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 March 31, 2006

 

 

 

 

 

OR

 

 

 

o

 

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

 

 

 

 

 

For the transition period from          to          

 

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 a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  ý

 

Accelerated filer  o

 

Non-accelerated filer  o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange 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 May 8, 2006:

Class A Common Stock:  91,142,751

Class B Common Stock:  None

 

 



 

SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

AND OTHER INFORMATION

 

THREE MONTHS ENDED MARCH 31, 2006

 

 

PART I.

FINANCIAL INFORMATION

 

 

 

 

Item 1.

Consolidated Financial Statements:

 

 

 

 

 

Balance Sheets as of December 31, 2005 and March 31, 2006

 

 

 

 

 

Statements of Income for the Three Months Ended March 31, 2005 and 2006

 

 

 

 

 

Condensed Statements of Cash Flows for the Three Months Ended March 31, 2005 and 2006

 

 

 

 

 

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 6.

Exhibits

 

 

2



 

SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited, in thousands, except per share amounts)

 

 

 

December 31,
2005

 

March 31,
2006

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

38,942

 

37,205

 

Accounts receivable, net of allowance for doubtful accounts of $6,149 and $6,186 at December 31, 2005 and March 31, 2006, respectively

 

129,250

 

141,060

 

Inventories

 

40,148

 

43,200

 

Deferred income taxes

 

14,242

 

17,486

 

Prepaid expenses, deposits and other current assets

 

31,971

 

35,886

 

Total current assets

 

254,553

 

274,837

 

Property and equipment, at cost

 

666,469

 

701,747

 

Less accumulated depreciation

 

300,250

 

313,129

 

Net property and equipment

 

366,219

 

388,618

 

Goodwill, net

 

339,169

 

414,872

 

Operating rights, net

 

14,020

 

14,321

 

Other intangible assets, net

 

73,269

 

91,898

 

Other assets and investments

 

125,283

 

143,279

 

Total assets

 

$

1,172,513

 

1,327,825

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Current installments of long-term debt

 

$

6,055

 

5,798

 

Accounts payable

 

54,223

 

45,982

 

Accrued liabilities

 

80,305

 

122,148

 

Interest payable

 

779

 

4,430

 

Total current liabilities

 

141,362

 

178,358

 

Deferred income taxes

 

9,759

 

9,344

 

Other long-term liabilities

 

59,879

 

74,382

 

Long-term debt, excluding current installments

 

574,680

 

640,387

 

Total liabilities

 

785,680

 

902,471

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

Class A common stock, par value $0.01 per share, 199,300 shares authorized, 89,869 and 91,110 shares outstanding at December 31, 2005 and March 31, 2006, respectively

 

899

 

911

 

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

 

 

 

Additional paid-in capital

 

425,750

 

441,924

 

Accumulated losses

 

(33,309

)

(10,939

)

Treasury stock, at cost

 

(9,556

)

(9,556

)

Accumulated other comprehensive income

 

3,049

 

3,014

 

Total stockholders’ equity

 

386,833

 

425,354

 

Total liabilities and stockholders’ equity

 

$

1,172,513

 

1,327,825

 

 

See accompanying notes to consolidated financial statements.

 

3



 

SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

Three Months Ended March 31, 2005 and 2006

 (Unaudited, in thousands, except per share amounts)

 

 

 

2005

 

2006

 

Operating revenues:

 

 

 

 

 

Services

 

$

155,754

 

176,960

 

Sales

 

28,802

 

31,169

 

 

 

184,556

 

208,129

 

Operating expenses

 

 

 

 

 

Cost of services (exclusive of depreciation and amortization)

 

85,249

 

94,948

 

Cost of sales (exclusive of depreciation and amortization)

 

20,274

 

24,544

 

Selling, general and administrative expenses

 

27,728

 

32,392

 

Depreciation and amortization

 

14,475

 

19,292

 

Operating income

 

36,830

 

36,953

 

Other deductions:

 

 

 

 

 

Interest expense

 

6,410

 

7,202

 

Equity in net (income) loss in joint ventures

 

543

 

(1,576

)

Other income, net

 

(144

)

(643

)

 

 

6,809

 

4,983

 

Income before income tax expense

 

30,021

 

31,970

 

Income tax expense

 

9,006

 

9,600

 

Net income

 

$

21,015

 

22,370

 

 

 

 

 

 

 

Basic and diluted net income per share:

 

 

 

 

 

Basic net income available to common stockholders

 

$

0.24

 

0.25

 

Diluted net income available to common stockholders

 

$

0.23

 

0.24

 

 

 

 

 

 

 

Weighted average number of shares used in per share calculations:

 

 

 

 

 

Basic shares

 

88,616

 

90,166

 

Diluted shares

 

91,968

 

93,172

 

 

See accompanying notes to consolidated financial statements.

