in the notes,
rather than upon disposition of the notes. This election once made applies to
all market discount obligations acquired on or after the first taxable year to
which the election applies, and may not be revoked without the consent of the
Internal Revenue Service.
A U.S. Holder of notes acquired at a market discount generally will be
required to defer the deduction of a portion of the interest on any indebtedness
incurred or maintained to purchase or carry such notes until the market discount
is recognized upon a subsequent disposition of such notes. Such a deferral is
not required, however, if the U.S. Holder elects to include accrued market
discount in income currently.
INFORMATION REPORTING AND BACKUP WITHHOLDING
Non-exempt U.S. Holders will be subject to information reporting with
respect to payments of interest on, and, perhaps, the proceeds of the
disposition of, notes. Non-exempt U.S. Holders who are subject to information
reporting and who do not provide appropriate information when requested may be
subject to backup withholding at a 31% rate. U.S. Holders should consult their
tax advisors.
148
<PAGE>
NON-U.S. HOLDERS
INTEREST AND DISPOSITION
In general, payments of interest received by a non-U.S. Holder will not be
subject to U.S. federal withholding tax, provided that the non-U.S. Holder (a)
does not actually or constructively own 10% or more of the total combined voting
power of all classes of our stock entitled to vote, (b) is not a controlled
foreign corporation that is related to us actually or constructively through
stock ownership, and (c) provides, to us or our agent, under penalties of
perjury (either directly or through a financial institution that holds the note
on behalf of the non-U.S. Holder and that holds customers' securities in the
ordinary course of its trade or business or through an intermediary or other
entity as provided in the applicable Treasury regulations) with the non-U.S.
Holder's (or, if different, the beneficial owner's) name and address and
certifies, under penalties of perjury, that it is not a U.S. Holder. Payments of
interest not exempt from United States federal withholding tax as described
above will be subject to withholding tax at the rate of 30% unless (i) the
interest received on the note is effectively connected with the conduct by the
non-U.S. Holder of a trade or business within the United States and the non-
U.S. Holder complies with certain reporting requirements (see "Effectively
Connected Income" below); or (ii) the non-U.S. Holder is entitled to the
benefits of an income tax treaty under which the interest is exempt from U.S.
withholding tax or the rate is reduced and the non-U.S. Holder complies with
certain reporting requirements.
A non-U.S. Holder generally will not be subject to U.S. federal income tax
(and generally no tax will be withheld) with respect to gain realized on the
disposition of a note, unless (i) the gain is effectively connected with a U.S.
trade or business conducted by the non-U.S. Holder (see "Effectively Connected
Income" below) or (ii) the non-U.S. Holder is an individual who is present in
the United States for 183 or more days during the taxable year of the
disposition and certain other requirements are satisfied.
EFFECTIVELY CONNECTED INCOME
If interest or other payments received by a non-U.S. Holder with respect to
the notes (including proceeds from the disposition of the notes) are effectively
connected with the conduct by the non-U.S. Holder of a trade or business within
the United States (or the non-U.S. Holder is otherwise subject to U.S. federal
income taxation on a net basis with respect to such holder's ownership of
notes), such non-U.S. Holder will generally be subject to the rules described
above under "U.S. Holders" (subject to any modification provided under an
applicable income tax treaty). Non-U.S. corporate holders may also be subject to
the U.S. "branch profits tax" at a rate of 30%, or a lower rate provided by an
applicable income tax treaty.
INFORMATION REPORTING AND BACKUP WITHHOLDING
If the notes are held by a non-U.S. Holder through a non-U.S., and non-U.S.
related, broker or financial institution, information reporting and backup
withholding generally would not be required. Information reporting, and possibly
backup withholding, may apply if the notes are held by a non-U.S. Holder through
a U.S., or U.S. related, broker or financial institution and the non-U.S. Holder
fails to provide appropriate information. Non-U.S. Holders should consult their
tax advisors.
149
<PAGE>
PLAN OF DISTRIBUTION
Each broker-dealer that receives series B notes for its own account pursuant
to the exchange offer must acknowledge that it will deliver a prospectus in
connection with any resale of the series B notes. This Prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of series B notes received in exchange for series A
notes where the series A notes were acquired as a result of market-making
activities or other trading activities. We have agreed that for a period of one
year from the expiration date, we will make this Prospectus, as amended or
supplemented, available to any broker-dealer for use in connection with any
resale. In addition, until , 2001, all broker-dealers effecting
transactions in the series B notes may be required to deliver a prospectus.
We will not receive any proceeds from any sale of series B notes by
broker-dealers. Series B notes received by broker-dealers for their own account
pursuant to the exchange offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writing of options on the series B notes or a combination of these methods
of resale, at market prices prevailing at the time of resale, at prices related
to these prevailing market prices or negotiated prices. Any resale may be made
directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any broker-dealer
and/or the purchasers of any series B notes. Any broker-dealer that resells
series B notes that were received by it for its own account pursuant to the
exchange offer and any broker or dealer that participates in a distribution of
the series B notes may be deemed to be an "underwriter" within the meaning of
the Securities Act and any profit from any resale of series B notes and any
commissions or concessions received by any of these persons may be deemed to be
underwriting compensation under the Securities Act. The Letter of Transmittal
states that by acknowledging that it will deliver and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it an "underwriter"
within the meaning of the Securities Act.
For a period of one year from the expiration of the exchange offer, we will
send a reasonable number of copies of this Prospectus and any amendment or
supplement to this Prospectus to any broker-dealer that requests those documents
in the Letter of Transmittal.
LEGAL MATTERS
Certain legal matters relating to the series B notes and certain series B
note guarantees will be passed upon on our behalf by Kramer Levin Naftalis &
Frankel LLP, New York, New York. Certain legal matters relating to the Autotote
Enterprises, Inc. series B guarantee will be passed upon on our behalf by Tobin,
Carberry, O'Malley, Reiley and Selinger, P.C. Connecticut. Certain legal matters
relating to the Acra Acquisition Corp. series B guarantee will be passed upon on
our behalf by Sills, Cummis, Raclin, Tischman, Epstein & Gross, P.A. New Jersey.
Certain legal matters relating to the Autotote Gaming, Inc. series B guarantee
will be passed upon on our behalf by Schreck Brigrane Godfrey, Nevada.
INDEPENDENT PUBLIC ACCOUNTANTS
The consolidated balance sheets of Autotote as of October 31, 1999 and 1998,
and the related consolidated statements of operations, stockholders' equity
(deficit) and cash flows for each of the years in the three-year period ended
October 31, 1999, together with the related notes, financial statement schedule
and report of KPMG LLP, independent auditors, all contained in Autotote's 1999
Annual Report on Form 10-K, are included herein.
The consolidated financial statements of Scientific Games as of December 31,
1998 and 1999 and for each of the years in the three-year period ended December
31, 1999, included in this Prospectus, have been audited by Ernst & Young LLP,
independent auditors, as stated in their report appearing herein.
150
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
AUTOTOTE CORPORATION
Independent Auditors' Report.............................. F-2
Audited Consolidated Financial Statements:
Balance Sheets as of October 31, 1998 and 1999.......... F-3
Statements of Operations for the years ended October 31,
1997, 1998 and 1999.................................... F-4
Statements of Stockholders' Equity (Deficit) and
Comprehensive Loss for the years ended October 31,
1997, 1998 and 1999.................................... F-5
Statements of Cash Flows for the years ended October 31,
1997, 1998 and 1999.................................... F-6
Notes to Audited Consolidated Financial Statements........ F-8
Schedule II:
Valuation and Qualifying Accounts....................... F-40
Unaudited Consolidated Financial Statements:
Balance Sheet as of July 31, 2000....................... F-41
Statements of Operations for the three months ended July
31, 1999 and 2000...................................... F-42
Statements of Operations for the nine months ended July
31, 1999 and 2000...................................... F-43
Statements of Cash Flows for the nine months ended July
31, 1999 and 2000...................................... F-44
Notes to Unaudited Consolidated Financial Statements...... F-45
SCIENTIFIC GAMES HOLDINGS CORP.
Report of Independent Auditors............................ F-58
Audited Consolidated Financial Statements:
Balance Sheets as of December 31, 1998 and 1999......... F-59
Statements of Income for the years ended December 31,
1997, 1998 and 1999.................................... F-60
Statements of Cash Flows for the years ended December
31, 1997, 1998 and 1999................................ F-61
Statements of Shareholders' Equity for the years ended
December 31, 1997,
1998 and 1999......................................... F-62
Notes to Audited Consolidated Financial Statements........ F-63
Unaudited Consolidated Condensed Financial Statements:
Balance Sheet as of June 30, 2000....................... F-86
Statements of Income for the three-month and six-month
period ended June 30, 1999 and 2000.................... F-87
Statements of Cash Flows for the six-month period ended
June 30, 1999 and 2000................................. F-88
Notes to Unaudited Consolidated Condensed Financial
Statements.............................................. F-89
</TABLE>
F-1
<PAGE>
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, 1998 and 1999, and the results of
their operations and their cash flows for each of the years in the three-year
period ended October 31, 1999, in conformity with 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, 1999
F-2
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
OCTOBER 31, 1998 AND 1999
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1998 1999
--------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 6,809 5,067
Restricted cash........................................... 638 771
Accounts receivable, net of allowance for doubtful
accounts of $1,811 and $2,789 in 1998 and 1999,
respectively............................................ 21,752 25,755
Inventories............................................... 11,295 14,636
Prepaid expenses, deposits and other current assets....... 1,932 2,319
--------- --------
Total current assets.................................. 42,426 48,548
--------- --------
Property and equipment, at cost............................. 196,748 199,767
Less accumulated depreciation............................. 118,315 123,039
--------- --------
Net property and equipment............................ 78,433 76,728
--------- --------
Goodwill, net of amortization............................... 3,614 5,237
Operating right, net of amortization........................ 14,848 13,848
Other assets and investments................................ 17,179 21,198
--------- --------
$ 156,500 165,559
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current installments of long-term debt.................... $ 2,992 4,253
Accounts payable.......................................... 13,610 20,102
Accrued liabilities....................................... 24,996 28,015
Interest payable.......................................... 3,706 3,898
--------- --------
Total current liabilities............................. 45,304 56,268
--------- --------
Deferred income taxes....................................... 1,832 1,656
Other long-term liabilities................................. 2,124 2,963
Long-term debt, excluding current installments.............. 120,878 117,891
Long-term debt, convertible subordinated debentures......... 35,000 35,000
--------- --------
Total liabilities..................................... 205,138 213,778
--------- --------
Stockholders' equity (deficit):
Preferred stock, par value $1.00 per share, 2,000 shares
authorized, none outstanding............................ -- --
Class A common stock, par value $0.01 per share, 99,300
shares authorized, 35,943 and 36,268 shares outstanding
at October 31, 1998 and 1999, respectively.............. 360 364
Class B non-voting common stock, par value $0.01 per
share, 700 shares authorized, none outstanding.......... -- --
Additional paid-in capital................................ 149,119 149,622
Accumulated losses........................................ (197,231) (196,852)
Treasury stock, at cost................................... (102) (102)
Accumulated other comprehensive loss...................... (784) (1,251)
--------- --------
Total stockholders' equity (deficit).................. (48,638) (48,219)
--------- --------
Commitments and contingencies (Notes 8, 10, 13 and 14)...... $ 156,500 165,559
========= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED OCTOBER 31, 1997, 1998 AND 1999
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Operating revenues:
Services................................................ $132,989 135,790 148,660
Sales................................................... 24,343 23,523 62,488
-------- ------- -------
157,332 159,313 211,148
-------- ------- -------
Operating expenses (exclusive of depreciation and
amortization shown below):
Services................................................ 80,496 88,916 99,496
Sales................................................... 15,396 15,739 43,937
-------- ------- -------
95,892 104,655 143,433
-------- ------- -------
Total gross profit.................................... 61,440 54,658 67,715
Selling, general and administrative expenses................ 28,444 26,205 27,178
(Gain) loss on sale of businesses........................... (1,823) 66 1,600
Depreciation and amortization............................... 36,728 29,489 22,189
-------- ------- -------
Operating income (loss)............................... (1,909) (1,102) 16,748
Other (income) deductions:
Interest expense........................................ 14,367 15,521 16,177
Other (income) expense.................................. 79 (1,064) 15
-------- ------- -------
14,446 14,457 16,192
-------- ------- -------
Income (loss) before income tax expense and
extraordinary item.................................... (16,355) (15,559) 556
Income tax expense.......................................... 906 321 177
-------- ------- -------
Income (loss) before extraordinary item................. (17,261) (15,880) 379
Extraordinary item--write-off of deferred financing fees and
expenses, net of gain on early retirement of subordinated
debt...................................................... (426) -- --
-------- ------- -------
Net income (loss)....................................... $(17,687) (15,880) 379
======== ======= =======
Net income (loss) per common share:
Net income (loss) per basic share and diluted share
before extraordinary item............................. (0.50) (0.44) 0.01
Extraordinary loss per basic share and diluted share.... (0.01) -- --
-------- ------- -------
Net income (loss) per basic share and diluted share..... $ (0.51) (0.44) 0.01
======== ======= =======
Weighted average number of shares used in per share
calculations:
Basic shares............................................ 34,469 35,696 36,118
Diluted shares.......................................... 34,469 35,696 38,343
======== ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
AND COMPREHENSIVE LOSS
YEARS ENDED OCTOBER 31, 1997, 1998 AND 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1998 1999
--------- -------- --------
<S> <C> <C> <C>
COMMON STOCK:
Beginning balance........................................... $ 315 354 360
Issuance of Class A common stock, net of issuance
expenses................................................ 9 6 4
Issuance of 2,964 shares of Class A common stock in
litigation settlement................................... 30 -- --
--------- -------- --------
Ending balance.............................................. 354 360 364
--------- -------- --------
ADDITIONAL PAID-IN CAPITAL:
Beginning balance........................................... 143,369 148,238 149,119
Issuance of Class A common stock, net of issuance
expenses................................................ 952 511 233
Issuance of Class A common stock in litigation
settlement.............................................. 3,470 -- --
Deferred compensation..................................... 447 370 270
--------- -------- --------
Ending balance.............................................. 148,238 149,119 149,622
--------- -------- --------
ACCUMULATED LOSSES:
Beginning balance........................................... (163,664) (181,351) (197,231)
Net income (loss)......................................... (17,687) (15,880) 379
--------- -------- --------
Ending balance.............................................. (181,351) (197,231) (196,852)
--------- -------- --------
TREASURY STOCK.............................................. (102) (102) (102)
--------- -------- --------
ACCUMULATED OTHER COMPREHENSIVE LOSS:
Beginning balance........................................... (114) (379) (784)
Other comprehensive loss.................................. (265) (405) (467)
--------- -------- --------
Ending balance.............................................. (379) (784) (1,251)
--------- -------- --------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT)........................ $ (33,240) (48,638) (48,219)
========= ======== ========
COMPREHENSIVE LOSS:
Net income (loss)........................................... $ (17,687) (15,880) 379
Other comprehensive loss:
Minimum pension liability adjustment...................... -- (495) (107)
Foreign currency translation adjustment................... (265) 90 (360)
--------- -------- --------
Other comprehensive loss.................................... (265) (405) (467)
--------- -------- --------
COMPREHENSIVE LOSS.......................................... $ (17,952) (16,285) (88)
========= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED OCTOBER 31, 1997, 1998 AND 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1998 1999
--------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)....................................... $ (17,687) (15,880) 379
--------- ------- -------
Adjustments to reconcile net income (loss) to cash
provided by operating activities:
Depreciation and amortization....................... 36,728 29,489 22,189
Change in deferred income taxes, net of effects of
businesses sold................................... (784) (592) 54
(Gain) loss on sale of businesses................... (1,823) 66 1,600
Non-cash extraordinary items........................ 426 -- --
Changes in operating assets and liabilities, net of
effects of acquisitions/dispositions of
subsidiaries:
Restricted cash................................. 99 57 (150)
Accounts receivable............................. 1,339 (7,841) (4,826)
Inventories..................................... (1,585) (4,600) (3,314)
Unbilled receivables............................ 2,553 -- --
Accounts payable................................ (3,314) 2,909 7,494
Accrued liabilities............................. 5,125 2,762 2,034
Other............................................... 2,641 1,790 1,089
--------- ------- -------
Total adjustments............................... 41,405 24,040 26,170
--------- ------- -------
Net cash provided by operating activities................... 23,718 8,160 26,549
--------- ------- -------
Cash flows from investing activities:
Capital expenditures.................................... (2,262) (2,773) (2,069)
Wagering systems expenditures........................... (5,226) (21,287) (12,865)
Increase in other assets and investments................ (2,336) (7,277) (9,035)
Business acquisitions, net of cash acquired............. -- 2,177 (2,333)
Proceeds from sale of business and assets, net of cash
transferred........................................... 21,056 -- --
Other................................................... (351) (63) 759
--------- ------- -------
Net cash provided by (used in) investing activities......... 10,881 (29,223) (25,543)
--------- ------- -------
Cash flows from financing activities:
Net repayments under revolving credit facility.......... (71,890) -- --
Proceeds from issuance of long-term debt, net of
financing fees........................................ 106,334 12,059 --
Payments on long-term debt.............................. (57,395) (3,072) (3,154)
Net proceeds from issuance of common stock.............. 961 516 237
--------- ------- -------
Net cash provided by (used in) financing activities......... (21,990) 9,503 (2,917)
--------- ------- -------
Effect of exchange rate changes on cash..................... (390) 162 169
--------- ------- -------
Increase (decrease) in cash and cash equivalents............ 12,219 (11,398) (1,742)
Cash and cash equivalents, beginning of year................ 5,988 18,207 6,809
--------- ------- -------
Cash and cash equivalents, end of year...................... $ 18,207 6,809 5,067
========= ======= =======
</TABLE>
F-6
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED OCTOBER 31, 1997, 1998 AND 1999
(IN THOUSANDS)
NON-CASH INVESTING AND FINANCING ACTIVITIES
1997, 1998 AND 1999
See Notes 9 and 10 for a description of the write-off of deferred financing
fees, and capital lease transactions; and also in 1997 see Notes 9 and 12 for a
description of the gain on early retirement of subordinated debt and the
issuance of common stock in settlement of a stockholder litigation.
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the year for:
<TABLE>
<CAPTION>
OCTOBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Interest........................................... $10,199 14,786 15,077
Income taxes....................................... $ 938 630 710
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1998 AND 1999
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. DESCRIPTION OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) DESCRIPTION OF THE BUSINESS
Autotote Corporation (the "Company") operates primarily in three business
segments, Pari-mutuel Operations, Venue Management and Lottery Operations.
Pari-mutuel Operations--include all aspects of our pari-mutuel service
business, which encompass our North American and international on-track,
off-track and inter-track pari-mutuel services, simulcasting and communications
services, video gaming, and sales of pari-mutuel systems and equipment. We are
the leading provider of computerized pari-mutuel wagering systems to the North
American Racing Industry and are also a leading provider of such systems
worldwide. We are one of the leading providers of simulcasting services to the
racing industry in the United States and Europe. Additionally, we provide
technologically advanced VGMs to the North American Racing Industry for use at
racetracks. Venue Management--we own and operate the Connecticut off-track
betting operations ("OTBs") and we are the exclusive licensed operator of all
on-track and off-track pari-mutuel wagering operations in The Netherlands.
Lottery Operations--include both domestic and international lottery service
operations. We provide lottery systems and services to three states in the
United States, Latin America and we sell lottery systems and equipment
internationally.
(B) PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the Company and subsidiaries in which the Company's ownership is greater than
50%. Investments in other entities where the Company has the ability to exercise
significant influence over the investee are accounted for on the equity basis.
Under the equity method, investments are stated at cost plus the Company's
equity in undistributed earnings after acquisition. All significant
inter-company balances and transactions have been eliminated in consolidation.
(C) CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments with an original
maturity at the date of purchase of three months or less to be cash equivalents.
(D) RESTRICTED CASH
Restricted cash represents amounts on deposit by customers for TeleBet
wagering. State regulations require the Company to maintain such balances until
deposited amounts are wagered or returned to the customer.
F-8
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(E) INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined as
follows:
<TABLE>
<CAPTION>
ITEM COST METHOD
---- -----------
<S> <C>
Parts.................... First-in, first-out or weighted moving average.
Work-in-process &
finished goods......... Specific identification or weighted moving average
for direct material and labor; other fixed and
variable production costs are allocated as a
percentage of direct labor cost.
Ticket paper............. First-in, first-out
</TABLE>
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:
<TABLE>
<CAPTION>
ESTIMATED LIFE
ITEM IN YEARS
---- --------------
<S> <C>
Machinery and equipment..................................... 3-10
Transportation equipment.................................... 3-7
Furniture and fixtures...................................... 5-10
Buildings and leasehold improvements........................ 5-40
</TABLE>
Depreciation expense includes the amortization of capital leased assets. Due
to the large number of service contract renewals in fiscal 1998 and the realized
durability of the equipment, the Company lengthened the depreciable lives of its
pari-mutuel terminals from seven to ten years commencing November 1, 1998. As a
result of the change in depreciable lives, depreciation expense was reduced by
approximately $4,400 annually. Additionally, in fiscal 1998, the Company
completed the installation of new lottery terminals for the Connecticut State
Lottery under a contract with an initial five-year term plus five one-year
options to extend the contract through May 2008. Based on industry practice of
lottery contracts and the Company's historical relationship with the Connecticut
State Lottery for the past ten years, the Company is depreciating the terminals
and installation costs on a straight-line method over their estimated useful
lives of ten years.
(G) DEFERRED INSTALLATION COSTS
Certain installation costs consisting of installation materials, customer
contracted software and installation labor associated with leased systems are
deferred and amortized over the lives of the leases unless such costs are
reimbursed by the lessee, in which case such amounts are included in revenue and
cost of sales. Deferred installation costs, net of accumulated depreciation,
included in property and equipment were approximately $5,517 and $5,807 at
October 31, 1998 and 1999, respectively.
F-9
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(H) GOODWILL
Goodwill represents the excess of the purchase price over the fair value of
the net assets of acquired companies. Goodwill acquired arising from the
Company's acquisition of its simulcasting operation is being amortized on a
straight-line basis over five years; for its German pari-mutuel wagering
business, goodwill is being amortized on a straight-line basis over 10 to
15 years; for its French pari-mutuel wagering business, goodwill was fully
amortized in fiscal 1998 due to the loss of a major service contract; for its
SJC Video business, goodwill was fully written-off in fiscal 1999 in connection
with the loss on disposition of that business. Total goodwill amounted to $3,614
and $5,237, net of accumulated amortization of $10,648 and $12,503 as of
October 31, 1998 and 1999, respectively.
The Company assesses the recoverability of this intangible asset by
determining whether the amortization of the goodwill balance over its remaining
life can be recovered through undiscounted future cash flows of the acquired
operation and other considerations. The amount of impairment of goodwill, if
any, is measured based on projected discounted future cash flows.
(I) OPERATING RIGHT
On July 1, 1993, the Company acquired the exclusive right to operate the
Connecticut off-track betting system. This operating asset is being amortized on
a straight-line basis over twenty years and amounted to $14,848 and $13,848 net
of accumulated amortization of $5,357 and $6,357 at October 31, 1998 and 1999,
respectively.
(J) OTHER ASSETS AND INVESTMENTS
The Company capitalizes costs associated with internally developed and/or
purchased software systems for new products and enhancements to existing
products that meet technological feasibility and recoverability tests. The
Company also capitalizes costs associated with the procurement of long-term
financing, and costs attributable to transponder leases, patents, trademarks,
marketing rights, and non-competition and employment agreements arising
primarily from business acquisitions. These capitalized costs are amortized on
the straight-line basis over their useful lives.
(K) REVENUE RECOGNITION
Revenues from wagering system, simulcast and lottery service contracts are
recognized over the contract period pursuant to the terms of the contracts.
Costs of providing operating services under contracts are charged to operations
in the period incurred. Revenue from the operation of off-track betting concerns
is recognized based on a percentage of amounts wagered.
Revenues from major contracts for the sale of wagering systems and revenues
for contracted software development are recognized on the percentage of
completion method of accounting based on the ratio of costs incurred to the
total estimated costs. Any anticipated losses on fixed price contracts are
charged to operations when such losses can be estimated. The Company recognizes
revenue from software licenses upon shipment if post-delivery obligations are
insignificant and if the terms of the agreement are such that the payment
obligation is non-cancelable and non-refundable. Revenue arising from the sale
of component equipment and supplies is recognized when shipped.
F-10
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(L) INCOME TAXES
Income taxes are calculated using the asset and liability method under
Statement of Financial Accounting Standard (SFAS) No. 109. Under this method,
deferred income taxes are calculated by applying enacted statutory tax rates to
cumulative temporary differences between financial statement carrying amounts
and the tax basis of existing assets and liabilities. Under SFAS 109, the effect
on deferred taxes of a change in tax rates is recognized in income in the period
that includes the enactment date.
(M) FOREIGN CURRENCY TRANSLATION
Assets and liabilities of foreign operations are translated at year-end
rates of exchange and operations are translated at the average rates of exchange
for the year. Gains or losses resulting from translating the foreign currency
financial statements are accumulated as a separate component of accumulated
other comprehensive loss in stockholders' equity (deficit). Gains or losses
resulting from foreign currency transactions are included in other income
deductions in the consolidated statements of operations.
(N) STOCK-BASED COMPENSATION
Stock-based compensation is recognized using the intrinsic value method. For
disclosure purposes (see Note 13), pro forma net income (loss) and income (loss)
per share data are provided in accordance with Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" as if the fair value method
had been applied.
(O) FINANCIAL STATEMENT PREPARATION
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Some of the more significant estimates being made involve
percentage of completion for contracted software development projects,
capitalization of software development costs, evaluation of the recoverability
of assets and assessment of litigation and contingencies, including income and
other taxes. Actual results could differ from those estimates.
(P) COMPREHENSIVE INCOME (LOSS)
On November 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130
establishes standards for the reporting and display of comprehensive income
(loss) and its components in a full set of financial statements. SFAS 130
requires that unrealized losses from the Company's foreign currency translation
adjustments and unrecognized minimum pension liability, which prior to adoption
were reported separately in stockholders' equity (deficit), to be included in
other comprehensive income (loss). Prior year consolidated financial statements
have been reclassified to conform to the requirements of SFAS 130.
F-11
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(Q) RECLASSIFICATION
Certain reclassifications have been made to the prior years consolidated
financial statements to conform to the current presentation.
2. BASIC NET INCOME (LOSS) PER COMMON SHARE AND DILUTED NET INCOME (LOSS) PER
COMMON SHARE
Basic net income (loss) per common share is computed by dividing net income
(loss) by the weighted average number of common shares outstanding during the
period. Diluted net income per share gives effect to all dilutive potential
common shares that were outstanding during the period. Potential common shares
are not included in the calculation of the dilutive net loss per share in the
applicable years presented, since their inclusion would be anti-dilutive. Basic
and diluted net loss per common share for the applicable years presented,
therefore, are the same. At October 31, 1999, the Company had outstanding stock
options, warrants, convertible subordinated debentures, Performance Accelerated
Restricted Stock Units and deferred shares which could potentially dilute basic
earnings per share in the future (see Notes 12 and 13).
The following represents a reconciliation of the numerator and denominator
used in computing basic and diluted net income per share for the years ended
October 31, 1997, 1998 and 1999:
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
INCOME (NUMERATOR)
Net income (loss).............................. $(17,687) (15,880) 379
======== ======== ========
SHARES (DENOMINATOR)
Basic weighted average common shares
outstanding.................................. 34,469 35,696 36,118
Effect of diluted securities-stock options,
warrants, and deferred shares................ -- -- 2,225
-------- -------- --------
Diluted weighted average common shares
outstanding.................................. 34,469 35,696 38,343
======== ======== ========
PER SHARE AMOUNT
Basic net income (loss) per share.............. $ (0.51) (0.44) 0.01
======== ======== ========
Diluted net income (loss) per share............ $ (0.51) (0.44) 0.01
======== ======== ========
</TABLE>
3. ACQUISITIONS AND DISPOSITIONS
ACQUISITION OF DATASPORT ASSETS AND INTEREST IN DATEK
On September 1, 1999, the Company completed the purchase of selected assets
and the assumption of certain liabilities, from Datasport Toto Dienstleistung
GmbH & Co KG ("Datasport"). As a result of this purchase, the Company is the
sole provider of totalisator and simulcasting services to the 14 thoroughbred
racetracks in Germany. The transaction also increased the Company's ownership
and control of Datek GmbH ("Datek"), the primary provider of pari-mutuel
wagering to OTBs and bookmakers in Germany. The purchase, which included
approximately $2,333 in cash and the assumption of certain liabilities, was
recorded using the purchase method of accounting, and the acquired assets and
liabilities have been recorded at their estimated fair value at the date of
acquisition. The excess of the purchase price over the fair values of the net
assets acquired was
F-12
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
3. ACQUISITIONS AND DISPOSITIONS (CONTINUED)
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.
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. The Company expects to incur a loss on the sale of
approximately $1,600 and, accordingly, has recorded this anticipated loss in
fiscal 1999.
On April 15, 1997, the Company completed the sale of its European lottery
business through the sale of its stock ownership of Tele Control Kommunikations
und Computersysteme Aktien Gesellschaft ("Tele Control") for cash consideration
of approximately $26,600, including contingent consideration of approximately
$1,600. The results of operations of Tele Control were included in the Company's
Lottery operations segment.
At closing, the Company provided the purchaser with a letter of credit to
secure certain obligations under the sales agreement. The letter of credit,
which had an outstanding balance of $1,500 at October 31, 1997, expired in
October 1998. The Company recorded gains on the sale of its European lottery
business in the amount of $1,823 in fiscal 1997 and $1,184 in fiscal 1998.
The following unaudited information shows the revenues, expenses and
operating income of the European lottery business that were included in the
Company's consolidated statements of operations for the fiscal year ended
October 31, 1997. Interest and income tax expenses have not been included in the
table below.
<TABLE>
<CAPTION>
1997
--------
<S> <C>
Operating revenue........................................... $6,119
Operating expenses, including selling, general and
administrative expenses, and depreciation and amortization
expenses.................................................. 6,181
------
Operating loss.............................................. $ (62)
======
</TABLE>
F-13
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
4. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
OCTOBER 31,
-------------------
1998 1999
-------- --------
<S> <C> <C>
Parts and work-in-process.................................. $10,082 13,735
Finished goods............................................. 448 344
Ticket paper............................................... 765 557
------- ------
$11,295 14,636
======= ======
</TABLE>
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:
<TABLE>
<CAPTION>
OCTOBER 31,
-------------------
1998 1999
-------- --------
<S> <C> <C>
Machinery, equipment and deferred installation costs..... $167,914 169,334
Land and buildings....................................... 14,455 14,251
Transportation equipment................................. 509 722
Furniture and fixtures................................... 3,629 3,971
Leasehold improvements................................... 4,941 5,886
Construction in progress................................. 5,300 5,603
-------- -------
$196,748 199,767
======== =======
</TABLE>
Depreciation expense for the years ended October 31, 1997, 1998, and 1999
amounted to $21,790, $19,310, and $14,158, respectively.
