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 September 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

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exhange Act).

Yes  o  No  ý

 

APPLICABLE ONLY TO CORPORATE ISSUERS:

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of November 7, 2005:

Class A Common Stock:  89,767,863

Class B Common Stock:  None

 

 



 

SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

AND OTHER INFORMATION

 

THREE MONTHS ENDED SEPTEMBER 30, 2005

 

PART I.

FINANCIAL INFORMATION

 

 

 

 

Item 1.

Consolidated Financial Statements:

 

 

 

 

 

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

 

 

 

 

 

Statements of Income for the Three Months Ended
September 30, 2004 and 2005

 

 

 

 

 

Statements of Income for the Nine Months Ended
September 30, 2004 and 2005

 

 

 

 

 

Condensed Statements of Cash Flows for the
Nine Months Ended September 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

 

September 30,
2005

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

66,120

 

50,431

 

Short-term investments

 

52,525

 

5,050

 

Accounts receivable, net of allowance for doubtful accounts of $4,818 and $5,094 at December 31, 2004 and September 30, 2005, respectively

 

106,991

 

118,879

 

Inventories

 

28,062

 

36,636

 

Prepaid expenses, deposits and other current assets

 

41,799

 

51,957

 

Total current assets

 

295,497

 

262,953

 

Property and equipment, at cost

 

544,387

 

618,647

 

Less accumulated depreciation

 

272,961

 

295,398

 

Net property and equipment

 

271,426

 

323,249

 

Goodwill, net

 

311,931

 

338,552

 

Operating right, net

 

14,020

 

14,020

 

Other intangible assets, net

 

80,182

 

73,962

 

Other assets and investments

 

120,169

 

136,520

 

Total assets

 

$

1,093,225

 

1,149,256

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Current installments of long-term debt

 

$

4,370

 

6,289

 

Interest payable

 

879

 

4,428

 

Accounts payable

 

40,923

 

49,233

 

Accrued liabilities

 

97,070

 

85,189

 

Total current liabilities

 

143,242

 

145,139

 

Other long-term liabilities

 

42,911

 

52,952

 

Long-term debt, excluding current installments

 

606,508

 

575,866

 

Total liabilities

 

792,661

 

773,957

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

Class A common stock, par value $0.01 per share, 199,300 shares authorized, 88,414 and 89,754 shares outstanding at December 31, 2004 and September 30, 2005, respectively

 

884

 

898

 

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

 

 

 

Additional paid-in capital

 

405,755

 

422,328

 

Accumulated losses

 

(108,628

)

(43,664

)

Treasury stock, at cost

 

(9,403

)

(9,556

)

Accumulated other comprehensive income

 

11,956

 

5,293

 

Total stockholders’ equity

 

300,564

 

375,299

 

Total liabilities and stockholders’ equity

 

$

1,093,225

 

1,149,256

 

 

See accompanying notes to consolidated financial statements.

 

3



 

SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

Three Months Ended September 30, 2004 and 2005

(Unaudited, in thousands, except per share amounts)

 

 

 

2004

 

2005

 

Operating revenues:

 

 

 

 

 

Services

 

$

152,636

 

155,925

 

Sales

 

26,673

 

40,899

 

 

 

179,309

 

196,824

 

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

 

 

 

 

 

Services

 

84,039

 

86,956

 

Sales

 

18,450

 

30,064

 

Amortization of service contract software

 

553

 

1,696

 

 

 

103,042

 

118,716

 

Gross profit

 

76,267

 

78,108

 

Selling, general and administrative expenses

 

23,273

 

31,489

 

Depreciation and amortization

 

14,528

 

15,434

 

Operating income

 

38,466

 

31,185

 

Other deductions:

 

 

 

 

 

Interest expense

 

7,692

 

7,139

 

Other income, net

 

(313

)

(470

)

 

 

7,379

 

6,669

 

Income before income tax expense

 

31,087

 

24,516

 

Income tax expense

 

9,626

 

5,331

 

Net income

 

21,461

 

19,185

 

Convertible preferred stock dividend

 

757

 

 

Net income available to common stockholders

 

$

20,704

 

19,185

 

 

 

 

 

 

 

Basic and diluted net income per share:

 

 

 

 

 

Basic net income available to common stockholders

 

$

0.26

 

0.21

 

Diluted net income available to common stockholders

 

$

0.24

 

0.21

 

 

 

 

 

 

 

Weighted average number of shares used in per share calculations:

 

 

 

 

 

Basic shares

 

78,661

 

89,689

 

Diluted shares

 

90,777

 

92,890

 

 

See accompanying notes to consolidated financial statements.

