UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D. C.  20549

 

Form 10-Q

 

{Mark One}

 

ý   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2005

 

OR

 

o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission File number:  0-13063

 

SCIENTIFIC GAMES CORPORATION

(Exact name of registrant as specified in its charter)

 

Delaware

 

81-0422894

(State or other jurisdiction of

 

(I.R.S. Employer Identification No.)

incorporation or organization)

 

 

 

750 Lexington Avenue, New York, New York 10022

(Address of principal executive offices)

(Zip Code)

 

(212) 754-2233

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes ý    No o

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).   Yes  ý  No  o

 

APPLICABLE ONLY TO CORPORATE ISSUERS:

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of August 4, 2005:

Class A Common Stock:  89,652,185

Class B Common Stock:  None

 

 



 

SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

AND OTHER INFORMATION

 

THREE MONTHS ENDED JUNE 30, 2005

 

PART I.

FINANCIAL INFORMATION

 

 

 

 

Item 1.

Consolidated Financial Statements:

 

 

 

 

 

Balance Sheets as of December 31, 2004 and June 30, 2005

 

 

 

 

 

Statements of Income for the Three Months Ended

 

 

June 30, 2004 and 2005

 

 

 

 

 

Statements of Income for the Six Months Ended

 

 

June 30, 2004 and 2005

 

 

 

 

 

Condensed Statements of Cash Flows for the

 

 

Six Months Ended June 30, 2004 and 2005

 

 

 

 

 

Notes to Consolidated Financial Statements

 

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial

 

 

 

Condition and Results of Operations

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

 

 

 

Item 4.

Controls and Procedures

 

 

 

 

PART II.

OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

Item 3.

Defaults Upon Senior Securities

 

Item 4.

Submission of Matters to a Vote of Security Holders

 

Item 5.

Other Information

 

Item 6.

Exhibits

 

 

2



 

PART I.  FINANCIAL INFORMATION

 

Item 1.  Consolidated Financial Statements

 

SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited, in thousands, except per share amounts)

 

 

 

December 31,
2004

 

June 30,
2005

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

66,120

 

52,646

 

Short-term investments

 

52,525

 

8,650

 

Accounts receivable, net of allowance for doubtful accounts of $4,818 and $5,328 at December 31, 2004 and June 30, 2005, respectively

 

105,789

 

119,771

 

Inventories

 

28,062

 

34,768

 

Prepaid expenses, deposits and other current assets

 

41,799

 

43,444

 

Total current assets

 

294,295

 

259,279

 

Property and equipment, at cost

 

544,387

 

578,825

 

Less accumulated depreciation

 

272,961

 

287,915

 

Net property and equipment

 

271,426

 

290,910

 

Goodwill, net

 

311,931

 

338,547

 

Operating right, net

 

14,020

 

14,020

 

Other intangible assets, net

 

80,182

 

76,190

 

Other assets and investments

 

120,169

 

121,825

 

Total assets

 

$

1,092,023

 

1,100,771

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Current installments of long-term debt

 

$

4,370

 

5,468

 

Accounts payable

 

40,923

 

37,850

 

Accrued liabilities

 

96,999

 

76,836

 

Interest payable

 

879

 

1,161

 

Total current liabilities

 

143,171

 

121,315

 

Other long-term liabilities

 

41,780

 

46,246

 

Long-term debt, excluding current installments

 

606,508

 

583,478

 

Total liabilities

 

791,459

 

751,039

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

Class A common stock, par value $0.01 per share, 199,300 shares authorized, 88,414 and 89,474 shares outstanding at December 31, 2004 and June 30, 2005, respectively

 

884

 

895

 

Class B non-voting common stock, par value $0.01 per share, 700 shares authorized, none outstanding

 

 

 

Additional paid-in capital

 

405,755

 

416,293

 

Accumulated losses

 

(108,628

)

(62,849

)

Treasury stock, at cost

 

(9,403

)

(9,556

)

Accumulated other comprehensive income

 

11,956

 

4,949

 

Total stockholders’ equity

 

300,564

 

349,732

 

Total liabilities and stockholders’ equity

 

$

1,092,023

 

1,100,771

 

 

See accompanying notes to consolidated financial statements.

 

3



 

SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

Three Months Ended June 30, 2004 and 2005

(Unaudited, in thousands, except per share amounts)

 

 

 

2004

 

2005

 

Operating revenues:

 

 

 

 

 

Services

 

$

147,570

 

160,867

 

Sales

 

30,542

 

36,557

 

 

 

178,112

 

197,424

 

Operating expenses (exclusive of depreciation and amortization shown below):

 

 

 

 

 

Services

 

77,644

 

87,432

 

Sales

 

20,755

 

25,503

 

Amortization of service contract software

 

1,597

 

1,898

 

 

 

99,996

 

114,833

 

Gross profit

 

78,116

 

82,591

 

Selling, general and administrative expenses

 

28,427

 

25,725

 

Depreciation and amortization

 

13,806

 

15,221

 

Operating income

 

35,883

 

41,645

 

Other deductions:

 

 

 

 

 

Interest expense

 

7,807

 

6,812

 

Other (income) expense, net

 

(384

)

377

 

 

 

7,423

 

7,189

 

Income before income tax expense

 

28,460

 

34,456

 

Income tax expense

 

8,952

 

9,692

 

Net income

 

19,508

 

24,764

 

Convertible preferred stock dividend

 

1,982

 

 

Net income available to common stockholders

 

$

17,526

 

24,764

 

 

 

 

 

 

 

Basic and diluted net income per share:

 

 

 

 

 

Basic net income available to common stockholders

 

$

0.28

 

0.28

 

Diluted net income available to common stockholders

 

$

0.21

 

0.27

 

 

 

 

 

 

 

Weighted average number of shares used in per share calculations:

 

 

 

 

 

Basic shares

 

63,153

 

89,207

 

Diluted shares

 

90,757

 

92,142

 

 

See accompanying notes to consolidated financial statements.