Costs for equipment associated with specific wagering systems contracts not
yet placed in service are recorded as construction in progress. When the
equipment is placed in service at wagering facilities, the related costs are
transferred from construction in progress to machinery and equipment, and the
Company commences depreciation of the costs.
F-14
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
6. OTHER ASSETS AND INVESTMENTS
Other assets and investments (net) consist of the following:
<TABLE>
<CAPTION>
OCTOBER 31,
-------------------
1998 1999
-------- --------
<S> <C> <C>
Software systems development costs......................... $ 5,978 8,718
Deferred financing costs................................... 4,293 3,351
Customer notes............................................. 2,014 3,031
Other intangible assets.................................... 911 862
Other assets............................................... 3,983 5,236
------- ------
$17,179 21,198
======= ======
</TABLE>
In fiscal 1998 and 1999, the Company capitalized $3,700 and $5,246,
respectively, of software systems development costs related primarily to video
gaming, pari-mutuel wagering and domestic lottery applications. Capitalized
costs are amortized on a straight-line basis over a period of five years.
Amortization of capitalized software systems development costs was $4,962,
$2,318 and $2,506 for the years ended October 31, 1997, 1998 and 1999,
respectively.
Deferred financing costs relate to those costs associated with the
procurement of long term financing by the Company. Such costs are amortized over
the life of the financing agreements. In fiscal 1998, the Company capitalized
$363 in deferred financing fees. Amortization of deferred financing costs
amounted to $1,268, $893 and $942 for the fiscal years ended October 31, 1997,
1998 and 1999, respectively.
Other assets in fiscal 1998 and 1999 includes $750 loaned by the Company to
Atlantic City Racing Association ("ACRA"). The loan is secured by a mortgage on
certain real estate owned by ACRA. In consideration for this loan, the Company
has the right to acquire ACRA for an additional $6,250 subject to certain other
adjustments. The Company's decision to acquire ACRA will depend on whether or
not several State of New Jersey legislative and regulatory approvals, and
actions by ACRA have a favorable outcome. The Company expects to recover the
loan, however, under certain conditions, should the Company decide not to
purchase ACRA or if the Company's option is extended, the loan will be forgiven.
Deferred transponder costs arose in connection with the acquisition of the
Company's simulcasting business and were being amortized over a four-year
period. In fiscal 1998, as the result of the Galaxy satellite failure, the
remaining balance of deferred transponders was fully amortized. Amortization
expense amounted to $1,125 and $1,406 for the years ended October 31, 1997 and
1998, respectively.
F-15
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
7. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
OCTOBER 31,
-------------------
1998 1999
-------- --------
<S> <C> <C>
Compensation and benefits.................................. $ 8,825 8,830
Customer advances.......................................... 2,402 3,760
Taxes, other than income................................... 1,861 2,043
Income taxes payable....................................... 861 244
Other...................................................... 11,047 13,138
------- ------
$24,996 28,015
======= ======
</TABLE>
8. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
OCTOBER 31,
-------------------
1998 1999
-------- --------
<S> <C> <C>
10 7/8% Series B Senior Notes Due 2004................... $110,000 110,000
5.5% convertible subordinated debentures due August
2001................................................... 35,000 35,000
8.87% Term Loan Due February 2001........................ 11,400 9,000
Term Loan due in November 1999........................... 1,250 1,250
Capital lease obligations, payable monthly through May
2003 Interest from 5.9% to 13.0%....................... 362 1,453
Various loans and bank facilities, interest from 4.3% to
13%.................................................... 858 441
-------- -------
Total long-term debt................................. 158,870 157,144
Less current installments............................ 2,992 4,253
-------- -------
Long-term debt, excluding current installments....... $155,878 152,891
======== =======
</TABLE>
On May 22, 1998, the Company and Autotote Lottery Corporation entered into a
$12,000, three-year term loan arrangement (the "Term Loan") to partially finance
the development and installation of a lottery system for the Connecticut State
Lottery, including the manufacture of approximately three thousand new lottery
terminals. The Term Loan bears interest at a fixed rate of 8.87% payable
quarterly and at maturity on February 15, 2001, with principal payments of $600
due quarterly through January 31, 2001 with a final principal payment of $6,000
due at maturity.
In addition to scheduled principal payments, the Term Loan requires
mandatory principal prepayments upon the occurrence of certain events, including
asset sales, the incurrence of certain indebtedness, Recovery Events (as
defined), and Autotote Lottery Corporation Excess Cash Flow (as defined), in
each case, in excess of specified thresholds. The Term Loan was extended in
conjunction with the July 28, 1997 revolving credit facility (the "Facility")
and is subject to certain restrictive and financial covenants contained in the
Facility. Obligations under the Facility and Term Loan are jointly and severally
guaranteed by substantially all of the Company's U.S. subsidiaries and are
secured by (i) first priority security interests in substantially all tangible
and intangible assets of the Company and its U.S. subsidiaries, and (ii) a first
priority lien on all of the capital stock of the Company's U.S. subsidiaries and
on 65% of the capital stock of the Company's non-U.S. subsidiaries. In addition,
the Term Loan is secured by a first priority security interest in substantially
all of the Company's
F-16
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
8. LONG-TERM DEBT (CONTINUED)
Connecticut lottery assets now owned or hereafter acquired. Also, under the
terms of the Request for Proposal for the development and installation of the
lottery system for the Connecticut State Lottery, the Company provided a
Performance Bond in the initial amount of $8,000, which was automatically
increased to $10,000 upon the effective date of the agreement, May 9, 1998.
On July 28, 1997, the Company issued $110,000 of 10 7/8% Series A Senior
Notes due August 1, 2004, which were exchanged for $110,000 of 10 7/8% Series B
Notes due August 1, 2004 (the "Notes") in connection with the Company's exchange
offer in October 1997. The Notes bear interest at a rate of 10 7/8% per annum
payable semi-annually on each February 1 and August 1. The Notes are senior,
unsecured obligations of the Company, ranking senior in right and priority of
payment to all indebtedness of the Company that by its terms is expressly
subordinated to the Notes. The Notes are jointly and severally guaranteed by
substantially all of the Company's wholly owned U.S. subsidiaries (see
Note 23). The Notes will be redeemable, in whole or in part, at the option of
the Company, at any time on or after August 1, 2001, at redemption prices of
105.438% in fiscal year 2001, 102.719% in fiscal year 2002, and 100.000% in
fiscal year 2003 and thereafter, plus accrued and unpaid interest, if any, to
the date of redemption. In addition, at any time prior to August 1, 2000, the
Company may, at its option, redeem up to 35% of the aggregate principal amount
of the Notes originally issued with the net cash proceeds of one or more public
equity offerings, as defined, at a redemption price equal to 110.875% of the
principal amount to be redeemed plus accrued and unpaid interest to the date of
redemption, if any, provided, however, that at least 65% of the original
aggregate principal amount of the Notes remains outstanding immediately after
any such redemption. The indenture governing the Notes contains certain
covenants that, among other things, limit the ability of the Company and its
restricted subsidiaries, as defined, to incur additional indebtedness, create
certain liens, pay dividends, consummate certain asset sales, enter into certain
transactions with affiliates and merge or consolidate with any other person or
sell, assign, transfer, lease, convey or otherwise dispose of all or
substantially all of the assets of the Company. The net proceeds from the
offering, after deducting fees and expenses of approximately $4,900 were
approximately $105,100, of which approximately $93,590 was used to repay $91,390
of indebtedness and approximately $2,200 of accrued interest under the Company's
previously existing bank credit facility. In addition, approximately $4,050 of
the net proceeds was used to repurchase, at a discount, Subordinated Debentures
plus accrued interest and fees. The balance of the net proceeds was used for
general corporate purposes.
In connection with the issuance of the Notes, the Company also entered into
a new revolving credit facility (the "Facility") with certain lenders which
matures in February 2001. The Facility provides, subject to certain terms and
conditions, for borrowings of up to $25,000 with a $15,000 sublimit for letters
of credit. The Facility requires mandatory commitment reductions upon the
occurrence of certain events, including asset sales and the incurrence of
certain indebtedness, in each case, in excess of specified thresholds. In
addition, the Company may make optional prepayments and commitment reductions.
Borrowings under the Facility are available for working capital and general
corporate purposes and will bear interest at the Base Rate (as defined) plus a
margin ranging from 1.00% to 1.75% per annum, or the Eurodollar Rate (as
defined) plus a margin ranging from 2.00% to 2.75% per annum, in each case
depending on the Company's performance as measured by the ratio of net debt (as
defined) to EBITDA (as defined). Fees will be payable on outstanding letters of
credit equal to the applicable Eurodollar Rate margin (2.25% as of October 31,
1999), plus a facing fee of 1/8% per annum. A commitment fee of 1/2% per annum
is payable on the unused amount of the Facility. Obligations under
F-17
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
8. LONG-TERM DEBT (CONTINUED)
the Facility are jointly and severally guaranteed by substantially all of the
Company's U.S. subsidiaries. In addition, the Facility is secured by (i) first
priority security interests in substantially all tangible and intangible assets
of the Company and its U.S. subsidiaries, and (ii) a first priority lien on all
of the capital stock of the Company's U.S subsidiaries and on 65% of the capital
stock of the Company's non-U.S. subsidiaries.
The Facility contains certain covenants which limit the ability of the
Company to incur additional indebtedness; create liens; make restricted
payments, including dividends; engage in mergers, consolidations and asset
sales; make acquisitions, investments and capital expenditures; and engage in
certain transactions with certain subsidiaries and affiliates, in each case
beyond certain thresholds. The Facility also requires compliance with certain
financial covenants, including maintenance of minimum EBITDA and interest
coverage levels, and a maximum net debt to EBITDA ratio. In December 1998, the
Company and its lenders amended certain covenants contained in the Notes and the
Facility agreements to permit the Company to incur additional debt, and to
utilize working capital in order to complete business expansions in Europe.
Although there were no borrowings outstanding under the Facility at October 31,
1999, approximately $1,040 of letters of credit were guaranteed under the
Facility. As of October 31, 1999, the Company had approximately $23,960
available for borrowing under the Facility.
The 5.5% convertible subordinated debentures due 2001 (the "Debentures") are
convertible into 1,750 shares of Class A Common Stock at a conversion price of
$20.00 per share.
9. EXTRAORDINARY ITEMS
In connection with the fiscal 1997 issuance of the Notes and the subsequent
repayment of all amounts outstanding under the Company's previously existing
bank credit facility (see Note 8), the Company wrote-off $1,376 of deferred
financing fees associated with the Senior Facility. Also in fiscal 1997, the
Company used a portion of the net proceeds from the offering of the Notes to
repurchase $5,000 of its Subordinated Debt for $4,050, resulting in a $950 gain
on the early retirement of this debt. There were no tax benefits recognized on
the net extraordinary loss because the Company is currently in a tax loss
carryforward position.
10. LEASES
At October 31, 1999, the Company was obligated under operating leases
covering office equipment, office space, transponders and transportation
equipment expiring at various dates through 2006. Future minimum lease payments
required under these leasing arrangements at October 31, 1999 are as follows:
2000, $7,937; 2001, $7,319; 2002, $7,173; 2003, $7,100; 2004, $6,920; and
thereafter $1,659. The Company also leases equipment as needed under various
month-to-month lease agreements. Total rental expense under these operating
leases was $8,890, $9,109 and $8,155 in the years ended October 31, 1997, 1998
and 1999, respectively.
The Company entered into capital leases obligations of $141 in the year
ended October 31, 1997, and acquired $59 of capitalized leases with the
acquisition of the Netherlands operations in the year ended October 31, 1998.
During the year ended October 31, 1999, the Company entered into capital lease
obligations of $201 and acquired $1,426 of capitalized leases with the
acquisition of the Datasport and Datek businesses.
F-18
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
11. FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of financial instruments is determined by reference to market
data and other valuation techniques as appropriate. The Company believes the
fair value of its financial instruments, principally cash and cash equivalents,
restricted cash, accounts receivable, other current assets, accounts payable,
and accrued liabilities approximates their recorded values.
The Company believes that the fair value of the Notes approximated $106,000
at October 31, 1998 and $112,200 at October 31, 1999, based on reference to
dealer markets and quoted market prices. The Company was, however, unable to
determine the fair value of the Debentures in fiscal years 1998 and 1999.
12. CAPITAL STOCK
The Company has two classes of common stock consisting of Class A Common
Stock and Class B Non-voting Common Stock (Class B Common Stock). All shares of
Class A Common Stock and Class B Common Stock entitle holders to the same rights
and privileges except that the Class B Common Stock is non-voting. Each share of
Class B Common Stock is convertible into one share of Class A Common Stock.
During fiscal 1998, warrants to purchase an aggregate of 467 unregistered
shares (the "Shares") of the Company's Class A Common Stock were exercised at
the aggregate price of $583. The warrants, which were scheduled to expire in
April 1998, were issued by the Company in January 1996 to various banks that
were party to the Company's prior senior bank credit facility, in connection
with the Company entering into an amendment to such facility as of January 26,
1996. In addition, in fiscal 1998, the Company repurchased warrants to purchase
an aggregate of 58 Shares at a cost of approximately $79.
During fiscal 1997, the Company issued 2,964 shares of Class A Common Stock
in settlement of its stockholder litigation and issued 798 shares of Class A
Common Stock under an employee stock purchase offer.
On April 1, 1999, the Company issued 14 shares of Class A Common Stock due
to the vesting, in connection with an employee's retirement, of certain PARS
issued May 1995 (see Note 13 for a description of PARS).
WARRANTS
At October 31, 1999, the Company had the following warrants outstanding,
after giving effect to adjustments made in accordance with certain anti-dilution
provisions:
<TABLE>
<CAPTION>
EXERCISE
SHARES PRICE EXPIRATION
-------- -------- ----------------
<S> <C> <C> <C>
Warrants to purchase Class A Common Stock:
1998 Warrants............................................ 2,298 $1.69 October 31, 2002
1995 Warrants............................................ 387 $2.98 April 30, 2000
-----
Total Class A Common Stock Warrants...................... 2,685
=====
Warrants to purchase Class B Common Stock.................. 147 $3.83 October 30, 2003
=====
</TABLE>
F-19
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
12. CAPITAL STOCK (CONTINUED)
On November 2, 1998, the Company amended and restated certain 1991 Warrants
to adjust the exercise price and expiration date (the "1998 Warrants"). The
warrants were priced at no less than the fair market value of the Company's
Class A Common Stock on the amendment date.
13. STOCK OPTIONS
The Company has four stock option plans under which shares of Class A Common
Stock have been authorized for issuance to employees, officers and directors:
the 1984 Stock Option Plan (the "1984 Plan")--1,350 shares; the 1992 Equity
Incentive Plan (the "1992 Plan")--3,000 shares; the 1995 Equity Incentive Plan
(the "1995 Plan")--4,000 shares, and the 1997 Incentive Compensation Plan (the
"1997 Plan")--1,600 shares.
In May 1995, the Company offered holders of stock options with exercise
prices above market value as of May 26, 1995 the right to cancel such options in
exchange for Performance Accelerated Restricted Stock Units (the "PARS"). The
PARS represent deferred shares of Class A Common Stock which vest in 20%
increments on the sixth, seventh, eighth, ninth and tenth anniversaries of the
date of grant, or, in certain circumstances, on an accelerated basis based on
the Company's stock trading at certain per share prices, or at the discretion of
the Board of Directors. Options to purchase 1,976 shares were exchanged for 504
PARS. Additionally, restricted shares and deferred shares with a three year
vesting schedule were granted to certain non-employee directors under the 1992
Plan as follows: a total of 110 deferred shares at a fair market value of
$4.1250 per share were granted in fiscal 1995, a total of 50 deferred shares at
a fair market value of $3.1875 per share were granted in fiscal 1996, a total of
135 deferred shares at a fair market value of $1.3125 per share were granted in
fiscal 1997, a total of 40 restricted shares at a fair market value of $2.4375
per share were granted in fiscal 1998 and a total of 40 restricted shares at a
fair market value of $2.000 per share were granted in fiscal 1999. Accordingly,
the Company has recorded compensation expense of $499, $371 and $272 in fiscal
1997, 1998 and 1999, respectively. Additional compensation expense aggregating
$852 will be charged to expense through fiscal 2002 as the restricted shares
become fully vested.
Stock options granted under the Company's equity incentive plans are
exercisable at not less than the fair market value of the stock at the date of
grant, and none may be exercised more than 10 years from the date of grant.
Options are generally exercisable in four equal installments on the first,
second, third and fourth anniversaries of the date of grant. The Board of
Directors may, in its discretion, accelerate the exercisability, the lapsing of
restrictions, or the expiration of deferral or vesting period of any award under
the plans. From time to time, the Company grants additional stock options to
individuals outside of the 1992, 1995 and 1997 Plans in recognition of
contributions made to the Company.
F-20
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
13. STOCK OPTIONS (CONTINUED)
Information with respect to the Company's stock options is as follows:
<TABLE>
<CAPTION>
AVERAGE
STOCK OPTIONS SHARES PRICE(1)
------------- -------- --------
<S> <C> <C>
Outstanding at October 31, 1996............................. 3,718 $3.60
Granted................................................... 2,508 1.20
Canceled.................................................. 457 2.59
----- -----
Outstanding at October 31, 1997............................. 5,769 2.63
Granted................................................... 732 2.65
Canceled.................................................. 397 1.83
Exercised................................................. 10 1.26
----- -----
Outstanding at October 31, 1998............................. 6,094 2.69
Granted................................................... 1,860 2.24
Canceled.................................................. 365 2.40
Exercised................................................. 216 1.09
----- -----
Outstanding at October 31, 1999............................. 7,373 $2.63
===== =====
</TABLE>
--------------------------
(1) Weighted average exercise price.
Summarized information about stock options outstanding and exercisable at
October 31, 1999 is as follows:
<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
------------------------------------ ----------------------
EXERCISABLE AVERAGE AVERAGE AVERAGE
PRICE RANGE SHARES LIFE(1) PRICE(2) SHARES PRICE(2)
----------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
$1.00 to 2.00................................... 2,637 7.18 $1.33 996 $1.19
$2.01 to 3.00................................... 3,367 7.14 2.66 1,566 2.68
$3.01 to 4.00................................... 1,009 3.28 3.40 937 3.41
over $4.00...................................... 360 3.63 9.73 360 9.73
----- -----
7,373 3,859
===== =====
</TABLE>
------------------------
(1) Weighted average contractual life remaining in years.
(2) Weighted average exercise price.
The number of shares and weighted average exercise price per share of
options exercisable at October 31, 1997, 1998, and 1999 were 2,301 shares at
$3.90, 3,185 shares at $3.36 and 3,859 shares at $3.13, respectively. At
October 31, 1997, 1998 and 1999, 3,677 shares, 3,302 shares and 1,797 shares,
respectively, were available for future grants under the terms of these plans.
Outstanding options expire prior to July 7, 2009 and are exercisable at prices
ranging from $1.06 to $17.00 per share.
Effective November 1, 1996, the Company adopted the provisions of Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). This statement defines a fair value method of
accounting for an employee stock option or similar equity instrument. However,
it allows an entity to continue to measure compensation cost for those
instruments using the intrinsic-value-based method of accounting prescribed by
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" provided it discloses the effect of SFAS 123 in footnotes to the
financial statements. The Company has chosen to continue to account for
F-21
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
13. STOCK OPTIONS (CONTINUED)
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:
<TABLE>
<CAPTION>
OCTOBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Net income (loss):
As reported..................................... $(17,687) (15,880) 379
Pro forma....................................... (19,182) (17,605) (1,597)
Net income (loss) per basic and diluted share:
As reported..................................... (0.51) (0.44) 0.01
Pro forma....................................... (0.56) (0.49) (0.04)
</TABLE>
The fair value of the options granted was estimated using the Black-Scholes
option-pricing model based on the weighted average market price at date of grant
of $1.20 in fiscal 1997, $2.65 in fiscal 1998 and $2.24 in fiscal 1999 and the
following weighted average assumptions: risk-free interest rate of 6.1% for
fiscal 1997, 4.5% for fiscal 1998 and 5.8% for fiscal 1999; expected option life
of 7.0 years for fiscal 1997, 1998 and 1999; volatility of 81% for fiscal 1997,
75% fiscal 1998 and 59% for 1999; and no dividend yield in any year. The average
fair values of options granted during fiscal years 1997, 1998 and 1999 were
$0.93, $1.93 and $1.45 respectively.
14. SERVICE CONTRACT ARRANGEMENTS
Service contracts for wagering systems in North America generally cover a
five-year period and provide for substantial related services such as software,
maintenance personnel, computer operators and certain operating supplies. Under
such contracts, the Company retains ownership of all equipment located at the
wagering facilities. The service contracts also provide for certain warranties
covering operation of the equipment, machines, display equipment and central
computing equipment. The breach of such warranties could result in significant
liquidated damages. The equipment is placed at customer facilities under
contracts generally providing for revenue based on the greater of a percentage
of total amounts wagered or, if appropriate, a specified minimum.
Minimum annual payments expected to be received under service contracts in
effect as of October 31, 1999 with specified minimums are as follows: 2000,
$18,931; 2001, $7,014; 2002, $15,974; 2003, $14,804; 2004, $13,120 and
thereafter $10,593.
15. EXPORT SALES AND MAJOR CUSTOMERS
Sales to foreign customers amounted to $14,230, $9,717 and $49,939 in fiscal
years 1997, 1998 and 1999, respectively. No single customer represented more
than 10% of revenues in fiscal 1997 and 1998. In fiscal 1999, one customer in
the Lottery operations segment represented $35,969 or 17% of revenues.
F-22
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
16. PENSION PLANS
The Company has a defined benefit plan for union employees. Retirement
benefits under the plan are based upon the number of years of credited service
up to a maximum of thirty years for the majority of the employees. The Company's
policy is to fund the minimum contribution permissible by the Internal Revenue
Service.
The net cost for the Company's defined benefit plan for union employees
consisted of the following components:
<TABLE>
<CAPTION>
PENSION BENEFITS
-------------------
1998 1999
-------- --------
<S> <C> <C>
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year..................... $1,499 1,802
Service cost................................................ 63 88
Loss due to census change................................... 29 --
Interest cost............................................... 108 116
Actuarial gain.............................................. -- (49)
Benefits paid............................................... (53) (129)
Revaluation loss............................................ 156 --
------ ----
Benefit obligation at end of year........................... 1,802 1,828
------ ----
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year.............. 1,419 1,600
Actual return on plan assets................................ 108 (45)
Employer contribution....................................... 126 129
Benefits paid............................................... (53) (129)
------ ----
Fair value of plan assets at end of year.................... 1,600 1,555
------ ----
Funded status............................................... (202) (273)
Unrecognized actuarial loss................................. 454 567
Unrecognized prior service cost............................. 88 79
Unrecognized net transition obligation...................... 16 35
------ ----
Net amount recognized....................................... $ 356 408
====== ====
</TABLE>
F-23
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
16. PENSION PLANS (CONTINUED)
<TABLE>
<CAPTION>
PENSION BENEFITS
-------------------
1998 1999
-------- --------
<S> <C> <C>
Amounts recognized in the statement of financial position
consist of:
Accrued benefit liability................................... $ (583) (681)
Intangible asset............................................ 88 79
Accumulated other comprehensive income...................... 495 602
Prepaid pension cost........................................ 356 408
------ ----
Net amount recognized....................................... $ 356 408
====== ====
WEIGHTED-AVERAGE ASSUMPTIONS AS OF OCTOBER 31:
Discount rate............................................... 6.750% 6.750%
Expected return on plan assets.............................. 8.000% 8.000%
Rate of compensation........................................ None None
</TABLE>
<TABLE>
<CAPTION>
PENSION BENEFITS
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
COMPONENTS OF NET PERIODIC BENEFIT COST:
Service cost................................................ $ 67 63 88
Interest cost............................................... 97 108 116
Expected return on plan assets.............................. (85) (114) (129)
Net amortization and deferral............................... (8) 23 27
---- ---- ----
Net periodic cost........................................... $ 71 80 102
==== ==== ====
</TABLE>
The accumulated benefit obligation represents the actuarial present value of
benefits based upon the benefit multiplied by the participants' historical years
of service.
The plan assets are invested in insurance company general accounts
guaranteed as to principal.
As required by Financial Accounting Standards Board Statement No. 87 ("SFAS
87"), "Employers' Accounting for Pensions" for pension plans where the
accumulated benefit obligation exceeds the fair value of plan assets, the
Company has recognized in the consolidated balance sheet at October 31, 1998 and
1999 the additional minimum liability of the unfunded accumulated benefit
obligation of $583 and $681, respectively, as a long-term liability, with a
partially offsetting intangible asset and equity adjustment.
In connection with its collective bargaining agreements, the Company
participates with other companies in a defined benefit pension plan covering
union employees. Payments made to the multi-employer plan were approximately
$403, $280 and $469 during the years ended October 31, 1997, 1998 and 1999,
respectively.
The Company has a 401K plan covering all employees who are not covered by a
collective bargaining agreement. Company contributions to the plan are at the
discretion of the Board of Directors. Pension expense for the years ended
October 31, 1997, 1998 and 1999 amounted to approximately $760, $926 and $1,015,
respectively. The Company has a 401K plan for all union employees which does not
provide for Company contributions.
F-24
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
17. MANAGEMENT INCENTIVE COMPENSATION
The Company has an incentive compensation plan for key management personnel
based on business unit performance, overall performance of the Company and
individual performance. Management incentive compensation expense amounted to
$1,707, $1,686 and $2,000 in fiscal years 1997, 1998 and 1999, respectively.
18. INCOME TAX EXPENSE (BENEFIT)
The consolidated income (loss) before income tax expense (benefit) and
extraordinary item, by domestic and foreign source, is as follows:
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Domestic....................................... $(14,367) (14,371) 128
Foreign........................................ (1,988) (1,188) 428
-------- -------- --------
Consolidated income (loss) before income tax
expense (benefit) and extraordinary item..... $(16,355) (15,559) 556
======== ======== ========
</TABLE>
Income tax expense (benefit) consists of:
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
-------- -------- --------
<S> <C> <C> <C>
1997- Foreign..................................... $ 938 (32) 906
======= ====== =======
1998- Foreign..................................... $ 1,040 (719) 321
======= ====== =======
1999- Federal..................................... $ (33) (15) (48)
- Foreign..................................... 137 (161) (24)
- State....................................... 249 -- 249
------- ------ -------
- Total....................................... $ 353 (176) 177
======= ====== =======
</TABLE>
F-25
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
18. INCOME TAX EXPENSE (BENEFIT) (CONTINUED)
Temporary differences between the financial statement carrying amounts and
tax basis of assets and liabilities that give rise to significant portions of
the deferred tax liability (asset) relate to the following:
<TABLE>
<CAPTION>
OCTOBER 31,
-------------------
1998 1999
-------- --------
<S> <C> <C>
NET DEFERRED TAX LIABILITY
Accrued vacation...................................... $ (815) (767)
Inventory reserve..................................... (704) (532)
Accrued litigation expenses........................... (120) (612)
Accrued loss on disposition of business............... -- (600)
Other accrued liabilities............................. (74) (942)
Reserve for doubtful accounts......................... (569) (959)
Accrued downsizing costs.............................. (761) --
------- -------
Current deferred tax asset.......................... (3,043) (4,412)
------- -------
Intangible assets-difference in amortization
periods............................................. 1,159 1,298
Property and equipment differences in depreciation
methods............................................. 5,493 4,747
Other, net............................................ 54 58
Interest charge, Domestic International Sales Corp.... 5,290 5,927
------- -------
Noncurrent deferred tax liability, net.............. 11,996 12,030
------- -------
Net operating loss carryforward....................... (52,476) (48,746)
Deferred compensation................................. (615) (627)
Partnership investments............................... (343) (354)
Alternative minimum tax credits....................... (184) (335)
Research and experimentation credits.................. (51) (34)
------- -------
Noncurrent deferred tax asset....................... (53,669) (50,096)
Valuation allowance................................. 46,548 44,134
------- -------
Noncurrent deferred tax asset, net.................. (7,121) (5,962)
------- -------
Noncurrent deferred tax liability................... 4,875 6,068
------- -------
Net deferred tax liability on balance sheet......... $ 1,832 1,656
======= =======
</TABLE>
The aggregate deferred tax assets before valuation allowance at October 31,
1998 and 1999 were $56,712 and $54,508, respectively. The aggregate deferred tax
liabilities at October 31, 1998 and 1999 were $11,996 and $12,030, respectively.
F-26
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
18. INCOME TAX EXPENSE (BENEFIT) (CONTINUED)
The actual tax expense differs from the "expected" tax expense (benefit)
(computed by applying the U.S. Federal corporate rate of 34% to income (loss)
before income tax expense and extraordinary item) as follows:
<TABLE>
<CAPTION>
OCTOBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Computed "expected" tax expense (benefit)......... $(5,561) (5,290) 189
Increase (reduction) in income taxes resulting
from:
Unused net operating loss....................... 4,155 4,788 --
Foreign tax differential........................ 1,782 725 (201)
Other, net...................................... 530 98 189
------- ------- -------
$ 906 321 177
======= ======= =======
</TABLE>
The Company has regular tax net operating loss carryforwards of
approximately $35,116 that expire in 2009, $40,777 that expire in 2010, $25,406
that expire in 2011, $11,074 that expire in 2012 and $10,150 that expire in
2018.
The Company has minimum tax credit carryforwards (which can be carried
forward indefinitely) of approximately $335 and research and experimentation
credit carryforwards of approximately $34. The research and experimentation
credits expire from 2000 to 2003.
The net changes in the valuation allowance for deferred tax assets for the
years ended October 31, 1998 and 1999 were an increase of $4,375 and a decrease
of $2,414, respectively.
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
asset will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income,
and tax planning strategies in making this assessment. Because of tax losses in
recent years, no deferred tax assets have been recorded.