 

4



 

SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

Nine Months Ended September 30, 2004 and 2005

(Unaudited, in thousands, except per share amounts)

 

 

 

2004

 

2005

 

Operating revenues:

 

 

 

 

 

Services

 

$

441,839

 

472,546

 

Sales

 

101,047

 

106,258

 

 

 

542,886

 

578,804

 

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

 

 

 

 

 

Services

 

237,568

 

259,637

 

Sales

 

69,861

 

75,841

 

Amortization of service contract software

 

3,584

 

5,217

 

 

 

311,013

 

340,695

 

Gross profit

 

231,873

 

238,109

 

Selling, general and administrative expenses

 

77,620

 

84,942

 

Depreciation and amortization

 

42,094

 

43,507

 

Operating income

 

112,159

 

109,660

 

Other deductions:

 

 

 

 

 

Interest expense

 

22,889

 

20,361

 

Other (income) expense, net

 

(89

)

306

 

 

 

22,800

 

20,667

 

Income before income tax expense

 

89,359

 

88,993

 

Income tax expense

 

27,969

 

24,029

 

Net income

 

61,390

 

64,964

 

Convertible preferred stock dividend

 

4,721

 

 

Net income available to common stockholders

 

$

56,669

 

64,964

 

 

 

 

 

 

 

Basic and diluted net income per share:

 

 

 

 

 

Basic net income available to common stockholders

 

$

0.83

 

0.73

 

Diluted net income available to common stockholders

 

$

0.68

 

0.70

 

 

 

 

 

 

 

Weighted average number of shares used in per share calculations:

 

 

 

 

 

Basic shares

 

67,958

 

89,118

 

Diluted shares

 

90,511

 

92,293

 

 

See accompanying notes to consolidated financial statements.

 

5



 

SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Nine Months Ended September 30, 2004 and 2005

(Unaudited, in thousands)

 

 

 

2004

 

2005

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

61,390

 

64,964

 

 

 

 

 

 

 

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

 

 

 

 

 

Depreciation and amortization

 

45,678

 

48,724

 

Change in deferred income taxes

 

5,443

 

2,802

 

Tax benefit from exercise of employee stock options

 

 

7,295

 

Non-cash interest expense

 

1,576

 

2,664

 

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

 

(31,825

)

(31,927

)

Change in short-term investments

 

2,025

 

47,475

 

Other

 

128

 

6,775

 

Total adjustments

 

23,025

 

83,808

 

Net cash provided by operating activities

 

84,415

 

148,772

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Capital expenditures

 

(17,056

)

(14,426

)

Wagering systems expenditures

 

(35,735

)

(72,391

)

Change in other assets and liabilities, net

 

(11,900

)

(26,080

)

Business acquisitions, net of cash acquired

 

(1,709

)

(24,774

)

Net cash used in investing activities

 

(66,400

)

(137,671

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Net repayments under revolving credit facility

 

 

(22,750

)

Payments on other long-term debt, net

 

(1,529

)

(6,377

)

Dividends paid

 

(4,721

)

 

Net proceeds from issuance of common stock

 

6,226

 

6,803

 

Net cash used in financing activities

 

(24

)

(22,324

)

Effect of exchange rate changes on cash and cash equivalents

 

1,290

 

(4,466

)

Increase (decrease) in cash and cash equivalents

 

19,281

 

(15,689

)

Cash and cash equivalents, beginning of period

 

37,198

 

66,120

 

Cash and cash equivalents, end of period

 

$

56,479

 

50,431

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

Interest

 

$

24,400

 

13,579

 

Income taxes

 

$

20,193

 

2,394

 

 

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 September 30, 2005, the consolidated statements of income for the three and nine months ended September 30, 2004 and 2005, and the consolidated condensed statements of cash flows for the nine months ended September 30, 2004 and 2005, have been prepared by Scientific Games Corporation (together with its consolidated subsidiaries,  the “Company”) without audit.  In the opinion of management, all adjustments necessary to present fairly the consolidated financial position of the Company at September 30, 2005 and the results of its operations for the three and nine months ended September 30, 2004 and 2005 and its cash flows for the nine months ended September 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 periods ended September 30, 2005 are not necessarily indicative of the operating results for the full year.