 

4



 

SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

Six Months Ended June 30, 2004 and 2005

(Unaudited, in thousands, except per share amounts)

 

 

 

2004

 

2005

 

Operating revenues:

 

 

 

 

 

Services

 

$

289,203

 

316,621

 

Sales

 

74,374

 

65,359

 

 

 

363,577

 

381,980

 

Operating expenses (exclusive of depreciation and amortization shown below):

 

 

 

 

 

Services

 

153,529

 

172,681

 

Sales

 

51,411

 

45,777

 

Amortization of service contract software

 

3,031

 

3,521

 

 

 

207,971

 

221,979

 

Gross profit

 

155,606

 

160,001

 

Selling, general and administrative expenses

 

54,347

 

53,453

 

Depreciation and amortization

 

27,566

 

28,073

 

Operating income

 

73,693

 

78,475

 

Other deductions:

 

 

 

 

 

Interest expense

 

15,197

 

13,222

 

Other expense, net

 

224

 

776

 

 

 

15,421

 

13,998

 

Income before income tax expense

 

58,272

 

64,477

 

Income tax expense

 

18,343

 

18,698

 

Net income

 

39,929

 

45,779

 

Convertible preferred stock dividend

 

3,964

 

 

Net income available to common stockholders

 

$

35,965

 

45,779

 

 

 

 

 

 

 

Basic and diluted net income per share:

 

 

 

 

 

Basic net income available to common stockholders

 

$

0.58

 

0.51

 

Diluted net income available to common stockholders

 

$

0.44

 

0.50

 

 

 

 

 

 

 

Weighted average number of shares used in per share calculations:

 

 

 

 

 

Basic shares

 

62,548

 

88,913

 

Diluted shares

 

90,384

 

92,047

 

 

See accompanying notes to consolidated financial statements.

 

5



 

SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Six Months Ended June 30, 2004 and 2005

(Unaudited, in thousands)

 

 

 

2004

 

2005

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

39,929

 

45,779

 

 

 

 

 

 

 

Adjustments to reconcile net income to cash provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

30,597

 

31,594

 

Change in deferred income taxes

 

5,205

 

9,604

 

Tax benefit from exercise of employee stock options

 

 

5,636

 

Changes in operating assets and liabilities, net of effects of acquisitions

 

(21,337

)

(46,547

)

Change in short-term investments

 

2,325

 

43,875

 

Other

 

1,052

 

4,980

 

Total adjustments

 

17,842

 

49,142

 

Net cash provided by operating activities

 

57,771

 

94,921

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Capital expenditures

 

(10,573

)

(11,878

)

Wagering systems expenditures

 

(21,139

)

(31,555

)

Change in other assets and liabilities, net

 

(836

)

(19,017

)

Business acquisitions, net of cash acquired

 

(1,709

)

(24,774

)

Net cash used in investing activities

 

(34,257

)

(87,224

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Net repayments under revolving credit facility

 

 

(22,500

)

(Proceeds) payments on long-term debt, net

 

(1,231

)

397

 

Dividends paid

 

(3,964

)

 

Net proceeds from issuance of common stock

 

3,828

 

4,903

 

Net cash used in financing activities

 

(1,367

)

(17,200

)

Effect of exchange rate changes on cash and cash equivalents

 

1,611

 

(3,971

)

Increase (decrease) in cash and cash equivalents

 

23,758

 

(13,474

)

Cash and cash equivalents, beginning of period

 

37,198

 

66,120

 

Cash and cash equivalents, end of period

 

$

60,956

 

52,646

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

Interest

 

$

15,153

 

10,786

 

Income taxes

 

$

17,831

 

384

 

 

See accompanying notes to consolidated financial statements.

 

6



 

SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, in thousands, except per share amounts)

 

Notes to Consolidated Financial Statements

 

(1)                                 Consolidated Financial Statements

 

Basis of Presentation

 

The consolidated balance sheet as of June 30, 2005, the consolidated statements of income for the three and six months ended June 30, 2004 and 2005, and the consolidated condensed statements of cash flows for the six months ended June 30, 2004 and 2005, have been prepared by Scientific Games Corporation (together with its consolidated subsidiaries, “we” or the “Company”) without audit.  In the opinion of management, all adjustments necessary to present fairly the consolidated financial position of the Company at June 30, 2005 and the results of its operations for the three and six months ended June 30, 2004 and 2005 and its cash flows for the six months ended June 30, 2004 and 2005 have been made.

 

Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted.  These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s 2004 Annual Report on Form 10-K.  The results of operations for the period ended June 30, 2005 are not necessarily indicative of the operating results for the full year.

 

The Company has reclassified $39,850 of Auction Rate Securities from Cash and cash equivalents to Short-term investments at June 30, 2004.  The cash flows from these investments are presented as operating cash flows for all periods presented.