Subsequently recognized tax benefits relating to the valuation allowance for
deferred tax assets as of October 31, 1999 will be allocated as follows:
<TABLE>
<S> <C>
Income tax benefit that would be reported in the
consolidated statements of operations..................... $41,284
Additional capital (benefit from exercise of stock
options).................................................. 2,850
-------
$44,134
=======
</TABLE>
19. BUSINESS AND GEOGRAPHIC SEGMENTS
The Company adopted Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information"
("SFAS 131") in fiscal 1999. Business segments are defined by SFAS 131 as
components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision maker
assessing performance and making operating and capital decisions.
F-27
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
19. BUSINESS AND GEOGRAPHIC SEGMENTS (CONTINUED)
The following tables represent revenues, profits, depreciation and assets by
business and geographic segments for the years ended October 31, 1997, 1998 and
1999. Service revenues and product sales are allocated among business and
geographic segments based on where the customer is located. The accounting
policies of the segments are the same as those described in the summary of
significant accounting policies in Note 1. Corporate expenses are allocated
among business and geographic segments. Interest expense and other (income)
deductions are not allocated to business segments. Prior year's segment
information has been restated to conform to the requirements of SFAS 131.
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
BUSINESS SEGMENTS
Service revenue and product sales
Pari-mutuel operations...................... $ 88,390 88,864 99,174
Venue management operations................. 43,732 50,525 61,562
Lottery operations.......................... 23,106 18,047 49,340
SJC Video operations........................ 2,104 1,877 1,072
-------- ------- -------
$157,332 159,313 211,148
======== ======= =======
Gross profit
Pari-mutuel operations...................... $ 37,823 35,317 39,612
Venue management operations................. 12,903 13,569 15,121
Lottery operations.......................... 9,731 5,313 12,672
SJC Video operations........................ 983 459 310
-------- ------- -------
$ 61,440 54,658 67,715
======== ======= =======
Operating income (loss)
Pari-mutuel operations...................... $ (7,745) (6,410) 5,383
Venue management operations................. 4,998 5,570 5,839
Lottery operations.......................... 625 321 7,999
SJC Video operations........................ 213 (583) (2,473)
-------- ------- -------
$ (1,909) (1,102) 16,748
======== ======= =======
Included in operating income (loss)
Depreciation and amortization
Pari-mutuel operations...................... $ 26,382 23,912 16,386
Venue management operations................. 2,483 2,633 2,778
Lottery operations.......................... 7,205 2,100 2,297
SJC Video operations........................ 658 844 728
-------- ------- -------
$ 36,728 29,489 22,189
======== ======= =======
(Gain) loss on sale/disposition of businesses
Lottery operations.......................... (1,823) (1,184) --
SJC Video operations........................ -- 1,250 1,600
-------- ------- -------
$ (1,823) 66 1,600
======== ======= =======
</TABLE>
F-28
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
19. BUSINESS AND GEOGRAPHIC SEGMENTS (CONTINUED)
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
BUSINESS SEGMENTS
A reconciliation of total segment operating income to
consolidated income (loss) before income tax expense and
extraordinary item is as follows:
Total reported segments................................... $ (1,909) (1,102) 16,748
Interest expense.......................................... 14,367 15,521 15,941
Other (income) expense.................................... 79 (1,064) 251
-------- ------- -------
$(16,355) (15,559) 556
======== ======= =======
Assets
Pari-mutuel operations.................................. $111,957 99,946 110,598
Venue management operations............................. 35,358 36,537 34,613
Lottery operations...................................... 3,512 17,380 20,348
SJC Video operations.................................... 2,714 2,637 --
-------- ------- -------
$153,541 156,500 165,559
======== ======= =======
Capital and wagering systems expenditures
Pari-mutuel operations.................................. $ 5,262 9,217 10,714
Venue management operations............................. 446 1,368 1,492
Lottery operations...................................... 102 13,312 2,615
SJC Video operations.................................... 1,678 163 113
-------- ------- -------
$ 7,488 24,060 14,934
======== ======= =======
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
GEOGRAPHIC SEGMENTS
Service revenue and product sales
North America........................................... $125,402 126,726 135,299
Italy................................................... 3,632 11,298 36,331
Other................................................... 28,298 21,289 39,518
-------- ------- -------
$157,332 159,313 211,148
======== ======= =======
Long-lived assets
North America........................................... $ 72,648 73,270 70,576
Europe.................................................. 2,925 4,252 5,629
Other................................................... 816 911 523
-------- ------- -------
$ 76,389 78,433 76,728
======== ======= =======
</TABLE>
F-29
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
20. SELECTED QUARTERLY FINANCIAL DATA--(UNAUDITED)
Selected quarterly financial data for the years ended October 31, 1998 and
1999 is as follows:
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31, 1998
-----------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Total operating revenues................................... $34,431 36,215 38,795 49,872
Gross profit............................................... 12,933 13,946 13,170 14,609
Net loss................................................... (5,194) (2,066) (4,413) (4,207)
Net loss per basic share and diluted share................. $ (0.15) (0.06) (0.12) (0.12)
======= ====== ====== ======
Weighted average number of shares used in per share
calculation:
Basic and diluted shares................................. 35,389 35,504 35,916 35,941
======= ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31, 1999
-----------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Total operating revenues................................... $45,652 53,079 53,170 59,247
Gross profit............................................... 14,333 16,631 17,631 19,120
Net income (loss).......................................... (2,434) 572 1,895 346
Net income (loss) per basic share and diluted share........ $ (0.07) 0.02 0.05 0.01
======= ====== ====== ======
Weighted average number of shares used in per share
calculation:
Basic share.............................................. 35,998 36,032 36,169 36,246
Diluted share............................................ 35,998 37,371 38,699 39,465
======= ====== ====== ======
</TABLE>
21. UNUSUAL ITEMS
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.
22. LITIGATION
Although the Company is a party to various claims and legal actions arising
in the ordinary course of business, management believes, on the basis of
information presently available to it, that the ultimate disposition of these
matters will not likely have a material adverse effect on the financial position
or results of operations of the Company.
23. FINANCIAL INFORMATION FOR GUARANTOR SUBSIDIARIES AND NON-GUARANTOR
SUBSIDIARIES
The Company conducts substantially all of its business through its domestic
and foreign subsidiaries. On July 28, 1997, the Company issued $110,000
aggregate principal amount of Notes bearing interest at a rate of 10 7/8%. The
proceeds from the issuance of the Notes were used to repay all amounts
outstanding under the Senior Facility (see Note 8). The Notes are jointly and
severally
F-30
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
23. FINANCIAL INFORMATION FOR GUARANTOR SUBSIDIARIES AND NON-GUARANTOR
SUBSIDIARIES (CONTINUED)
guaranteed by substantially all of the Company's wholly owned domestic
subsidiaries (the "Guarantor Subsidiaries").
In August 2000, the Company expects to issue $150,000 of Senior Subordinated
Notes due 2010. Such notes will be jointly and severally guaranteed by all of
the Guarantor Subsidiaries.
Presented below is condensed consolidating financial information for
(i) Autotote Corporation (the "Parent Company") which includes the activities of
Autotote Management Corporation, (ii) the Guarantor Subsidiaries and (iii) the
wholly owned foreign subsidiaries and the non-wholly owned domestic and foreign
subsidiaries (the "Non-Guarantor Subsidiaries") as of October 31, 1998 and
October 31, 1999 and for the fiscal years ended October 31, 1997, 1998 and 1999.
The condensed consolidating financial information has been presented to show the
nature of assets held, results of operations and cash flows of the Parent
Company, Guarantor Subsidiaries and Non-Guarantor Subsidiaries assuming the
guarantee structure of the Notes was in effect at the beginning of the periods
presented. Separate financial statements for Guarantor Subsidiaries are not
presented based on management's determination that they would not provide
additional information that is material to investors.
The condensed consolidating financial information reflects the investments
of the Parent Company in the Guarantor and Non-Guarantor Subsidiaries using the
equity method of accounting. In addition, corporate interest and administrative
expenses have not been allocated to the subsidiaries.
F-31
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
OCTOBER 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
PARENT GUARANTOR NON-GUARANTOR ELIMINATING
COMPANY SUBSIDIARIES SUBSIDIARIES ENTRIES CONSOLIDATED
--------- ------------ -------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents.................. $ 2,054 260 4,495 -- 6,809
Accounts receivable, net................... -- 18,559 3,193 -- 21,752
Other current assets....................... 39 10,245 4,058 (477) 13,865
Property and equipment, net................ 389 70,897 7,437 (290) 78,433
Investment in subsidiaries................. 62,826 -- -- (62,826) --
Goodwill................................... 204 1,686 1,724 -- 3,614
Other assets............................... 6,090 26,748 692 (1,503) 32,027
--------- ------- ------ ------- -------
Total assets........................... $ 71,602 128,395 21,599 (65,096) 156,500
========= ======= ====== ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT)
Current liabilities........................ $ 12,463 21,668 8,103 78 42,312
Current installments of long-term debt..... -- 2,679 326 (13) 2,992
Long-term debt, excluding current
installments............................. 146,250 9,056 572 -- 155,878
Other non-current liabilities.............. 1,535 1,192 1,229 -- 3,956
Intercompany balances...................... (40,008) 42,900 (2,892) -- --
Stockholders' equity (deficit)............. (48,638) 50,900 14,261 (65,161) (48,638)
--------- ------- ------ ------- -------
Total liabilities and stockholders'
equity (deficit)..................... $ 71,602 128,395 21,599 (65,096) 156,500
========= ======= ====== ======= =======
</TABLE>
F-32
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
OCTOBER 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
PARENT GUARANTOR NON-GUARANTOR ELIMINATING
COMPANY SUBSIDIARIES SUBSIDIARIES ENTRIES CONSOLIDATED
--------- ------------ -------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents.................. $ 1,598 506 2,963 -- 5,067
Accounts receivable, net................... -- 21,083 4,672 -- 25,755
Other current assets....................... 30 14,143 4,017 (464) 17,726
Property and equipment, net................ 298 66,973 9,708 (251) 76,728
Investment in subsidiaries................. 58,214 -- -- (58,214) --
Goodwill................................... 198 353 4,686 -- 5,237
Other assets............................... 6,199 30,385 659 (2,197) 35,046
--------- ------- ------ ------- -------
Total assets........................... $ 66,537 133,443 26,705 (61,126) 165,559
========= ======= ====== ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT)
Current 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
========= ======= ====== ======= =======
</TABLE>
F-33
<PAGE>
AUTOTOTE CORPORATON AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED STATEMENT OF OPERATIONS
YEAR ENDED OCTOBER 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
PARENT GUARANTOR NON-GUARANTOR ELIMINATING
COMPANY SUBSIDIARIES SUBSIDIARIES ENTRIES CONSOLIDATED
-------- ------------ ------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Operating revenues.................................. $ -- 129,130 30,614 (2,412) 157,332
Operating expenses.................................. -- 80,303 17,915 (2,326) 95,892
-------- ------- ------ --------- -------
Gross profit...................................... -- 48,827 12,699 (86) 61,440
Selling, general and administrative expenses........ 10,963 12,696 4,686 99 28,444
Gain on sale/disposition of business................ (1,823) -- -- -- (1,823)
Depreciation and amortization....................... 69 28,423 8,578 (342) 36,728
-------- ------- ------ --------- -------
Operating income (loss)........................... (9,209) 7,708 (565) 157 (1,909)
Interest expense.................................... 14,269 (228) 497 (171) 14,367
Other (income) deductions........................... (326) (413) 746 72 79
-------- ------- ------ --------- -------
Income (loss) before equity in income of
subsidiaries, income taxes and extraordinary
items........................................... (23,152) 8,349 (1,808) 256 (16,355)
Equity in income of subsidiaries.................... 4,716 -- -- (4,716) --
Income tax expense.................................. 201 113 592 -- 906
-------- ------- ------ --------- -------
Net income (loss) before extraordinary items...... (18,637) 8,236 (2,400) (4,460) (17,261)
Extraordinary items:
(Write-off) of deferred financing fees and expenses,
net of gain on early retirement of debt........... 950 (1,376) -- -- (426)
-------- ------- ------ --------- -------
Net income (loss)................................. $(17,687) 6,860 (2,400) (4,460) (17,687)
======== ======= ====== ========= =======
</TABLE>
F-34
<PAGE>
AUTOTOTE CORPORATON AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED STATEMENT OF OPERATIONS
YEAR ENDED OCTOBER 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
PARENT GUARANTOR NON-GUARANTOR ELIMINATING
COMPANY SUBSIDIARIES SUBSIDIARIES ENTRIES CONSOLIDATED
-------- ------------ ------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
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)
======== ======= ====== ======= =======
</TABLE>
F-35
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED STATEMENT OF OPERATIONS
YEAR ENDED OCTOBER 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
PARENT GUARANTOR NON-GUARANTOR ELIMINATING
COMPANY SUBSIDIARIES SUBSIDIARIES ENTRIES CONSOLIDATED
-------- ------------ ------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Operating revenues.................................. $ -- 181,387 48,660 (18,899) 211,148
Operating expenses.................................. -- 119,324 42,994 (18,885) 143,433
------- ------- ------ ------- -------
Gross profit...................................... -- 62,063 5,666 (14) 67,715
Selling, general and administrative expenses........ 9,170 13,515 4,511 (18) 27,178
Loss on sale/disposition of businesses.............. -- 1,600 -- -- 1,600
Depreciation and amortization....................... 196 18,981 3,115 (103) 22,189
------- ------- ------ ------- -------
Operating income (loss)........................... (9,366) 27,967 (1,960) 107 16,748
Interest expense.................................... 14,893 883 401 (236) 15,941
Other (income) deductions........................... (1,839) (690) 36 2,744 251
------- ------- ------ ------- -------
Income (loss) before equity in income of
subsidiaries, and income taxes.................. (22,420) 27,774 (2,397) (2,401) 556
Equity in income of subsidiaries.................... 23,031 -- -- (23,031) --
Income tax expense (benefit)........................ 232 252 (307) -- 177
------- ------- ------ ------- -------
Net income (loss)................................. $ 379 27,522 (2,090) (25,432) 379
======= ======= ====== ======= =======
</TABLE>
F-36
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED STATEMENT OF CASH FLOWS
YEAR ENDED OCTOBER 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
PARENT GUARANTOR NON-GUARANTOR ELIMINATING
COMPANY SUBSIDIARIES SUBSIDIARIES ENTRIES CONSOLIDATED
-------- ------------ ------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Net income (loss)............................ $(17,687) 6,860 (2,400) (4,460) (17,687)
Depreciation and amortization.............. 69 28,423 8,578 (342) 36,728
Equity in income of subsidiaries........... (4,716) -- -- 4,716 --
Gain on sale of business................... (1,823) -- -- -- (1,823)
Non-cash extraordinary items............... (950) 1,376 -- -- 426
Other non-cash adjustments................. 3,264 40 (658) -- 2,646
Changes in working capital................. 5,004 (4,531) 2,942 13 3,428
-------- ------- ------ ------- -------
Net cash provided by (used in) operating
activities................................. (16,839) 32,168 8,462 (73) 23,718
-------- ------- ------ ------- -------
Cash flows from investing activities:
Capital and wagering systems
expenditures............................. (49) (5,415) (2,062) 38 (7,488)
Proceeds from sale of business and assets
disposals................................ 23,216 260 (2,420) -- 21,056
Other assets and investments............... (442) (1,463) (642) (140) (2,687)
-------- ------- ------ ------- -------
Net cash provided by (used in) investing
activities................................. 22,725 (6,618) (5,124) (102) 10,881
-------- ------- ------ ------- -------
Cash flows from financing activities:
Net repayments under revolving credit
facility................................. -- (71,890) -- -- (71,890)
Net proceeds from issuance of long
term-debt................................ 105,100 -- 1,234 -- 106,334
Payments on long-term debt................. (4,350) (52,224) (846) 25 (57,395)
Other, principally intercompany balances... (94,432) 98,631 (3,401) 163 961
-------- ------- ------ ------- -------
Net cash provided by (used in) financing
activities................................. 6,318 (25,483) (3,013) 188 (21,990)
-------- ------- ------ ------- -------
Effect of exchange rate changes on cash...... 2 -- (379) (13) (390)
-------- ------- ------ ------- -------
Increase/(decrease) in cash and cash
equivalents................................ 12,206 67 (54) -- 12,219
Cash and cash equivalents, beginning of
year....................................... 3,376 261 2,351 -- 5,988
-------- ------- ------ ------- -------
Cash and cash equivalents, end of year....... $ 15,582 328 2,297 -- 18,207
======== ======= ====== ======= =======
</TABLE>
F-37
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED STATEMENT OF CASH FLOWS
YEAR ENDED OCTOBER 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
PARENT GUARANTOR NON-GUARANTOR ELIMINATING
COMPANY SUBSIDIARIES SUBSIDIARIES ENTRIES CONSOLIDATED
-------- ------------ ------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
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
======== ======= ====== ====== =======
</TABLE>
F-38
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED STATEMENT OF CASH FLOWS
YEAR ENDED OCTOBER 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
PARENT GUARANTOR NON-GUARANTOR ELIMINATING
COMPANY SUBSIDIARIES SUBSIDIARIES ENTRIES CONSOLIDATED
-------- ------------ ------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
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
======== ======= ====== ======= =======
</TABLE>
F-39
<PAGE>
SCHEDULE II
AUTOTOTE CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
THREE YEARS ENDED OCTOBER 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
--------------------
CHARGED BALANCE
BALANCE AT TO CHARGED AT
BEGINNING COSTS AND TO OTHER END OF
OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS(1) PERIOD
---------- --------- -------- ------------- --------
<S> <C> <C> <C> <C> <C>
YEAR ENDED OCTOBER 31, 1997
Allowance for doubtful accounts............. $2,053 1,070 -- 1,147 1,976
Reserve for inventory obsolescence.......... $2,328 185 187 462 2,238
YEAR ENDED OCTOBER 31, 1998
Allowance for doubtful accounts............. $1,976 888 -- 1,053 1,811
Reserve for inventory obsolescence.......... $2,238 296 50 247 2,337
YEAR ENDED OCTOBER 31, 1999
Allowance for doubtful accounts............. $1,811 1,140 -- 162 2,789
Reserve for inventory obsolescence.......... $2,337 221 -- 712 1,846
</TABLE>
------------------------
(1) Amounts written off or collected.
F-40
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
OCTOBER 31, JULY 31,
1999 2000
----------- -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 5,067 3,181
Restricted cash........................................... 771 795
Accounts receivable, net.................................. 25,755 23,645
Inventories............................................... 14,636 8,452
Prepaid expenses, deposits and other current assets....... 2,319 3,138
--------- ---------
Total current assets.................................... 48,548 39,211
--------- ---------
Property and equipment, at cost............................. 199,767 223,791
Less accumulated depreciation............................. 123,039 132,424
--------- ---------
Net property and equipment.............................. 76,728 91,367
--------- ---------
Goodwill, net of amortization............................... 5,237 3,992
Operating right, net of amortization........................ 13,848 13,098
Other assets and investments................................ 21,198 27,036
--------- ---------
$ 165,559 174,704
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current installments of long-term debt.................... $ 4,253 877
Accounts payable.......................................... 20,102 13,456
Accrued liabilities....................................... 28,015 20,770
Interest payable.......................................... 3,898 7,588
--------- ---------
Total current liabilities............................... 56,268 42,691
--------- ---------
Deferred income taxes....................................... 1,656 1,642
Other long-term liabilities................................. 2,963 3,702
Long-term debt, excluding current installments.............. 117,891 134,882
Long-term debt, convertible subordinated debentures......... 35,000 35,000
--------- ---------
Total liabilities....................................... 213,778 217,917
--------- ---------
Stockholders' equity (deficit):
Preferred stock, par value $1.00 per share, 2,000 shares
authorized, none outstanding............................ -- --
Class A common stock, par value $0.01 per share, 99,300
shares authorized, 36,268 and 36,909 shares outstanding
at October 31, 1999 and July 31, 2000 , respectively.... 364 370
Class B non-voting common stock, par value $0.01 per
share, 700 shares authorized, none outstanding.......... -- --
Additional paid-in capital................................ 149,622 151,289
Accumulated losses........................................ (196,852) (192,421)
Accumulated other comprehensive loss...................... (1,251) (2,349)
Treasury stock, at cost................................... (102) (102)
--------- ---------
Total stockholders' equity (deficit).................... (48,219) (43,213)
--------- ---------
$ 165,559 174,704
========= =========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
F-41
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED JULY 31, 1999 AND 2000
(UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1999 2000
-------- --------
<S> <C> <C>
Operating revenues:
Services.................................................. $38,883 40,840
Sales..................................................... 14,287 9,139
------- ------
53,170 49,979
------- ------
Operating expenses (exclusive of depreciation and
amortization shown below):
Services.................................................. 25,908 26,164
Sales..................................................... 9,631 5,563
------- ------
35,539 31,727
------- ------
Total gross profit...................................... 17,631 18,252
Selling, general and administrative expenses................ 6,641 6,662
Depreciation and amortization............................... 5,352 5,308
------- ------
Operating income........................................ 5,638 6,282
------- ------
Other deductions:
Interest expense.......................................... 4,011 4,413
Other income.............................................. (163) (67)
------- ------
3,848 4,346
------- ------
Income before income tax expense (benefit).................. 1,790 1,936
Income tax expense (benefit)................................ (105) 275
------- ------
Net income.............................................. $ 1,895 1,661
======= ======
Net income per basic share.............................. $ 0.05 0.05
======= ======
Net income per diluted share............................ $ 0.05 0.04
======= ======
Weighted average number of shares used in per share
calculation:
Basic shares............................................ 36,169 36,886
======= ======
Diluted shares.......................................... 38,699 41,430
======= ======
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
F-42
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED JULY 31, 1999 AND 2000
(UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1999 2000
-------- --------
<S> <C> <C>
Operating revenues:
Services.................................................. $109,608 115,458
Sales..................................................... 42,293 35,147
-------- -------
151,901 150,605
-------- -------
Operating expenses (exclusive of depreciation and
amortization shown below):
Services.................................................. 72,801 75,091
Sales..................................................... 30,505 21,916
-------- -------
103,306 97,007
-------- -------
Total gross profit...................................... 48,595 53,598
Selling, general and administrative expenses................ 19,854 19,909
Depreciation and amortization............................... 16,363 15,960
-------- -------
Operating income........................................ 12,378 17,729
-------- -------
Other deductions:
Interest expense.......................................... 12,181 12,850
Other (income) expense.................................... 77 (138)
-------- -------
12,258 12,712
-------- -------
Income before income tax expense............................ 120 5,017
Income tax expense.......................................... 87 586
-------- -------
Net income.............................................. $ 33 4,431
======== =======
Net income per basic share.............................. $ -- 0.12
======== =======
Net income per diluted share............................ $ -- 0.11
======== =======
Weighted average number of shares used in per share
calculation:
Basic shares............................................ 36,075 36,632
======== =======
Diluted shares.......................................... 38,004 41,250
======== =======
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
F-43
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED JULY 31, 1999 AND 2000
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
1999 2000
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 33 4,431
-------- -------
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation and amortization........................... 16,363 15,960
Changes in operating assets and liabilities............. 8,797 (2,564)
Other................................................... 946 1,170
-------- -------
Total adjustments......................... 26,106 14,566
-------- -------
Net cash provided by operating activities................... 26,139 18,997
-------- -------
Cash flows from investing activities:
Capital expenditures...................................... (1,306) (3,225)
Wagering systems expenditures............................. (9,971) (24,490)
Increase in other assets and investments.................. (5,034) (8,176)
-------- -------
Net cash used in investing activities....................... (16,311) (35,891)
-------- -------
Cash flows from financing activities:
Net borrowings under revolving credit facility............ -- 6,420
Proceeds from the issuance of long-term debt.............. 60 11,021
Payments on long-term debt................................ (2,356) (3,575)
Net proceeds from issuance of common stock................ 146 1,450
-------- -------
Net cash provided (used) by financing activities............ (2,150) 15,316
-------- -------
Effect of exchange rate changes on cash..................... (22) (308)
-------- -------
Increase (decrease) in cash and cash equivalents............ 7,656 (1,886)
Cash and cash equivalents, beginning of period.............. 6,809 5,067
-------- -------
Cash and cash equivalents, end of period.................... $ 14,465 3,181
======== =======
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest................................................ $ 7,843 8,500
======== =======
Income taxes.............................................. $ 579 586
======== =======
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
F-44
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. CONSOLIDATED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
The consolidated balance sheet as of July 31, 2000 and the consolidated
statements of operations for the three and nine months ended July 31, 1999 and
2000, and the consolidated statements of cash flows for the nine months then
ended, have been prepared by the Company without audit. In the opinion of
management, all adjustments necessary to present fairly the financial position
of the Company at July 31, 2000 and the results of its operations for the three
and nine months ended July 31, 1999 and 2000 and its cash flows for the nine
months ended July 31, 1999 and 2000 have been made.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. These consolidated financial statements should
be read in conjunction with the financial statements and notes thereto included
in the Company's Annual Report on Form 10-K for the year ended October 31, 1999.
The results of operations for the nine months ended July 31, 2000 are not
necessarily indicative of the operating results for the full year.
Certain items in the prior year's financial statements have been
reclassified to conform with the current year presentation.
BASIC NET INCOME PER SHARE AND DILUTED NET INCOME PER SHARE
The following represents a reconciliation of the numerator and denominator
used in computing basic and diluted net income per share for the three and nine
month periods ended July 31, 1999 and 2000:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
JULY 31, JULY 31,
------------------- -------------------
1999 2000 1999 2000
-------- -------- -------- --------
<S> <C> <C> <C> <C>
INCOME (NUMERATOR)
Net income.............................................. $ 1,895 $ 1,661 $ 33 $ 4,431
======= ======= ======= =======
SHARES (DENOMINATOR)
Basic weighted average common shares outstanding........ 36,169 36,886 36,075 36,632
Effect of diluted securities-stock options, warrants,
and deferred shares................................... 2,530 4,544 1,929 4,618
------- ------- ------- -------
Diluted weighted average common shares outstanding...... 38,699 41,430 38,004 41,250
======= ======= ======= =======
PER SHARE AMOUNT
Basic net income per share.............................. $ 0.05 $ 0.05 $ -- $ 0.12
======= ======= ======= =======
Diluted net income per share............................ $ 0.05 $ 0.04 $ -- $ 0.11
======= ======= ======= =======
</TABLE>
At July 31, 2000, the Company had outstanding stock options, warrants,
convertible subordinated debentures and deferred shares which could potentially
dilute basic earnings per share in the future. (See Notes 12 and 13 to the
Consolidated Financial Statements for the year ended October 31, 1999 in the
Company's 1999 Annual Report on Form 10-K.)
F-45
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2. ACQUISITION OF DATASPORT ASSETS AND INTEREST IN DATEK
On September 1, 1999, the Company completed the purchase of selected assets
and the assumption of certain liabilities from Datasport Toto Dienstleistung
GmbH & Co KG ("Datasport"). As a result of this purchase, the Company is the
sole provider of totalisator and simulcasting services to the 14 thoroughbred
racetracks in Germany. The transaction also increased the Company's ownership
and control of Datek GmbH ("Datek"), the primary provider of pari-mutuel
wagering to off-track betting establishments ("OTBs") and bookmakers in Germany.
The purchase, which included a cash payment of approximately $2,333 and the
assumption of certain liabilities, was recorded using the purchase method of
accounting, and the acquired assets and liabilities have been recorded at their
estimated fair value at the date of acquisition. The excess of the purchase
price over the fair values of the net assets acquired was approximately $3.2
million and has been recorded as goodwill which is being amortized over 15
years. The operating results of the Datasport and Datek businesses have been
included in the consolidated statements of operations since the date of
acquisition. Had the operating results of the Datasport and Datek businesses
been included as if the transaction had been consummated on November 1, 1998,
the pro forma operating results of the Company for the three and nine month
periods ended July 31, 1999 would not have been materially different.
F-46
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
3. BUSINESS SEGMENTS
The following tables represent revenues and profits by business segments for
the three and nine month periods ended July 31, 1999 and 2000. Corporate
expenses are allocated among business segments. Interest expense and other
(income) deductions are not allocated to business segments.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
JULY 31, JULY 31,
------------------- -------------------
1999 2000 1999 2000
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Service revenue and product sales:
Pari-mutuel operations.............................. $27,597 $22,185 $ 69,082 $ 73,525
Venue management operations......................... 16,277 16,139 46,023 46,208
Lottery operations.................................. 9,282 11,655 36,196 30,545
SJC Video operations................................ 14 -- 600 327
------- ------- -------- --------
$53,170 $49,979 $151,901 $150,605
======= ======= ======== ========
Gross profit:
Pari-mutuel operations.............................. $10,928 10,050 27,761 31,579
Venue management operations......................... 4,163 4,525 11,500 12,840
Lottery operations.................................. 2,679 3,677 9,268 9,179
SJC Video operations................................ (139) -- 66 --
------- ------- -------- --------
Total gross profit................................ $17,631 $18,252 $ 48,595 $ 53,598
======= ======= ======== ========
Operating income (loss):
Pari-mutuel operations.............................. $ 2,825 1,945 2,909 6,639
Venue management operations......................... 1,784 2,204 4,498 6,048
Lottery operations.................................. 1,459 2,133 5,843 5,042
SJC Video operations................................ (430) -- (872) --
------- ------- -------- --------
5,638 6,282 12,378 17,729
Other deductions:
Interest expense.................................... 4,011 4,413 12,181 12,850
Other (income) expense.............................. (163) (67) 77 (138)
------- ------- -------- --------
Income before income tax expense...................... $ 1,790 $ 1,936 $ 120 $ 5,017
======= ======= ======== ========
</TABLE>
<TABLE>
<CAPTION>
OCTOBER 31, JULY 31,
1999 2000
----------- --------
<S> <C> <C>
Assets
Pari-mutuel operations.................................... $110,598 $111,293
Venue management operations............................... 34,613 34,832
Lottery operations........................................ 20,348 28,579
SJC Video operations...................................... -- --
-------- --------
$165,559 $174,704
======== ========
</TABLE>
F-47
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
3. BUSINESS SEGMENTS (CONTINUED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
JULY 31,
-------------------
1999 2000
-------- --------
<S> <C> <C>
Capital and wagering systems expenditures
Pari-mutuel operations.................................... $ 7,749 $16,981
Venue management operations............................... 1,016 1,479
Lottery operations........................................ 2,428 9,255
SJC Video operations...................................... 84 --
------- -------
$11,277 $27,715
======= =======
</TABLE>
4. COMPREHENSIVE INCOME (LOSS)
The following presents a reconciliation of net income to comprehensive
income (loss) for the three and nine months ended July 31, 1999 and 2000:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
JULY 31, JULY 31,
------------------- -------------------
1999 2000 1999 2000
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income.................................................. $1,895 $1,661 $ 33 $ 4,431
Other comprehensive income (loss):
Foreign currency translation.............................. 50 78 (287) (1,098)
------ ------ ----- -------
Comprehensive income (loss)................................. $1,945 $1,739 $(254) $ 3,333
====== ====== ===== =======
</TABLE>
5. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
OCTOBER 31, JULY 31,
1999 2000
----------- --------
<S> <C> <C>
Parts and work-in-process................................... $13,735 $7,429
Finished goods.............................................. 344 189
Ticket paper................................................ 557 834
------- ------
$14,636 $8,452
======= ======
</TABLE>
Work-in-process includes costs for equipment expected to be sold. Costs
incurred for equipment associated with specific wagering system service
contracts not yet placed in service are classified as construction in progress
in property and equipment.