 

The Company has reclassified $40,150 of auction rate securities from Cash and cash equivalents to Short-term investments at September 30, 2004.  The cash flows from these investments are presented as operating cash flows for all periods presented.   Certain other reclassifications have been made to the prior year’s consolidated financial statements to conform to the current presentation.

 

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 nine months ended September 30, 2004 and 2005:

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2004

 

2005

 

2004

 

2005

 

Income (numerator)

 

 

 

 

 

 

 

 

 

Net income available to common stockholders (basic)

 

$

20,704

 

19,185

 

56,669

 

64,964

 

Add back preferred stock dividend

 

757

 

 

4,721

 

 

Income before preferred dividend available to common stockholders (diluted)

 

$

21,461

 

19,185

 

61,390

 

64,964

 

Shares (denominator)

 

 

 

 

 

 

 

 

 

Basic weighted average common shares outstanding

 

78,661

 

89,689

 

67,958

 

89,118

 

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

 

12,116

 

3,201

 

22,553

 

3,175

 

Diluted weighted average common shares outstanding

 

90,777

 

92,890

 

90,511

 

92,293

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted per share amounts

 

 

 

 

 

 

 

 

 

Basic net income per share available to common stockholders

 

$

0.26

 

0.21

 

0.83

 

0.73

 

Diluted net income per share available to common stockholders

 

$

0.24

 

0.21

 

0.68

 

0.70

 

 

7



 

The aggregate number of shares that the Company could be obligated to issue upon conversion of its $275,000 principal amount of 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 nine months ended September 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 continues 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-based 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
September 30,

 

Nine Months Ended
September 30,

 

 

 

2004

 

2005

 

2004

 

2005

 

 

 

 

 

 

 

 

 

 

 

Net income as reported

 

$

21,461

 

19,185

 

61,390

 

64,964

 

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

 

46

 

52

 

140

 

155

 

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

 

(1,287

)

(2,811

)

(3,981

)

(6,588

)

Pro forma net income

 

$

20,220

 

16,426

 

57,549

 

58,531

 

 

 

 

 

 

 

 

 

 

 

Net income available to common stockholders per basic share:

 

 

 

 

 

 

 

 

 

As reported

 

$

0.26

 

0.21

 

0.83

 

0.73

 

Pro forma

 

$

0.25

 

0.19

 

0.79

 

0.67

 

Net income available to common stockholders per diluted share:

 

 

 

 

 

 

 

 

 

As reported

 

$

0.24

 

0.21

 

0.68

 

0.70

 

Pro forma

 

$

0.23

 

0.18

 

0.65

 

0.65

 

 

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 of approximately $20,700 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 nine months ended September 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 nine months ended September 30, 2004 and 2005, and assets at September 30, 2004 and 2005, by business segment.  Corporate expenses, interest expense and other (income) expense are not allocated to business segments.

 

 

 

Three Months Ended September 30, 2004

 

 

 

Lottery
Group

 

Pari-
Mutuel
Group

 

Venue
Management
Group

 

Telecommunications
Products
Group

 

Totals

 

Service revenues

 

$

116,477

 

20,596

 

15,563

 

 

152,636

 

Sales revenues

 

9,042

 

381

 

 

17,250

 

26,673

 

Total revenues

 

125,519

 

20,977

 

15,563

 

17,250

 

179,309

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of service

 

61,285

 

11,459

 

11,295

 

 

84,039

 

Cost of sales

 

5,264

 

253

 

 

12,933

 

18,450

 

Amortization of service contract software

 

866

 

(313

)

 

 

553

 

 

 

67,415

 

11,399

 

11,295

 

12,933

 

103,042

 

Gross profit

 

58,104

 

9,578

 

4,268

 

4,317

 

76,267

 

Selling, general and administrative expenses

 

12,716

 

1,993

 

774

 

1,489

 

16,972

 

Depreciation and amortization

 