 

Basic 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 available to common stockholders for the three and six months ended June 30, 2004 and 2005:

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2004

 

2005

 

2004

 

2005

 

Income (numerator)

 

 

 

 

 

 

 

 

 

Net income available to common stockholders (basic)

 

$

17,526

 

24,764

 

35,965

 

45,779

 

Add back preferred stock dividend

 

1,982

 

 

3,964

 

 

Income before preferred dividend available to common stockholders (diluted)

 

$

19,508

 

24,764

 

39,929

 

45,779

 

Shares (denominator)

 

 

 

 

 

 

 

 

 

Basic weighted average common shares outstanding

 

63,153

 

89,207

 

62,548

 

88,913

 

Effect of dilutive securities-stock options, warrants, preferred shares and deferred shares

 

27,604

 

2,935

 

27,836

 

3,134

 

Diluted weighted average common shares outstanding

 

90,757

 

92,142

 

90,384

 

92,047

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted per share amounts

 

 

 

 

 

 

 

 

 

Basic net income per share available to common stockholders

 

$

0.28

 

0.28

 

0.58

 

0.51

 

Diluted net income per share available to common stockholders

 

$

0.21

 

0.27

 

0.44

 

0.50

 

 

7



 

The aggregate number of shares that the Company could be obligated to issue upon conversion of its $275,000 0.75% convertible senior subordinated debentures due 2024 (the “Convertible Debentures”), which the Company sold in December 2004, is approximately 9,450. The Convertible Debentures provide for net share settlement upon exercise, and the Company has purchased a bond hedge to mitigate the potential dilution from conversion. Such shares were excluded from the three and six months ended June 30, 2005 calculations as they were anti-dilutive.  (See Note 9 to the Consolidated Financial Statements for the year ended December 31, 2004 in the Company’s 2004 Annual Report on Form 10-K.)

 

Stock-Based Compensation

 

The Company has chosen to continue to account for stock-based compensation using the intrinsic-value method prescribed by Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees”.  Accordingly, no stock compensation expense has been recognized for a majority of its stock-based compensation plans.  Had the Company elected to recognize compensation cost based on the fair value of the stock options at the date of grant under Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”) as amended by SFAS No.148, “Accounting for Stock-Based Compensation Transition and Disclosure, an Amendment of FASB Statement No. 123” (“SFAS 148”), such costs would have been recognized ratably over the vesting period of the underlying instruments and the Company’s net income and net income per share would have changed to the pro forma amounts indicated in the table below:

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2004

 

2005

 

2004

 

2005

 

 

 

 

 

 

 

 

 

 

 

Net income available to common stockholders as reported

 

$

17,526

 

$

24,764

 

$

35,965

 

$

45,779

 

Add: Stock-based compensation expense included in reported net income, net of related tax effects

 

47

 

51

 

94

 

103

 

Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects

 

(1,314

)

(2,152

)

(2,508

)

(4,024

)

Pro forma net income available to common stockholders

 

$

16,259

 

$

22,663

 

$

33,551

 

$

41,858

 

 

 

 

 

 

 

 

 

 

 

Net income available to common stockholders per basic share:

 

 

 

 

 

 

 

 

 

As reported

 

$

0.28

 

0.28

 

$

0.58

 

0.51

 

Pro forma

 

$

0.26

 

0.26

 

$

0.55

 

0.48

 

Net income available to common stockholders per diluted share:

 

 

 

 

 

 

 

 

 

As reported

 

$

0.21

 

0.27

 

$

0.43

 

0.50

 

Pro forma

 

$

0.20

 

0.25

 

$

0.42

 

0.46

 

 

8



 

(2)                                 Acquisitions

 

In April 2005, the Company acquired the remaining 35% minority interest in Scientific Games Latin America S.A. (“SGLA”), a supplier of lottery tickets, pre-paid phone cards and promotional games in Latin America.  The Company originally acquired a 65% interest in SGLA in June 2002.  Pursuant to the April 2005 transactions, the Company paid approximately $19,600 for the purchase price of the minority interest and additional amounts of approximately $4,300 for the balance of the purchase price for the 2002 acquisition, repayment of a prior loan to the minority shareholders, and the minority shareholders’ pro-rata share of dividends.

 

The excess of the additional purchase price over the fair value of the net assets acquired was recorded as goodwill. The operating results of SGLA have been included in the Company’s operating income since the initial acquisition of the 65% interest in 2002, with the minority portion of such earnings included as a deduction in “Other expense”. In the second quarter of 2005, this deduction ceased.

 

On December 31, 2004, the Company acquired all of the outstanding shares of Printpool Honsel GmbH (“Honsel”), a German company which is the supplier of instant tickets to all of the 16 state operated lotteries in Germany and sells other lottery products, such as bet slips and paper rolls, to customers in approximately 25 countries.  The purchase price was approximately $21,000 in cash and additional amounts of up to approximately $10,500 in cash upon achievement of certain performance levels over the next five years. The operating results of Honsel have been included in the Company’s consolidated operating results since January 1, 2005.  Had the operating results of Honsel been included as if the transaction had been consummated on January 1, 2004, the Company’s pro forma operating results for the three and six months ended June 30, 2004 would not have been materially different from the actual reported results.  The preliminary estimate of goodwill of approximately $12,400 from the acquisition of Honsel is not deductible for tax purposes. Additionally, other assets and liabilities acquired in the transaction, such as certain intangible assets, property and equipment, current assets and liabilities and debt were included in the preliminary purchase price allocation.

 

9



 

(3)                                 Business Segments

 

The following tables represent revenues, profits, depreciation, amortization, and capital expenditures for the three and six months ended June 30, 2004 and 2005, and assets at June 30, 2004 and 2005, by business segment.  Corporate expenses, interest expense and other (income) expense are not allocated to business segments.