F-48
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
6. OTHER ASSETS AND INVESTMENTS
Other assets at July 31, 2000 includes $750 loaned by the Company to
Atlantic City Racing Association ("ACRA"). The loan is secured by a mortgage on
certain real estate owned by ACRA. In consideration for this loan, the Company
had the right to acquire ACRA for an additional $6,250 subject to certain other
adjustments. The Company had extended its option to acquire the ACRA until
August 31, 2000. The extension period expired without the Company exercising its
option. The Company is currently evaluating its ability to extend the option and
determining what portion, if any, of the loan will be recovered. If the Company
decides in the fourth quarter of fiscal 2000 not to pursue the acquisition of
ACRA, the Company will charge to expense deferred acquisition costs of
approximately $350, and may charge $750 to expense if the Company decides that
the loan is not recoverable.
7. DEBT
On June 19, 2000, the Company entered into a $10,000 term loan (the "2000
Term Loan") which matures on February 15, 2001. The 2000 Term Loan bears
interest at a rate of prime plus 2.50% per annum or LIBOR plus 3.50% per annum,
and such interest is paid quarterly. Loan repayments of $100 were due August 15
and November 15, 2000, with a final principal payment of $9,800 due at maturity.
At July 31, 2000, the Company had approximately $17,806 available for
borrowing under the Company's then existing revolving credit facility (the "Old
Facility"). There were $6,420 in borrowings outstanding under the Old Facility
at July 31, 2000, approximately $774 in letters of credit were issued under the
Old Facility, and $110,000 was outstanding under the 10 7/8%, Series B Senior
Notes due 2004 (the "10 7/8% Notes"). All borrowings outstanding under the Old
Facility, the 2000 Term Loan, the 1998 Term Loan, the 10 7/8% Notes and $35,000
of convertible subordinated debentures were repaid on September 6, 2000 at the
time of the Scientific Games acquisition and approximately $450 in letters of
credit were collateralized by funds deposited into escrow. (See below.)
8. ACQUISITION OF SCIENTIFIC GAMES HOLDINGS CORP. AND NEW DEBT AND EQUITY
FINANCING
On September 6, 2000, the Company completed the acquisition of Scientific
Games Holdings Corp. ("Scientific Games"), a world leading supplier of lottery
products, integrated lottery systems and support services, and pre-paid
telephone cards. The acquisition was completed through a merger in which
Scientific Games became a wholly-owned subsidiary of the Company, at a cost of
approximately $308,000 in aggregate merger consideration to Scientific Games
stockholders, plus related fees and expenses. The acquisition will be recorded
using the purchase method of accounting, the acquired assets and liabilities
will be recorded at their estimated fair value at the date of acquisition and
the operating results of Scientific Games' businesses will be included in the
consolidated statements of operations from the date of the acquisition.
The Scientific Games acquisition and the refinancing of substantially all
existing debt of both the Company (see Note 7) and Scientific Games, along with
the payment of certain related fees and expenses, was completed with funds
provided by: (1) proceeds from the issuance of $150,000 principal amount of the
Company's 12 1/2% Senior Subordinated Notes due August 15, 2010 (the "Notes");
(2) $280,000 of term loan borrowings under the terms of a new senior credit
facility (the "New Facility"); (3) $2,987 of borrowings under the revolving
credit facility of the New Facility; (4) $4,805 of
F-49
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
8. ACQUISITION OF SCIENTIFIC GAMES HOLDINGS CORP. AND NEW DEBT AND EQUITY
FINANCING (CONTINUED)
cash on hand; and (5) $110,000 of gross proceeds from the sale of new
convertible preferred stock, principally to an affiliated entity of Olivetti
S.p.A. (collectively, the "Transactions").
The Notes were originally issued on August 14, 2000, in anticipation of the
completion of the pending Scientific Games acquisition, with the proceeds of the
Note issuance being held in escrow for the redemption of the Notes if the
consummation of the Scientific Games acquisition and other Transactions did not
occur. The process was completed and the escrow released on September 6, 2000.
The Notes bear interest at the rate of 12 1/2% per annum payable semi-annually
on each February 15 and August 15, commencing February 15, 2001. The Notes are
senior subordinated, unsecured obligations of the Company, ranking junior to all
existing and future senior debt including obligations under the New Facility.
The Notes are fully and unconditionally guaranteed on a senior subordinated
basis by all of the Company's wholly-owned U.S. subsidiaries.
The Notes will be redeemable, at the option of the Company, at any time on
or after August 15, 2005, in whole or in part. In addition, on or before August
15, 2003, the Company may, at its option, redeem up to 35% of the Notes at 112%
of the principal amount thereof, plus accrued and unpaid interest, with the net
proceeds of equity offerings, provided at least 65% of the original aggregate
principal amount of the Company's new Notes remains outstanding immediately
after such redemption.
In addition to the issuance of the Notes, the Company also entered into a
New Facility with certain lenders, providing for borrowings of up to $345,000.
The New Facility, consists of: (a) a $65,000 revolving credit facility (the
"Revolver") which matures in September 2006 with interest at the Base Rate (as
defined) plus a margin of 2.25% per annum, or at the rate of LIBOR plus a margin
of 3.50% per annum, plus a commitment fee on the unused portion of 0.05% per
annum for the first six months and thereafter as determined by reference to a
leverage-based pricing grid; (b) a $60,000 term loan (the "Term A Loan") which
matures in September 2006 with interest at the Base Rate plus a margin of 2.25%
per annum, or at the rate of LIBOR plus 3.50% per annum for the first six months
and thereafter as determined by reference to a leverage-based pricing grid; and
(c) a $220,000 term loan (the "Term B Loan") which matures in September 2007
with interest at the Base Rate plus a margin of 3.00% per annum, or at the rate
of LIBOR plus 4.25% per annum. The New Facility is secured by a first-priority,
perfected lien on: (i) substantially all the property and assets (real and
personal, tangible and intangible) of the Company and its domestic subsidiaries,
(ii) 100% of the capital stock of all of the direct and indirect domestic
subsidiaries and 65% of the capital stock of the foreign subsidiaries of the
Company and (iii) all inter-company indebtedness owing to the Company and its
material subsidiaries. The New Facility will also be supported by guarantees
provided by all of the Company's direct and indirect, wholly-owned domestic
subsidiaries. The New Facility will be subject to the following mandatory
prepayments with certain customary exceptions, to the extent of: (i) 100% of the
net cash proceeds from the sale or issuance of debt securities; (ii) 100% of the
net proceeds from the sale of assets and casualty insurance proceeds; (iii) 50%
of the Company's excess cash flow (as defined), or if the leverage ratio is less
than 3.00 to 1.00, 25% of the Company's excess cash flow; and (iv) 50% of the
net cash proceeds from the sale or issuance of equity (except for the issuance
of the Company's new convertible preferred stock).
The indenture governing the Notes and the agreement governing the New
Facility contain certain covenants that, among other things, limit the Company's
ability and the ability of certain of the Company's restricted subsidiaries, to
incur additional indebtedness, pay dividends or distributions or
F-50
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
8. ACQUISITION OF SCIENTIFIC GAMES HOLDINGS CORP. AND NEW DEBT AND EQUITY
FINANCING (CONTINUED)
make certain other restricted payments, purchase or redeem capital stock, make
investments or extend credit, engage in certain transactions with affiliates,
engage in sale-leaseback transactions, consummate certain asset sales, effect a
consolidation or merger or sell, transfer, lease or otherwise dispose of all or
substantially all assets, and create certain liens and other encumbrances on new
assets. Additionally, the agreement governing the New Facility contains the
following financial covenants which will be computed quarterly on a rolling
four-quarter basis as applicable: (i) minimum Interest Coverage ratio, (ii)
minimum Fixed Charge Coverage ratio; (iii) maximum Leverage ratio; and (iv)
minimum Net Worth.
On September 6, 2000, the Company issued, for gross proceeds of $110,000,
1,100 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 ("Ramius"), which acted as placement
agent.
The Preferred Stock is convertible into Company common stock at a price of
$6.00 per share (subject to potential reset to no less than $5.00 per share
based on possible future market price minimums), will mature and become
mandatorily convertible into common stock after five years and will pay
dividends at the rate of 6% per annum (payable in kind in additional shares or,
at the Company's option beginning with the ninth quarterly dividend date, in
cash). The holders of Preferred Stock also have the right to participate on an
as-converted basis in any dividends with respect to the common stock. The
holders of Preferred Stock have the right to vote along with the holders of
common stock on all matters on which the holders of common stock are entitled to
vote, are entitled to vote separately as a class with respect to certain
matters, and are also entitled to certain rights of first refusal with respect
to future financings. The Preferred Stock is also subject to certain customary
anti-dilution provisions. In addition, the holders of Preferred Stock have the
right to designate, initially, four members of the Company's Board of Directors
(and to elect three additional Directors in the event of certain defaults by the
Company). The Preferred Stock has preference over common stock with regard to
the distribution of assets upon a liquidation, dissolution or other winding up
of the Company.
In connection with the Transactions, the Company also issued 27.5 shares of
Preferred Stock to Ramius, which acted as placement agent in connection with the
sale of the Preferred Stock, and issued warrants to purchase at a nominal price
2,900 shares of the Company's common stock to Donaldson, Lufkin & Jenrette
Securities Corporation and LBI Group, Inc. (an affiliate of Lehman Brothers),
the Company's financial advisors in connection with their services to the
Company in obtaining certain financing commitments.
In the fourth quarter of fiscal 2000, the Company expects to take charges in
connection with the refinancing which could aggregate approximately $23,000 for
the write-off of deferred financing fees related to the Old Facility, to record
the premium paid to repurchase the 10 7/8% Notes and expenses associated with
certain bridge loans.
Further information regarding aspects of the Scientific Games acquisition
and financing can be found in the Current Reports on Form 8-K filed by the
Company on May 19, 2000 and May 26, 2000 and certain Exhibits to this Quarterly
Report previously filed on Form 10-Q.
F-51
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
9. FINANCIAL INFORMATION FOR GUARANTOR SUBSIDIARIES AND NON-GUARANTOR
SUBSIDIARIES
The Company conducts substantially all of its business through its domestic
and foreign subsidiaries. In July 1997, the Company issued $110,000 aggregate
principal amount of 10 7/8% Notes. On May 22, 1998, the Company and Autotote
Lottery Corporation entered into a $12,000 three-year term loan arrangement that
bears interest at a fixed annual rate of 8.87% (the "1998 Term Loan"). On June
19, 2000, the Company entered into a $10,000 term loan (the "2000 Term Loan")
which bears interest at a rate of prime plus 2.50% per annum or LIBOR plus 3.50%
per annum and matures on February 15, 2001. The 1998 Term Loan and the 2000 Term
Loan were extended in conjunction with the Old Facility and are subject to
certain restrictive and financial covenants contained in the Old Facility.
Obligations under the Old Facility and the 10 7/8% Notes are jointly and
severally guaranteed by substantially all of the Company's wholly-owned domestic
subsidiaries (the "Guarantor Subsidiaries"). (See Note 8 to the Consolidated
Financial Statements for the year ended October 31, 1999 in the Company's 1999
Annual Report on Form 10-K.)
On August 14, 2000, in connection with the Transactions, the Company issued
$150,000 aggregate principal amount of its new Notes, with the proceeds being
held in escrow, and on September 6, 2000 the escrow was released and the Company
entered into its New Facility with certain lenders for borrowings of up to
$345,000. Obligations under the New Facility and the Notes are fully and
unconditionally guaranteed by all of the Company's Guarantor Subsidiaries. (See
Note 8).
Presented below is condensed consolidating financial information for (i)
Autotote Corporation (the "Parent Company") which includes the activities of
Autotote Management Corporation, (ii) the Guarantor Subsidiaries and (iii) the
wholly-owned foreign subsidiaries and the non-wholly owned domestic and foreign
subsidiaries (the "Non-Guarantor Subsidiaries") as of October 31, 1999 (audited)
and July 31, 2000 (unaudited) and for the three and nine month periods ended
July 31, 1999 and 2000 (unaudited). The condensed consolidating financial
information has been presented to show the nature of assets held, results of
operations and cash flows of the Parent Company, Guarantor Subsidiaries and
Non-Guarantor Subsidiaries assuming the guarantee structure of the Notes and the
New Facility were in effect at the beginning of the periods presented. Separate
financial statements for Guarantor Subsidiaries are not presented based on
management's determination that they would not provide additional information
that is material to investors.
The condensed consolidating financial information reflects the investments
of the Parent Company in the Guarantor and Non-Guarantor Subsidiaries using the
equity method of accounting. In addition, corporate interest and administrative
expenses have not been allocated to the subsidiaries.
F-52
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
OCTOBER 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
PARENT GUARANTOR NON-UARANTOR ELIMINATING
COMPANY SUBSIDIARIES SUBSIDIARIES ENTRIES CONSOLIDATED
-------- ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents............. $ 1,598 $ 506 $ 2,963 $ -- $ 5,067
Accounts receivable, net.............. -- 21,083 4,672 -- 25,755
Other current assets.................. 30 14,143 4,017 (464) 17,726
Property and equipment, net........... 298 66,973 9,708 (251) 76,728
Investment in subsidiaries............ 58,214 -- -- (58,214) --
Goodwill.............................. 198 353 4,686 -- 5,237
Other assets.......................... 6,199 30,385 659 (2,197) 35,046
-------- -------- ------- -------- --------
Total assets........................ $66,537 $133,443 $26,705 $(61,126) $165,559
======== ======== ======= ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT)
Current installments of long-term
debt................................ $ 1,250 $ 2,429 $ 574 $ -- $ 4,253
Current liabilities................... 12,219 29,546 10,922 (672) 52,015
Long-term debt, excluding current
installments........................ 145,000 6,627 1,264 -- 152,891
Other non-current liabilities......... 2,193 1,233 1,766 (573) 4,619
Intercompany balances................. (45,906) 43,214 1,942 750 --
Stockholders' equity (deficit)........ (48,219) 50,394 10,237 (60,631) (48,219)
-------- -------- ------- -------- --------
Total liabilities and stockholders'
equity (deficit).................. $66,537 $133,443 $26,705 $(61,126) $165,559
======== ======== ======= ======== ========
</TABLE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
JULY 31, 2000
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
PARENT GUARANTOR NON-GUARANTOR ELIMINATING
COMPANY SUBSIDIARIES SUBSIDIARIES ENTRIES CONSOLIDATED
-------- ------------ ------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents............. $ 35 $ 1,147 $ 1,998 $ 1 $ 3,181
Accounts receivable, net.............. -- 18,473 5,172 -- 23,645
Other current assets.................. 17 8,933 3,686 (251) 12,385
Property and equipment, net........... 272 80,343 11,019 (267) 91,367
Investment in subsidiaries............ 81,938 -- -- (81,938) --
Goodwill.............................. 193 -- 3,799 -- 3,992
Other assets.......................... 9,440 31,669 1,387 (2,362) 40,134
-------- -------- ------- -------- --------
Total assets........................ $91,895 $140,565 $27,061 $(84,817) $174,704
======== ======== ======= ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT)
Current installments of long-term
debt................................ $ 100 $ 7 $ 770 $ -- $ 877
Current liabilities................... 14,427 20,058 7,631 (302) 41,814
Long-term debt, excluding current
installments........................ 161,320 7,222 1,340 -- 169,882
Other non-current liabilities......... 3,086 648 2,183 (573) 5,344
Intercompany balances................. (43,825) 39,657 3,783 385 --
Stockholders' equity (deficit)........ (43,213) 72,973 11,354 (84,327) (43,213)
-------- -------- ------- -------- --------
Total liabilities and stockholders'
equity (deficit).................... $91,895 $140,565 $27,061 $(84,817) $174,704
======== ======== ======= ======== ========
</TABLE>
F-53
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
THREE MONTHS ENDED JULY 31, 1999
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
PARENT GUARANTOR NON-GUARANTOR ELIMINATING
COMPANY SUBSIDIARIES SUBSIDIARIES ENTRIES CONSOLIDATED
-------- ------------ ------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Operating revenues.................. $ -- $46,250 $13,351 $(6,431) $53,170
Operating expenses.................. -- 29,284 12,682 (6,427) 35,539
------- ------- ------- ------- -------
Gross profit...................... -- 16,966 669 (4) 17,631
Selling, general and administrative
expenses.......................... 2,387 3,286 972 (4) 6,641
Depreciation and amortization....... 46 4,578 753 (25) 5,352
------- ------- ------- ------- -------
Operating income (loss)........... (2,433) 9,102 (1,056) 25 5,638
Interest expense.................... 3,679 221 111 -- 4,011
Other (income) expense.............. (50) (28) (85) -- (163)
------- ------- ------- ------- -------
Income (loss) before equity in
income of subsidiaries, and income
taxes............................. (6,062) 8,909 (1,082) 25 1,790
Equity in income of subsidiaries.... 8,008 -- -- (8,008) --
Income tax expense (benefit)........ 51 57 (213) -- (105)
------- ------- ------- ------- -------
Net income (loss)................... $ 1,895 $ 8,852 $ (869) $(7,983) $ 1,895
======= ======= ======= ======= =======
</TABLE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
THREE MONTHS ENDED JULY 31, 2000
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
PARENT GUARANTOR NON-GUARANTOR ELIMINATING
COMPANY SUBSIDIARIES SUBSIDIARIES ENTRIES CONSOLIDATED
-------- ------------ ------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Operating revenues.................. $ -- $40,384 $13,539 $(3,944) $49,979
Operating expenses.................. -- 25,893 9,745 (3,911) 31,727
------- ------- ------- ------- -------
Gross profit...................... -- 14,491 3,794 (33) 18,252
Selling, general and administrative
expenses.......................... 2,735 3,017 913 (3) 6,662
Depreciation and amortization....... 69 4,489 775 (25) 5,308
------- ------- ------- ------- -------
Operating income (loss)........... (2,804) 6,985 2,106 (5) 6,282
Interest expense.................... 4,199 141 267 (194) 4,413
Other (income) expense.............. (146) (9) (106) 194 (67)
------- ------- ------- ------- -------
Income (loss) before equity in
income of subsidiaries, and income
taxes............................. (6,857) 6,853 1,945 (5) 1,936
Equity in income of subsidiaries.... 8,539 -- -- (8,539) --
Income tax expense.................. 21 69 185 -- 275
------- ------- ------- ------- -------
Net income.......................... $ 1,661 $ 6,784 $ 1,760 $(8,544) $ 1,661
======= ======= ======= ======= =======
</TABLE>
F-54
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
NINE MONTHS ENDED JULY 31, 1999
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
PARENT GUARANTOR NON-GUARANTOR ELIMINATING
COMPANY SUBSIDIARIES SUBSIDIARIES ENTRIES CONSOLIDATED
-------- ------------ ------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Operating revenues.................. $ -- $131,715 $34,239 $(14,053) $151,901
Operating expenses.................. -- 86,694 30,654 (14,042) 103,306
-------- -------- ------- -------- --------
Gross profit...................... -- 45,021 3,585 (11) 48,595
Selling, general and administrative
expenses.......................... 6,852 9,859 3,159 (16) 19,854
Depreciation and amortization....... 136 14,105 2,199 (77) 16,363
-------- -------- ------- -------- --------
Operating income (loss)........... (6,988) 21,057 (1,773) 82 12,378
Interest expense.................... 11,232 727 222 -- 12,181
Other (income) expense.............. (1,825) 52 2 1,848 77
-------- -------- ------- -------- --------
Income (loss) before equity in
income of subsidiaries, and income
taxes............................. (16,395) 20,278 (1,997) (1,766) 120
Equity in income of subsidiaries.... 16,597 -- -- (16,597) --
Income tax expense (benefit)........ 169 102 (184) -- 87
-------- -------- ------- -------- --------
Net income (loss)................... $ 33 $ 20,176 $(1,813) $(18,363) $ 33
======== ======== ======= ======== ========
</TABLE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
NINE MONTHS ENDED JULY 31, 2000
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
PARENT GUARANTOR NON-GUARANTOR ELIMINATING
COMPANY SUBSIDIARIES SUBSIDIARIES ENTRIES CONSOLIDATED
-------- ------------ ------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Operating revenues.................. $ -- $125,464 $37,904 $(12,763) $150,605
Operating expenses.................. -- 79,074 30,658 (12,725) 97,007
-------- -------- ------- -------- --------
Gross profit...................... -- 46,390 7,246 (38) 53,598
Selling, general and administrative
expenses.......................... 7,297 9,481 3,139 (8) 19,909
Depreciation and amortization....... 213 13,336 2,488 (77) 15,960
-------- -------- ------- -------- --------
Operating income (loss)........... (7,510) 23,573 1,619 47 17,729
Interest expense.................... 12,106 580 578 (414) 12,850
Other (income) expense.............. (369) (168) (15) 414 (138)
-------- -------- ------- -------- --------
Income (loss) before equity in
income of subsidiaries, and income
taxes............................. (19,247) 23,161 1,056 47 5,017
Equity in income of subsidiaries.... 23,785 -- -- (23,785) --
Income tax expense.................. 107 384 95 -- 586
-------- -------- ------- -------- --------
Net income.......................... $ 4,431 $ 22,777 $ 961 $(23,738) $ 4,431
======== ======== ======= ======== ========
</TABLE>
F-55
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
NINE MONTHS ENDED JULY 31, 1999
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
PARENT GUARANTOR NON-GUARANTOR ELIMINATING
COMPANY SUBSIDIARIES SUBSIDIARIES ENTRIES CONSOLIDATED
-------- ------------ ------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Net income (loss)................... $ 33 $ 20,176 $(1,813) $(18,363) $ 33
Depreciation and amortization..... 136 14,105 2,199 (77) 16,363
Equity in income of
subsidiaries.................... (16,597) -- -- 16,597 --
Other non-cash adjustments........ 930 15 1 -- 946
Changes in working capital........ 2,557 8,343 (1,944) (159) 8,797
-------- -------- ------- -------- --------
Net cash provided by (used in)
operating activities.............. (12,941) 42,639 (1,557) (2,002) 26,139
-------- -------- ------- -------- --------
Cash flows from investing
activities:
Capital and wagering systems
expenditures.................... (26) (9,467) (1,780) (4) (11,277)
Other assets and investments...... (504) (5,447) (275) 1,192 (5,034)
-------- -------- ------- -------- --------
Net cash provided by (used in)
investing activities.............. (530) (14,914) (2,055) 1,188 (16,311)
-------- -------- ------- -------- --------
Cash flows from financing
activities:
Proceeds from issuance of
long-term debt.................. -- 60 -- -- 60
Payments on long-term debt........ -- (2,066) (290) -- (2,356)
Net proceeds from stock issue..... 146 -- -- -- 146
Other, principally intercompany
balances........................ 23,081 (25,316) 1,621 614 --
-------- -------- ------- -------- --------
Net cash provided by (used in)
financing activities.............. 23,227 (27,322) 1,331 614 (2,150)
-------- -------- ------- -------- --------
Effect of exchange rate changes on
cash.............................. 45 -- (267) 200 (22)
-------- -------- ------- -------- --------
Increase/(decrease) in cash and cash
equivalents....................... 9,801 403 (2,548) -- 7,656
Cash and cash equivalents, beginning
of period......................... 2,054 193 4,562 -- 6,809
-------- -------- ------- -------- --------
Cash and cash equivalents, end of
period............................ $ 11,855 $ 596 $ 2,014 $ -- $ 14,465
======== ======== ======= ======== ========
</TABLE>
F-56
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
NINE MONTHS ENDED JULY 31, 2000
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
PARENT GUARANTOR NON-GUARANTOR ELIMINATING
COMPANY SUBSIDIARIES SUBSIDIARIES ENTRIES CONSOLIDATED
-------- ------------ ------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Net income (loss)................... $ 4,431 $ 22,777 $ 961 $(23,738) $ 4,431
Depreciation and amortization..... 213 13,336 2,488 (77) 15,960
Equity in income of
subsidiaries.................... (23,785) -- -- 23,785 --
Other non-cash adjustments........ 915 369 (114) -- 1,170
Changes in working capital........ 2,260 (1,550) (3,274) -- (2,564)
-------- -------- ------- -------- --------
Net cash provided by (used in)
operating activities.............. (15,966) 34,932 61 (30) 18,997
-------- -------- ------- -------- --------
Cash flows from investing
activities:
Capital and wagering systems
expenditures.................... (68) (23,735) (3,942) 30 (27,715)
Other assets and investments...... (3,188) (5,040) (453) 505 (8,176)
-------- -------- ------- -------- --------
Net cash provided by (used in)
investing activities.............. (3,256) (28,775) (4,395) 535 (35,891)
-------- -------- ------- -------- --------
Cash flows from financing
activities:
Net proceeds from issuance of
long-term debt.................. 16,420 -- 1,021 -- 17,441
Payments on long-term debt........ (1,250) (1,827) (498) -- (3,575)
Net Proceeds from stock issue..... 1,450 -- -- -- 1,450
Other, principally intercompany
balances........................ 1,039 (3,923) 3,389 (505) --
-------- -------- ------- -------- --------
Net cash provided by (used in)
financing......................... 17,659 (5,750) 3,912 (505) 15,316
activities........................ -- -- -- --
-------- -------- ------- -------- --------
Effect of exchange rate changes on
cash.............................. -- 235 (543) -- (308)
-------- -------- ------- -------- --------
Increase/(decrease) in cash and cash
equivalents....................... (1,563) 642 (965) -- (1,886)
Cash and cash equivalents, beginning
of period......................... 1,598 506 2,963 -- 5,067
-------- -------- ------- -------- --------
Cash and cash equivalents, end of
period............................ $ 35 $ 1,148 $ 1,998 $ -- $ 3,181
======== ======== ======= ======== ========
</TABLE>
F-57
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Scientific Games Holdings Corp.
We have audited the consolidated balance sheets of Scientific Games Holdings
Corp. (the "Company") as of December 31, 1999 and 1998, and the related
consolidated statements of income, shareholders' equity, and cash flows for each
of the three years in the period ended December 31, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. 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 financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Scientific Games
Holdings Corp. at December 31, 1999 and 1998, and the results of its operations
and cash flows for each of the three years in the period ended December 31,
1999, in conformity with accounting principles generally accepted in the United
States.
ERNST & YOUNG LLP
Atlanta, Georgia
February 10, 2000, except for
Note 13, as to which the
date is July 24, 2000
F-58
<PAGE>
SCIENTIFIC GAMES HOLDINGS CORP.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
---------------------
1999 1998
--------- ---------
(IN THOUSANDS, EXCEPT
SHARE NUMBERS AND PAR
VALUE)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 14,775 $ 9,270
Trade receivables......................................... 48,655 39,445
Inventories............................................... 15,281 15,090
Prepaid expenses and other current assets................. 2,706 2,111
Deferred income tax benefits.............................. 1,053 1,032
-------- --------
Total current assets........................................ 82,470 66,948
Property and equipment, at cost:
Land...................................................... 2,404 2,521
Buildings................................................. 12,535 11,664
Production and other equipment............................ 110,219 101,098
Construction-in-progress.................................. 12,526 2,047
-------- --------
137,684 117,330
Less accumulated depreciation and amortization............ (68,705) (57,386)
-------- --------
68,979 59,944
Goodwill.................................................... 31,473 35,282
Other assets................................................ 20,711 17,459
-------- --------
$203,633 $179,633
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 15,912 $ 16,270
Accrued liabilities....................................... 23,397 17,822
Credit facility........................................... -- 12,482
Income taxes payable...................................... 1,827 3,932
-------- --------
Total current liabilities................................... 41,136 50,506
Credit facility............................................. 23,547 --
Other long-term liabilities................................. 5,677 8,221
Deferred income taxes payable............................... 6,727 6,694
Minority interest in consolidated subsidiaries.............. 3,004 2,306
Shareholders' equity:
Preferred stock--3,000,000 shares authorized, no shares
issued and outstanding.................................. -- --
Common stock--par value $.001 per share:
25,750,000 shares authorized; 11,915,702 shares and
11,875,737 shares issued at December 31, 1999 and
1998, respectively.................................... 12 12
Additional paid-in capital................................ 66,060 65,551
Accumulated earnings...................................... 66,689 46,201
Accumulated other comprehensive income.................... (1,198) 142
Treasury stock, at cost--509,200 shares at December 31,
1999.................................................... (8,021) --
-------- --------
Total shareholders' equity.................................. 123,542 111,906
-------- --------
$203,633 $179,633
======== ========
</TABLE>
See accompanying notes.
F-59
<PAGE>
SCIENTIFIC GAMES HOLDINGS CORP.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------------------
1999 1998 1997
----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Revenues.................................................... $228,573 $213,800 $197,456
Cost of revenues............................................ 148,826 138,630 124,718
-------- -------- --------
79,747 75,170 72,738
Selling, general and administrative expenses................ 29,031 26,518 25,653
Depreciation and amortization............................... 18,024 16,330 13,229
Pull-tab business write-off................................. -- -- 3,376
In-process technology write-off............................. -- -- 10,102
Interest income............................................. 502 484 354
Other income/(expense)...................................... (37) 147 --
Gain/(loss) on foreign currency............................. 437 (65) 507
Interest expense............................................ 588 1,353 911
Minority interest in subsidiaries' (income)/loss............ (531) 85 --
-------- -------- --------
Income before income taxes.................................. 32,475 31,620 20,328
Income tax expense.......................................... 11,987 12,211 11,356
-------- -------- --------
Net income.................................................. $ 20,488 $ 19,409 $ 8,972
======== ======== ========
Basic net income per common share........................... $ 1.73 $ 1.60 $ 0.75
======== ======== ========
Diluted net income per common share......................... $ 1.72 $ 1.58 $ 0.72
======== ======== ========
Average common shares outstanding--basic.................... 11,828 12,108 12,020
Dilutive effect of stock options and non-vested restricted
stock awards.............................................. 116 190 407
-------- -------- --------
Average common shares outstanding--diluted.................. 11,944 12,298 12,427
======== ======== ========
</TABLE>
See accompanying notes.