 

4



 

SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Three Months Ended March 31, 2005 and 2006

(Unaudited, in thousands)

 

 

 

2005

 

2006

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

21,015

 

22,370

 

 

 

 

 

 

 

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

 

 

 

 

 

Depreciation and amortization

 

14,475

 

19,292

 

Change in deferred income taxes

 

5,322

 

(2,878

)

Share-based compensation

 

 

4,495

 

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

 

19,861

 

(8,402

)

Other

 

1,473

 

(713

)

Net cash provided by operating activities

 

62,146

 

34,164

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Capital expenditures

 

(6,154

)

(4,239

)

Wagering systems expenditures

 

(17,134

)

(31,248

)

Other intangible assets and software expenditures

 

(5,351

)

(17,320

)

Change in other assets and liabilities, net

 

(2,441

)

(2,888

)

Business acquisitions, net of cash acquired

 

(2,927

)

(57,564

)

Net cash used in investing activities

 

(34,007

)

(113,259

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Net borrowings (repayments) under revolving credit facility

 

(22,000

)

66,000

 

Long-term debt, net

 

(473

)

(564

)

Excess tax benefit from equity-based compensation plan

 

 

2,814

 

Net proceeds from issuance of common stock

 

2,778

 

8,602

 

Net cash provided by (used in) financing activities

 

(19,695

)

76,852

 

Effect of exchange rate changes on cash and cash equivalents

 

(1,678

)

506

 

Increase (decrease) in cash and cash equivalents

 

6,766

 

(1,737

)

Cash and cash equivalents, beginning of period

 

66,120

 

38,942

 

Cash and cash equivalents, end of period

 

$

72,886

 

37,205

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

Interest

 

$

2,172

 

2,490

 

Income taxes, net of refunds

 

$

1,709

 

396

 

Liabilities assumed in a business combination

 

$

 

34,073

 

 

See accompanying notes to consolidated financial statements.

 

5



 

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 March 31, 2006, the consolidated statements of income for the three months ended March 31, 2005 and 2006, and the consolidated condensed statements of cash flows for the three months ended March 31, 2005 and 2006, 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 March 31, 2006 and the results of its operations for the three months ended March 31, 2005 and 2006 and its cash flows for the three months ended March 31, 2005 and 2006 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 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 2005 Annual Report on Form 10-K. The results of operations for the period ended March 31, 2006 are not necessarily indicative of the operating results for the full year.

 

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 months ended March 31, 2005 and 2006:

 

 

 

Three months ended March 31,

 

 

 

2005

 

2006

 

Income (numerator)

 

 

 

 

 

Net income (basic)

 

$

21,015

 

22,370

 

Shares (denominator)

 

 

 

 

 

Basic weighted average common shares outstanding

 

88,616

 

90,166

 

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

 

3,352

 

3,006

 

Diluted weighted average common shares outstanding

 

$

91,968

 

93,172

 

 

 

 

 

 

 

Basic and diluted per share amounts

 

 

 

 

 

Basic net income per share available to common stockholders

 

$

0.24

 

0.25

 

Diluted net income per share available to common stockholders

 

$

0.23

 

0.24

 

 

The aggregate number of shares that the Company could be obligated to issue upon conversion of its $275,000, 0.75% convertible subordinated notes 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 quarter ended March 31, 2006 and 2005 calculation, as they were anti-dilutive.

 

6



 

(2)            Acquisitions

 

On March 22, 2006, the Company acquired the online lottery assets of Swedish firm EssNet AB (“EssNet”) which specializes in online lottery systems and terminals to run online lotteries, sports betting, instant tickets and mobile games on a national level. EssNet’s lottery customers include seven states in Germany, the national lotteries of Hungary and Norway, Golden Casket and Tattersall’s Lottery in Australia, and other national lotteries.  The Company expects that its acquisition of EssNet will enable it to further expand into the European lottery market.  The purchase price was approximately $60 million in cash.  The acquisition was recorded using the purchase method of accounting.  The operating results of EssNet are included in the Lottery Systems segment and have been included in the Company’s statements of operations since the date of acquisition.  The majority of the preliminary estimate of goodwill of approximately $75 million from the acquisition of EssNet is 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 were included in the preliminary purchase price allocation. The acquisition of EssNet was not material to the Company’s operations.