 

 

 

Three Months Ended June 30, 2004

 

 

 

Lottery
Group

 

Pari-
Mutuel
Group

 

Venue
Management
Group

 

Telecommunications
Products
Group

 

Totals

 

Service revenues

 

$

109,740

 

21,307

 

16,523

 

 

147,570

 

Sales revenues

 

15,797

 

1,778

 

 

12,967

 

30,542

 

Total revenues

 

125,537

 

23,085

 

16,523

 

12,967

 

178,112

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of service

 

54,745

 

10,871

 

12,028

 

 

77,644

 

Cost of sales

 

9,798

 

1,024

 

 

9,933

 

20,755

 

Amortization of service contract software

 

853

 

744

 

 

 

1,597

 

 

 

65,396

 

12,639

 

12,028

 

9,933

 

99,996

 

Gross profit

 

60,141

 

10,446

 

4,495

 

3,034

 

78,116

 

Selling, general and administrative expenses

 

16,165

 

1,969

 

1,194

 

1,435

 

20,763

 

Depreciation and amortization

 

9,893

 

2,489

 

507

 

705

 

13,594

 

Segment operating income

 

$

34,083

 

5,988

 

2,794

 

894

 

43,759

 

Unallocated corporate expense

 

 

 

 

 

 

 

 

 

7,876

 

Consolidated operating income

 

 

 

 

 

 

 

 

 

$

35,883

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital and wagering systems expenditures

 

$

9,976

 

1,974

 

326

 

148

 

12,424

 

 

10



 

 

 

Three Months Ended June 30, 2005

 

 

 

Lottery
Group

 

Pari-
Mutuel
Group

 

Venue
Management
Group

 

Telecommunications
Products
Group

 

Totals

 

Service revenues

 

$

126,330

 

18,496

 

16,041

 

 

160,867

 

Sales revenues

 

19,563

 

3,519

 

 

13,475

 

36,557

 

Total revenues

 

145,893

 

22,015

 

16,041

 

13,475

 

197,424

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of service

 

63,181

 

11,972

 

12,279

 

 

87,432

 

Cost of sales

 

12,874

 

2,288

 

 

10,341

 

25,503

 

Amortization of service contract software

 

1,285

 

613

 

 

 

1,898

 

 

 

77,340

 

14,873

 

12,279

 

10,341

 

114,833

 

Gross profit

 

68,553

 

7,142

 

3,762

 

3,134

 

82,591

 

Selling, general and administrative expenses

 

13,886

 

2,416

 

702

 

1,382

 

18,386

 

Depreciation and amortization

 

10,654

 

2,838

 

487

 

952

 

14,931

 

Segment operating income

 

$

44,013

 

1,888

 

2,573

 

800

 

49,274

 

Unallocated corporate expense

 

 

 

 

 

 

 

 

 

7,629

 

Consolidated operating income

 

 

 

 

 

 

 

 

 

$

41,645

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital and wagering systems expenditures

 

$

15,624

 

3,420

 

553

 

548

 

20,145

 

 

11



 

 

 

Six Months Ended June 30, 2004

 

 

 

Lottery
Group

 

Pari-
Mutuel
Group

 

Venue
Management
Group

 

Telecommunications
Products
Group

 

Totals

 

Service revenues

 

$

217,034

 

40,350

 

31,819

 

 

289,203

 

Sales revenues

 

45,362

 

2,467

 

 

26,545

 

74,374

 

Total revenues

 

262,396

 

42,817

 

31,819

 

26,545

 

363,577

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of service

 

109,755

 

20,865

 

22,909

 

 

153,529

 

Cost of sales

 

30,045

 

1,433

 

 

19,933

 

51,411

 

Amortization of service contract software

 

1,646

 

1,385

 

 

 

3,031

 

 

 

141,446

 

23,683

 

22,909

 

19,933

 

207,971

 

Gross profit

 

120,950

 

19,134

 

8,910

 

6,612

 

155,606

 

Selling, general and administrative expenses

 

32,727

 

3,808

 

2,198

 

2,917

 

41,650

 

Depreciation and amortization

 

19,400

 

5,309

 

997

 

1,438

 

27,144

 

Segment operating income

 

$

68,823

 

10,017

 

5,715

 

2,257

 

86,812

 

Unallocated corporate expense

 

 

 

 

 

 

 

 

 

13,119

 

Consolidated operating income

 

 

 

 

 

 

 

 

 

$

73,693

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets at June 30, 2004

 

$

567,715

 

86,572

 

34,403

 

45,318

 

734,008

 

Unallocated assets at June 30, 2004

 

 

 

 

 

 

 

 

 

238,395

 

Consolidated assets at June 30, 2004

 

 

 

 

 

 

 

 

 

$

972,403

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital and wagering systems expenditures

 

$

24,437

 

6,307

 

662

 

306

 

31,712

 

 

12



 

 

 

Six Months Ended June 30, 2005

 

 

 

Lottery
Group

 

Pari-
Mutuel
Group

 

Venue
Management
Group

 

Telecommunications
Products
Group

 

Totals

 

Service revenues

 

$

249,721

 

36,527

 

30,373

 

 

316,621

 

Sales revenues

 

33,094

 

3,876

 

 

28,389

 

65,359

 

Total revenues

 

282,815

 

40,403

 

30,373

 

28,389

 

381,980

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of service

 

127,070

 

22,341

 

23,270

 

 

172,681

 

Cost of sales

 

22,203

 

2,703

 

 

20,871

 

45,777

 

Amortization of service contract software

 

2,258

 

1,263

 

 

 

3,521

 

 

 

151,531

 

26,307

 

23,270

 

20,871

 

221,979

 

Gross profit

 

131,284

 

14,096

 

7,103

 

7,518

 

160,001

 

Selling, general and administrative expenses

 

29,500

 

5,457

 

1,576

 

2,886

 

39,419

 

Depreciation and amortization

 

19,576

 

5,042

 

971

 

1,919

 