F-60
<PAGE>
SCIENTIFIC GAMES HOLDINGS CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income.................................................. $ 20,488 $ 19,409 $ 8,972
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation.............................................. 12,813 12,012 10,361
Amortization.............................................. 5,211 4,318 2,868
In-process technology write-off........................... -- -- 10,102
Pull-tab business write-off............................... -- -- 3,376
Loss (gain) on disposal of property and equipment......... 32 (5) --
Deferred income taxes..................................... 12 4,407 (1,513)
Stock compensation expense................................ 64 563 1,313
Minority interest......................................... 531 (85) --
Changes in operating assets and liabilities:
Accounts receivable....................................... (9,319) (4,416) 536
Inventories............................................... (466) (3,470) 1,376
Accounts payable.......................................... 298 9,751 (4,256)
Other..................................................... (3,384) 3,039 (11,670)
-------- -------- --------
Net cash provided by operating activities................... 26,280 45,523 21,465
INVESTING ACTIVITIES
Proceeds from sale of assets................................ 174 188 800
Payments for property and equipment......................... (22,470) (8,359) (22,280)
Acquisitions of businesses, net of cash acquired............ (1,250) (6,469) (24,091)
-------- -------- --------
Net cash used in investing activities....................... (23,546) (14,640) (45,571)
FINANCING ACTIVITIES
Payments on notes receivable from officers.................. -- 71 --
Borrowings under credit facility............................ 65,685 3,000 36,060
Payments on credit facility................................. (54,620) (21,142) (9,420)
Repurchase of common stock.................................. (8,021) (10,461) (5,787)
Proceeds from the exercise of common stock options.......... 417 4,427 57
-------- -------- --------
Net cash provided by (used in) financing activities......... 3,461 (24,105) 20,910
Effect of exchange rate changes on cash..................... (690) (351) (213)
-------- -------- --------
Increase (decrease) in cash and cash equivalents............ 5,505 6,427 (3,409)
Cash and cash equivalents at beginning of year.............. 9,270 2,843 6,252
-------- -------- --------
Cash and cash equivalents at end of year.................... $ 14,775 $ 9,270 $ 2,843
======== ======== ========
</TABLE>
See accompanying notes.
F-61
<PAGE>
SCIENTIFIC GAMES HOLDINGS CORP.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
NOTES
RECEIVABLE
COMMON STOCK ADDITIONAL FROM THE OTHER
------------------- PAID-IN TREASURY ACCUMULATED SALE OF COMPREHENSIVE
SHARES AMOUNT CAPITAL STOCK EARNINGS STOCK INCOME TOTAL
-------- -------- ---------- -------- ------------ ---------- -------------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1,
1997...................... 12,158 $12 $56,486 -- $ 36,671 $(71) $ 691 $ 93,789
Foreign currency translation
adjustment................ -- -- -- -- -- -- (310) (310)
Net income.................. -- -- -- -- 8,972 -- -- 8,972
------ --- ------- ------- -------- ---- ------- --------
Comprehensive income........ -- -- -- -- -- -- -- 8,662
------ --- ------- ------- -------- ---- ------- --------
Exercise of stock options,
including tax benefit..... 20 -- 150 -- -- -- -- 150
Compensation expense in
connection with stock
option plans.............. -- -- 1,313 -- -- -- -- 1,313
Repurchase and retirement of
common stock.............. (302) -- -- -- (5,787) -- -- (5,787)
------ --- ------- ------- -------- ---- ------- --------
Balance at December 31,
1997...................... 11,876 $12 $57,949 -- $ 39,856 $(71) $ 381 $ 98,127
Foreign currency translation
adjustment................ -- -- -- -- -- -- 16 16
Additional minimum pension
liability................. -- -- -- -- -- -- (255) (255)
Net income.................. -- -- -- -- 19,409 -- -- 19,409
------ --- ------- ------- -------- ---- ------- --------
Comprehensive income........ -- -- -- -- -- -- -- 19,170
------ --- ------- ------- -------- ---- ------- --------
Exercise of stock options,
including tax benefit..... 659 1 7,039 -- -- -- -- 7,040
Compensation expense in
connection with stock
option plans.............. -- -- 563 -- -- -- -- 563
Repurchase and retirement of
common stock.............. (659) (1) -- -- (13,064) -- -- (13,065)
Repayment of notes
receivable................ -- -- -- -- -- 71 -- 71
------ --- ------- ------- -------- ---- ------- --------
Balance at December 31,
1998...................... 11,876 12 65,551 -- 46,201 -- 142 111,906
Foreign currency translation
adjustment................ -- -- -- -- -- -- (1,487) (1,487)
Unrealized gain on
investments............... -- -- -- -- -- -- 21 21
Additional minimum pension
liability................. -- -- -- -- -- -- 126 126
Net income.................. -- -- -- -- 20,488 -- -- 20,488
------ --- ------- ------- -------- ---- ------- --------
Comprehensive income........ -- -- -- -- -- -- -- 19,148
------ --- ------- ------- -------- ---- ------- --------
Exercise of stock options,
including tax benefit..... 24 -- 152 -- -- -- -- 152
Employee stock purchase
plan...................... 16 -- 293 -- -- -- -- 293
Compensation expense in
connection with stock
option plans.............. -- -- 64 -- -- -- -- 64
Repurchase and retirement of
common stock.............. -- -- -- -- -- -- -- --
Purchase of treasury
stock..................... (509) -- -- (8,021) -- -- -- (8,021)
------ --- ------- ------- -------- ---- ------- --------
Balance at December 31,
1999...................... 11,407 $12 $66,060 $(8,021) $ 66,689 $ -- $(1,198) $123,542
====== === ======= ======= ======== ==== ======= ========
</TABLE>
See accompanying notes.
F-62
<PAGE>
SCIENTIFIC GAMES HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
1. CORPORATE ORGANIZATION AND BASIS OF PRESENTATION
Scientific Games Holdings Corp. ("Company") provides a 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 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. These products and services (Instant Ticket
and Related Services and Systems) are provided primarily to domestic and
international governmentally sanctioned lotteries. The Company enters into
short-term and long-term contracts with these lotteries to obtain rights to
provide lottery products and services. Non-lottery products and services include
the production of prepaid telephone cards. Products and services are provided
through the Company's wholly owned subsidiaries and its joint ventures,
Alpharetta, Georgia- based Scientific Games Inc. ("SGI"), United Kingdom-based
Scientific Games International Limited ("SGIL"), Austria-based Scientific Games
International GmbH ("SG Austria") and France-based SciGames France SAS ("SG
France"). See Note 3.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL
The following summarizes the Company's principal accounting policies.
Consolidated financial statements presented herein include the accounts and
operations of the Company and its subsidiaries. All significant intercompany
accounts and transactions have been eliminated.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
REVENUES AND COST OF REVENUES
Revenues from the sales of the Company's products and services are
recognized based upon shipment and delivery, a percentage of the lottery's
instant ticket or on-line sales to the public over a contracted period, as
support and maintenance services are provided under related agreements, or the
percentage of completion method for development projects, or any combination of
the foregoing. All costs related to the design, planning and production of
instant ticket segment products are capitalized as inventories and recognized as
cost of revenues when the tickets are shipped or when sold to the public. Costs
related to the planning and development of the systems and systems-related
services may be recorded based upon the percentage of completion method, or if
the revenue is recognized based on lottery sales to the public, then the costs
may be recognized over the period of the contract. Costs related to the
provision of support and maintenance services are recorded in costs of revenues,
and revenues are recognized when the service is provided.
F-63
<PAGE>
SCIENTIFIC GAMES HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist principally of cash and institutional
money market funds on deposit with banks. The Company considers all highly
liquid investments with a maturity of three months or less when purchased to be
cash equivalents.
TRADE RECEIVABLES
The Company generally does not require collateral or other security for its
receivables. For certain foreign receivables, the Company requires letters of
credit backing such amounts. Credit losses have been within management's
expectations. The company had unbilled receivables of $14.0 million and $9.6
million on its percentage of completion contracts at December 31, 1999 and 1998
respectively. The unbilled receivables are expected to be collected within one
year.
INVENTORIES
Inventories consist principally of instant lottery tickets, telephone cards,
materials related to their production, and certain electronic components related
to Systems terminals. Inventories are valued at the lower of cost (first-in,
first-out method) or market. Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31
----------------------
1999 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Finished goods........................................... $ 8,633 $ 7,939
Work-in-process.......................................... 2,075 1,087
Raw materials............................................ 4,573 6,064
------- -------
$15,281 $15,090
======= =======
</TABLE>
PROPERTY AND EQUIPMENT
Leasehold improvements are amortized on the straight-line method over the
lives of the respective leases or, where applicable, the related lottery game
contracts. Amortization associated with capitalized leases is included in
depreciation expense. Production and other equipment and office furniture and
equipment are depreciated on the straight-line method, generally over 3 to 14
years. Buildings are depreciated on the straight-line method over 31 years.
GOODWILL
Goodwill represents the excess purchase price paid over the net assets
acquired in connection with business combinations accounted for under the
purchase method. Goodwill is being amortized on the straight-line method.
Goodwill related to SGIL, SG Austria and SG France is being amortized over
periods of 4 to 30 years. Accumulated amortization of goodwill totaled
approximately $5.9 million and $3.5 million at December 31, 1999 and 1998,
respectively.
In the event facts and circumstances indicate that goodwill or other
long-lived assets may be impaired, an evaluation of recoverability would then be
performed. If an evaluation is required, the estimated future undiscounted cash
flows associated with the asset would be compared to the asset's
F-64
<PAGE>
SCIENTIFIC GAMES HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
carrying amount to determine if a write-down to market value or discounted cash
flow value is required.
OTHER ASSETS
Other assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31
----------------------
1999 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Cash surrender value of life insurance................... $ 5,513 $ 3,836
Lottery contract costs................................... 3,721 5,509
Intangible pension asset................................. 2,781 3,138
Other.................................................... 8,696 4,976
------- -------
$20,711 $17,459
======= =======
</TABLE>
ACCRUED LIABILITIES
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31
----------------------
1999 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Potential legal claims and other assessments............. $ 799 $ 917
Reserves for defective ticket adjustments................ 549 650
Accrued compensation..................................... 4,949 2,920
Due to other entities.................................... 4,051 3,283
Accrued contract costs................................... 7,440 7,645
Other.................................................... 5,609 2,407
------- -------
$23,397 $17,822
======= =======
</TABLE>
FOREIGN CURRENCY TRANSLATION
Assets and liabilities of foreign operations are translated from the local
currency into U.S. dollars at the rate of currency exchange at the end of the
fiscal period. Translation gains and losses of foreign operations that use local
currencies as the functional currency are accumulated and reported as other
comprehensive income in shareholders' equity. Revenues and expenses are
translated at average monthly exchange rates. Transaction gains and losses
arising from exchange rate fluctuations on transactions denominated in a
currency other than the local functional currency are included in the results of
operations.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount reflected in the consolidated balance sheets for cash,
cash equivalents, accounts receivable, accounts payable, and bank debt
approximate their respective fair values.
F-65
<PAGE>
SCIENTIFIC GAMES HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ACCOUNTING POLICIES NOT YET ADOPTED
In June 1998, the FASB issued Statement No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND FOR HEDGING ACTIVITIES. Statement 133 provides a comprehensive
standard for the recognition and measurement of derivatives and hedging
activities. Statement No. 133 requires all derivatives to be recorded on the
balance sheet at fair value and establishes "special accounting" for the
different types of hedges. Though the accounting treatment and criteria for each
type of hedge are unique, they all result in recognizing offsetting changes in
value or cash flows of both the hedge and the hedged item in earnings in the
same period. Changes in fair value of derivatives that do not meet the hedge
criteria are included in earnings in the period of the change. The Company does
not believe that the adoption of Statement No. 133 in 2001 will have a
significant impact on its consolidated financial statements.
3. ACQUISITIONS AND DISPOSITIONS
On April 15, 1997, the Company completed its stock acquisition of
TeleControl Kommunikations-und Computersysteme Gesellschaft m.b.h., an Austrian
corporation which was renamed Scientific Games Kommunikations-und
Computersysteme GmbH. ("SG Austria"), an on-line lottery and transaction systems
company located in Vienna, Austria, from Autotote Corporation. The purchase
price was $26.9 million net of $2.8 million of SG Austria's acquired cash. The
purchase was accounted for under the purchase method of accounting. The purchase
price was allocated to approximately $5.1 million of net assets and to a
one-time write-off of $10.1 million in connection with in-process research and
development costs based on an appraisal, with the remainder allocated to
goodwill to be amortized over 15 years.
The accompanying financial statements include the results of operation of SG
Austria from the date of such acquisition. The following table summarizes the
Company's estimated pro forma unaudited results of operations as if the purchase
of SG Austria occurred on January 1, 1996, (in thousands, except per share
amounts):
<TABLE>
<CAPTION>
1997
--------
<S> <C>
Revenues.................................................... $200,225
Net income.................................................. 18,841
Earnings per common share--basic............................ 1.57
Earnings per common share--diluted.......................... 1.51
</TABLE>
The pro forma results presented above include adjustments to reflect
interest expense on borrowings for the acquisitions, amortization of assets
acquired including intangibles, certain management expenses related to the
Company's combined operations and the income tax effect of such pro forma
adjustments and income taxes on earnings.
These pro forma unaudited results of operations do not purport to represent
what the Company's actual results of operations would have been if the SG
Austria acquisition had occurred on January 1, 1996, and should not serve as a
forecast of the Company's operating results for any future periods. The pro
forma adjustments are based solely upon certain assumptions that management
believes are reasonable under the circumstances at this time. However, the full
impact of potential cost savings has not been reflected in the pro forma results
presented above, although there can be no assurances such cost savings will be
achieved.
F-66
<PAGE>
SCIENTIFIC GAMES HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
3. ACQUISITIONS AND DISPOSITIONS (CONTINUED)
In the fourth quarter of 1998, the Company formed a joint venture with La
Francaise des Jeux, the operator of the French National Lottery. The joint
venture corporation, ("SG France"), was formed to provide systems maintenance
services for the lottery terminal software and hardware of six German provincial
lotteries, terminal maintenance for the French National Lottery and to develop a
lottery terminal to be used by La Francaise de Jeux in France and by the Company
throughout the world. The Company's initial cash contribution to SG France was
approximately $1.9 million which resulted in a 55% ownership interest. The
Company also advanced to SG France approximately $1.4 million as a loan to
acquire inventory to be used in the venture. Goodwill and other intangibles
totaling approximately $2.5 million have been recognized in the consolidated
financial statements in connection with the joint venture.
In 1997, the Company discontinued its charity pull-tab ticket business line
which was produced and distributed by its then named subsidiary GameTec, Inc.
("GameTec"). A write-off of $3.4 million (pre-tax) was recognized for the
disposition of the assets of this business line in 1997. In connection with the
disposition, the Company sold substantially all of the assets of GameTec. The
Company entered into a three-year extendible marketing agreement with the buyer
to provide marketing and related services to state lotteries for pull-tab
tickets. The Company will continue to provide pull-tab tickets to its lottery
customers through the marketing agreement.
4. CREDIT FACILITY
On November 30, 1999 the Company entered into a three-year, $80 million
credit facility with four banks (the "$80 Million Credit Facility"). The $80
Million Credit Facility contains provisions for domestic and foreign currency
loans whereby, at the request of the Company, funds may be borrowed and repaid
in either, US Dollars, British Pounds Sterling, French Francs, Deutsche Marks,
or the European currency, Euros. In addition, on the same day, the Company also
entered into a separate, 364 day, $25 million credit facility with one of the
participating banks (the "$25 Million Credit Facility"). The $25 Million Credit
Facility expires on November 29, 2000, and can be renegotiated at the mutual
consent of both the bank and the Company, for the subsequent 364 days. The
interest-rate options available to the Company under both credit facilities are
LIBOR, IBOR and the Base Rate (the higher of the prime rate, or the federal
funds rate plus .5%), plus the applicable margin as defined in the Credit
Facility. These interest rates options are applicable and available in varying
circumstances based upon, among other things, the amount and nature of the
borrowings and the Company's leverage ratio at the time such amounts are
borrowed. The weighted-average interest rate on the outstanding borrowings under
the combined credit facilities, including foreign currency debt, during 1999 and
1998 was 4.9% and 5.0%, respectively. For the $80 Million Credit Facility
exclusively, a per annum fee of .20% is payable on the average, daily unused
portion of the commitment. At December 31, 1999, outstanding borrowings under
the combined credit facilities was $23.5 million. This amount included $10.5
million British pounds sterling, $5.0 million Euros, and the balance of $8.0
million was U.S. dollars.
Both credit facilities agreements contain covenants that restrict the
Company's ability to incur additional debt or create liens on any of its
property, except as permitted, and require the Company to maintain a leverage
ratio, as defined, at or below 50% and a fixed charge coverage ratio of at least
three to one.
F-67
<PAGE>
SCIENTIFIC GAMES HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
4. CREDIT FACILITY (CONTINUED)
For the year ended December 31, 1999 interest paid totaled $770,000, of
which $101,000 was capitalized. For the year ended December 31, 1998 interest
paid totaled $1.2 million. These amounts include interest on bank debt, interest
on capital leases and commitment fees. For the year ended December 31, 1997,
total interest paid and incurred totaled $955,000, of which $44,000 was
capitalized.
The outstanding balance under the $80 Million Credit Facility is due on
November 30, 2002.
5. SHAREHOLDERS' EQUITY
In July 1997, the Company adopted a shareholders' rights plan, which
provided for the issuance to each holder of the Company's common stock, certain
rights (the "Rights") to purchase shares of the Company's redeemable Series A
Participating Cumulative Preferred Stock pursuant to the terms of a Rights
Agreement. Such Rights are exercisable after distribution by the holders
thereof, other than "Acquiring Persons" as defined in the Rights Agreement, in
the event of certain ownership changes and in connection with certain business
combinations. The Rights have certain anti-takeover effects. The Rights may
cause substantial dilution to a person that attempts to acquire the Company
without a condition to such an offer being that a substantial number of the
Rights to be acquired or that the Rights be redeemed or declared invalid. The
Rights should not interfere with any merger or other business combination
approved by the Board of Directors (under some circumstances with the
concurrence of the continuing directors, as defined) since the rights may be
redeemed by the Company.
6. STOCK OPTIONS
The Company has elected to follow Accounting Principles Board Opinion No.
25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES (APB 25) and related
Interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FASB
Statement No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, requires use of
option valuation models that were not developed for use in valuing employee
stock options.
The Company has stock option plans that provide for the granting of
non-qualified options to purchase the Company's common stock to selected key
employees, officers and directors. Such options generally have ratable, annual
vesting periods ranging from 3 to 7 years from the date of the grant, and
maximum terms ranging from 7 to 10 years from the date of the grant.
A summary of the Company's stock option activity, and related information
for the years ended December 31, 1999, 1998 and 1997 follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------------------- ------------------------- -------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
SHARES AVERAGE SHARES AVERAGE SHARES AVERAGE
(000'S) EXERCISE PRICE (000'S) EXERCISE PRICE (000'S) EXERCISE PRICE
-------- -------------- -------- -------------- -------- --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding--beginning of year... 1,019 $17.72 1,376 $12.46 1,271 $11.41
Granted.......................... 125 17.08 345 19.76 125 20.60
Exercised........................ (25) 5.54 (659) 7.56 (18) 3.17
Forfeited........................ (58) 7.70 (43) 20.68 (2) 3.06
----- ------ ----- ------ ----- ------
Outstanding--end of year......... 1,061 17.27 1,019 17.72 1,376 $12.46
----- ------ ----- ------ ----- ------
Exercisable--end of year......... 662 $16.38 558 $15.06 885 $ 9.59
===== ====== ===== ====== ===== ======
</TABLE>
F-68
<PAGE>
SCIENTIFIC GAMES HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
6. STOCK OPTIONS (CONTINUED)
Exercise prices for options outstanding as of December 31, 1998, ranged from
$1.46 to $7.00 for approximately 149,000 options, from $9.44 to $20.00 for
approximately 580,000 options, and from $20.00 to $38.00 for approximately
332,000 options. The weighted-average remaining contractual life of those
options is 7.3 years.
The Company charged approximately $64,000, $563,000, and $1.3 million to
operations in 1999, 1998 and 1997, respectively, representing the amortization
of the difference in the option price and the fair market value of the option
shares at the date of grant.
At December 31, 1999, the Company has reserved approximately 518,000 shares
of Common Stock for possible future issuance in connection with its stock option
plans.
Pro forma information regarding net income and earnings per share is
required by Statement 123, which also requires that the information be
determined as if the Company has accounted for its employee stock options
granted subsequent to December 31, 1994, under the fair value method of that
Statement. The fair value of these options was estimated at the date of grant
using a Black-Scholes option pricing model with the following weighted-average
assumptions for 1999, 1998 and 1997, respectively: risk-free interest rates of
5.4%, 5.2% and 6.7%, a dividend yield of 0.0%; volatility factors of the
expected market price of the Company's common stock of .41, .41 and .46; and a
weighted-average expected life of the option of 8.0, 8.0 and 8.7 years. The
weighted-average fair value of options granted during 1999, 1998, and 1997 were
$9.50, $10.94, and $13.16, respectively.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions, including the expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Pro forma net income.............................. $19,238 $18,352 $7,689
Pro forma earnings per share--diluted............. $ 1.61 $ 1.51 $ .62
</TABLE>
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows (in thousands except for earnings per share
information):
Because Statement 123 is applicable to options granted subsequent to
December 31, 1994, its pro forma effect will not be fully reflected until future
years.
F-69
<PAGE>
SCIENTIFIC GAMES HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
7. INCOME TAXES
Income tax expense is composed of the following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Current:
Federal.......................................... $ 7,329 $ 5,939 $10,457
State............................................ 984 796 2,600
Foreign.......................................... 3,662 1,069 842
Deferred:
Federal.......................................... -- 2,765 (1,433)
State............................................ 1 629 (213)
Foreign.......................................... 11 1,013 (897)
------- ------- -------
Income tax expense............................... $11,987 $12,211 $11,356
======= ======= =======
</TABLE>
The pre-tax income (loss) attributed to the Company's foreign operations was
approximately $9.3 million, $7.7 million, and ($8.5) million for the years ended
December 31, 1999, 1998 and 1997 respectively.
The difference between the provision for income taxes and amounts computed
by applying federal statutory rates to income before income taxes is summarized
as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Federal income tax expense at statutory rates.... $11,367 $11,067 $ 7,115
State income taxes net of federal income tax
effect......................................... 639 1,082 1,551
Non-deductible expenses.......................... 1,236 1,139 450
In-process technology write-off.................. -- -- 3,535
Tax credits...................................... (115) (305) (582)
Other............................................ (1,140) (772) (713)
------- ------- -------
Income tax provision............................. $11,987 $12,211 $11,356
======= ======= =======
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax
F-70
<PAGE>
SCIENTIFIC GAMES HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
7. INCOME TAXES (CONTINUED)
purposes. Significant components of the Company's deferred tax liabilities and
assets as of December 31, 1999 and 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Deferred tax liabilities:
Tax over book depreciation.................................. $5,058 $3,897
Other--net.................................................. 1,669 2,797
------ ------
Total deferred tax liabilities.............................. 6,727 6,694
Deferred tax assets:
Accruals and reserves....................................... 150 130
Stock compensation.......................................... 903 902
------ ------
Total deferred tax assets................................... 1,053 1,032
------ ------
Net deferred tax liabilities................................ $5,674 $5,662
====== ======
</TABLE>
The Company made federal and state income tax payments of approximately
$10.1 million, $7.6 million and $11.7 million, in the years ended December 31,
1999, 1998 and 1997, respectively. The Company made $4.7 million, $580,000, and
$750,000 in foreign income tax payments in the years ended December 31, 1999,
1998, and 1997 respectively.
8. LEASES
The Company leases certain office and warehouse facilities under operating
leases. Lease expense for operating leases totaled approximately $4.0 million,
$2.8 million and $2.3 million for the years ended December 31, 1999, 1998 and
1997, respectively. Future minimum lease obligations at December 31, 1999, are
summarized as follows (in thousands):
<TABLE>
<CAPTION>
OPERATING
LEASES
---------
<S> <C>
2000........................................................ $ 3,805
2001........................................................ 3,066
2002........................................................ 1,339
2003........................................................ 829
2004........................................................ 720
Thereafter.................................................. 2,245
-------
Total lease obligations..................................... $12,004
=======
</TABLE>
9. BENEFIT PLANS
THE COMPANY SPONSORS THE FOLLOWING DEFINED CONTRIBUTION PLANS FOR ITS
EMPLOYEES AND DIRECTORS:
The Company sponsors the Scientific Games Inc. Savings and Investment Plan,
a savings plan which covers all SGI employees who elect to participate.
Employees are eligible for participation on the enrollment date following six
months of service. Prior to 1999, the Company contributed an amount equal to 33%
of the portion of the employee's elective deferral contributions which do not
exceed 6% of the employee's total pay for each payroll period in which an
elective deferral is made, subject to the
F-71
<PAGE>
SCIENTIFIC GAMES HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
9. BENEFIT PLANS (CONTINUED)
limitations of the Internal Revenue Code. Beginning in 1999, the Company
contributed an amount equal to 50% of the portion of the employee's elective
deferral contributions which do not exceed 6% of the employee's total pay for
each payroll period in which an elective deferral is made. The Company's
matching portion of employees' contributions is made with the Company's common
stock, which is purchased on the open market. Matching contributions of the
Company are 100% vested upon receipt. Approximately $581,000, $360,000 and
$331,000 was expensed by the Company related to this plan during 1999, 1998 and
1997, respectively.
On October 1, 1996, the Company established the Scientific Games Inc.
Management Deferred Compensation Plan (MDCP) to provide deferred compensation
for a select group of management or highly compensated employees. Generally,
participants in the MDCP may elect to defer up to 50% of their salary and up to
100% of their annual cash incentive bonus. Assets of the MDCP may be held by a
rabbi trust and are accounted for as assets of the Company; therefore all
earnings and expenses are recorded in the Company's financial statements. The
net amount of the MDCP's earnings and losses is recorded as additional liability
to the participants and is an expense of the Company. Assets and liabilities of
the MDCP totaled approximately $1.4 million and $1.7 million, respectively, at
December 31, 1999. Compensation expense associated with the MDCP was
approximately $292,000, $546,000 and $649,000 for the years ended December 31,
1999, 1998 and 1997, respectively.
Effective July 11, 1996, the Company established Scientific Games Holdings
Corp. Directors Deferred Compensation Plan (DDCP) to provide each member of the
Board of Directors who is not an employee of the Company (a "Director") an
opportunity, on an annual basis, to defer all or any portion of his or her
director's fees. Similar to the MDCP discussed above, assets of the DDCP may be
held by a rabbi trust. Assets and liabilities of the DDCP totaled approximately
$279,000 and $322,000, respectively, at December 31, 1999. Compensation expense
associated with the DDCP was approximately $60,000, $133,000 and $71,000 for the
years ended December 31, 1999, 1998 and 1997, respectively.
THE COMPANY ALSO SPONSORS THE FOLLOWING DEFINED BENEFIT PLANS FOR CERTAIN
EMPLOYEES:
Certain employees of SGIL are participants in a defined-benefit pension plan
administered by SGIL. The benefits are based on an average of the employee's
compensation over two years preceding retirement or leave of service.
The Company also sponsors the Scientific Games Inc. Supplemental Executive
Retirement Plan ("SERP") covering certain executives as determined by the
Compensation Committee of the Board. All current participants are 100% vested in
their benefits. Generally, participants will receive benefits for 15 years in an
amount equal to 53% of his or her compensation in the final three calendar years
of employment. Such amounts may be reduced based upon length of service and
vesting schedules for participants entering the SERP after January 1, 1996.
F-72
<PAGE>
SCIENTIFIC GAMES HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
9. BENEFIT PLANS (CONTINUED)
The following tables summarize the SGIL Plan and the SERP amounts related to
the SERP for 1997 have not been presented as such amounts were not significant.
<TABLE>
<CAPTION>
DECEMBER 31
----------------------------------------------------
SGIL SERP
------------------------------ -------------------
1999 1998 1997 1999 1998
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CHANGES IN BENEFIT OBLIGATION
Net benefit obligation at beginning of year....... $11,960 $ 9,634 $8,089 $5,506 $5,252
Service cost...................................... 1,018 963 775 283 134
Interest cost..................................... 646 631 770 404 394
Actuarial (gain) loss............................. 2,044 732 -- (23) (152)
Gross benefits paid............................... -- -- -- (163) (122)
------- ------- ------ ------ ------
Net benefit obligation at end of year............. $15,668 $11,960 $9,634 $6,007 $5,506
======= ======= ====== ====== ======
CHANGES IN PLAN ASSETS
Fair value of plan assets at beginning of year.... $11,777 $ 9,883 $9,059 $ -- $ --
Actual return on plan assets...................... 1,647 780 49 -- --
Employer contributions............................ 799 963 775 -- --
Plan participants' contribution................... 476 151 -- -- --
Gross benefits paid............................... -- -- -- -- --
------- ------- ------ ------ ------
Fair value of plan assets at end of year.......... $14,699 $11,777 $9,883 $ -- $ --
======= ======= ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31
----------------------------------------------------
SGIL SERP
------------------------------ -------------------
1999 1998 1997 1999 1998
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Funded status at end of year......................... $(969) $(183) $ 249 $(6,007) $(5,506)
Unrecognized net actuarial gain (loss)............... 727 (100) (396) 595 623
Unrecognized prior service cost...................... -- -- -- 2,781 3,139
Additional minimum liability......................... -- -- -- (2,910) (3,394)
Intangible asset..................................... -- -- -- 2,781 3,139
Accrued other comprehensive Income................... -- -- -- 129 255
----- ----- ----- ------- -------
Net amount recognized at end of year................. $(242) $(283) $(147) $(2,631) $(1,744)
===== ===== ===== ======= =======
</TABLE>
F-73
<PAGE>
SCIENTIFIC GAMES HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
9. BENEFIT PLANS (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31
----------------------------------------------------
SGIL SERP
------------------------------ -------------------
1999 1998 1997 1999 1998
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Service cost........................................... $1,018 $ 963 $ 775 $ 283 $134
Interest cost.......................................... 646 631 770 404 394
Expected return on plan assets......................... (889) (780) (819) -- --
Amortization of unrecognized transition obligation..... -- (16) -- -- --
Amortization of prior service cost..................... -- -- -- 358 358
Amortization of actuarial loss (gain).................. -- -- -- 4 29
------ ----- ----- ------ ----
Net periodic pension cost.............................. $ 775 $ 798 $ 726 $1,049 $915
====== ===== ===== ====== ====
</TABLE>
Assumptions used in the accounting for the defined benefit plans are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31
----------------------------------------------------
SGIL SERP
------------------------------ -------------------
1999 1998 1997 1999 1998
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Weighted-average discount rate............................ 6.0% 5.5% 6.5% 7.5% 7.5%
Rate of increase in future compensation levels............ 4.5% 4.0% 4.5% 5.0% 5.0%
Expected long term rate of return on plan assets.......... 7.5% 7.5% 7.5% -- --
</TABLE>
The SERP is not a qualified plan and has no plan assets. To provide a
funding source for the payment of benefits under the SERP, the Company owns
whole-life insurance contracts on the participants. The cash value of these
policies was approximately $2.5 million at December 31, 1998 and approximately
$3.8 million at December 31, 1999. The Company made cash payments associated
with the policies of approximately $787,000 annually during 1999, 1998 and 1997.