9,598

 

3,284

 

524

 

909

 

14,315

 

Segment operating income

 

$

35,790

 

4,301

 

2,970

 

1,919

 

44,980

 

Unallocated corporate expense

 

 

 

 

 

 

 

 

 

6,514

 

Consolidated operating income

 

 

 

 

 

 

 

 

 

$

38,466

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital and wagering systems expenditures

 

$

17,442

 

2,324

 

300

 

238

 

20,304

 

 

10



 

 

 

Three Months Ended September 30, 2005

 

 

 

Lottery
Group

 

Pari-
Mutuel
Group

 

Venue
Management
Group

 

Telecommunications
Products
Group

 

Totals

 

Service revenues

 

$

121,425

 

18,585

 

15,915

 

 

155,925

 

Sales revenues

 

25,044

 

2,285

 

 

13,570

 

40,899

 

Total revenues

 

146,469

 

20,870

 

15,915

 

13,570

 

196,824

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of service

 

62,369

 

12,051

 

12,536

 

 

86,956

 

Cost of sales

 

18,480

 

2,137

 

 

9,447

 

30,064

 

Amortization of service contract software

 

1,169

 

527

 

 

 

1,696

 

 

 

82,018

 

14,715

 

12,536

 

9,447

 

118,716

 

Gross profit

 

64,451

 

6,155

 

3,379

 

4,123

 

78,108

 

Selling, general and administrative expenses

 

16,590

 

5,714

 

758

 

1,267

 

24,329

 

Depreciation and amortization

 

11,383

 

2,443

 

490

 

824

 

15,140

 

Segment operating income (loss)

 

$

36,478

 

(2,002

)

2,131

 

2,032

 

38,639

 

Unallocated corporate expense

 

 

 

 

 

 

 

 

 

7,454

 

Consolidated operating income

 

 

 

 

 

 

 

 

 

$

31,185

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital and wagering systems expenditures

 

$

36,493

 

6,278

 

367

 

246

 

43,384

 

 

11



 

 

 

Nine Months Ended September 30, 2004

 

 

 

Lottery
Group

 

Pari-
Mutuel
Group

 

Venue
Management
Group

 

Telecommunications
Products
Group

 

Totals

 

Service revenues

 

$

333,511

 

60,946

 

47,382

 

 

441,839

 

Sales revenues

 

54,404

 

2,848

 

 

43,795

 

101,047

 

Total revenues

 

387,915

 

63,794

 

47,382

 

43,795

 

542,886

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of service

 

171,040

 

32,324

 

34,204

 

 

237,568

 

Cost of sales

 

35,309

 

1,686

 

 

32,866

 

69,861

 

Amortization of service contract software

 

2,512

 

1,072

 

 

 

3,584

 

 

 

208,861

 

35,082

 

34,204

 

32,866

 

311,013

 

Gross profit

 

179,054

 

28,712

 

13,178

 

10,929

 

231,873

 

Selling, general and administrative expenses

 

45,443

 

5,801

 

2,972

 

4,406

 

58,622

 

Depreciation and amortization

 

28,998

 

8,593

 

1,521

 

2,347

 

41,459

 

Segment operating income

 

$

104,613

 

14,318

 

8,685

 

4,176

 

131,792

 

Unallocated corporate expense

 

 

 

 

 

 

 

 

 

19,633

 

Consolidated operating income

 

 

 

 

 

 

 

 

 

$

112,159

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets at September 30, 2004

 

$

606,148

 

85,120

 

34,129

 

46,076

 

771,473

 

Unallocated assets at September 30, 2004

 

 

 

 

 

 

 

 

 

229,263

 

Consolidated assets at September 30, 2004

 

 

 

 

 

 

 

 

 

$

1,000,736

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital and wagering systems expenditures

 

$

42,924

 

8,414

 

909

 

544

 

52,791

 

 

12



 

 

 

Nine Months Ended September 30, 2005

 

 

 

Lottery
Group

 

Pari-
Mutuel
Group

 

Venue
Management
Group

 

Telecommunications
Products
Group

 

Totals

 

Service revenues

 

$

371,146

 

55,112

 

46,288

 

 

472,546

 

Sales revenues

 

58,138

 

6,161

 

 

41,959

 