 

In conjunction with the purchase of EssNet, the Company has a plan to close certain operating locations as part of the integration of EssNet.  The Company has recorded approximately $34 million in liabilities, primarily related to involuntary employee terminations, termination of leases and termination of service contracts that will result from the integration.

 

(3)            Operating Segment and Geographic Information

 

SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information” (“SFAS No. 131”), defines operating segments to be those components of a business for which separate financial information is available that is regularly evaluated by management in making operating decisions and in assessing performance. SFAS No. 131 further requires that segment information be presented consistently with the basis and manner in which management internally disaggregates financial information for the purposes of assisting in making internal operating decisions.

 

In late 2005, we determined that our previously reported segments consisting of Lottery, Pari-mutuel, Venue Management and Telecommunications Products no longer reflected the way we manage the business. Beginning this quarter, we are reporting our business in three segments – Printed Products, Lottery Systems and Diversified Gaming. The Printed Products segment includes the instant lottery ticket business and the pre-paid phone card business (formerly the Telecommunications Product Group). The Lottery Systems segment includes our online lottery business. The Diversified Gaming segment includes the racing systems business (formerly the Pari-mutuel Group) and the off-track wagering business (formerly the Venue Management Group). All prior period amounts have been restated to conform to the new structure.

 

The Printed Products Group provides instant ticket and related services that includes ticket design and manufacturing as well as value-added services, including game design, sales and marketing support, inventory management and warehousing and fulfillment services. It also provides lotteries with over 80 licensed brand products. Its printed products include prepaid phone cards for cellular phone service providers. The Lottery Systems Group offers online, instant and video lottery products and online and instant ticket validation systems. Its business includes the supply of transaction processing software for the accounting and validation of both instant and online lottery games, point-of-sale terminal hardware sales, central site computers and communication hardware sales, and ongoing support and maintenance for these products. The Diversified Gaming Group provides computerized wagering systems and services such as race simulcasting and communications services and telephone and internet account wagering to the pari-mutuel wagering industry. It owns and operates licensed pari-mutuel wagering facilities in Connecticut, Maine and the Netherlands.

 

7



 

The following tables represent revenues, profits, depreciation, amortization, and capital expenditures for the three months ended March 31, 2005 and 2006, by current reportable segments. Corporate expenses, interest expense and other (income) deductions are not allocated to the reportable segments. All prior period amounts have been restated to reflect the current reportable segments.

 

 

 

Three Months Ended March 31, 2005

 

 

 

Printed
Products
Group

 

Lottery
Systems
Group

 

Diversified
Gaming
Group

 

Totals

 

Service revenues

 

$

83,517

 

39,874

 

32,363

 

155,754

 

Sales revenues

 

18,629

 

9,816

 

357

 

28,802

 

Total revenues

 

102,146

 

49,690

 

32,720

 

184,556

 

 

 

 

 

 

 

 

 

 

 

Cost of services (exclusive of depreciation and amortization)

 

43,159

 

20,730

 

21,360

 

85,249

 

Cost of sales (exclusive of depreciation and amortization)

 

13,508

 

6,351

 

415

 

20,274

 

Selling, general and administrative expenses

 

10,405

 

6,713

 

3,915

 

21,033

 

Depreciation and amortization

 

4,349

 

6,513

 

3,338

 

14,200

 

Segment operating income

 

$

30,725

 

9,383

 

3,692

 

43,800

 

Unallocated corporate expense

 

 

 

 

 

 

 

6,970

 

Consolidated operating income

 

 

 

 

 

 

 

$

36,830

 

 

 

 

 

 

 

 

 

 

 

Assets at March 31, 2005

 

$

425,034

 

329,849

 

111,693

 

866,576

 

Unallocated assets at March 31, 2005

 

 

 

 

 

 

 

220,366

 

Consolidated assets at March 31, 2005

 

 

 

 

 

 

 

$

1,086,942

 

 

 

 

 

 

 

 

 

 

 

Capital and wagering systems expenditures

 