27,508

 

Segment operating income

 

$

82,208

 

3,597

 

4,556

 

2,713

 

93,074

 

Unallocated corporate expense

 

 

 

 

 

 

 

 

 

14,599

 

Consolidated operating income

 

 

 

 

 

 

 

 

 

$

78,475

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets at June 30, 2005

 

$

716,893

 

77,552

 

35,388

 

63,256

 

893,089

 

Unallocated assets at June 30, 2005

 

 

 

 

 

 

 

 

 

207,682

 

Consolidated assets at June 30, 2005

 

 

 

 

 

 

 

 

 

$

1,100,771

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital and wagering systems expenditures

 

$

35,919

 

5,497

 

833

 

1,184

 

43,433

 

 

The following table provides a reconciliation of consolidated operating income to the consolidated income before income tax expense for each period:

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2004

 

2005

 

2004

 

2005

 

Reported consolidated operating income

 

$

35,883

 

41,645

 

$

73,693

 

78,475

 

Interest expense

 

7,807

 

6,812

 

15,197

 

13,222

 

Other (income) expense, net

 

(384

)

377

 

224

 

776

 

Income before income tax expense

 

$

28,460

 

34,456

 

$

58,272

 

64,477

 

 

13



 

(4)                                 Income Tax Expense

 

The effective income tax rate for the three and six months ended June 30, 2005 of approximately 28.1% and 29.0%, respectively, differed from the federal statutory rate of 35% due to benefits from expanded business outside the United States, the 2004 debt restructuring and increasing research and development activities. The effective income tax rate for the three and six months ended June 30, 2004 was approximately 31.5%, which differed from the federal statutory rate of 35% due primarily to benefits from the realization of foreign tax credits and the implementation of the extra-territorial income exclusion regime.  On October 22, 2004, the American Jobs Creation Act (“the Act”) was signed into law.  The Act creates a temporary incentive for U.S. corporations to repatriate accumulated income earned abroad by providing an 85% dividend received deduction for certain dividends from controlled foreign corporations.  As of June 30, 2005 the Company has decided not to repatriate any qualifying earnings under the Act.

 

(5)                                 Comprehensive Income

 

The following presents a reconciliation of net income to comprehensive income for the three and six month periods ended June 30, 2004 and 2005:

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2004

 

2005

 

2004

 

2005

 

Net income

 

$

19,508

 

24,764

 

$

39,929

 

45,779

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

Foreign currency translation

 

(617

)

(5,262

)

767

 

(8,652

)

Unrealized gain on investments

 

715

 

1,656

 

727

 

1,645

 

Unrealized gain on Canadian dollar hedges

 

 

 

1,107

 

 

Other comprehensive income (loss)

 

98

 

(3,606

)

2,601

 

(7,007

)

Comprehensive income

 

19,606

 

21,158

 

42,530

 

38,772

 

 

(6)                                 Inventories

 

Inventories consist of the following:

 

 

 

December 31,
2004

 

June 30,
2005

 

Parts and work-in-process

 

$

18,655

 

22,487

 

Finished goods

 

9,407

 

12,281

 

 

 

$

28,062

 

34,768

 

 

Point of sale 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.

 

14



 

(7)                                 Accrued Liabilities

 

Accrued liabilities consist of the following:

 

 

 

December 31,
2004

 

June 30,
2005

 

Compensation and benefits

 

$

26,135

 

16,738

 

Customer advances

 

4,579

 

2,245

 

Deferred revenue

 

3,192

 

8,345

 

Accrued contract costs

 

10,958

 

9,954

 

Other

 

52,135

 

39,554

 

 

 

$

96,999

 

76,836

 

 

(8)                                 Debt

 

At June 30, 2005, the Company had approximately $218,451 available for borrowing under the Company’s revolving credit facility, which was entered into in December 2004, as part of the Company’s senior secured credit facility (the “2004 Facility”).  There were no borrowings outstanding under the revolving credit facility, but approximately $31,549 in letters of credit were issued and outstanding at June 30, 2005.  At December 31, 2004, the Company’s available borrowing capacity under the revolving credit facility was $199,900.  At June 30, 2005, there was $99,500 in outstanding Term Loans under the 2004 Facility.

 

The Credit Agreement governing the 2004 Facility (the “Credit Agreement”) contains certain covenants that, among other things, limit the Company’s ability, and the ability of certain of the Company’s subsidiaries, to incur additional indebtedness, pay dividends or make distributions or certain other restricted payments, purchase or redeem capital stock, make investments or extend credit, engage in sale-leaseback transactions, consummate certain asset sales, effect a consolidation or merger, sell, transfer, lease or otherwise dispose of all or substantially all assets, or create certain liens and other encumbrances on assets.  Additionally, the Credit Agreement contains the following financial covenants that are computed quarterly on a rolling four-quarter basis as applicable:

 

                  A maximum Consolidated Leverage Ratio of 3.75, which will be reduced according to the terms of the 2004 Credit Agreement on July 1, 2006, from which date until December 2009 the ratio shall be 3.50.  Consolidated Leverage Ratio means the ratio of (x) the aggregate stated balance sheet amount of the Company’s indebtedness determined on a consolidated basis in accordance with GAAP as of the last day of the fiscal quarter for which such determination is being made to (y) Consolidated EBITDA for the four consecutive fiscal quarters ended on the last day of the fiscal quarter for which such determination is being made.

 

                  A minimum Consolidated Fixed Charge Coverage Ratio of 1.00 until December 2009.  Consolidated Fixed Charge Coverage Ratio means, as of any date of determination, the ratio computed for the Company’s four most recent fiscal quarters of (x) Consolidated EBITDA to (y) the sum of (i) total interest expense less non-cash amortization costs included in interest expense, (ii) scheduled payments of principal on indebtedness, (iii) capital expenditures and (iv) all income taxes paid in cash.