106,258

 

Total revenues

 

429,284

 

61,273

 

46,288

 

41,959

 

578,804

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of service

 

189,439

 

34,392

 

35,806

 

 

259,637

 

Cost of sales

 

40,683

 

4,840

 

 

30,318

 

75,841

 

Amortization of service contract software

 

3,427

 

1,790

 

 

 

5,217

 

 

 

233,549

 

41,022

 

35,806

 

30,318

 

340,695

 

Gross profit

 

195,735

 

20,251

 

10,482

 

11,641

 

238,109

 

Selling, general and administrative expenses

 

46,090

 

11,171

 

2,334

 

4,153

 

63,748

 

Depreciation and amortization

 

30,959

 

7,485

 

1,461

 

2,743

 

42,648

 

Segment operating income

 

$

118,686

 

1,595

 

6,687

 

4,745

 

131,713

 

Unallocated corporate expense

 

 

 

 

 

 

 

 

 

22,053

 

Consolidated operating income

 

 

 

 

 

 

 

 

 

$

109,660

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets at September 30, 2005

 

$

773,115

 

85,638

 

35,769

 

43,785

 

938,307

 

Unallocated assets at September 30, 2005

 

 

 

 

 

 

 

 

 

210,949

 

Consolidated assets at September 30, 2005

 

 

 

 

 

 

 

 

 

$

1,149,256

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital and wagering systems expenditures

 

$

72,412

 

11,775

 

1,200

 

1,430

 

86,817

 

 

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

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2004

 

2005

 

2004

 

2005

 

Reported consolidated operating income

 

$

38,466

 

31,185

 

$

112,159

 

109,660

 

Interest expense

 

7,692

 

7,139

 

22,889

 

20,361

 

Other (income) expense

 

(313

)

(470

)

(89

)

306

 

Income before income tax expense

 

$

31,087

 

24,516

 

$

89,359

 

88,993

 

 

13



 

(4)                   Income Tax Expense

 

The effective income tax rate for the three and nine months ended September 30, 2005 of  21.7% and 27.0%, respectively, was determined using an estimated annual effective tax rate, which was less than the United States statutory rate due to lower tax rates applicable to the Company’s operations outside the United States, additional research and development credit refunds and the tax benefit of the debt restructuring completed in 2004.  The effective income tax rate for the three and nine months ended September 30, 2004 was 31.0% and 31.3%, respectively, and included the benefits arising from the realization of foreign tax credit carryovers and the extra territorial income exclusion.

 

(5)                   Comprehensive Income

 

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

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2004

 

2005

 

2004

 

2005

 

Net income

 

$

21,461

 

19,185

 

$

61,390

 

64,694

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

Foreign currency translation

 

129

 

213

 

896

 

(8,439

)

Unrealized gain on investments

 

407

 

131

 

1,134

 

1,776

 

Unrealized gain on Canadian dollar hedges

 

 

 

1,107

 

 

Other comprehensive income (loss)

 

536

 

344

 

3,137

 

(6,663

)

Comprehensive income

 

$

21,997

 

19,529

 

$

64,527

 

58,031

 

 

(6)                   Inventories

 

Inventories consist of the following:

 

 

 

December 31,
2004

 

September 30,
2005

 

Parts and work-in-process

 

$

18,655

 

22,475

 

Finished goods

 

9,407

 

14,161

 

 

 

$

28,062

 

36,636

 

 

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

 

September 30,
2005

 

Compensation and benefits

 

$

26,135

 

17,170

 

Customer advances

 

4,579

 

6,601

 

Deferred revenue

 

3,263

 

6,714

 

Accrued income taxes

 

7,149

 

12,238

 

Taxes, other than income

 

6,806

 

6,191

 

Accrued contract costs

 

10,958

 

9,262

 

Other

 

38,180

 

27,013

 

 

 

$

97,070

 

85,189

 

 

(8)                   Debt

 

At September 30, 2005, the Company had approximately $218,885 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 $31,115 in letters of credit were issued and outstanding at September 30, 2005.  At December 31, 2004, the Company’s available borrowing capacity under the revolving credit facility was $199,900.  At September 30, 2005, there was $99,250 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 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.

 

In August 2005, the Company paid cash of $8,100, including a redemption premium of $500, to redeem all remaining 2000 Notes.