$

1,346

 

19,585

 

2,357

 

23,288

 

 

8



 

 

 

Three Months Ended March 31, 2006

 

 

 

Printed
Products
Group

 

Lottery
Systems
Group

 

Diversified
Gaming
Group

 

Totals

 

Service revenues

 

$

93,579

 

52,717

 

30,664

 

176,960

 

Sales revenues

 

14,121

 

14,699

 

2,349

 

31,169

 

Total revenues

 

107,700

 

67,416

 

33,013

 

208,129

 

 

 

 

 

 

 

 

 

 

 

Cost of services (exclusive of depreciation and amortization)

 

46,291

 

27,673

 

20,984

 

94,948

 

Cost of sales (exclusive of depreciation and amortization)

 

10,773

 

11,592

 

2,179

 

24,544

 

Selling, general and administrative expenses

 

11,356

 

7,449

 

2,441

 

21,246

 

Depreciation and amortization

 

5,185

 

10,493

 

3,396

 

19,074

 

Segment operating income

 

$

34,095

 

10,209

 

4,013

 

48,317

 

Unallocated corporate expense

 

 

 

 

 

 

 

11,364

 

Consolidated operating income

 

 

 

 

 

 

 

$

36,953

 

 

 

 

 

 

 

 

 

 

 

Assets at March 31, 2006

 

$

478,491

 

526,284

 

133,491

 

1,138,266

 

Unallocated assets at March 31, 2006

 

 

 

 

 

 

 

189,559

 

Consolidated assets at March 31, 2006

 

 

 

 

 

 

 

$

1,327,825

 

 

 

 

 

 

 

 

 

 

 

Capital and wagering systems expenditures

 

$

5,658

 

22,898

 

6,725

 

35,281

 

 

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

 

 

 

Three Months Ended March 31,

 

 

 

2005

 

2006

 

Reported consolidated operating income

 

$

36,830

 

36,953

 

Interest expense

 

6,410

 

7,202

 

Equity in net (income) loss of joint ventures

 

543

 

(1,576

)

Other income, net

 

(144

)

(643

)

Income before income tax expense

 

$

30,021

 

31,970

 

 

9



 

The following table provides information on our geographic regions for the periods indicated:

 

 

 

Three Months Ended March 31,

 

 

 

2005

 

2006

 

Geographic Segments

 

 

 

 

 

Service and Sales Revenue:

 

 

 

 

 

North America

 

$

132,514

 

145,806

 

Europe, other than United Kingdom

 

31,380

 

44,574

 

United Kingdom

 

4,191

 

4,390

 

Other

 

16,471

 

13,359

 

 

 

$

184,556

 

208,129

 

Long-lived assets (excluding identifiable intangibles):

 

 

 

 

 

North America

 

$

226,688

 

298,416

 

Europe, other than United Kingdom

 

13,426

 

41,857

 

United Kingdom

 

30,820

 

27,444

 

Other

 

12,409

 

20,901

 

 

 

$

283,343

 

388,618

 

 

(4)            Income Tax Expense

 

The effective tax rate for the three month period ended March 31, 2006 of 30% 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 our operations outside the United States and the tax benefit of the 2004 debt restructuring.  The effective income tax rate for the three months ended March 31, 2005 was approximately 30%, which differed from the federal statutory rate of 35% due primarily to benefits from the tax restructuring plan implemented in 2004.

 

(5)            Comprehensive Income

 

The following presents a reconciliation of net income to comprehensive income for the three-month periods ended March 31, 2005 and 2006:

 

 

 

Three Months Ended
March 31,

 

 

 

2005

 

2006

 

Net income

 

$

21,015

 

22,370

 

Other comprehensive income (loss):

 

 

 

 

 

Foreign currency translation

 

(3,390

)

740

 

Unrealized loss on investments

 

(11

)

(775

)

Other comprehensive loss

 

(3,401

)

(35

)

Comprehensive income

 

$

17,614

 

22,335

 

 

10



 

(6)            Inventories

 

Inventories consist of the following:

 

 

 

December 31,
2005

 

March 31,
2006

 

Parts and work-in-process

 

$

20,694

 

25,345

 

Finished goods

 

19,454

 

17,855

 

 

 

$

40,148

 

43,200

 

 

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.