These policies have been placed in a rabbi trust, which will hold the policies
and death benefits as they are received.
10. CONTINGENCIES
As initially reported in July 1993 and periodically reported thereafter, the
Company's Scientific Games Inc. ("SGI") subsidiary 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 of lottery ticket sales 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
F-74
<PAGE>
SCIENTIFIC GAMES HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
10. CONTINGENCIES (CONTINUED)
asserted various claims for compensation and penalties against Wintech, SGI and
other shareholders of Wintech. As the Company has previously disclosed in its
filings with the Commission, 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.
SGI has consulted with Colombian counsel and been advised that SGI has
various legal defenses to Ecosalud's claims. 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.
The Colombian surety which issued a $4.0 million bond to Ecosalud under the
contract paid $2.4 million to Ecosalud under the bond, and made demand upon SGI
for that amount under the indemnity agreement entered into by 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. 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.
On April 2, 1998, Seguros brought suit against SGI in the United States
District Court for the Northern District of Georgia, Atlanta Division, Civil
Action No. 1:98-CV-968-CAM. The plaintiff sought $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. SGI filed a motion to dismiss based on the
Colombian statute of limitations of two years and, alternatively, sought that
the case be dismissed on other grounds. Seguros filed a motion for summary
judgment with the Court on May 6, 1998 seeking summary judgment on its claim in
the amount of $2.4 million, plus interest.
On September 29, 1999, the District Court issued an order in which it denied
various motions of SGI, including a motion to dismiss, and granted Seguros'
motion for summary judgment. On September 29, 1999, the District Court also
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 matters covered by the District Court's order and
judgment. SGI has posted an appeal bond in the amount of $7 million through its
existing bonding arrangements. 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.
In addition to vigorously prosecuting its appeal of the District Court's
order and judgment, SGI continues to vigorously defend the Colombian litigation
and has been advised by counsel that SGI has various defenses on the merits as
well as procedural defenses to the litigation (which it has asserted).
Nevertheless, it is not possible to determine the exact/ultimate outcome of the
appeal of the order and judgment granted to Seguros or the outcome of any
litigation in Colombia. While it is not feasible to predict or determine the
final outcome of these proceedings, management, based on the knowledge of
F-75
<PAGE>
SCIENTIFIC GAMES HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
10. CONTINGENCIES (CONTINUED)
the related facts and circumstances does not believe that any potential losses
will result in a materially adverse effect on the Company's financial position,
results of operations, liquidity or capital resources.
At December 31, 1999 the company has contracts for the completion of the
expansions of the Alpharetta and U.K. facilities totaling approximately
$17.5 million.
Scientific Games Holdings Corp. Notes to Consolidated Financial Statements
December 31, 1999
11. SEGMENT INFORMATION
The Company's primary customers are government sanctioned lotteries
worldwide. The two primary products sold by these lotteries are instant ticket
games (scratch-off lottery tickets) and online lottery games (lotto-type games).
The Company's two reportable segments are organized based on the products and
services it supplies to lotteries, Instant Tickets and Related Services and
Systems.
In the Instant Ticket and Related Services segment, the Company primarily
supplies game design, sales and marketing support, instant ticket manufacturing
and delivery, inventory management and distribution, and retailer telemarketing
and field service. In addition, this segment includes the supply of promotional
instant tickets and pull-tab tickets, which are sold to both lottery and
non-lottery customers as well as prepaid phone cards which are sold to
telecommunications companies. These products represent less than 10% of the
Company's revenue.
In the Systems segment, the Company primarily supplies transaction
processing software that accommodates instant ticket accounting and validation
and online games, point-of-sale terminal hardware which connects to these
systems, central site computer and communication hardware which run these
systems, and ongoing maintenance services for each of these items. On-line
lottery games include lotto, daily pick, keno and other games. The Systems
segment also includes software and hardware for sports betting systems and
credit card processing systems for non-lottery customers.
The Company refers to Cooperative Services in various sections of this
annual report. Cooperative Services is a branded marketing name given to the
combination of any of the products offered by the two segments under one
customer contract. The Company believes the Cooperative Services name assists it
in promoting greater awareness of its capabilities, but does not treat it as a
separate segment. The intersegment sales relate to Systems activity included in
Instant ticket and related services customer contracts. The amount of
intersegment sales was calculated based on the market value of the
F-76
<PAGE>
SCIENTIFIC GAMES HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
11. SEGMENT INFORMATION (CONTINUED)
product or service provided as if it was sold separately. The Corporate line
items in the schedules relate to general and administrative functions which are
not allocated to the segments.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
SEGMENT INFORMATION
Revenue from external customers:
Instant tickets and related services...................... $188,571 $176,676 $178,923
Intersegment revenue.................................... (7,306) (8,098) (6,353)
Systems................................................... 39,716 36,810 18,470
Intersegment revenue.................................... 7,306 8,098 6,353
Corporate................................................. 286 314 63
-------- -------- --------
Total revenue from external customers....................... $228,573 $213,800 $197,456
======== ======== ========
Depreciation and amortization:
Instant tickets and related services...................... $ 9,186 $ 8,887 $ 8,868
Systems................................................... 6,880 6,091 3,406
Corporate................................................. 1,958 1,352 955
-------- -------- --------
Total depreciation and amortization......................... $ 18,024 $ 16,330 $ 13,229
======== ======== ========
Operating income (loss):
Instant tickets and related services...................... $ 38,255 $ 34,343 $ 37,707
Pull-tab business write-off............................. -- -- (3,376)
Systems................................................... 6,152 7,577 5,553
In-process technology write-off......................... -- -- (10,102)
Corporate................................................. (11,715) (9,598) (9,404)
-------- -------- --------
Total operating income...................................... 32,692 32,322 20,378
Interest expense........................................ (588) (1,353) (911)
Other................................................... 371 651 861
-------- -------- --------
Income before income taxes.................................. $ 32,475 $ 31,620 $ 20,328
======== ======== ========
Assets:
Instant tickets and related services...................... $131,101 $137,718 $136,470
Systems................................................... 56,141 26,564 19,485
Corporate................................................. 16,391 15,351 8,455
-------- -------- --------
Total assets................................................ $203,633 $179,633 $164,410
======== ======== ========
</TABLE>
F-77
<PAGE>
SCIENTIFIC GAMES HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
11. SEGMENT INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
GEOGRAPHIC INFORMATION
Net revenues(a):
United States............................................. $168,147 $169,360 $158,911
Europe.................................................... 60,426 44,440 38,545
-------- -------- --------
Total net revenues.......................................... $228,573 $213,800 $197,456
======== ======== ========
Net revenues(b):
United States............................................. $141,392 $138,199 $131,335
Europe.................................................... 69,150 68,250 58,089
Other..................................................... 18,031 7,351 8,032
-------- -------- --------
Total net revenues.......................................... $228,573 $213,800 $197,456
======== ======== ========
Net long lived assets:
United States............................................. $ 74,467 $ 75,062 $ 80,738
Europe.................................................... 25,985 20,164 17,460
-------- -------- --------
Total long lived assets..................................... $100,452 $ 95,226 $ 98,198
======== ======== ========
</TABLE>
------------------------
(a) Based on subsidiaries' countries of domicile
(b) Based on customers' countries of domicile
During the years ended December 31, 1999 one customer comprised
approximately 10% of the Company's total revenues and in 1998 and 1997,
respectively, no single customer accounted for over 10% of the Company's total
revenues.
F-78
<PAGE>
SCIENTIFIC GAMES HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
12. QUARTERLY INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
IN THOUSANDS, EXCEPT PER SHARE DATA
<S> <C> <C> <C> <C>
1999
Revenues................................................ $52,665 $57,125 $59,511 $59,272
Gross profit............................................ 18,947 21,549 20,444 18,807
Income before taxes..................................... 8,081 8,628 7,866 7,900
Net income.............................................. 5,006 5,430 5,373 4,679
------- ------- ------- -------
Net income per share--basic............................. $ 0.42 $ 0.46 $ 0.45 $ 0.40
======= ======= ======= =======
Net income per share--diluted........................... $ 0.42 $ 0.45 $ 0.45 $ 0.40
======= ======= ======= =======
1998
Revenues................................................ $48,419 $51,567 $53,928 $59,886
Gross profit............................................ 16,862 18,832 20,116 19,360
Income before taxes..................................... 6,229 8,103 9,093 8,195
Net income.............................................. 3,777 4,853 5,282 5,497
------- ------- ------- -------
Net income per share--basic............................. $ .32 $ .39 $ .43 $ .46
======= ======= ======= =======
Net income per share--diluted........................... $ .31 $ .39 $ .43 $ .46
======= ======= ======= =======
</TABLE>
F-79
<PAGE>
SCIENTIFIC GAMES HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
13. SUBSEQUENT EVENTS AND FINANCIAL INFORMATION FOR GUARANTOR SUBSIDIARIES AND
NON-GUARANTOR SUBSIDIARIES
On May 18, 2000, the Company and Autotote Corporation announced a definitive
merger agreement. Autotote will pay $26 per share in cash, or a total of
approximately $308 million, to the shareholders of the Company. The merger is
subject to approval by Scientific Games' shareholders and certain government
entities and agencies. In connection with the merger agreement, certain third
parties have issued a commitment letter to provide debt financing for the
acquisition and related costs. In connection with the contemplated debt
financing, the Company and its wholly-owned domestic subsidiaries (the
"Guarantor Subsidiaries") may guarantee the debt financing.
Presented below is condensed consolidating financial information for the
Guarantor Subsidiaries and the Company's wholly owned foreign subsidiaries and
the non-wholly owned domestic and foreign subsidiaries (the "Non-Guarantor
Subsidiaries") as of December 31, 1998 and December 31, 1999 and for the fiscal
years ended December 31, 1997, 1998 and 1999. The condensed consolidating
financial information has been presented to show the nature of assets held,
results of operations and cash flows of Guarantor Subsidiaries and Non-Guarantor
Subsidiaries assuming the guarantee structure of the debt financing was in
effect at the beginning of the periods presented. Separate financial statements
for Guarantor Subsidiaries are not presented based on the Company's
determination that they would not provide additional information that is
material to investors. The Company's interest and administrative expenses have
not been allocated to the subsidiaries.
SCIENTIFIC GAMES HOLDINGS CORP.
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR ELIMINATING
SUBSIDIARIES SUBSIDIARIES ENTRIES CONSOLIDATED
------------ ------------- ----------- ------------
<S> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents.................. $ 7,276 7,499 -- 14,775
Trade receivable, net...................... 41,569 11,883 (4,797) 48,655
Inventories................................ 11,470 3,811 -- 15,281
Other current assets....................... 1,767 1,992 -- 3,759
Property and equipment, net................ 53,238 15,741 -- 68,979
Goodwill................................... 21,137 10,336 -- 31,473
Other assets............................... 52,094 2,780 (34,163) 20,711
-------- ------ ------- -------
Total assets........................... $188,551 54,042 (38,960) 203,633
======== ====== ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable........................... $ 12,687 7,369 (4,144) 15,912
Accrued liabilities........................ 14,112 11,764 (652) 25,224
Credit facility............................ 23,547 4,944 (4,944) 23,547
Other non-current liabilities.............. 10,506 14,928 (10,026) 15,408
Stockholders' equity....................... 127,699 15,037 (19,194) 123,542
-------- ------ ------- -------
Total liabilities and stockholders'
equity............................... $188,551 54,042 (38,960) 203,633
======== ====== ======= =======
</TABLE>
F-80
<PAGE>
SCIENTIFIC GAMES HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
13. SUBSEQUENT EVENTS AND FINANCIAL INFORMATION FOR GUARANTOR SUBSIDIARIES AND
NON-GUARANTOR SUBSIDIARIES (CONTINUED)
SCIENTIFIC GAMES HOLDINGS CORP.
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
GURANTOR NON-GUARANTOR ELIMINATING
SUBSIDIARIES SUBSIDIAIES ENTRIES CONSOLIDATED
------------ ------------- ----------- ------------
<S> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents.................. $ 306 8,964 -- 9,270
Trade receivable, net...................... 33,939 22,018 (16,512) 39,445
Inventories................................ 11,256 3,834 -- 15,090
Other current assets....................... 1,018 2,125 -- 3,143
Property and equipment, net................ 52,907 7,037 -- 59,944
Goodwill................................... 22,132 13,150 -- 35,282
Other assets............................... 58,422 2,991 (43,954) 17,459
-------- ------ -------- -------
Total assets........................... $179,980 60,119 (60,466) 179,633
======== ====== ======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Credit facility, current portion........... $ 12,482 -- -- 12,482
Accounts payable........................... 10,826 8,996 (3,552) 16,270
Accrued liabilities........................ 24,983 8,836 (12,065) 21,754
Credit facility............................ -- 18,884 (18,884) --
Other non-current liabilities.............. 12,015 12,236 (7,030) 17,221
Stockholders' equity....................... 119,674 11,167 (18,935) 111,906
-------- ------ -------- -------
Total liabilities and stockholders'
equity............................... $179,980 60,119 (60,466) 179,633
======== ====== ======== =======
</TABLE>
SCIENTIFIC GAMES HOLDINGS CORP.
SUPPLEMENTAL CONDENSED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR ELIMINATING
SUBSIDIARIES SUBSIDIARIES ENTRIES CONSOLIDATED
------------ ------------- ----------- ------------
<S> <C> <C> <C> <C>
Revenues..................................... $168,451 69,487 (9,365) 228,573
Cost of revenues............................. 113,212 44,658 (9,044) 148,826
-------- ------ ------ -------
Gross profit............................. 55,239 24,829 (321) 79,747
Selling, general and administrative
expenses................................... 18,366 10,665 -- 29,031
Depreciation and amortization................ 13,613 4,411 -- 18,024
Interest expense............................. 703 1,089 (1,204) 588
Other (income) deductions.................... (1,866) (240) 1,735 (371)
-------- ------ ------ -------
Income before income taxes................... 24,423 8,904 (852) 32,475
Income tax expense........................... 8,477 3,510 -- 11,987
-------- ------ ------ -------
Net income (loss)............................ $ 15,946 5,394 (852) 20,488
======== ====== ====== =======
</TABLE>
F-81
<PAGE>
SCIENTIFIC GAMES HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
13. SUBSEQUENT EVENTS AND FINANCIAL INFORMATION FOR GUARANTOR SUBSIDIARIES AND
NON-GUARANTOR SUBSIDIARIES (CONTINUED)
SCIENTIFIC GAMES HOLDINGS CORP.
SUPPLEMENTAL CONDENSED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR ELIMINATING
SUBSIDIARIES SUBSIDIARIES ENTRIES CONSOLIDATED
------------ ------------- ----------- ------------
<S> <C> <C> <C> <C>
Revenues..................................... $170,374 49,753 (6,327) 213,800
Cost of revenues............................. 111,657 32,766 (5,793) 138,630
-------- ------ ------ -------
Gross profit............................. 58,717 16,987 (534) 75,170
Selling, general and administrative
expenses................................... 17,501 9,489 (472) 26,518
Depreciation and amortization................ 12,441 3,889 -- 16,330
Interest expense............................. 1,600 1,389 (1,636) 1,353
Other (income) deductions.................... (1,550) (652) 1,551 (651)
-------- ------ ------ -------
Income before income taxes................... 28,725 2,872 23 31,620
Income tax expense........................... 10,214 1,997 -- 12,211
-------- ------ ------ -------
Net income................................... $ 18,511 875 23 19,409
======== ====== ====== =======
</TABLE>
SCIENTIFIC GAMES HOLDINGS CORP.
SUPPLEMENTAL CONDENSED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR ELIMINATING
SUBSIDIARIES SUBSIDIARIES ENTRIES CONSOLIDATED
------------ ------------- ----------- ------------
<S> <C> <C> <C> <C>
Revenues..................................... $159,706 38,545 (795) 197,456
Cost of revenues............................. 98,720 26,441 (443) 124,718
-------- ------ ---- -------
Gross profit............................. 60,986 12,104 (352) 72,738
Selling, general and administrative
expenses................................... 18,883 7,122 (352) 25,653
Depreciation and amortization................ 10,215 3,014 -- 13,229
Pull-tab business write-off.................. 3,376 -- -- 3,376
In-process technology write-off.............. -- 10,102 -- 10,102
Interest expense............................. 911 858 (858) 911
Other (income) deductions.................... (1,189) (530) 858 (861)
-------- ------ ---- -------
Income (loss) before income taxes............ 28,790 (8,462) -- 20,328
Income tax expense........................... 11,411 (55) -- 11,356
-------- ------ ---- -------
Net income (loss)............................ $ 17,379 (8,407) -- 8,972
======== ====== ==== =======
</TABLE>
F-82
<PAGE>
SCIENTIFIC GAMES HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
13. SUBSEQUENT EVENTS AND FINANCIAL INFORMATION FOR GUARANTOR SUBSIDIARIES AND
NON-GUARANTOR SUBSIDIARIES (CONTINUED)
SCIENTIFIC GAMES HOLDINGS CORP.
SUPPLEMENTAL CONDENSED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR ELIMINATING
SUBSIDIARIES SUBSIDIARIES ENTRIES CONSOLIDATED
------------ ------------- ----------- ------------
<S> <C> <C> <C> <C>
Net income (loss)............................ $15,946 5,394 (852) 20,488
Depreciation and amortization.............. 13,613 4,411 -- 18,024
Other non-cash adjustments................. 131 (23) 531 639
Changes in working capital................. (12,446) 9,555 (9,980) (12,871)
------- ------- ------- -------
Net cash provided by (used in) operating
activities................................. 17,244 19,337 (10,301) 26,280
------- ------- ------- -------
Cash flows from investing activities:
Proceeds from sales of property and
equipment................................ 174 -- -- 174
Purchases of property, systems and
equipment................................ (11,891) (10,413) (166) (22,470)
Acquisition of businesses, net of cash
acquired................................. (1,791) 541 -- (1,250)
------- ------- ------- -------
Net cash provided by (used in) investing
activities................................. (13,508) (9,872) (166) (23,546)
------- ------- ------- -------
Cash flows from financing activities:
Borrowings under credit facility........... 65,685 4,000 (4,000) 65,685
Payments on credit facilities.............. (54,620) (11,759) 11,759 (54,620)
Repurchases of common stock................ (8,021) -- -- (8,021)
Proceeds of exercise of common stock
options.................................. 417 -- -- 417
------- ------- ------- -------
Net cash provided by (used in) financing
activities................................. 3,461 (7,759) 7,759 3,461
------- ------- ------- -------
Effect of exchange rate changes on cash...... (227) (3,171) 2,708 (690)
------- ------- ------- -------
Increase/(decrease) in cash and cash
equivalents................................ 6,970 (1,465) -- 5,505
Cash and cash equivalents, beginning of
period..................................... 306 8,964 -- 9,270
------- ------- ------- -------
Cash and cash equivalents, end of period..... $ 7,276 7,499 -- 14,775
======= ======= ======= =======
</TABLE>
F-83
<PAGE>
SCIENTIFIC GAMES HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
13. SUBSEQUENT EVENTS AND FINANCIAL INFORMATION FOR GUARANTOR SUBSIDIARIES AND
NON-GUARANTOR SUBSIDIARIES (CONTINUED)
SCIENTIFIC GAMES HOLDINGS CORP.
SUPPLEMENTAL CONDENSED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR ELIMINATING
SUBSIDIARIES SUBSIDIARIES ENTRIES CONSOLIDATED
------------ ------------- ----------- ------------
<S> <C> <C> <C> <C>
Net income................................... $18,511 875 23 19,409
Depreciation and amortization.............. 12,440 3,890 -- 16,330
Loss (gain) on disposal of property and
equipment................................ -- (5) -- (5)
Other non-cash adjustments................. 4,182 788 (85) 4,885
Changes in working capital................. 4,281 767 (144) 4,904
------- ------ ------ -------
Net cash provided by (used in) operating
activities................................. 39,414 6,315 (206) 45,523
------- ------ ------ -------
Cash flows from investing activities:
Proceeds from sales of property and
equipment................................ 39 149 -- 188
Purchases of property, systems and
equipment................................ (5,392) (2,967) -- (8,359)
Acquisitions of businesses, net of cash
acquired................................. (8,777) -- 2,308 (6,469)
------- ------ ------ -------
Net cash provided by (used in) investing
activities................................. (14,130) (2,818) 2,308 (14,640)
------- ------ ------ -------
Cash flows from financing activities:
Payments on notes receivable from
officers................................. 71 -- -- 71
Borrowings under credit facility........... 3,000 2,102 (2,102) 3,000
Payments on credit facilities.............. (21,142) -- -- (21,142)
Repurchases of common stock................ (10,461) -- -- (10,461)
Proceeds of exercise of common stock
options.................................. 4,427 -- -- 4,427
------- ------ ------ -------
Net cash provided by (used in) financing
activities................................. (24,105) 2,102 (2,102) (24,105)
------- ------ ------ -------
Effect of exchange rate changes on cash...... 46 (397) -- (351)
------- ------ ------ -------
Increase/(decrease) in cash and cash
equivalents................................ 1,225 5,202 -- 6,427
Cash and cash equivalents, beginning of
period..................................... (919) 3,762 -- 2,843
------- ------ ------ -------
Cash and cash equivalents, end of period..... $ 306 8,964 -- 9,270
======= ====== ====== =======
</TABLE>
F-84
<PAGE>
SCIENTIFIC GAMES HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
13. SUBSEQUENT EVENTS AND FINANCIAL INFORMATION FOR GUARANTOR SUBSIDIARIES AND
NON-GUARANTOR SUBSIDIARIES (CONTINUED)
SCIENTIFIC GAMES HOLDINGS CORP.
SUPPLEMENTAL CONDENSED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR ELIMINATING
SUBSIDIARIES SUBSIDIARIES ENTRIES CONSOLIDATED
------------ ------------- ----------- ------------
<S> <C> <C> <C> <C>
Net income (loss)............................ $ 17,379 (8,407) -- 8,972
Depreciation and amortization.............. 10,215 3,014 -- 13,229
In-process technology write-off............ -- 10,102 -- 10,102
Pull-tab business write-off................ 3,376 -- -- 3,376
Other non-cash adjustments................. 2,739 (2,939) -- (200)
Changes in working capital................. (18,352) (12,880) 17,218 (14,014)
-------- ------- ------- -------
Net cash provided by (used in) operating
activities................................. 15,357 (11,110) 17,218 21,465
-------- ------- ------- -------
Cash flows from investing activities:
Proceeds from sales of assets.............. 670 130 -- 800
Purchases of property, systems and
equipment................................ (18,015) (4,265) -- (22,280)
Acquisitions of businesses, net of cash
acquired................................. (24,910) 819 -- (24,091)
-------- ------- ------- -------
Net cash provided by (used in) investing
activities................................. (42,255) (3,316) -- (45,571)
-------- ------- ------- -------
Cash flows from financing activities:
Borrowings under credit facility........... 36,060 16,782 (16,782) 36,060
Payments on credit facilities.............. (9,420) -- -- (9,420)
Repurchases of common stock................ (5,787) -- -- (5,787)
Proceeds of exercise of common stock
options.................................. 57 -- -- 57
-------- ------- ------- -------
Net cash provided by (used in) financing
activities................................. 20,910 16,782 (16,782) 20,910
-------- ------- ------- -------
Effect of exchange rate changes on cash...... 616 (393) (436) (213)
-------- ------- ------- -------
Increase/(decrease) in cash and cash
equivalents................................ (5,372) 1,963 -- (3,409)
Cash and cash equivalents, beginning of
period..................................... 4,453 1,799 -- 6,252
-------- ------- ------- -------
Cash and cash equivalents, end of period..... $ (919) 3,762 -- 2,843
======== ======= ======= =======
</TABLE>
F-85
<PAGE>
SCIENTIFIC GAMES HOLDINGS CORP.
CONSOLIDATED CONDENSED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
---------- ------------
(UAUDITED) (1)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 11,296 $ 14,775
Trade receivables......................................... 46,669 48,655
Inventories............................................... 15,648 15,281
Prepaid expenses and other current assets................. 3,500 2,706
Income taxes receivable................................... 74 --
Deferred income tax benefits.............................. 1,100 1,053
-------- --------
Total current assets.................................... 78,287 82,470
PROPERTY, SYSTEMS AND EQUIPMENT, AT COST:
Land...................................................... 5,024 2,404
Buildings................................................. 12,405 12,535
Leasehold improvements.................................... 3,016 2,367
Production, systems and other equipment................... 115,650 112,884
Construction-in-progress.................................. 25,759 12,089
-------- --------
161,854 142,279
Less accumulated depreciation and amortization.............. (75,407) (69,324)
-------- --------
86,447 72,955
OTHER ASSETS:
Goodwill, net of amortization............................. 29,819 31,473
Other assets.............................................. 18,462 16,735
-------- --------
$213,015 $203,633
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 13,457 $ 15,912
Accrued Liabilities....................................... 25,125 23,397
Income taxes payable...................................... -- 1,827
-------- --------
Total current liabilities............................... 38,582 41,136
LONG-TERM LIABILITIES:
Credit facilities......................................... 28,900 23,547
Other long-term liabilities............................... 5,364 5,677
Deferred income taxes payable............................. 7,471 6,727
Minority interest in consolidated subsidiaries............ 3,238 3,004
STOCKHOLDERS' EQUITY:
Common stock par value $.001 per share:
shares authorized: 25,750,000; issued and outstanding
shares 11,924,151 at June 30, 2000 and 11,915,702 at
December 31, 1999..................................... 12 12
Additional paid-in capital................................ 66,144 66,060
Accumulated earnings...................................... 72,337 66,689
Accumulated other comprehensive income.................... (999) (1,198)
Treasury stock, at cost--509,200 shares at June 30, 2000
and December 31, 1999................................... (8,034) (8,021)
-------- --------
Total stockholders' equity.............................. 129,460 123,542
-------- --------
$213,015 $203,633
======== ========
</TABLE>
------------------------
(1) Derived from audited financial statements
See accompanying notes.
F-86
<PAGE>
SCIENTIFIC GAMES HOLDINGS CORP.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE-MONTH PERIOD SIX-MONTH PERIOD
ENDED JUNE 30, ENDED JUNE 30,
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues.............................................. $61,448 $57,125 $120,511 $109,790
Cost of revenues...................................... 42,973 35,576 82,616 69,294
------- ------- -------- --------
18,475 21,549 37,895 40,496
Selling, general and administrative expenses.......... 7,510 7,617 16,058 14,357
Depreciation and amortization......................... 4,856 4,822 9,424 8,894
Plant closure costs................................... 309 -- 2,826 --
------- ------- -------- --------
Operating income...................................... 5,800 9,110 9,587 17,245
Other income (expense):
Interest income..................................... 175 189 368 279
Other income........................................ 70 25 78 30
Gain/(loss) on foreign currency..................... (14) (174) (308) 273
Interest expense.................................... 337 235 622 402
Minority interest elimination....................... (118) (287) (176) (716)
------- ------- -------- --------
Income before income taxes............................ 5,576 8,628 8,927 16,709
Income tax expense.................................... 2,062 3,198 3,278 6,273
------- ------- -------- --------
Net income............................................ $ 3,514 $ 5,430 $ 5,649 $ 10,436
======= ======= ======== ========
Basic net income per common share..................... $ 0.31 $ 0.46 $ 0.50 $ 0.88
======= ======= ======== ========
Diluted net income per common share................... $ 0.30 $ 0.45 $ 0.49 $ 0.87
======= ======= ======== ========
Average common shares outstanding--basic.............. 11,415 11,885 11,411 11,885
Dilutive effect of stock options and non-vested
restricted stock awards............................. 163 108 124 108
------- ------- -------- --------
Average common shares outstanding--diluted............ 11,578 11,993 11,535 11,993
======= ======= ======== ========
</TABLE>
See accompanying notes.
F-87
<PAGE>
SCIENTIFIC GAMES HOLDINGS CORP.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTH PERIOD
ENDED JUNE 30,
----------------------
2000 1999
-------- --------
<S> <C> <C>
CASH FLOW PROVIDED BY OPERATING ACTIVITIES
Net income................................................ $ 5,649 $ 10,436
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation............................................ 6,645 5,838
Amortization............................................ 2,778 3,056
Gain on disposal of property and equipment.............. (521) (12)
Stock compensation expense.............................. 35 31
Minority interest....................................... 118 348
Deferred income taxes................................... (32) 257
Changes in operating assets and liabilities:
Accounts receivable................................... 1,745 (12,752)
Inventories........................................... (526) (527)
Accounts payable...................................... (2,400) 435
Other................................................. (288) 3,520
-------- --------
Net cash provided by operating activities................. 13,203 10,630
-------- --------
CASH FLOWS USED IN INVESTING ACTIVITIES
Proceeds from sales of property and equipment............. 442 120
Purchases of property and equipment....................... (22,270) (5,956)
-------- --------
Net cash used in investing activities................. (21,828) (5,836)
-------- --------
CASH FLOWS USED IN FINANCING ACTIVITIES
Borrowings under credit facilities........................ 23,891 21,265
Payments on bank credit facilities........................ (18,000) (19,771)
Repurchase of common stock................................ (13) --
Proceeds of exercise of common stock options.............. 4 8
-------- --------
Net cash provided by financing activities............... 5,882 1,502
-------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH..................... (736) (1,834)
-------- --------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS........ (3,479) 4,462
CASH AND CASH EQUIVALENTS, beginning of period.............. 14,775 9,270
-------- --------
CASH AND CASH EQUIVALENTS, end of period.................... $ 11,296 $ 13,732
======== ========
SUPPLEMENTAL CASH FLOWS DISCLOSURE:
Cash paid for interest.................................... $ 460 $ 318
======== ========
</TABLE>
See accompanying notes.
