Scientific Games Corporation

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Scientific Games Corporation

750 Lexington Avenue, 25th Floor
New York, New York 10022
U.S.A.
Telephone: (212) 754-2233
Toll Free: (800) 367-9345
Fax: (212) 754-2372
Web site: http://www.scientificgames.com

Public Company
Incorporated: 1979 as Autotote Systems, Inc.
Employees: 3,430
Sales: $560.9 million (2003)
Stock Exchanges: NASDAQ
Ticker Symbol: SGMS
NAIC: 541512 Computer Systems Design Services; 713290 Other Gambling Industries; 713990 All Other Amusement and Recreation Industries

Scientific Games Corporation, formerly known as Autotote, operates as the global leader in lottery and pari-mutuel technology. It provides wagering equipment, online and instant ticket lottery systems, video gaming machines, and pre-paid phone cards. The company holds a 64 percent share of the instant ticket market in the United States, controls 27 percent of U.S. online gambling, and over 65 percent of the North American pari-mutuel market. Scientific Games' pari-mutuel division supplies technology and equipment for wagering conducted at thoroughbred, harness, and greyhound race tracks, jai alai frontons, and off-track betting facilities.

Autotote Before 1992

Autotote Corporation began as Autotote Systems, a firm established in 1979 by Thomas H. Lee, a Boston venture capitalist and specialist in leveraged buyouts who purchased Autotote Limited from ATL Limited of Sydney, Australia. Based in Newark, Delaware, Autotote Systems designed, engineered, manufactured, marketed, and operated computerized pari-mutuel wagering systems in the form of totalizators, or tote boards, which calculate and display odds and potential payouts for racetrack bettors. The company maintained a warehouse and manufacturing facilities as well as its offices in Newark. It also had manufacturing facilities in Hatfield, Pennsylvania, and a sales office in Konstanz, West Germany. Net sales rose from $5.4 million in fiscal 1980 (the period from the firm's inception in May 1979 to June 30, 1980) to $10.2 million in fiscal 1982. Net income increased from $124,000 to $970,000 over this period.

Autotote Systems had revenues of $36.2 million in fiscal 1989 and was supplying wagering equipment to some of the largest racing associations in the United States and more than 50 racetracks abroad when it merged in 1989 with United Tote, Inc. By this means, United Tote, though smaller than Autotote, acquired all of Autotote's outstanding shares for $87.8 million in cash and securities. Together, the two companies commanded almost half of the $92-million-a-year U.S. market for the manufacturing and servicing of totalizators. United Tote's owners thought they would run the business, but Autotote's owners conceived the transaction as a back-door method of taking their company public. Since Lee and his partners held the largest share in the combined company—36 percent—the president of Autotote, James H. Pierce, became president of United Tote.

The deal quickly unraveled when, despite assurance by lawyers from four major firms that there would be no problem with the merger, the U.S. Department of Justice filed suit against United Tote for violation of antitrust law. While the suit was in the courts, it became impossible to integrate the operations of the two firms except to discuss essential financial information. Moreover, one of the lenders who had made a bridge loan to finance the cash portion of the deal refused to refinance it when it ran into legal difficulties, and no other lender would step in to complete the transaction. Largely because of legal costs, increased interest payments, depreciation, and amortization expenses from the acquisition as well as delays in international sales, United Tote posted a loss of $2.7 million in fiscal 1990 (the year ended October 31, 1990) on revenues of $69.2 million.

A federal court decision in 1991 forced the dissolution of United Tote. Autotote Corp., founded in 1992, retained operations accounting for about 59 percent of the consolidated company's revenues, consisting of the principal totalizator unit and a Nevada sports/race-wagering business. A. Lorne Weil, a director and consultant to Autotote Systems since 1982, became chief executive officer of Autotote Corp., which assumed about $50 million of the consolidated company's long-term debt.

Expanded Operations: 1992–95

In fiscal 1992, Autotote had revenues of $48.4 million—two-thirds in the United States—and net income of $5.7 million. It was providing about 60 percent of the tote boards in the United States, receiving a percentage (about 0.5 percent) of the sum of wagers placed. Moreover, Autotote had become the leader in the field not only in on-track but also inter-track betting. In 1992, it won a contract to provide on-site betting parlors for all three major California racetracks, so that between races at one track patrons could bet on races being held at the other two. The company was also poised to introduce a new system, called Probe, that was the first fully integrated system not only for pari-mutuel betting but also video lotteries, keno, nonracing-sports betting, and any other form of legal betting involved with odds.

In 1993, Autotote was selected to operate Connecticut's off-track betting (OTB) system, which was being privatized. The company, which was already providing systems for keeping track of the Connecticut OTB bets, now took over operation of the betting parlors as well, paying the state a flat fee of about $20 million and making annual payments based on total dollars wagered. In the spring of 1995, it opened a $9 million, Las Vegas-style New Haven emporium called Sports Haven, where patrons could view and bet on races throughout North America and also patronize a bar wrapped around a cylindrical aquarium stocked with exotic sharks, dine at an upscale restaurant, dance the night away at a discotheque, or shop for sports memorabilia.