 

The Company was in compliance with its debt covenants as of September 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 September 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

 

4

 

 

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 September 30, 2005

 

 

 

 

 

 

 

 

 

 

Amortizable intangible assets:

 

 

 

 

 

 

 

 

 

 

Patents

 

15

 

 

$

4,669

 

629

 

4,040

 

Customer lists

 

14

 

 

19,426

 

8,621

 

10,805

 

Customer service contracts

 

15

 

 

3,793

 

1,357

 

2,436

 

Licenses

 

4

 

 

12,210

 

6,136

 

6,074

 

Lottery contracts

 

5

 

 

32,200

 

12,049

 

20,151

 

 

 

 

 

 

72,298

 

28,792

 

43,506

 

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

 

 

 

 

$

127,211

 

39,229

 

87,982

 

 

16



 

The aggregate intangible amortization expense for the nine-month periods ended September 30, 2004 and 2005 was approximately $8,400 and $8,200, 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 September 30, 2005.  In 2005, the Company has 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 $2,927 increase in goodwill associated with the Honsel acquisition.  Although substantially complete the purchase price allocation for the recent acquisitions will be completed within one year of their respective acquisition dates.

 

Goodwill

 

Lottery
Group

 

Pari-
Mutuel
Group

 

Venue
Management
Group

 

Telecommunications
Products Group

 

Totals

 

Balance at December 31, 2004

 

$

311,444

 

487

 

 

 

311,931

 

Additions:

 

26,534

 

 

87

 

 

26,621

 

Balance at September 30, 2005

 

$

337,978

 

487

 

87

 

 

338,552

 

 

(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, as of September 30, 2005 the Company has funded approximately $1,900.

 

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 nine month periods ended September 30, 2004 and 2005:

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2004

 

2005

 

2004

 

2005

 

Components of net periodic pension benefit cost:

 

 

 

 

 

 

 

 

 

Service cost

 

$

676

 

814

 

$

2,377

 

2,441

 

Interest cost

 

641

 

788

 

1,923

 

2,363

 

Expected return on plan assets

 

(448

)

(625

)

(1,344

)

(1,876

)

Actuarial loss

 

295

 

419

 

885

 

1,258

 

Net amortization and deferral

 

13

 

16

 

40

 

48

 

Amortization of prior service costs

 

192

 

192

 

576

 

576

 

Net periodic cost

 

$

1,369

 

1,604

 

$

4,457

 

4,810

 

 

(11)            Stockholders’ Equity

 

At September 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, the Company 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

 

The Company has been advised that in early November 2005, the North Carolina Secretary of State referred to the North Carolina Attorney General for investigation alleged misdemeanor violations of the North Carolina Lobbying Act by the Company’s subsidiary Scientific Games International, Inc. and one of its employees.  The Company is cooperating with the investigation and, while no assurance can be given, believes that the inquiry will conclude that the Company did not engage in any wrongdoing.

 

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 the Company’s 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 100% 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 100% owned foreign subsidiaries and the non-100% owned domestic and foreign subsidiaries (the “Non-Guarantor Subsidiaries”) as of December 31, 2004 and September 30, 2005 and for the three and nine months ended September 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

 

 

74,438

 

32,592

 

(39

)

106,991

 

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

 

954,155

 

141,346

 

(931,916

)

1,093,225

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current installments of long-term debt

 

$

1,000

 

 

3,370

 

 

4,370

 

Current liabilities

 

8,672

 

91,574

 

37,426

 

1,200

 

138,872

 

Long-term debt, excluding current installments

 

603,645

 

 

2,863

 

 

606,508

 

Other non-current liabilities

 

(5,486

)

31,634

 

16,699

 

64

 

42,911

 

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

 

954,155

 

141,346

 

(931,916

)

1,093,225

 

 

20



 

SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES

SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET

September 30, 2005

(unaudited, in thousands)

 

 

 

Parent
Company

 

Guarantor
Subsidiaries

 

Non-
Guarantor
Subsidiaries

 

Eliminating
Entries

 

Consolidated

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

24,190

 

(2,966

)

29,206

 

1

 

50,431

 

Short-term investments

 

5,050

 

 

 

 

5,050

 