F-88
<PAGE>
SCIENTIFIC GAMES HOLDINGS CORP.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited consolidated condensed financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements and should be read in conjunction with the financial
statement disclosures contained in the Company's 1999 Annual Report on Form 10-K
for the year ended December 31, 1999. In the opinion of management, all
adjustments considered necessary for a fair presentation (which were of a
normal, recurring nature) have been included. Operating results for the three
and six month periods ended June 30, 2000 are not necessarily indicative of the
results that may be expected for the year ended December 31, 2000.
NOTE 2. INVENTORIES
Inventories consist principally of instant lottery tickets, materials
related to their production and certain electronic components related to Systems
terminals which are valued at the lower of cost (first-in, first-out method) or
market. Inventories consisted of the following at:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
-------- ------------
(IN THOUSANDS)
<S> <C> <C>
Finished goods......................................... $ 9,015 $ 8,633
Work-in-process........................................ 1,915 2,075
Raw materials.......................................... 4,718 4,573
------- -------
$15,648 $15,281
======= =======
</TABLE>
NOTE 3. CONTINGENCIES
As initially reported in July 1993 and periodically reported thereafter, the
Company's Scientific Games Inc. ("SGI") subsidiary 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 of lottery ticket sales 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. As the Company has previously disclosed in its filings
with the Commission, 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.
F-89
<PAGE>
SCIENTIFIC GAMES HOLDINGS CORP.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 3. CONTINGENCIES (CONTINUED)
SGI has consulted with Colombian counsel and been advised that SGI has
various legal defenses to Ecosalud's claims. 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.
The Colombian surety, which issued a $4.0 million bond to Ecosalud under the
contract, paid $2.4 to Ecosalud under the bond, and made demand upon SGI for
that amount under the indemnity agreement entered into by 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. 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.
On April 2, 1998, Seguros brought suit against SGI in the United States
District Court for the Northern District of Georgia, Atlanta Division, Civil
Action No. 1:98-CV-968-CAM. The plaintiff sought $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. SGI filed a motion to dismiss based on the
Colombian statute of limitations of two years and, alternatively, sought that
the case be dismissed on other grounds. Seguros filed a motion for summary
judgment with the Court on May 6, 1998 seeking summary judgment on its claim in
the amount of $2.4 million, plus interest.
On September 29, 1999, the District Court issued an order in which it denied
various motions of SGI, including a motion to dismiss, and granted Seguros'
motion for summary judgment. On September 29, 1999, the District Court also
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 matters covered by the District Court's order and
judgment. SGI has posted an appeal bond in the amount of $7 million through its
existing bonding arrangements. 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.
In addition to vigorously prosecuting its appeal of the District Court's
order and judgment, SGI continues to vigorously defend the Colombian litigation
and has been advised by counsel that SGI has various defenses on the merits as
well as procedural defenses to the litigation (which it has asserted).
Nevertheless, it is not possible to determine the exact/ultimate outcome of the
appeal of the order and judgment granted to Seguros or the outcome of any
litigation in Colombia. While it is not feasible to predict or determine the
final outcome of these proceedings, management, based on the knowledge of the
related facts and circumstances, believes that any potential losses will not
result in a materially adverse effect on the Company's financial position,
results of operations, liquidity or capital resources.
NOTE 4. COMPREHENSIVE INCOME
Total comprehensive income was $195,000 and $5.8 million for the three-month
and six-month periods ended June 30, 2000 and $5.4 million and $10.0 million for
the three-month and six-month periods ended June 30, 1999, respectively.
F-90
<PAGE>
SCIENTIFIC GAMES HOLDINGS CORP.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 5. CREDIT FACILITIES
The Company has two credit facilities, an $80 million revolving credit
facility with four banks which expires November 30, 2002 and a $25 million
revolving 364-day credit facility with a single bank that expires on November
29, 2000. (Refer to the Company's 10-K for the year ended December 31, 1999 for
a description of the Company's credit facilities). Net borrowings under the
credit facilities were $28.9 million at June 30, 2000.
NOTE 6. SEGMENT INFORMATION
<TABLE>
<CAPTION>
I. THREE MONTH II. SIX MONTH PERIOD
A. OPERATING SEGMENT INFORMATION PERIOD ENDED JUNE 30 ENDED JUNE 30
-------------------------------- --------------------- ---------------------
2000 1999 2000 1999
--------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenue from external customers:
Instant Ticket and Related Services.................. $54,312 $45,917 $106,872 $86,673
Intersegment Revenue............................... (1,876) (1,896) (3,784) (3,565)
Systems.............................................. 7,250 11,161 13,652 23,054
Intersegment Revenue............................... 1,876 1,896 3,784 3,565
Corporate............................................ (114) 47 (13) 63
------- ------- -------- -------
Total revenue from external customers.................. 61,448 57,125 120,511 109,790
======= ======= ======== =======
Operating income
Instant Ticket and Related Services.................. 9,302 9,729 18,968 17,604
Systems.............................................. (476) 2,807 (3,510) 5,731
Corporate............................................ (3,026) (3,426) (5,871) (6,090)
Total operating income................................. 5,800 9,110 9,587 17,245
Interest expense, net................................ (164) (46) (254) (123)
Other................................................ (60) (436) (406) (413)
------- ------- -------- -------
Income before income tax............................... $ 5,576 $ 8,628 $ 8,927 $16,709
======= ======= ======== =======
</TABLE>
NOTE 7. PLANT CLOSURE
On January 28, 2000, the Company announced plans to consolidate its printing
operations by expanding its Alpharetta, Georgia facility and closing its instant
ticket printing operation in Gilroy, California. The severance and stay
incentive plan was announced to the employees on January 27, 2000. A total of
$309,000 and $2.8 million in closure costs were expensed for the quarter and six
months ended June 30, 2000, respectively. The reserve in accrued liabilities was
$2.4 million at June 30, 2000. These costs consisted of severance, stay
incentives, lease termination and asset write-downs. There are approximately 130
employees that will be terminated including both production and support
employees at the plant. The plant stopped printing operations on July 26, 2000
and will cease total operations by the end of August 2000. There were $185,000
in charges taken against the reserve during the quarter ended June 30, 2000.
F-91
<PAGE>
SCIENTIFIC GAMES HOLDINGS CORP.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 8. SUBSEQUENT EVENTS AND FINANCIAL INFORMATION FOR GUARANTOR SUBSIDIARIES
AND NON-GUARANTOR SUBSIDIARIES
On May 18, 2000, the Company and Autotote Corporation announced a definitive
merger agreement. Autotote will pay $26 per share in cash, or a total of
approximately $308 million, to the shareholders of the Company. The merger is
subject to approval by Scientific Games' shareholders and certain government
entities and agencies. In connection with the merger agreement, certain third
parties have issued a commitment letter to provide debt financing for the
acquisition and related costs. In connection with the contemplated debt
financing, the Company and its wholly owned domestic subsidiaries (the
"Guarantor Subsidiaries") may guarantee the debt financing.
Presented below is condensed consolidating financial information for the
Guarantor Subsidiaries and the Company's wholly owned foreign subsidiaries and
the non-wholly owned domestic and foreign subsidiaries (the "Non-Guarantor
Subsidiaries") as of June 30, 2000 and for the three month and six month periods
ended June 30, 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 Guarantor Subsidiaries and Non-Guarantor Subsidiaries assuming the
guarantee structure of the debt financing was in effect at the beginning of the
periods presented. Separate financial statements for Guarantor Subsidiaries are
not presented based on the Company's determination that they would not provide
additional information that is material to investors. The Company's interest and
administrative expenses have not been allocated to the subsidiaries.
SCIENTIFIC GAMES HOLDINGS CORP.
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
JUNE 30, 2000
(IN THOUSANDS)
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR ELIMINATING
SUBSIDIARIES SUBSIDIARIES ENTRIES CONSOLIDATED
------------ ------------- ----------- ------------
<S> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents.................. $ 5,282 $ 6,014 $ -- $ 11,296
Trade receivable, net...................... 38,551 13,797 (5,679) 46,669
Inventories................................ 12,795 2,853 -- 15,648
Other current assets....................... 4,384 290 -- 4,674
Property and equipment, net................ 63,730 23,241 (524) 86,447
Goodwill................................... 20,616 9,203 -- 29,819
Other assets............................... 53,879 2,625 (38,042) 18,462
-------- ------- -------- --------
Total assets............................. $199,237 $58,023 $(44,245) $213,015
======== ======= ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT)
Accounts payable........................... $ 9,784 $ 7,805 $ (4,132) $ 13,457
Accrued liabilities........................ 18,587 8,085 (1,547) 25,125
Credit facility............................ 28,957 4,688 (4,745) 28,900
Other non-current liabilities.............. 11,432 18,796 (14,155) 16,073
Stockholders' equity (deficit)............... 130,477 18,649 (19,666) 129,460
-------- ------- -------- --------
Total liabilities and stockholders'
equity (deficit)....................... $199,237 $58,023 $(44,245) $213,015
======== ======= ======== ========
</TABLE>
F-92
<PAGE>
SCIENTIFIC GAMES HOLDINGS CORP.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 8. SUBSEQUENT EVENTS AND FINANCIAL INFORMATION FOR GUARANTOR SUBSIDIARIES
AND NON-GUARANTOR SUBSIDIARIES (CONTINUED)
SCIENTIFIC GAMES HOLDINGS CORP.
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR ELIMINATING
SUBSIDIARIES SUBSIDIARIES ENTRIES CONSOLIDATED
------------ ------------- ----------- ------------
<S> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents.................. $ 7,276 7,499 -- 14,775
Trade receivable, net...................... 41,569 11,883 (4,797) 48,655
Inventories................................ 11,470 3,811 -- 15,281
Other current assets....................... 1,767 1,992 -- 3,759
Property and equipment, net................ 53,238 15,741 -- 68,979
Goodwill................................... 21,137 10,336 -- 31,473
Other assets............................... 52,094 2,780 (34,163) 20,711
-------- ------ ------- -------
Total assets........................... $188,551 54,042 (38,960) 203,633
======== ====== ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable........................... $ 12,687 7,369 (4,144) 15,912
Accrued liabilities........................ 14,112 11,764 (652) 25,224
Credit facility............................ 23,547 4,944 (4,944) 23,547
Other non-current liabilities.............. 10,506 14,928 (10,026) 15,408
Stockholders' equity....................... 127,699 15,037 (19,194) 123,542
-------- ------ ------- -------
Total liabilities and stockholders'
equity............................... $188,551 54,042 (38,960) 203,633
======== ====== ======= =======
</TABLE>
F-93
<PAGE>
SCIENTIFIC GAMES HOLDINGS CORP.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 8. SUBSEQUENT EVENTS AND FINANCIAL INFORMATION FOR GUARANTOR SUBSIDIARIES
AND NON-GUARANTOR SUBSIDIARIES (CONTINUED)
SCIENTIFIC GAMES HOLDINGS CORP.
SUPPLEMENTAL CONDENSED STATEMENT OF INCOME
THREE MONTHS ENDED JUNE 30, 2000
(IN THOUSANDS)
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR ELIMINATING
SUBSIDIARIES SUBSIDIARIES ENTRIES CONSOLIDATED
------------ ------------- ----------- ------------
<S> <C> <C> <C> <C>
Revenues..................................... $41,958 $21,743 $(2,253) $61,448
Cost of revenues............................. 31,229 13,935 (2,191) 42,973
------- ------- ------- -------
Gross profit............................... 10,729 7,808 (62) 18,475
Selling, general and administrative
expenses................................... 4,933 2,577 -- 7,510
Depreciation and amortization................ 3,727 1,129 -- 4,856
Plant closure costs.......................... 309 -- -- 309
------- ------- ------- -------
Operating income............................. 1,760 4,102 (62) 5,800
Interest expense............................. 530 194 (387) 337
Other (income) deductions.................... (492) (126) 505 (113)
------- ------- ------- -------
Income (loss) before income taxes............ 1,722 4,034 (180) 5,576
Income tax expense........................... 610 1,452 -- 2,062
------- ------- ------- -------
Net income (loss)............................ $ 1,112 $ 2,582 $ (180) $ 3,514
======= ======= ======= =======
</TABLE>
SCIENTIFIC GAMES HOLDINGS CORP.
SUPPLEMENTAL CONDENSED STATEMENT OF INCOME
THREE MONTHS ENDED JUNE 30, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR ELIMINATING
SUBSIDIARIES SUBSIDIARIES ENTRIES CONSOLIDATED
------------ ------------- ----------- ------------
<S> <C> <C> <C> <C>
Revenues..................................... $43,150 $16,755 $(2,780) $57,125
Cost of revenues............................. 29,012 9,275 (2,711) 35,576
------- ------- ------- -------
Gross profit............................... 14,138 7,480 (69) 21,549
Selling, general and administrative
expenses................................... 5,036 2,581 -- 7,617
Depreciation and amortization................ 3,153 1,669 -- 4,822
------- ------- ------- -------
Operating income............................. 5,949 3,230 (69) 9,110
Interest expense............................. 202 281 (248) 235
Other (income) deductions.................... (209) (79) 535 247
------- ------- ------- -------
Income (loss) before income taxes............ 5,956 3,028 (356) 8,628
Income tax expense........................... 2,245 1,215 (262) 3,198
------- ------- ------- -------
Net income (loss)............................ $ 3,711 $ 1,813 $ (94) $ 5,430
======= ======= ======= =======
</TABLE>
F-94
<PAGE>
SCIENTIFIC GAMES HOLDINGS CORP.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 8. SUBSEQUENT EVENTS AND FINANCIAL INFORMATION FOR GUARANTOR SUBSIDIARIES
AND NON-GUARANTOR SUBSIDIARIES (CONTINUED)
SCIENTIFIC GAMES HOLDINGS CORP.
SUPPLEMENTAL CONDENSED STATEMENT OF INCOME
SIX MONTHS ENDED JUNE 30, 2000
(IN THOUSANDS)
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR ELIMINATING
SUBSIDIARIES SUBSIDIARIES ENTRIES CONSOLIDATED
------------ ------------- ----------- ------------
<S> <C> <C> <C> <C>
Revenues..................................... $80,552 $44,446 $(4,487) $120,511
Cost of revenues............................. 58,155 28,805 (4,344) 82,616
------- ------- ------- --------
Gross profit............................... 22,397 15,641 (143) 37,895
Selling, general and administrative
expenses................................... 9,809 6,249 -- 16,058
Depreciation and amortization................ 7,133 2,291 -- 9,424
In-process technology write-off.............. 2,826 -- -- 2,826
------- ------- ------- --------
Operating income............................. 2,629 7,101 (143) 9,587
Interest expense............................. 908 386 (672) 622
Other (income) deductions.................... (668) (142) 848 38
------- ------- ------- --------
Income before income taxes................... 2,389 6,857 (319) 8,927
Income tax expense........................... 799 2,479 -- 3,278
------- ------- ------- --------
Net income................................... $ 1,590 $ 4,378 $ (319) $ 5,649
======= ======= ======= ========
</TABLE>
SCIENTIFIC GAMES HOLDINGS CORP.
SUPPLEMENTAL CONDENSED STATEMENT OF INCOME
SIX MONTHS ENDED JUNE 30, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR ELIMINATING
SUBSIDIARIES SUBSIDIARIES ENTRIES CONSOLIDATED
------------ ------------- ----------- ------------
<S> <C> <C> <C> <C>
Revenues..................................... $82,812 $32,367 $(5,389) $109,790
Cost of revenues............................. 55,691 18,811 (5,208) 69,294
------- ------- ------- --------
Gross profit............................... 27,121 13,556 (181) 40,496
Selling, general and administrative
expenses................................... 9,262 5,095 -- 14,357
Depreciation and amortization................ 6,124 2,770 -- 8,894
------- ------- ------- --------
Operating income............................. 11,735 5,691 (181) 17,245
Interest expense............................. 452 652 (702) 402
Other (income) deductions.................... (1,074) (210) 1,418 134
------- ------- ------- --------
Income (loss) before income taxes............ 12,357 5,249 (897) 16,709
Income tax expense........................... 4,588 2,162 (477) 6,273
------- ------- ------- --------
Net income (loss)............................ $ 7,769 $ 3,087 $ (420) $ 10,436
======= ======= ======= ========
</TABLE>
F-95
<PAGE>
SCIENTIFIC GAMES HOLDINGS CORP.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 8. SUBSEQUENT EVENTS AND FINANCIAL INFORMATION FOR GUARANTOR SUBSIDIARIES
AND NON-GUARANTOR SUBSIDIARIES (CONTINUED)
SCIENTIFIC GAMES HOLDINGS CORP.
SUPPLEMENTAL CONDENSED STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2000
(IN THOUSANDS)
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR ELIMINATING
SUBSIDIARIES SUBSIDIARIES ENTRIES CONSOLIDATED
------------ ------------- ----------- ------------
<S> <C> <C> <C> <C>
Net income................................... $ 1,590 $ 4,378 $ (319) $ 5,649
Depreciation and amortization.............. 7,132 2,291 -- 9,423
Other non-cash adjustments................. (494) (24) 118 (400)
Changes in working capital................. (3,493) (2,614) 4,638 (1,469)
-------- -------- ------- --------
Net cash provided by (used in) operating
activities................................. 4,735 4,031 4,437 13,203
-------- -------- ------- --------
Cash flows from investing activities:
Proceeds from sales of assets.............. 413 29 -- 442
Purchases of property, systems and
equipment................................ (12,266) (10,004) -- (22,270)
Acquisitions of businesses, net of cash
acquired................................. -- 200 (200) --
-------- -------- ------- --------
Net cash provided by (used in) investing
activities................................. (11,853) (9,775) (200) (21,828)
-------- -------- ------- --------
Cash flows from financing activities:
Borrowings under credit facility........... 22,766 6,384 (5,259) 23,891
Payments on credit facilities.............. (16,302) (1,698) -- (18,000)
Repurchases of common stock................ (13) -- -- (13)
Proceeds of exercise of common stock
options.................................. 4 -- -- 4
-------- -------- ------- --------
Net cash provided by (used in) financing
activities................................. 6,455 4,686 (5,259) 5,882
-------- -------- ------- --------
Effect of exchange rate changes on cash...... (1,331) (427) 1,022 (736)
-------- -------- ------- --------
Increase/(decrease) in cash and cash
equivalents................................ (1,994) (1,485) -- (3,479)
Cash and cash equivalents, beginning of
period..................................... 7,276 7,499 -- 14,775
-------- -------- ------- --------
Cash and cash equivalents, end of period..... $ 5,282 $ 6,014 $ -- $ 11,296
======== ======== ======= ========
</TABLE>
F-96
<PAGE>
SCIENTIFIC GAMES HOLDINGS CORP.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 8. SUBSEQUENT EVENTS AND FINANCIAL INFORMATION FOR GUARANTOR SUBSIDIARIES
AND NON-GUARANTOR SUBSIDIARIES (CONTINUED)
SCIENTIFIC GAMES HOLDINGS CORP.
SUPPLEMENTAL CONDENSED STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR ELIMINATING
SUBSIDIARIES SUBSIDIARIES ENTRIES CONSOLIDATED
------------ ------------- ----------- ------------
<S> <C> <C> <C> <C>
Net income................................... $ 7,769 $ 3,087 $ (420) $ 10,436
Depreciation and amortization.............. 6,124 2,770 -- 8,894
Other non-cash adjustments................. 31 245 348 624
Changes in working capital................. (8,158) 5,957 (7,123) (9,324)
-------- ------- ------- --------
Net cash provided by (used in) operating
activities................................. 5,766 12,059 (7,195) 10,630
-------- ------- ------- --------
Cash flows from investing activities:
Proceeds from sales of assets.............. 95 25 -- 120
Purchases of property, systems and
equipment................................ (4,340) (1,616) -- (5,956)
-------- ------- ------- --------
Net cash provided by (used in) investing
activities................................. (4,245) (1,591) -- (5,836)
-------- ------- ------- --------
Cash flows from financing activities:
Borrowings under credit facility........... 21,264 802 (801) 21,265
Payments on credit facilities.............. (19,771) (7,996) 7,996 (19,771)
Proceeds of exercise of common stock
options.................................. 8 -- -- 8
-------- ------- ------- --------
Net cash provided by (used in) financing
activities................................. 1,501 (7,194) 7,195 1,502
-------- ------- ------- --------
Effect of exchange rate changes on cash...... (300) (1,534) -- (1,834)
-------- ------- ------- --------
Increase/(decrease) in cash and cash
equivalents................................ 2,722 1,740 -- 4,462
Cash and cash equivalents, beginning of
period..................................... 306 8,964 -- 9,270
-------- ------- ------- --------
Cash and cash equivalents, end of period..... $ 3,028 $10,704 $ -- $ 13,732
======== ======= ======= ========
</TABLE>
F-97
<PAGE>
PART II INFORMATION
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The General Corporation Law of the State of Delaware (the "DGCL") at
Section 102(b)(7) enables a corporation in its original certificate of
incorporation or an amendment thereto to eliminate or limit the personal
liability of a director to the corporation or its stockholders for monetary
damages for breach of the director's fiduciary duty, except (i) for any breach
of the director's duty of loyalty to the corporation or its stockholders, (ii)
for acts or omissions not in good faith or which involve intentional misconduct
or a knowing violation of law, (iii) pursuant to Section 174 of the DGCL
(providing for liability of directors for unlawful payment of dividends or
unlawful stock purchases or redemptions), or (iv) for any transaction from which
the director derived an improper personal benefit.
The DGCL, at Section 145, provides, in pertinent part, that a corporation
may indemnify any person who was or is a party or is threatened to be made a
party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative (other than an action
by or in the right of the corporation), by reason of the fact that he is or was
a director, officer, employee or agent of the corporation or is or was serving
another corporation, partnership, joint venture, trust or other enterprise, at
the request of the corporation, against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement, actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interest of the corporation and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful. Lack of
good faith, or lack of a reasonable belief that one's actions are in or not
opposed to the best interest of the corporation, or with respect to any criminal
action or proceeding, lack of reasonable cause to believe one's conduct was
unlawful is not presumed from the termination of any action, suit or proceeding
by judgment, order, settlement, conviction, or nolo contendere plea or its
equivalent. In addition, the indemnification of expenses (including attorneys'
fees) is allowed in derivative actions, except no indemnification is allowed in
respect of any claim, issue or matter as to which any such person has been
adjudged to be liable to the corporation, unless and only to the extent the
Court of Chancery or the court in which such action or suit was brought decides
that indemnification is proper. To the extent that any such person succeeds on
the merits or otherwise in defense of any of the above described actions or
proceedings, he shall be indemnified against expenses (including attorneys'
fees). The determination that the person to be indemnified met the applicable
standard of conduct, if not made by a court, is made by the Board of Directors
of the corporation by a majority vote of a quorum consisting of directors not
party to such an action, suit or proceeding or, if a quorum is not obtainable or
a disinterested quorum so directs, by independent legal counsel in a written
opinion or by the stockholders. Expenses may be paid in advance upon the receipt
of undertakings to repay. A corporation may purchase indemnity insurance.
The Certificate of Incorporation of Autotote Corporation, a Delaware
corporation (the "Company"), provides at Article NINTH that no director of the
Company shall be liable to the Company or its stockholders for monetary damages
for breach of fiduciary duty to the fullest extent allowed by Delaware law. The
Company's By-laws at Article VII provide that the Company shall indemnify all
allowed persons for liabilities and expenses to the fullest extent allowed by
Delaware law. The same provisions are made for Autotote Lottery Corporation, a
Delaware corporation, by Article SIXTH of its Certificate of Incorporation
and Article VIII of its By-laws.
Article SEVENTH of the Certificate of Incorporation of Autotote
Dominicana, Inc., a Delaware corporation ("Autotote Dominicana"), provides that
no director of Autotote Dominicana shall be liable to Autotote Dominicana or its
stockholders for monetary damages for breach of fiduciary to the fullest extent
allowed by Delaware law. Autotote Dominicana's By-laws at Article VII provide
that it shall
II-1
<PAGE>
indemnify all allowed persons and limit the liability of directors to the
fullest extent allowed by Delaware law.
Section 17 of the By-laws of Autotote Systems, Inc., a Delaware corporation
("Autotote Systems"), provides that Autotote Systems shall indemnify all allowed
persons to the greatest extent allowed by Delaware law.
Article SEVENTH of the Certificate of Incorporation of Autotote Management
Corporation, a Delaware corporation, provides for the limitation of the
liability of directors to the fullest extent allowable under Delaware law. The
same provision is made for Scientific Games Royalty Corporation, a Delaware
corporation ("Scientific Games Royalty"), by Article SIXTH of its Certificate of
Incorporation. Article VIII of the By-laws of Scientific Games Royalty provides
that Scientific Games Royalty shall indemnify all allowed persons and limits the
liability of directors to the fullest extent allowed by Delaware law.
The Certificate of Incorporation of Scientific Games Holdings Corp., a
Delaware corporation ("Scientific Games Holdings"), provides at Article VIII for
the limitation of the liability of directors to the fullest extent allowable
under Delaware law. Scientific Games Holdings' By-laws at Article IX provides
that Scientific Games Holdings shall indemnify all allowed persons to the
greatest extent allowed by Delaware law. The same provisions are made for (i)
Scientific Games Inc., a Delaware corporation, by Article NINTH of its
Certificate of Incorporation and Article IX of its By-laws, and (ii) Scientific
Games Acquisition Inc., a Delaware corporation, by Article NINTH of its
Certificate of Incorporation and Article IX of its By-laws.
The Certificate of Incorporation of SciGames France Inc., a Delaware
corporation ("SciGames France"), provides at Number 11 that no director of the
Company shall be liable to the Company or its stockholders for monetary damages
for breach of fiduciary duty to the fullest extent allowed by Delaware law.
SciGames France's By-laws at Article IX provides that SciGames shall indemnify
all allowed persons to the greatest extent allowed by Delaware law. The same
provisions are made for Scientific Games (Greece), Inc., a Delaware corporation,
by Number 10 of its Certificate of Incorporation and Article IX of its By-laws.
The Certificate of Incorporation and the By-laws of Autotote
International, Inc., a Delaware corporation, make no provision for the
limitation of liability of directors or indemnification of any person beyond the
provisions of Delaware law.
The New York Business Corporation Law (the "NYBCL") at Sections 719 and 717
provides that a director shall not be liable to the corporation or its
shareholders for actions taken as a director, if (1) he acted in good faith, and
(2) he acted with the care an ordinarily prudent person in a like position would
exercise under similar circumstances.
The NYBCL, at Sections 722 through Section 726, provides, in pertinent part,
that a corporation may indemnify any person who was or is a party or is
threatened to be made a party to any action, or proceeding, whether civil,
criminal, (other than an action by or in the right of the corporation), by
reason of the fact that he is or was a director or officer of the corporation or
is or was serving another corporation, partnership, joint venture, trust or
other enterprise, at the request of the corporation, against reasonable expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement,
actually and reasonably incurred by him in connection with such action or
proceeding if he acted in good faith and in a manner he reasonably believed to
be in or not opposed to the best interest of the corporation and, with respect
to any criminal action or proceeding, had no reasonable cause to believe his
conduct was unlawful. Lack of good faith, or lack of a reasonable belief that
one's actions are in or not opposed to the best interest of the corporation, or
with respect to any criminal action or proceeding, lack of reasonable cause to
believe one's conduct was unlawful is not presumed from the termination of any
action, suit or proceeding by judgment, order, settlement, conviction, or nolo
II-2
<PAGE>
contendere plea or its equivalent. In addition, indemnification is allowed in
derivative actions, except no indemnification is allowed in respect of any
claim, issue or matter as to which any such person has been adjudged to be
liable to the corporation, unless and only to the extent the court in which such
action was brought, or, if no action was brought, any court of competent
jurisdiction, decides that indemnification is proper. To the extent that any
such person succeeds on the merits or otherwise in defense of any of the above
described actions or proceedings, he shall be entitled to indemnification. The
determination that the person to be indemnified met the applicable standard of
conduct, if not made by a court, is made by the Board of Directors of the
corporation by a majority vote of a quorum consisting of directors not party to
such an action, suit or proceeding or, if a quorum is not obtainable or a
disinterested quorum so directs, by independent legal counsel in a written
opinion or by the stockholders. Expenses may be paid in advance upon the receipt
of undertakings to repay. A corporation may purchase indemnity insurance.
The Certificate of Incorporation of Marvin H. Sugarman Productions, Inc., a
New York corporation ("MHS"), at Article SEVENTH provides for the limitation of
liability of the directors of MHS to the fullest extent allowable by New York
law and that MHS shall indemnify all allowed persons to the fullest extent
allowed by New York law.
The Business Corporation Act of the State of Connecticut (the "CBCA") at
Section 33-756, provides, in pertinent part, that a director is not liable for
action taken as a director, or any failure to take any action, if (1) he acted
in good faith, (2) he acted with the care an ordinarily prudent person in a like
position would exercise under similar circumstances, and (3) in a manner he
reasonably believes to be in the best interests of the corporation.
The CBCA at Sections 33-770 through 778, provides, in pertinent part, that
unless its certificate of incorporation otherwise provides, a corporation
incorporated prior to January 1, 1997 shall indemnify any person who is made a
party to any proceeding, other than an action by or in the right of the
corporation in which the person was adjudged liable to the corporation or any
proceeding charging improper benefit, by reason of the fact that he is or was a
director or officer. In the case of a proceeding by or in the right of the
Corporation, indemnification is limited to reasonable expenses incurred by him
in connection with the proceeding against the corporation to which the
individual was named a party. The corporation shall indemnify such person only
if (1) he conducted himself in good faith, and (2) he reasonably believed
(A) in the case of conduct in his official capacity with the corporation, that
his conduct was in its best interests, and (B) in all other cases, that his
conduct was at least not opposed to its best interests, and (3) in the case of
any criminal proceeding, he had no reasonable cause to believe his conduct was
unlawful. Termination of a proceeding by judgment, order, settlement or
conviction or a plea of nolo contendere or its equivalent is not, of itself,
determinative that the director or officer did not meet the standard of conduct
required by the statute. Unless limited by its certificate of incorporation, a
corporation shall indemnify a director or an officer who was wholly successful,
on the merits or otherwise, in the defense of any proceeding to which he was a
party because he is or was a director or an officer of that corporation against
reasonable expenses incurred by him in connection with the proceeding to which
he was a party. Expenses may be paid in advance upon receipt of a written
affirmation from the party claiming indemnification that his conduct in question
met the standards of conduct required by the statute and a written undertaking
to repay such advanced expenses and upon determination by the members of the
Board of Directors by a majority vote of a quorum consisting of directors not at
the time parties to the proceeding that no known facts would preclude
indemnification. A director may also apply to a court of appropriate
jurisdiction for indemnification. A corporation may purchase indemnity
insurance.
