Incorporated: 1979 as Autotote Systems, Inc.
Sales: $176.2 million (fiscal 1996)
Stock Exchanges: American
SICs: 7372 Prepackaged Software; 7373 Computer Integrated Systems Design; 7999 Amusement and Recreation Services, Not Elsewhere Classified
Autotote Corporation provides computerized wagering equipment, computer software, facilities management, and satellite broadcast services for parimutuel wagering at horse and dog racetracks, jai-alai frontons, government-sponsored lotteries, and legalized sports-betting facilities on four continents. It was, in 1996, the leading provider and operator to the racing industry. In 1993 Autotote became the exclusive licensed operator of almost all off-track wagering in Connecticut. The company suffered heavy losses in the mid-1990s, forcing it to sell its manufacturing facilities in 1995 and its casino/sports-wagering service business in 1996. In early 1997 it signed a letter of intent to sell its European lottery business.
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 parimutuel 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, and 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. Lome 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 .5 percent) of the sum of wagers placed. Moreover, Autotote had become the leader in the field not only in on-track but also intertrack 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. And the company was poised to introduce a new system, called Probe, that was the first fully integrated system not only for parimutuel 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 already was 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. And 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. Management cited, as factors contributing to the loss, 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.
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.
Autotote’s Operations in 1996
In 1996 Autotote’s parimutuel 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, also in eight Atlantic City casinos. In addition, Autotote had installed about 1,300 video gaming machines in racetracks in West Virginia and Manitoba.
Autotote also was simulcasting live horse and greyhound racing events to approximately 50 racetracks and more than 850 OTB parlors throughout North America as well as in 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 parimutuel 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.
Autotote Communication Services, Inc.; Autotote Enterprises, Inc.; Autotote Keno Corporation; Autotote Management Corporation; Autotote Mexico, Ltd.; Autotote Products, Inc.; ETAG Electronic Totalisator AG (Switzerland); ETAG Electronic Totalisator GesMBH (Austria); Marvin H. Sugarman Productions, Inc.; Racing Technology, Inc.
”Autotote Selling Off European Lottery Business,” New York Times, January 15, 1997, p. D4.
Benson, Barbara, “Exec’s Focused Course Improves Firm’s Odds,” Grain’s New York Business, November 13, 1995, p. 15.
Berman, Phyllis, “Home on the Range,” Forbes, November 9, 1992, pp. 113-14, 116, 118, 120.
Siklos, Richard, “Autotote Gambles on High-Tech High-Rollers,” Financial Post, May 25, 1995, p. 5.
Simmons, Jacqueline, “Autotote Corp. Appoints New Finance Officer,” Wall Street Journal, March 24, 1995, p. B4.
Welling, Kathryn M., “No-Name Stocks,” Barron’s, December 14, 1992, p. 15.