 

(7)            Accrued Liabilities

 

Accrued liabilities consist of the following:

 

 

 

December 31,
2005

 

March 31,
2006

 

Compensation and benefits

 

$

21,992

 

14,219

 

Customer advances

 

6,667

 

1,277

 

Deferred revenue

 

8,873

 

11,133

 

Accrued income taxes

 

 

10,891

 

Taxes, other than income

 

4,489

 

10,176

 

Accrued licenses

 

5,396

 

4,218

 

Liabilites assumed in a business combination

 

 

34,073

 

Accrued contract costs

 

9,461

 

10,207

 

Other

 

23,427

 

25,954

 

 

 

$

80,305

 

122,148

 

 

11



 

(8)            Long-Term Debt

 

On March 31, 2006, the Company amended (the “Amendment”) its existing credit agreement dated as of December 23, 2004, as amended (the “2004 Credit Agreement”) to provide for an additional $100 million senior secured term loan (the “Term Loan C), to increase our existing revolving credit facility by $50 million, and to make certain other changes to the 2004 Credit Agreement (the 2004 Credit Agreement and the Amendment are collectively referred to as the “Amended and Restated Credit Agreement”). This Amendment became effective on April 3, 2006. The proceeds from the Term Loan C were used to finance the acquisition of The Global Draw, Limited, a supplier of fixed odds betting terminals and systems and interactive betting systems, and certain related companies. The interest rate with respect to the Term Loan C will vary, depending upon our consolidated leverage ratio, from 75 basis points to 150 basis points above LIBOR for eurocurrency loans and from zero basis points to 50 basis points above the higher of (i) the prime rate or (ii) the Federal Funds Effective Rate plus 0.50%, for base rate loans. We paid a commitment fee with respect to the Term Loan C commitment from the effective date of the Amended and Restated Credit Agreement until the date of funding or termination of such commitment at the rate of 0.25% per annum on the Term Loan C commitment. The Company paid $0.4 million to certain financial institutions for the Amendment plus legal fees. The Amended and Restated Credit Agreement will terminate on December 23, 2009.

 

Effective April 3, 2006, the Company had approximately $177,123 available for borrowing under the Company’s revolving credit facility and $100,000 available under the new Term Loan C, both of which are under the Amended and Restated Credit Agreement.   There were $66,000 of borrowings and $56,877 in letters of credit outstanding under the revolving credit facility at March 31, 2006. At December 31, 2005, the Company’s available borrowing capacity under the revolving credit facility was $219,699.

 

The Amended and Restated 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 certain transactions with affiliates, 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 Amended and Restated 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 Amended and Restated 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 Generally Accepted Accounting Principles (“GAAP”) as of the last day of the fiscal quarter for which such determination is being made to (y) Consolidated Earnings Before Interest, Taxes, Depreciation and Amortization (“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) 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. In certain cases, we have a limited ability to reduce the amount of Consolidated Fixed Charges used in the calculation.

 

       A maximum Consolidated Senior Debt Ratio of 2.00, which will be reduced according to the terms of the Amended and Restated 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, 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.

 

       A minimum Consolidated Interest Coverage Ratio of 3.50 until December 2009. Consolidated Interest Coverage Ratio means, as of any date of determination, the ratio computed for the Company’s four most recent fiscal quarters of (x) EBITDA to (y) the total interest expense less non-cash amortization costs included in interest expense.

 

12



 

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) provisions for taxes based on income, (iv) total

 

13



 

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 covenants as of March 31, 2006.

 

(9)            Goodwill and Intangible Assets

 

The following disclosure presents certain information regarding the Company’s acquired intangible assets as of December 31, 2005 and March 31, 2006. 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, 2005

 

 

 

 

 

 

 

 

 

Amortizable intangible assets:

 

 

 

 

 

 

 

 

 

Patents

 

15

 

$

5,201

 

811

 

4,390

 

Customer lists

 

14

 

18,813

 

8,804

 

10,009

 

Customer service contracts

 

15

 

3,793

 

1,392

 

2,401

 

Licenses

 

4

 

14,458

 

6,906

 

7,552

 

Lottery contracts

 

5

 

31,902

 

13,441

 

18,461

 

 

 

 

 

74,167

 

31,354

 

42,813

 

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

 

 

 

$

129,080

 

41,791

 

87,289

 

 

 

 

 

 

 

 

 

 

 

Balance at March 31, 2006

 

 

 

 

 

 

 

 

 

Amortizable intangible assets:

 