Accounts receivable, net

 

 

87,841

 

31,077

 

(39

)

118,879

 

Inventories

 

 

27,079

 

9,982

 

(425

)

36,636

 

Other current assets

 

5,617

 

18,229

 

28,081

 

30

 

51,957

 

Property and equipment, net

 

4,677

 

235,700

 

85,128

 

(2,256

)

323,249

 

Investment in subsidiaries

 

847,051

 

187,523

 

(35,236

)

(999,338

)

 

Goodwill

 

183

 

300,015

 

38,354

 

 

338,552

 

Intangible assets

 

 

74,064

 

13,918

 

 

87,982

 

Other assets

 

57,018

 

62,161

 

28,213

 

(10,872

)

136,520

 

Total assets

 

$

943,786

 

989,646

 

228,723

 

(1,012,899

)

1,149,256

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

Current installments of long-term debt

 

$

1,000

 

 

5,289

 

 

6,289

 

Current liabilities

 

11,616

 

76,886

 

50,461

 

(113

)

138,850

 

Long-term debt, excluding current installments

 

573,250

 

 

2,616

 

 

575,866

 

Other non-current liabilities

 

5,625

 

28,826

 

18,495

 

6

 

52,952

 

Intercompany balances

 

(127,275

)

64,091

 

69,007

 

(5,823

)

 

Stockholders’ equity

 

479,570

 

819,843

 

82,855

 

(1,006,969

)

375,299

 

Total liabilities and stockholders’ equity

 

$

943,786

 

989,646

 

228,723

 

(1,012,899

)

1,149,256

 

 

21



 

SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES

SUPPLEMENTAL CONDENSED STATEMENT OF INCOME

Three Months Ended September 30, 2004

(unaudited, in thousands)

 

 

 

Parent
Company

 

Guarantor
Subsidiaries

 

Non-
Guarantor
Subsidiaries

 

Eliminating
Entries

 

Consolidated

 

Operating revenues

 

$

 

137,410

 

45,312

 

(3,413

)

179,309

 

Operating expenses

 

 

74,813

 

31,106

 

(3,430

)

102,489

 

Amortization of service contract software

 

 

478

 

75

 

 

553

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

 

62,119

 

14,131

 

17

 

76,267

 

Selling, general and administrative expenses

 

6,301

 

13,040

 

3,935

 

(3

)

23,273

 

Depreciation and amortization

 

213

 

10,900

 

3,415

 

 

14,528

 

Operating income (loss)

 

(6,514

)

38,179

 

6,781

 

20

 

38,466

 

Interest expense

 

7,318

 

318

 

1,332

 

(1,276

)

7,692

 

Other (income) expense

 

(229

)

(1,526

)

357

 

1,085

 

(313

)

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

 

(13,603

)

39,387

 

5,092

 

211

 

31,087

 

Equity in income of subsidiaries

 

41,689

 

 

 

(41,689

)

 

Income tax expense

 

6,625

 

1,251

 

1,750

 

 

9,626

 

Net income

 

$

21,461

 

38,136

 

3,342

 

(41,478

)

21,461

 

 

SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES

SUPPLEMENTAL CONDENSED STATEMENT OF INCOME

Three Months Ended September 30, 2005

(unaudited, in thousands)

 

 

 

Parent
Company

 

Guarantor
Subsidiaries

 

Non-
Guarantor
Subsidiaries

 

Eliminating
Entries

 

Consolidated

 

Operating revenues

 

$

 

152,032

 

48,010

 

(3,218

)

196,824

 

Operating expenses

 

 

85,843

 

34,395

 

(3,218

)

117,020

 

Amortization of service contract software

 

 

1,659

 

37

 

 

1,696

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

 

64,530

 

13,578

 

 

78,108

 

Selling, general and administrative expenses

 

7,148

 

16,444

 

7,917

 

(20

)

31,489

 

Depreciation and amortization

 

294

 

11,423

 

3,717

 

 

15,434

 

Operating income (loss)

 

(7,442

)

36,663

 

1,944

 

20

 

31,185

 

Interest expense

 

6,881

 

118

 

140

 

 

7,139

 

Other (income) expense

 

(1,242

)

(3,475

)

4,246

 

1

 

(470

)

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

 

(13,081