 

                  A maximum Consolidated Senior Debt Ratio of 2.00, which will be reduced according to the terms of the 2004 Credit Agreement on July 1, 2006, from which date until December 2009 the ratio shall be 1.75.  Consolidated Senior Debt Ratio means the ratio of (x) the aggregate stated balance sheet amount of the Company’s indebtedness, less the amount of the Company’s 12 1/2% senior subordinated notes (the “2000 Notes”), the Company’s 6.25% senior subordinated notes due 2012 (the “2004 Notes”) and the Convertible Debentures determined on a consolidated basis in accordance with GAAP as of the last day of the fiscal quarter for which such determination is being made to (y) Consolidated EBITDA for the four consecutive fiscal quarters ended on the last day of the fiscal quarter for which such determination is being made.

 

15



 

For purposes of the foregoing limitations, Consolidated EBITDA means the sum of (i) consolidated net income, (ii) consolidated interest expense with respect to all outstanding indebtedness, (iii) provision for taxes based on income, (iv) total depreciation expense, (v) total amortization expense and (vi) certain adjustments, in each case for the period being measured, all of the foregoing as determined on a consolidated basis for the Company and its subsidiaries in accordance with GAAP.

 

The Company was in compliance with its loan covenants as of June 30, 2005.

 

(9)                                 Goodwill and Intangible Assets

 

The following disclosure presents certain information regarding the Company’s acquired intangible assets as of December 31, 2004 and June 30, 2005.  Amortizable intangible assets are being amortized over their estimated useful lives, as indicated below, with no estimated residual values.

 

Intangible Assets

 

Weighted
Average
Amortization
Period

 

Gross
Carrying
Amount

 

Accumulated
Amortization

 

Net Balance

 

Balance at December 31, 2004

 

 

 

 

 

 

 

 

 

Amortizable intangible assets:

 

 

 

 

 

 

 

 

 

Patents

 

15

 

$

4,221

 

477

 

3,744

 

Customer lists

 

14

 

20,175

 

7,597

 

12,578

 

Customer service contracts

 

15

 

3,781

 

1,331

 

2,450

 

Licenses

 

15

 

10,377

 

3,315

 

7,062

 

Lottery contracts

 

5

 

31,802

 

7,910

 

23,892

 

 

 

 

 

70,356

 

20,630

 

49,726

 

Non-amortizable intangible assets:

 

 

 

 

 

 

 

 

 

Tradename

 

 

 

32,574

 

2,118

 

30,456

 

Connecticut off-track betting system operating right

 

 

 

22,339

 

8,319

 

14,020

 

 

 

 

 

54,913

 

10,437

 

44,476

 

Total intangible assets

 

 

 

$

125,269

 

31,067

 

94,202

 

 

 

 

 

 

 

 

 

 

 

Balance at June 30, 2005

 

 

 

 

 

 

 

 

 

Amortizable intangible assets:

 

 

 

 

 

 

 

 

 

Patents

 

15

 

$

4,656

 

559

 

4,097

 

Customer lists

 

14

 

19,453

 

8,286

 

11,167

 

Customer service contracts

 

15

 

3,384

 

1,310

 

2,074

 

Licenses

 

15

 

11,955

 

5,137

 

6,818

 

Lottery contracts

 

5

 

32,200

 

10,622

 

21,578

 

 

 

 

 

71,648

 

25,914

 

45,734

 

Non-amortizable intangible assets:

 

 

 

 

 

 

 

 

 

Tradename

 

 

 

32,574

 

2,118

 

30,456

 

Connecticut off-track betting system operating right

 

 

 

22,339

 

8,319

 

14,020

 

 

 

 

 

54,913

 

10,437

 

44,476

 

Total intangible assets

 

 

 

$

126,561

 

36,351

 

90,210

 

 

16



 

The aggregate intangible amortization expense for the six-month periods ended June 30, 2004 and 2005 was approximately $5,600 and $5,300, respectively.

 

The table below reconciles the change in the carrying amount of goodwill, by reporting unit, which is the same as business segment, for the period from January 1, 2005 to June 30, 2005.  In 2005, the Company recorded (a) a $2,927 increase in goodwill in connection with the acquisition of certain assets and the assumption of certain liabilities from Promo-Travel International, Inc. in February 2005, (b) a $20,680 increase in goodwill related to the acquisition of the remaining 35% minority interest in SGLA in April 2005, (c) an $87 increase for the acquisition of an off-track betting operation in June 2005 and (d) a $2,922 increase in goodwill associated with the Honsel acquisition.

 

Goodwill

 

Lottery
Group

 

Pari-
mutuel
Group

 

Venue
Management
Group

 

Telecommunications
Products
Group

 

Totals

 

Balance at December 31, 2004

 

$

311,444

 

487

 

 

 

311,931

 

Additions:

 

26,529

 

 

87

 

 

26,616

 

Balance at June 30, 2005

 

$

337,973

 

487

 

87

 

 

338,547

 

 

(10)                          Pension Plans

 

The Company has two funded defined benefit pension plans. It has a defined benefit plan for its U.S. based union employees. Retirement benefits under this plan are based upon the number of years of credited service, up to a maximum of 30 years for the majority of the employees.  It also has a defined benefit plan for U.K. based employees.  Retirement benefits under the U.K. plan are based on an employee’s average compensation over the two years preceding retirement.  The Company’s policy is to fund the minimum contribution permitted by the respective regulatory authorities.  The Company estimates that the amount to be funded in year 2005 will be approximately $2,500.