 

 

 

 

 

 

 

 

Patents

 

15

 

$

5,068

 

816

 

4,252

 

Customer lists

 

14

 

18,873

 

9,045

 

9,828

 

Customer service contracts

 

15

 

3,793

 

1,566

 

2,227

 

Licenses

 

4

 

25,286

 

7,693

 

17,593

 

Intellectual property

 

5

 

2,904

 

169

 

2,735

 

Lottery contracts

 

5

 

39,606

 

14,799

 

24,807

 

 

 

 

 

95,530

 

34,088

 

61,442

 

Non-amortizable intangible assets:

 

 

 

 

 

 

 

 

 

Tradename

 

 

 

32,574

 

2,118

 

30,456

 

Connecticut off-track betting system operating right

 

 

 

22,640

 

8,319

 

14,321

 

 

 

 

 

55,214

 

10,437

 

44,777

 

Total intangible assets

 

 

 

$

150,744

 

44,525

 

106,219

 

 

14



 

The aggregate intangible amortization expense for the three-month periods ended March 31, 2005 and 2006 was approximately $2,700.

 

The table below reconciles the change in the carrying amount of goodwill, by reporting unit, which is the same as reportable segment, for the period from January 1, 2006 to March 31, 2006. In 2006, the Company recorded (a) a $489 increase in goodwill associated with the final purchase price valuation and allocation adjustments of  Promo-Travel International, Inc.,  (b) a $314 decrease in goodwill associated with the acquisition of the remaining 35% minority interest in SGLA, (c) a $75,485 increase in goodwill in connection with the acquisition of the online assets of EssNet and (d) a $43 increase in goodwill for the acquisition of an off-track betting operation.

 

Goodwill

 

Printed
Products
Group

 

Lottery
Systems
Group

 

Diversified
Gaming
Group

 

Totals

 

Balance at December 31, 2005

 

$

243,439

 

95,115

 

615

 

339,169

 

Adjustments:

 

175

 

75,485

 

43

 

75,703

 

Balance at March 31, 2006

 

$

243,614

 

170,600

 

658

 

414,872

 

 

(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 permissible by the respective tax authorities. The Company estimates that the amount to be funded in year 2006 will approximate $2,500.

 

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 following table sets forth the combined amount of net periodic benefit cost recognized for the three month periods ended March 31, 2005 and 2006:

 

 

 

Three Months Ended
March 31,

 

 

 

2005

 

2006

 

Components of net periodic pension benefit cost:

 

 

 

 

 

Service cost

 

$

814

 

547

 

Interest cost

 

788

 

551

 

Expected return on plan assets

 

(625

)

(562

)

Actuarial loss

 

419

 

275

 

Net amortization and deferral

 

16

 

20

 

Amortization of prior service costs

 

192

 

 

Net periodic cost

 

$

1,604

 

831

 

 

15



 

The Company previously disclosed in its financial statements for the year ended December 31, 2005, that it expected to contribute approximately $2,500 to its defined benefit pension plans in 2006. As of March 31, 2006, approximately $500 and $10 of contributions to the U.K. Plan and U.S. Plan, respectively, have been made. The Company presently anticipates contributing an additional $1,990 of contributions to its defined benefit pension plans, in 2006, for a total of $2,500.

 

(11)     Stockholders’ Equity

 

At March 31, 2006, 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.

 

(12)     Stock-Based Compensation

 

On January 1, 2006, we adopted, using the modified prospective application, Statement of Financial Accounting Standards No. 123(revised 2004), “Share-Based Payment” (“SFAS 123(R)”). SFAS 123(R) requires all share-based payments to employees, including grants of employee stock options and shares purchased under an employee stock purchase plan (if certain parameters are not met), to be recognized in the financial statements based on their fair values and did not change the accounting guidance for share-based payment transactions with parties other than employees provided in SFAS 123, “Accounting for Stock Based Compensation” (“SFAS 123”), as originally issued and Emerging Issues Task Force (“EITF”) 96-18, “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services.” SFAS 123(R) did not address the accounting for employee share ownership plans, which are subject to Statement of Position (“SOP”) 93-6, “Employers’ Accounting for Employee Stock Ownership Plans.”  Under the modified prospective method our prior interim period and prior fiscal year financial statements will not reflect any restated amounts for the adoption of SFAS 123(R).