Autotote also was adding to its significant level of operations abroad. It signed a contract in 1992 to supply 10,000 lottery terminals to an Italian lottery based on horse racing. In June 1993, Autotote acquired the ETAG Group of Switzerland, a leading supplier of European computerized wagering systems, for $10.5 million, and in September of that year it completed its acquisition of Tele Control GmbH, an Austrian company providing lottery systems in Germany, Austria, the Netherlands, and Switzerland, and wagering systems for racetracks in Germany and Austria. In fiscal 1993, the company had net income of $9.5 million on revenues of $84.9 million.

In 1994, Autotote acquired Marvin H. Sugarman Productions Inc. and its affiliate, Racing Technology Inc., for 500,000 shares of common stock. Sugarman Productions was the largest simulcaster of live horse and greyhound racing events to OTB patrons in North America. In January 1995, Autotote acquired certain assets of IDB Communications Group Inc.'s broadcast division for $13.5 million in cash and subleases for satellite transponders, or channels. A spokesman for Autotote said the transaction would allow it to telecast simultaneously races from more than 60 horse and dog tracks in North America.

Heavy Losses: 1994–96

By this time, however, Autotote was clearly sailing into troubled waters. Although its revenues climbed to $149 million in fiscal 1994, it lost $22.2 million and doubled its long-term debt to $144 million. As factors contributing to the loss, management cited charges of about $3.8 million resulting from closing the Newark manufacturing facility and discontinuing certain product lines, a $4.3 million writeoff of certain assets principally related to domestic and overseas projects, costs of $2.8 million attributed to a strike by employees of a subsidiary, and an extraordinary noncash writeoff of $4.2 million associated with the company's repayment of its prior senior bank credit facility, as well as payments for the acquisitions made in 1993 and 1994.

Autotote's stock fell from a year-long high of $26.50 a share to a low of $4.50 in February 1995, when the company admitted it was not in compliance with its credit covenants. Nine banks refused to lend the company additional funds for violation of these covenants in lending agreements. Several shareholders filed a class-action suit in federal court, charging that Autotote's officers and directors had violated certain securities laws. A settlement in 1996 for $11.8 million in cash and preferred stock did not require any admission of guilt on the company's part.

Thomas DeFazio was appointed chief financial officer of Autotote in May 1995 and president and chief operating officer later in the year. He restored the company's relations with its creditors and launched a restructuring program expected to save the company some $15 million by closing its North American lottery headquarters and its plant in Ballymahon, Ireland. In October, DeFazio persuaded Autotote's subordinated debtholders to accept company shares instead of $2.2 million in interest payments that it could not meet.

Nevertheless, Autotote lost $49.9 million in fiscal 1995 on revenues of $153 million. The company attributed $11.6 million of the loss to a restructuring charge taken for the closing of the support facility for lottery operations in Owings Mills, Maryland, and the scaling back of certain international activities, including the closing of the Irish plant. The company also wrote off $6.6 million in investments and assets, including $2.7 million attributable to its Mexican video-gaming-machine contracts and $2.6 million attributable to European wagering terminals. Its long-term debt swelled to $166 million.

Company Perspectives:

At Scientific Games, we bring together cutting edge technology and content to create higher entertainment value for our customers and their patrons. This attention to customer requirements has made us the undisputed leader in the instant ticket and pari-mutuel industries and the fastest growing on-line lottery provider.

During fiscal 1996, Autotote reduced its long-term debt by $6 million and cut its loss to a still substantial $34.2 million on revenues of $176.2 million. Its costs included a $6.6 million litigation-settlements charge. Autotote's stock dropped below $1 a share at one point during the year. In October 1996, the company sold its Autotote CBS Inc. sports-wagering subsidiary, which had provided systems to 107 of the 113 Nevada casinos and to the leading operator of sports-wagering facilities in Mexico. Three months later, Autotote signed a letter of intent to sell its European lottery business, Tele Control, to Scientific Games Holding Corp. for a price estimated at between $25 million and $30 million, using the proceeds to pay off bank debt.

In 1996, Autotote's pari-mutuel wagering systems processed approximately two-thirds of the estimated $20 billion total racing-industry handle (betting volume). Its wagering systems and/or related equipment were installed at more than 100 racetracks in North America, including 10 of the 15 largest, and in more than 800 OTB betting parlors. These company systems were also in use in many of the largest racetracks and OTB parlors in Europe—including all French, German, and Austrian racetracks—Latin America, the Far East, and New Zealand, as well as in eight Atlantic City casinos. In addition, Autotote had installed about 1,300 video-gaming machines in racetracks in West Virginia and Manitoba, Canada.

Autotote was also simulcasting live horse and greyhound racing events to approximately 50 racetracks and more than 850 OTB parlors throughout North America and to Atlantic City casinos. In its simulcasting operations, the company leased satellite transponders and owned decoders used to unscramble the transmission signal. Prior to its decision to sell its lottery operations abroad, Autotote was providing terminals for a nationwide Italian lottery based on horse racing and, with a European partner, designing and installing computer-based lottery systems in six German states. It had also been selling central processing systems and/or terminals for lotteries in Austria, Switzerland, the Netherlands, and Israel. In the United States, Autotote was operating the Connecticut Lottery and providing services to the Massachusetts State Lottery.