 

In connection with its U.S. based collective bargaining agreements, the Company participates with other companies in a defined benefit pension plan covering union employees. The Company expects to make payments to the multi-employer plan of approximately $250 during the year ending December 31, 2005.

 

The Company has a 401(k) plan covering all U.S. based employees who are not covered by a collective bargaining agreement. Company contributions to the plan are at the discretion of the Company’s Board of Directors.  The Company has a 401(k) plan for all union employees which does not provide for Company contributions.

 

The Company has an unfunded nonqualified Supplemental Executive Retirement Plan (the “SERP”) and an unfunded nonqualified Deferred Compensation Plan. The SERP provides for retirement benefits for certain senior executives according to a formula based on each participant’s compensation and years of service with the Company, and the Deferred Compensation Plan permits salary and bonus deferrals and does not provide for Company contributions.

 

17



 

The following table sets forth the combined amount of net periodic benefit cost recognized for the three and six month periods ended June 30, 2004 and 2005:

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2004

 

2005

 

2004

 

2005

 

Components of net periodic pension benefit cost:

 

 

 

 

 

 

 

 

 

Service cost

 

$

1,026

 

813

 

$

1,701

 

1,627

 

Interest cost

 

641

 

787

 

1,282

 

1,575

 

Expected return on plan assets

 

(448

)

(626

)

(896

)

(1,251

)

Actuarial loss

 

295

 

420

 

590

 

839

 

Net amortization and deferral

 

13

 

16

 

27

 

32

 

Amortization of prior service costs

 

192

 

192

 

384

 

384

 

Net periodic cost

 

$

1,719

 

1,602

 

$

3,088

 

3,206

 

 

(11)                          Stockholders’ Equity

 

At June 30, 2005, the Company had a total of 2,000 shares of preferred stock, $1.00 par value, authorized for issuance, including 229 authorized shares of Series A Convertible Preferred Stock and 1 authorized share of Series B Preferred Stock. No shares of preferred stock are currently outstanding.

 

In August 2004, holders of all of the Company’s then outstanding Series A Convertible Preferred Stock and Series B Preferred Stock were issued an aggregate of 23,832 shares of the Company’s Class A Common Stock in connection with their conversion, representing a conversion price of $5.56 per share. Prior to conversion, the Series A Convertible Preferred Stock required dividend payments at a rate of 6% per annum. Prior to 2004, we satisfied the dividend requirement using additional shares of convertible preferred stock.  In 2004 the Company paid the dividends in cash totaling $3,964.

 

(12)                          Litigation

 

On May 9, 2005, Scientific Games Royalty Corporation, a wholly-owned indirect subsidiary of Scientific Games Corporation, filed suit against GTECH Corporation in Federal District Court of Delaware alleging patent infringement of the Company’s group participation multiplier patents, U.S. Patent Nos. 6,648,753 and 6,692,354.  These patents apply to online lottery games that have an optional bonus wager as a feature of the game.  In the event that a player wins a prize in the base game and has chosen to make the bonus wager, all of the player’s prizes in the base game, with the exception of the jackpot amount, may be multiplied by a randomly selected multiplier.  The Company believes that GTECH currently provides such games that infringe the Company’s applicable patents in various jurisdictions in the United States.  The Company’s lawsuit seeks damages and other relief for such infringement.

 

On or about April 6, 2005, the Company was served with a complaint in the Texas state court action captioned GTECH Holdings Corporation and GTECH Corporation v. Scientific Games International, Inc. previously described in our Annual Report on Form 10-K for the year ended December 31, 2004.  The Company continues to believe that the plaintiffs’ claims lack merit and intends to contest them vigorously.

 

18



 

(13)                          Financial Information for Guarantor Subsidiaries and Non-Guarantor Subsidiaries

 

The Company conducts substantially all of its business through its domestic and foreign subsidiaries.  The 2004 Notes, the Convertible Debentures and the 2004 Facility are fully, unconditionally and jointly and severally guaranteed by substantially all of the Company’s wholly owned domestic subsidiaries (the “Guarantor Subsidiaries”).

 

Presented below is condensed consolidating financial information for (i) Scientific Games Corporation (the “Parent Company”), which includes the activities of Scientific Games 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 December 31, 2004 and June 30, 2005 and for the three and six months ended June 30, 2004 and 2005.  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 2004 Facility, the Convertible Debentures and the 2004 Notes 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.  Corporate interest and administrative expenses have not been allocated to the subsidiaries.

 

19



 

SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES

SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET

December 31, 2004

(unaudited, in thousands)

 

 

 

Parent
Company

 

Guarantor
Subsidiaries

 

Non-
Guarantor
Subsidiaries

 

Eliminating
Entries

 

Consolidated

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

34,979

 

14,987

 

16,154

 

 

66,120

 

Short-term investments

 

52,525

 

 

 

 

52,525

 

Accounts receivable, net

 

 

73,236

 

32,592

 

(39

)

105,789

 

Inventories

 

 

18,245

 

10,425

 

(608

)

28,062

 

Other current assets

 

11,778

 

17,310

 

12,681

 

30

 

41,799

 

Property and equipment, net

 

5,093

 

206,331

 

60,633

 

(631

)

271,426

 

Investment in subsidiaries

 

771,987

 

187,019

 

(36,563

)

(922,443

)

 

Goodwill

 

183

 

297,000

 

14,748

 

 

311,931

 

Intangible assets

 

 

79,303

 

14,899

 

 

94,202

 

Other assets

 

53,095

 

59,522

 

15,777

 

(8,225

)

120,169

 