The Certificate of Incorporation of Autotote Enterprises, Inc., a
Connecticut corporation ("Autotote Enterprises"), at Section 4(b) provides that
the personal liability of a director to Autotote Enterprises or its shareholders
for monetary damages for breach of duty as a director shall be limited to an
amount that is equal to the compensation received by the director for serving
Autotote
II-3
<PAGE>
Enterprises during the year of the violation if such breach did not (i) involve
a knowing and culpable breach of law, (ii) involve improper personal economic
gain, (iii) show a lack of good faith and a conscious disregard for the duty of
the director to Autotote Enterprises, (iv) constitute a sustained and unexcused
pattern of inattention that amounted to an abdication of the director's duty to
Autotote Enterprises, or (v) create liability under Section 33-321 of the
Connecticut General Statutes. The Certificate of Incorporation and the By-laws
of Autotote Enterprises make no provision for indemnification of any person
beyond what is required by Connecticut law.
The Business Corporation Act of the State of Nebraska (the "NBCA") at
Section 21-2095, provides, in pertinent part, that a director is not liable for
action taken as a director, or any failure to take any action, if he or she (1)
acted in good faith, (2) acted with the care an ordinarily prudent person in a
like position would exercise under similar circumstances, and (3) acted in a
manner he or she reasonably believed to be in the best interests of the
corporation.
The NBCA at Sections 21-20,103 through 20,111, provides, in pertinent part,
that a corporation may indemnify any person who is made a party to any
proceeding, other than an action by or in the right of the corporation or any
proceeding charging improper benefit, by reason of the fact that he or she is or
was a director or officer. In the case of a proceeding by or in the right of the
corporation, indemnification is limited to reasonable expenses incurred by him
in connection with the proceeding against the corporation to which the
individual was named a party. The corporation shall indemnify such person only
if (1) he or she conducted himself in good faith, and (2) he or she reasonably
believed (A) in the case of conduct in his or her official capacity with the
corporation, that his or her conduct was in its best interests, and (B) in all
other cases, that his or her conduct was at least not opposed to its best
interest, and (3) in the case of any criminal proceeding, he or she had no
reasonable cause to believe his or her conduct was unlawful. Termination of a
proceeding by judgment, order, settlement or conviction or a plea of nolo
contendere or its equivalent is not, of itself, determinative that the director
did not meet the standard of conduct required by the statute. Unless limited by
its certificate of incorporation, a corporation shall indemnify a director who
was wholly successful, on the merits or otherwise, in the defense of any
proceeding to which he or she was a party because he or she is or was a director
of that corporation against reasonable expenses incurred by him in connection
with the proceeding to which he was a party. Expenses may be paid in advance
upon receipt of a written affirmation from the party claiming indemnification
that his or her conduct in question met the standards of conduct required by the
statute and a written undertaking to repay such advanced expenses and upon
determination by the members of the Board of Directors by a majority vote of a
quorum consisting of directors not at the time parties to the proceeding that no
known facts would preclude indemnification. A director may also apply to a court
of appropriate jurisdiction for indemnification. The NBCA at Section 21-20,108
provides that an officer of a corporation may be indemnified to the same extent
as a director. An officer who is not a director may be indemnified further
through provisions of a contract, the Certificate of Incorporation, By-laws, or
by action of the Board of Directors except for actions by or in the right of the
corporation, receipt by such officer of improper financial benefit, intentional
infliction of harm on the corporation, or intentional violation of law. A
corporation may, by provision in its Certificate of Incorporation, limit or
extend indemnification rights and the right to prepayment of expenses. A
corporation may purchase indemnity insurance.
The Certificate of Incorporation and the By-laws of Autotote Keno
Corporation, a Nebraska corporation, make no provision for limitation of
liability of directors or indemnification of any person beyond the provisions of
Nebraska law.
The foregoing discussion is qualified in its entirety by reference to the
DGCL, NYBCL, CBCA and NBCA and the referenced certificates of incorporation and
by-laws.
II-4
<PAGE>
Autotote Corporation maintains officers' and directors' liability insurance,
as permitted by Article VII of the Company's By-Laws, which insures against
liabilities that officers and directors of the Company and its subsidiaries may
incur in such capacities.
The Certificate of Incorporation of Acra Acquisition Corp., a New Jersey
corporation ("Acra Acquisition"), provides at Number 11 that Acra Acquisition
shall indemnify all allowed persons for liabilities and expenses to the fullest
extent allowed by New Jersey law. Acra Acquisition's By-laws at Article X
provides that Acra Acquisition shall indemnify all allowed persons for
reasonable expenses to the fullest extent fixed by the Board of Directors.
The Certificate of Incorporation of Autotote Gaming, Inc., a Nevada
corporation ("Autotote Gaming"), provides at Article IV that no director or
officer of Autotote Gaming shall be liable to Autotote Gaming or its
stockholders for damages for breach of fiduciary duty to the fullest extent
allowed by Nevada law. Article VII of the By-laws of Autotote Gaming provides
that Autotote Gaming shall indemnify all allowed persons to the greatest extent
allowable under Nevada law.
ITEM 21. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
--------------------- -----------
<C> <S>
3.1 Autotote's Certificate of Incorporation was filed as Exhibit
3.1 to Autotote's Quarterly Report on Form 10-Q for the
quarter ended July 31, 1995 and is hereby incorporated by
this reference. Autotote amended its Certificate of
Incorporation by filing a Certificate of Designation for
Autotote's Series A Convertible Preferred Stock with the
Secretary of the State of Delaware on September 6, 2000. A
copy of such Certificate of Designation was filed as Exhibit
3.3 to Autotote's Quarterly Report on Form 10-Q filed with
the Securities and Exchange Commission on September 14, 2000
(the "September 2000 10-Q") and is hereby incorporated by
this reference.
3.2 By-laws of the Company.*
4.5 First Supplemental Indenture, dated as August 5, 2000, among
the Company, the Guarantors and The Bank of New York
(successor to IBJ Schroder Bank & Trust Company), as
trustee, supplementing the Indenture, dated as of July 28,
1997, among the Company, the subsidiaries of the Company
named therein as guarantors and IBJ Schroder Bank & Trust
Company, as trustee, relating to the Company's 10 7/8%
Senior Notes due 2004 (Filed as Exhibit 4.5 to the September
2000 10-Q and hereby incorporated by this reference.
4.6 Indenture, dated as of August 14, 2000, among the Company,
the Subsidiary Guarantors and The Bank of New York, as
Trustee (Filed as Exhibit 4.6 to the September 2000 10-Q and
hereby incorporated by this reference).
4.7 Form of Series A 12 1/2% Senior Subordinated Note due 2010
(Filed as Exhibit 4.7 to the September 2000 10-Q and hereby
incorporated by this reference).
4.8 First Supplemental Indenture, dated as of September 6, 2000,
among the Company, the Guarantors, the Additional Guarantors
and The Bank of New York, as trustee, supplementing the
Indenture, dated as of August 14, 2000, among the Company,
the Guarantors and the Trustee, relating to the Company's
12 1/2% Senior Subordinated Notes due 2010 (Filed as Exhibit
4.8 to the September 2000 10-Q and hereby incorporated by
this reference).
4.9 Registration Rights Agreement by and among the Company, the
Guarantors and Donaldson, Lufkin & Jenrette Securities
Corporation and Lehman Brothers Inc., dated as of August 14,
2000 (Filed as Exhibit 4.9 to the September 2000 10-Q and
hereby incorporated by this reference).
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
--------------------- -----------
<C> <S>
5.1 Opinion of Kramer Levin Naftalis & Frankel, LLP relating to
the series B notes and certain series B note guarantees.**
5.2 Opinion of Tobin, Carberry, O'Malley, Riley and Selinger,
P.C. relating to the Autotote Enterprises, Inc. series B
note guarantee.**
5.3 Opinion of Sills, Cummis, Radin Tischman Epstein & Gross,
P.A. relating to the Acra Acquisition Corp. series B note
guarantee.**
5.4 Opinion of Martin E. Schloss, general counsel to Autotote
Corporation and Autotote Keno Corporation relating to the
Autotote Keno Corporation series B note guarantee.**
5.5 Opinion of Schreck Brignone Godfrey relating to the Autotote
Gaming, Inc. Series B note guarantee.**
10.38 Stockholders' Agreement by and among Cirmatica Gaming, S.A.,
The Oak Fund, Peconic Fund Ltd., Ramius Securities, LLC,
Olivetti International S.A. and the Company, dated September
6, 2000, relating to the Preferred Stock (Filed as Exhibit
10.38 to the September 2000 10-Q and hereby incorporated by
this reference).
10.40 Security Agreement among the Company, the Subsidiary
Guarantors and the Administrative Agent, dated as of
September 6, 2000 (Filed as Exhibit 10.41 to the September
2000 10-Q and hereby incorporated by this reference).
10.41 Warrant Registration Rights Agreement among the Company,
Donaldson, Lufkin & Jenrette Securities Corporation and LBI
Group Inc. dated as of September 6, 2000 (Filed as Exhibit
10.41 to the September 2000 10-Q and hereby incorporated by
this reference).
10.42 Amended and Restated Credit Agreement among the Company, the
Lenders listed therein, DLJ Capital Funding, Inc., Lehman
Amended and Prestated 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
(which amended and restated the Credit Agreement, dated
September 6, 2000 among the same parties) (Filed as Exhibit
10.39 to the September 2000 10-Q and hereby incorporated by
this reference).
12.1 Statement re Computation of ratios.**
23.1 Consent of KPMG LLP**
23.2 Consent of Ernst & Young LLP**
25.1 Form T-1 Statement of Eligibility and Qualification of the
Bank of New York, as Trustee.**
99.11 Form of Warrant issued to Donaldson, Lufkin & Jenrette
Securities Corporation and LBI Group Inc. (see Exhibit 99.11
to the September 2000 10-Q).**
99.12 Form of Letter of Transmittal.**
99.13 Form of Notice of Guaranteed Delivery.**
99.14 Form of Letter to Brokers, Dealers, Commercial Banks, Trust
Companies and Other Nominees.**
99.15 Form of Letter to Clients.**
99.16 Guidelines for Certifications of Taxpayer Identification
Number on Form W-9.**
</TABLE>
------------------------
* Autotote's by-laws were filed as Exhibit 4.4 to the Company's Registration
Statement on Form S-8 (Registration No. 33-46594) which became effective
March 20, 1992. An amendment to Autotote's by-laws was filed as Exhibit 3.4
to the September 2000 10-Q.
** Filed herewith.
II-6
<PAGE>
ITEM 22. UNDERTAKINGS.
(1) The undersigned registrants hereby undertake as follows: that prior to
any public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other items of the applicable form. (2) The registrants undertake
that every prospectus: (i) that is filed pursuant to paragraph (1) immediately
preceding, or (ii) that purports to meet the requirements of Section 10(a)(3) of
the Act and is used in connection with an offering of securities subject to
Rule 415, will be filed as a part of the amendment to the registration statement
and will not be used until such amendment is effective, and that, for purposes
of determining any liability under the Securities Act of 1933, each such post-
effective amendment shall be deemed to be a new registration statement relating
to the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof. Insofar as
indemnification for liabilities arising under the Securities Act of 1933 may be
permitted to directors, officers and controlling persons of any registrants
pursuant to the foregoing provisions, or otherwise, the registrants have been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrants of expenses incurred
or paid by a director, officer or controlling person of any registrants in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, such registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue. The undersigned registrants hereby undertake to file
an application for the purpose of determining the eligibility of the trustee to
act under subsection (a) of Section 310 of the Trust Indenture Act in accordance
with the rules and regulations prescribed by the SEC under Section 305(b)(2) of
the Act. The undersigned registrants hereby undertake to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11 or 13 of this Form, within one business day of receipt of such
request, and to send the incorporated documents by first class mail or other
equally prompt means. This includes information contained in documents filed
subsequent to the effective date of the registration statement through the date
of responding to the request. The undersigned registrants hereby undertake to
supply by means of a post-effective amendment all information concerning a
transaction, and the company being acquired involved therein, that was not the
subject of and included in the registration statement when it became effective.
II-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this registration statement or amendment thereto to be signed on its
behalf by the undersigned, thereto duly authorized, in the City of New York, New
York, on December 27, 2000.
<TABLE>
<S> <C> <C>
AUTOTOTE CORPORATION
By: /s/ A. LORNE WEIL
-----------------------------------------
A. Lorne Weil,
CHAIRMAN OF THE BOARD,
PRESIDENT AND CHIEF EXECUTIVE OFFICER
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, this
registration statement or amendment has been signed by the following persons in
the capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE(S) DATE
--------- -------- ----
<C> <S> <C>
/s/ A. LORNE WEIL
------------------------------------ Chairman of the Board, President and 12/27/00
A. Lorne Weil Director
/s/ DEWAYNE E. LAIRD
------------------------------------ Vice President, Chief Financial Officer 12/27/00
DeWayne E. Laird and Principal Accounting Officer
/s/ WILLIAM G. MALLOY
------------------------------------ Director 12/27/00
William G. Malloy
/s/ LARRY J. LAWRENCE
------------------------------------ Director 12/27/00
Larry J. Lawrence
/s/ SIR BRIAN G. WOLFSON
------------------------------------ Director 12/27/00
Sir Brian G. Wolfson
/s/ ROBERTO SGAMBATI
------------------------------------ Director 12/27/00
Roberto Sgambati
/s/ LUCIANO LANOCE
------------------------------------ Director 12/27/00
Luciano LaNoce
/s/ PETER COHEN
------------------------------------ Director 12/27/00
Peter Cohen
/s/ COLIN J. O'BRIEN
------------------------------------ Director 12/27/00
Colin J. O'Brien
</TABLE>
II-8
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this registration statement or amendment thereto to be signed on its
behalf by the undersigned, thereto duly authorized, in the City of New York, New
York, on December 27, 2000.
<TABLE>
<S> <C> <C>
AUTOTOTE LOTTERY CORPORATION
By: /s/ WILLIAM J. HUNTLEY
-----------------------------------------
William J. Huntley,
PRESIDENT
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, this
registration statement or amendment has been signed by the following persons in
the capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE(S) DATE
--------- -------- ----
<C> <S> <C>
/s/ WILLIAM J. HUNTLEY
------------------------------------ President (Chief Executive Officer) 12/27/00
William J. Huntley
/s/ DEWAYNE E. LAIRD
------------------------------------ Vice President of Finance (Principal 12/27/00
DeWayne E. Laird Financial and Accounting Officer)
/s/ A. LORNE WEIL
------------------------------------ Director 12/27/00
A. Lorne Weil
/s/ MARTIN E. SCHLOSS
------------------------------------ Director 12/27/00
Martin E. Schloss
</TABLE>
II-9
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this registration statement or amendment thereto to be signed on its
behalf by the undersigned, thereto duly authorized, in the City of New York, New
York, on December 27, 2000.
<TABLE>
<S> <C> <C>
AUTOTOTE ENTERPRISES, INC.
By: /s/ GERALD LAWRENCE
-----------------------------------------
Gerald Lawrence,
PRESIDENT & CHIEF EXECUTIVE OFFICER
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, this
registration statement or amendment has been signed by the following persons in
the capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE(S) DATE
--------- -------- ----
<C> <S> <C>
/s/ GERALD LAWRENCE
------------------------------------ President & Chief Executive Officer 12/27/00
Gerald Lawrence
/s/ DEWAYNE E. LAIRD
------------------------------------ Vice President (Principal Financial and 12/27/00
DeWayne E. Laird Accounting Officer)
/s/ LARRY J. LAWRENCE
------------------------------------ Director 12/27/00
Larry J. Lawrence
/s/ JOHN PONZIO
------------------------------------ Director 12/27/00
John Ponzio
/s/ MARTIN E. SCHLOSS
------------------------------------ Director 12/27/00
Martin E. Schloss
</TABLE>
II-10
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this registration statement or amendment thereto to be signed on its
behalf by the undersigned, thereto duly authorized, in the City of New York, New
York, on December 27, 2000.
<TABLE>
<S> <C> <C>
ACRA ACQUISITION CORP.
By: /s/ A. LORNE WEIL
-----------------------------------------
A. Lorne Weil,
PRESIDENT
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, this
registration statement or amendment has been signed by the following persons in
the capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE(S) DATE
--------- -------- ----
<C> <S> <C>
/s/ A. LORNE WEIL
------------------------------------ President (Chief Executive Officer) 12/27/00
A. Lorne Weil
/s/ DEWAYNE E. LAIRD Vice President, Treasurer (Principal
------------------------------------ Financial and Accounting Officer) and 12/27/00
DeWayne E. Laird Director
/s/ MARTIN E. SCHLOSS
------------------------------------ Director 12/27/00
Martin E. Schloss
</TABLE>
II-11
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this registration statement or amendment thereto to be signed on its
behalf by the undersigned, thereto duly authorized, in the City of New York, New
York, on December 27, 2000.
<TABLE>
<S> <C> <C>
MARVIN H. SUGARMAN PRODUCTIONS, INC.
By: /s/ GERALD LAWRENCE
-----------------------------------------
Gerald Lawrence
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, this
registration statement or amendment has been signed by the following persons in
the capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE(S) DATE
--------- -------- ----
<C> <S> <C>
/s/ GERALD LAWRENCE
------------------------------------ Chairman, Chief Executive Officer and 12/27/00
Gerald Lawrence Director
/s/ DEWAYNE E. LAIRD
------------------------------------ Vice President and Treasurer (Principal 12/27/00
DeWayne E. Laird Financial and Accounting Officer)
/s/ A. LORNE WEIL
------------------------------------ Director 12/27/00
A. Lorne Weil
/s/ MARTIN E. SCHLOSS
------------------------------------ Director 12/27/00
Martin E. Schloss
</TABLE>
II-12
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this registration statement or amendment thereto to be signed on its
behalf by the undersigned, thereto duly authorized, in the City of New York, New
York, on December 27, 2000.
<TABLE>
<S> <C> <C>
AUTOTOTE GAMING, INC.
By: /s/ BROOKS H. PIERCE
-----------------------------------------
Brooks H. Pierce,
PRESIDENT
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, this
registration statement or amendment has been signed by the following persons in
the capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE(S) DATE
--------- -------- ----
<C> <S> <C>
/s/ BROOKS H. PIERCE
------------------------------------ President (Chief Executive Officer) and 12/27/00
Brooks H. Pierce Director
/s/ DEWAYNE E. LAIRD Vice President, Treasurer (Principal
------------------------------------ Financial and Accounting Officer) and 12/27/00
DeWayne E. Laird Director
/s/ MARTIN E. SCHLOSS
------------------------------------ Director 12/27/00
Martin E. Schloss
</TABLE>
II-13
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this registration statement or amendment thereto to be signed on its
behalf by the undersigned, thereto duly authorized, in the City of New York, New
York, on December 27, 2000.
<TABLE>
<S> <C> <C>
AUTOTOTE KENO CORPORATION
By: /s/ A. LORNE WEIL
-----------------------------------------
A. Lorne Weil,
CHAIRMAN OF THE BOARD AND PRESIDENT
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, this
registration statement or amendment has been signed by the following persons in
the capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE(S) DATE
--------- -------- ----
<C> <S> <C>
/s/ A. LORNE WEIL
------------------------------------ Chairman of the Board, President (Chief 12/27/00
A. Lorne Weil Executive Officer) and Director
/s/ DEWAYNE E. LAIRD
------------------------------------ Vice President and Treasurer (Principal 12/27/00
DeWayne E. Laird Financial and Accounting Officer)
/s/ MARTIN E. SCHLOSS
------------------------------------ Director 12/27/00
Martin E. Schloss
</TABLE>
II-14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this registration statement or amendment thereto to be signed on its
behalf by the undersigned, thereto duly authorized, in the City of New York, New
York, on December 27, 2000.
<TABLE>
<S> <C> <C>
AUTOTOTE SYSTEMS, INC.
By: /s/ BROOKS H. PIERCE
-----------------------------------------
Brooks H. Pierce,
PRESIDENT
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, this
registration statement or amendment has been signed by the following persons in
the capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE(S) DATE
--------- -------- ----
<C> <S> <C>
/s/ BROOKS H. PIERCE
------------------------------------ President (Chief Executive Officer) 12/27/00
Brooks H. Pierce
/s/ DEWAYNE E. LAIRD Vice President of Finance (Principal
------------------------------------ Financial and Accounting Officer) and 12/27/00
DeWayne E. Laird Director
/s/ A. LORNE WEIL
------------------------------------ Director 12/27/00
A. Lorne Weil
/s/ MARTIN E. SCHLOSS
------------------------------------ Director 12/27/00
Martin E. Schloss
</TABLE>
II-15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this registration statement or amendment thereto to be signed on its
behalf by the undersigned, thereto duly authorized, in the City of New York, New
York, on December 27, 2000.
<TABLE>
<S> <C> <C>
AUTOTOTE INTERNATIONAL, INC.
By: /s/ A. LORNE WEIL
-----------------------------------------
A. Lorne Weil,
PRESIDENT
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, this
registration statement or amendment has been signed by the following persons in
the capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE(S) DATE
--------- -------- ----
<C> <S> <C>
/s/ A. LORNE WEIL
------------------------------------ President (Chief Executive Officer) and 12/27/00
A. Lorne Weil Director
/s/ DEWAYNE E. LAIRD
------------------------------------ Vice President and Treasurer (Principal 12/27/00
DeWayne E. Laird Financial and Accounting Officer)
/s/ GERALD LAWRENCE
------------------------------------ Director 12/27/00
Gerald Lawrence
/s/ MARTIN E. SCHLOSS
------------------------------------ Director 12/27/00
Martin E. Schloss
</TABLE>
II-16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this registration statement or amendment thereto to be signed on its
behalf by the undersigned, thereto duly authorized, in the City of New York, New
York, on December 27, 2000.
<TABLE>
<S> <C> <C>
AUTOTOTE MANAGEMENT CORPORATION
By: /s/ A. LORNE WEIL
-----------------------------------------
A. Lorne Weil,
PRESIDENT
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, this
registration statement or amendment has been signed by the following persons in
the capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE(S) DATE
--------- -------- ----
<C> <S> <C>
/s/ A. LORNE WEIL
------------------------------------ President (Chief Executive Officer) and 12/27/00
A. Lorne Weil Director
/s/ DEWAYNE E. LAIRD
------------------------------------ Vice President (Principal Financial and 12/27/00
DeWayne E. Laird Accounting Officer) and Director
/s/ MARTIN E. SCHLOSS
------------------------------------ Director 12/27/00
Martin E. Schloss
</TABLE>
II-17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this registration statement or amendment thereto to be signed on its
behalf by the undersigned, thereto duly authorized, in the City of New York, New
York, on December 27, 2000.
<TABLE>
<S> <C> <C>
AUTOTOTE DOMINICANA INC.
By: /s/ BROOKS H. PIERCE
-----------------------------------------
Brooks H. Pierce,
PRESIDENT
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, this
registration statement or amendment has been signed by the following persons in
the capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE(S) DATE
--------- -------- ----
<C> <S> <C>
/s/ BROOKS H. PIERCE
------------------------------------ President (Chief Executive Officer) and 12/27/00
Brooks H. Pierce Director
/s/ DEWAYNE E. LAIRD Vice President, Treasurer (Principal
------------------------------------ Financial and Accounting Officer) and 12/27/00
DeWayne E. Laird Director
/s/ MARTIN E. SCHLOSS
------------------------------------ Director 12/27/00
Martin E. Schloss
</TABLE>
II-18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this registration statement or amendment thereto to be signed on its
behalf by the undersigned, thereto duly authorized, in the City of New York, New
York, on December 27, 2000.
<TABLE>
<S> <C> <C>
SCIENTIFIC GAMES HOLDINGS CORP.
By: /s/ A. LORNE WEIL
-----------------------------------------
A. Lorne Weil,
CHAIRMAN OF THE BOARD OF DIRECTORS AND
CHIEF EXECUTIVE OFFICER
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, this
registration statement or amendment has been signed by the following persons in
the capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE(S) DATE
--------- -------- ----
<C> <S> <C>
/s/ GERARD D. SCHEINBACH
------------------------------------ Vice President--Finance (Principal 12/27/00
Gerard D. Scheinbach Financial and Accounting Officer)
/s/ A. LORNE WEIL
------------------------------------ Chairman of the Board of Directors and 12/27/00
A. Lorne Weil Chief Executive Officer
/s/ CLIFF O. BICKELL
------------------------------------ Director 12/27/00
Cliff O. Bickell
/s/ WILLIAM J. HUNTLEY
------------------------------------ Director 12/27/00
William J. Huntley
</TABLE>
II-19
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this registration statement or amendment thereto to be signed on its
behalf by the undersigned, thereto duly authorized, in the City of New York, New
York, on December 27, 2000.
<TABLE>
<S> <C> <C>
SCIENTIFIC GAMES INC.
By: /s/ A. LORNE WEIL
-----------------------------------------
A. Lorne Weil,
CHAIRMAN OF THE BOARD OF DIRECTORS AND
CHIEF EXECUTIVE OFFICER
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, this
registration statement or amendment has been signed by the following persons in
the capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE(S) DATE
--------- -------- ----
<C> <S> <C>
/s/ GERARD D. SCHEINBACH
------------------------------------ Vice President--Finance (Principal 12/27/00
Gerard D. Scheinbach Financial and Accounting Officer)
/s/ A. LORNE WEIL
------------------------------------ Chairman of the Board of Directors and 12/27/00
A. Lorne Weil Chief Executive Officer
/s/ CLIFF O. BICKELL
------------------------------------ Director 12/27/00
Cliff O. Bickell
/s/ WILLIAM J. HUNTLEY
------------------------------------ Director 12/27/00
William J. Huntley
</TABLE>
II-20
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this registration statement or amendment thereto to be signed on its
behalf by the undersigned, thereto duly authorized, in the City of New York, New
York, on December 27, 2000.
<TABLE>
<S> <C> <C>
SCIENTIFIC GAMES (GREECE) INC.
By: /s/ CLIFF O. BICKELL
-----------------------------------------
Cliff O. Bickell,
PRESIDENT
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, this
registration statement or amendment has been signed by the following persons in
the capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE(S) DATE
--------- -------- ----
<C> <S> <C>
/s/ GERARD D. SCHEINBACH
------------------------------------ Vice President--Finance (Principal 12/27/00
Gerard D. Scheinbach Financial and Accounting Officer)
/s/ CLIFF O. BICKELL
------------------------------------ President (Chief Executive Officer) and 12/27/00
Cliff O. Bickell Director
/s/ WILLIAM J. HUNTLEY
------------------------------------ Director 12/27/00
William J. Huntley
</TABLE>
II-21
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this registration statement or amendment thereto to be signed on its
behalf by the undersigned, thereto duly authorized, in the City of New York, New
York, on December 27, 2000.
<TABLE>
<S> <C> <C>
SCIENTIFIC GAMES ACQUISITION INC.
By: /s/ CLIFF O. BICKELL
-----------------------------------------
Cliff O. Bickell,
PRESIDENT
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, this
registration statement or amendment has been signed by the following persons in
the capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE(S) DATE
--------- -------- ----
<C> <S> <C>
/s/ GERARD D. SCHEINBACH
------------------------------------ Vice President--Finance (Principal 12/27/00
Gerard D. Scheinbach Financial and Accounting Officer)
/s/ CLIFF O. BICKELL
------------------------------------ President (Chief Executive Officer) and 12/27/00
Cliff O. Bickell Director
/s/ WILLIAM J. HUNTLEY
------------------------------------ Director 12/27/00
William J. Huntley
</TABLE>
II-22
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this registration statement or amendment thereto to be signed on its
behalf by the undersigned, thereto duly authorized, in the City of New York, New
York, on December 27, 2000.
<TABLE>
<S> <C> <C>
SCIGAMES FRANCE INC.
By: /s/ CLIFF O. BICKELL
-----------------------------------------
Cliff O. Bickell,
PRESIDENT
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, this
registration statement or amendment has been signed by the following persons in
the capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE(S) DATE
--------- -------- ----
<C> <S> <C>
/s/ GERARD D. SCHEINBACH
------------------------------------ Vice President--Finance (Principal 12/27/00
Gerard D. Scheinbach Financial and Accounting Officer)
/s/ CLIFF O. BICKELL
------------------------------------ President (Chief Executive Officer) and 12/27/00
Cliff O. Bickell Director
/s/ WILLIAM J. HUNTLEY
------------------------------------ Director 12/27/00
William J. Huntley
</TABLE>
II-23
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this registration statement or amendment thereto to be signed on its
behalf by the undersigned, thereto duly authorized, in the City of New York, New
York, on December 27, 2000.
<TABLE>
<S> <C> <C>
SCIENTIFIC GAMES ROYALTY CORPORATION
By: /s/ GERARD D. SCHEINBACH
-----------------------------------------
Gerard D. Scheinbach,
PRESIDENT AND TREASURER
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, this
registration statement or amendment has been signed by the following persons in
the capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE(S) DATE
--------- -------- ----
<C> <S> <C>
/s/ GERARD D. SCHEINBACH President (Chief Executive Officer),
------------------------------------ Treasurer (Principal Financial and 12/27/00
Gerard D. Scheinbach Accounting Officer) and Director
/s/ VICTORIA L. GARRETT
------------------------------------ Director 12/27/00
Victoria L. Garrett
</TABLE>
II-24
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this registration statement or amendment thereto to be signed on its
behalf by the undersigned, thereto duly authorized, in the City of New York, New
York, on December 27, 2000.
<TABLE>
<S> <C> <C>
SCIENTIFIC GAMES FINANCE CORPORATION
By: /s/ GERARD D. SCHEINBACH
-----------------------------------------
Gerard D. Scheinbach,
PRESIDENT AND TREASURER
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, this
registration statement or amendment has been signed by the following persons in
the capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE(S) DATE
--------- -------- ----
<C> <S> <C>
/s/ GERARD D. SCHEINBACH President (Chief Executive Officer),
------------------------------------ Treasurer (Principal Financial and 12/27/00
Gerard D. Scheinbach Accounting Officer) and Director
/s/ VICTORIA L. GARRETT
------------------------------------ Director 12/27/00
Victoria L. Garrett
</TABLE>
II-25