Of Autotote's revenues in 1996, services accounted for 78 percent and sales contracts for wagering equipment and software for the remaining 22 percent. The pari-mutuel group (including wagering and simulcasting systems, the Connecticut OTB, video gaming, and casino/sports wagering) accounted for 73 percent of revenues and lottery operations for the remaining 27 percent. The company's long-term debt was $159.7 million at the end of fiscal 1996. Officers and directors held about 26 percent of Autotote's common stock, with director Thomas H. Lee controlling nearly 13 percent.

Changes in the Late 1990s and Beyond

Autotote continued to improve its financial record in 1997. Several U.S. subsidiaries were sold to pay down debt. It placed a seven-year $110 bond offering in July, which provided additional relief for the company's debt load. The firm also completed the divestiture of its European lottery operations that year, leaving it to focus on its pari-mutuel and North American lottery holdings.

By 1998, business appeared to be back on track. Autotote secured its largest contract in company history that year when it teamed up with Sisal Sport Italia Spa. As part of the deal, the company was slated to provide up to 20,000 Extrema terminals to the Italian lottery operator. It also landed a seven-year contract to provide services to the Montana State Lottery that year. Additional lottery contracts were obtained over the next several years in Vermont, New Hampshire, Iowa, and Maine.

Sales reached $211 million in 1999, and the company reported a small profit compared to a loss of $15.9 million in the previous year. Despite another revenue gain in 2000, Autotote found itself once again posting another loss. Company management believed it was time to make a bold move. As such, the firm made a $310 million play for competitor Scientific Games Holding Corp. William Mallory, CEO of Scientific Games, and Autotote chairman and CEO Lorne Weil believed a merger would greatly benefit the two companies. "In a world where 'bigger is better' is no longer just a saying, the merger with Autotote gives the newly combined company the breadth and scale to develop and deliver products that will drive the future success of the lottery industry," Mallory declared in a 2000 Atlanta Journal article. Weil agreed, and in a company press release he added that as a result of the merger Autotote would be the "largest provider of service, systems and products to both the pari-mutuel gaming and instant ticket lottery industries as well as the only fully integrated lottery service provider in the world." Shareholders approved the deal and during the integration process in 2001, Autotote changed its name to Scientific Games Corporation.

The newly merged company acquired a 65 percent stake in Serigrafica Chilena S.A. in June 2002, which strengthened its position in the Latin American phone card and instant-win lottery ticket market. It bolstered its holdings in 2003 by acquiring MDI Entertainment Inc. and IGT OnLine Entertainment Systems Inc.

In just two short years, it appeared that the union of Autotote and Scientific Games was paying off. Sales reached $560.9 million in 2003 while net income remained steady at $52.1 million. With the problems of the past behind it, the company was poised for future growth. As a leading force in the lottery and pari-mutuel industries, Scientific Games looked as if it was on track for growth in the years to come.

Key Dates:

1979:
Autotote Systems is established by Thomas H. Lee.: 1989:
The company merges with United Tote Inc.: 1991:
Due to antitrust issues, a federal court forces the dissolution of United Tote.: 1992:
Autotote Corporation is founded.: 1995:
The company admits it is not in compliance with its credit covenants; several shareholders file a class action suit claiming that key executives have violated certain securities laws.: 2000:
Scientific Games Holding Corporation is acquired.: 2001:
Autotote changes its name to Scientific Games Corporation.

Principal Subsidiaries

Scientific Games Management Corporation; Scientific Games Holdings Corporation; Scientific Games (Greece), Inc.; Scientific Games Acquisition, Inc.; Scientific Games International Holdings Ltd. (United Kingdom); Scientific Games International GmbH (Austria); Scientific Games UK Holdings Ltd.; Scientific Games International Ltd. (United Kingdom); Scientific Connections SDN BHD (Malaysia); Knightway Promotions Ltd. (United Kingdom); Scientific Connections Ltd. (United Kingdom); Scientific Games Finance Corporation; Scientific Games International, Inc.; MDI Entertainment, LLC; Scientific Games Royalty Corporation; Scientific Games Canada, Inc.; Scientific Connections India Private Limited (India; 99.9%); Scientific Games del Peru, S.R.L. (99.9%); Autotote Systems, Inc.; Autotote International, Inc.; Autotote Canada, Inc.; NASRIN Services LLC; SG Racing, Inc.; TRACKPLAY LLC (70%); Autotote Electronics and Computer Services and Trading LLC (Turkey; 99.9%); Autotote Enterprises, Inc.; Autotote Keno Corporation; Autotote Europe GmbH (Germany); Scientific Games Racing SAS (France; 99.96%); Autotote Panama, Inc.; Autotote Nederland B.V. (Netherlands); Autotote Gaming, Inc.; Autotote Dominicana, Inc.; Autotote Interactive, Inc.; Scientific Games Online Entertainment Systems, Inc.; Scientific Games Chile Ltda.; Scientific Games Worldwide Ltd. (Ireland).