Total assets

 

$

929,640

 

952,953

 

141,346

 

(931,916

)

1,092,023

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

Current installments of long-term debt

 

$

1,000

 

 

3,370

 

 

4,370

 

Current liabilities

 

8,672

 

91,503

 

37,426

 

1,200

 

138,801

 

Long-term debt, excluding current installments

 

603,645

 

 

2,863

 

 

606,508

 

Other non-current liabilities

 

(5,486

)

30,503

 

16,699

 

64

 

41,780

 

Intercompany balances

 

(124,873

)

108,969

 

17,948

 

(2,044

)

 

Stockholders’ equity

 

446,682

 

721,978

 

63,040

 

(931,136

)

300,564

 

Total liabilities and stockholders’ equity

 

$

929,640

 

952,953

 

141,346

 

(931,916

)

1,092,023

 

 

20



 

SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES

SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET

June 30, 2005

(unaudited, in thousands)

 

 

 

Parent
Company

 

Guarantor
Subsidiaries

 

Non-
Guarantor
Subsidiaries

 

Eliminating
Entries

 

Consolidated

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

29,454

 

(4,986

)

28,177

 

1

 

52,646

 

Short-term investments

 

8,650

 

 

 

 

8,650

 

Accounts receivable, net

 

 

94,304

 

25,506

 

(39

)

119,771

 

Inventories

 

 

25,295

 

9,898

 

(425

)

34,768

 

Other current assets

 

5,599

 

18,289

 

19,526

 

30

 

43,444

 

Property and equipment, net

 

4,816

 

216,822

 

69,902

 

(630

)

290,910

 

Investment in subsidiaries

 

810,470

 

187,458

 

(35,913

)

(962,015

)

 

Goodwill

 

183

 

300,015

 

38,349

 

 

338,547

 

Intangible assets

 

 

75,935

 

14,275

 

 

90,210

 

Other assets

 

46,651

 

61,158

 

19,829

 

(5,813

)

121,825

 

Total assets

 

$

905,823

 

974,290

 

189,549

 

(968,891

)

1,100,771

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

Current installments of long-term debt

 

$

1,000

 

 

4,468

 

 

5,468

 

Current liabilities

 

3,107

 

78,498

 

34,159

 

83

 

115,847

 

Long-term debt, excluding current installments

 

581,145

 

 

2,333

 

 

583,478

 

Other non-current liabilities

 

144

 

29,881

 

16,215

 

6

 

46,246

 

Intercompany balances

 

(133,575

)

84,527

 

48,363

 

685

 

 

Stockholders’ equity

 

454,002

 

781,384

 

84,011

 

(969,665

)

349,732

 

Total liabilities and stockholders’ equity

 

$

905,823

 

974,290

 

189,549

 

(968,891

)

1,100,771

 

 

21



 

SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES

SUPPLEMENTAL CONDENSED STATEMENT OF INCOME

Three Months Ended June 30, 2004

(unaudited, in thousands)

 

 

 

Parent
Company

 

Guarantor
Subsidiaries

 

Non-
Guarantor
Subsidiaries

 

Eliminating
Entries

 

Consolidated

 

Operating revenues

 

$

 

144,597

 

41,330

 

(7,815

)

178,112

 

Operating expenses

 

 

79,144

 

27,087

 

(7,832

)

98,399

 

Amortization of service contract software

 

 

1,497

 

100

 

 

1,597

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

 

63,956

 

14,143

 

17

 

78,116

 

Selling, general and administrative expenses

 

7,664

 

16,164

 

4,602

 

(3

)

28,427

 

Depreciation and amortization

 

212

 

11,080

 

2,514

 

 

13,806

 

Operating income (loss)

 

(7,876

)

36,712

 

7,027

 

20

 

35,883

 

Interest expense

 

7,420

 

296

 

1,243

 

(1,152

)

7,807

 

Other (income) expense

 

(277

)

(1,588

)

327

 

1,154

 

(384

)

Income (loss) before equity in income of subsidiaries, and income taxes

 

(15,019

)

38,004

 

5,457

 

18

 

28,460

 

Equity in income of subsidiaries

 

40,324

 

 

 

(40,324

)

 

Income tax expense

 

5,797

 

1,126

 

2,029

 

 

8,952

 

Net income

 

$

19,508

 

36,878

 

3,428

 

(40,306

)

19,508

 

 

SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES

SUPPLEMENTAL CONDENSED STATEMENT OF INCOME

Three Months Ended June 30, 2005

(unaudited, in thousands)

 

 

 

Parent
Company

 

Guarantor
Subsidiaries

 

Non-
Guarantor
Subsidiaries

 

Eliminating
Entries

 

Consolidated

 

Operating revenues

 

$

 

152,056

 

49,657

 

(4,289

)

197,424

 

Operating expenses

 

 

81,653

 

35,471

 

(4,189

)

112,935

 

Amortization of service contract software

 

 

1,868

 

30

 

 

1,898

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

 

68,535

 

14,156

 

(100

)

82,591

 

Selling, general and administrative expenses

 

7,227

 

14,052

 

4,466

 

(20

)

25,725

 

Depreciation and amortization

 

290

 

11,483

 

3,448

 

 

15,221

 

Operating income (loss)

 

(7,517

)

43,000

 

6,242

 

(80

)

41,645

 

Interest expense

 

6,357

 

154

 

301

 

 

6,812

 

Other (income) expense

 

(227

)

472

 

99

 

33

 

377

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) before equity in income of subsidiaries, and income taxes

 

(13,647

)

42,374

 

5,842

 

(113

)

34,456

 

Equity in income of subsidiaries

 

45,322