 

Upon our adoption of SFAS 123(R), we began recording compensation cost related to the continued vesting of all stock options that remained unvested as of January 1, 2006, as well as for all stock options granted, modified or cancelled after our adoption date. The compensation cost to be recorded is based on the fair value at the grant date. The adoption of SFAS 123(R) did not have an effect on our recognition of compensation expense relating to the vesting of restricted stock grants.

 

Prior to the adoption of SFAS 123(R), cash flows resulting from the tax benefit related to equity-based compensation was presented in our operating cash flows, along with other tax cash flows, in accordance with the provisions of EITF 00-15, “Classification in the Statement of Cash Flows of the Income Tax Benefit Received by a Company upon Exercise of a Nonqualified Employee Stock Option,” (“EITF 00-15”). SFAS 123(R) superseded EITF 00-15, amended SFAS 95, “Statement of Cash Flows,” and requires tax benefits relating to excess equity-based compensation deductions to be prospectively presented in our statement of cash flows as financing cash inflows.

 

The effect of adopting SFAS 123(R) on our income from operations, income before income taxes, net income, net cash provided by operating activities, net cash provided by financing activities, and basic and diluted earnings per share for the three-month period ended March 31, 2006, is as follows (in thousands, except per share data):

 

16



 

 

 

Three Months Ended
Mar 31, 2006

 

Income from operations, as reported

 

$

36,953

 

Effect of adopting SFAS 123(R) on income from operations

 

3,691

 

Income from operations

 

$

40,644

 

 

 

 

 

Income before income taxes, as reported

 

$

31,970

 

Effect of adopting SFAS 123(R) on income before income taxes

 

3,691

 

Income before income taxes

 

$

35,661

 

 

 

 

 

Net income, as reported

 

$

22,370

 

Effect of adopting SFAS 123(R) on net income

 

2,326

 

Net income

 

$

24,696

 

 

 

 

 

Net cash provided by operating activities, as reported

 

$

34,164

 

Effect of adopting SFAS 123(R) on net cash provided by operating activities

 

2,326

 

Net cash provided by operating activities

 

$

36,490

 

 

 

 

 

Net cash provided by financing activities, as reported

 

$

76,852

 

Effect of adopting SFAS 123(R) on net cash provided by financing activities

 

(2,326

)

Net cash provided by financing activities

 

$

74,526

 

 

 

 

 

Net income per share, as reported:

 

 

 

Basic

 

$

0.25

 

Diluted

 

$

0.24

 

 

 

 

 

Effect of adopting SFAS 123(R) on net income per share, basic and diluted

 

$

0.03

 

 

 

 

 

Net income per share:

 

 

 

Basic

 

$

0.28

 

Diluted

 

$

0.27

 

 

Prior to our adoption of SFAS 123(R), we accounted for equity-based compensation under the provisions and related interpretations of Accounting Principles Board (“APB”) No. 25, “Accounting for Stock Issued to Employees” (“APB 25”). Accordingly, we were not required to record compensation expense when stock options were granted to our employees as long as the exercise price was not less than the fair market value of the stock at the grant date. Also, we were not required to record compensation expense when we issued common stock under our Employee Stock Purchase Plan as long as the purchase price was not less than 85% of the fair market value of our common stock on the grant date. In October 1995, FASB issued SFAS 123, which allowed us to continue to follow the guidelines of APB 25, but required pro-forma disclosures of net income and earnings per share as if we had adopted the provisions of SFAS 123. In December 2002, the FASB issued SFAS 148, “Accounting for Stock-Based Compensation — Transition and Disclosure — an Amendment of FASB 123,” which provided alternative methods of transition for an entity that voluntarily changes to the fair value based method of accounting for equity-based employee compensation. We continued to account for equity-based compensation under the provisions of APB 25 using the intrinsic value method.

 

17



 

Had compensation cost for our equity-based compensation plans been determined based on the fair value at the grant dates for awards under those plans in accordance with the provisions of SFAS 123, our net income and net income per share for the three-month period ended March 31, 2005, would have been as follows (in thousands, except per share data):

 

 

 

Three Months Ended
March 31, 2005

 

Net income, as reported

 

$

21,015

 

Equity-based compensation included in net income, as reported

 

51

 

Equity-based compensation under SFAS 123

 

(1,871

)

Pro forma net income

 

$

19,195

 

 

 

 

 

Reported net income per share:

 

 

 

Basic

 

$

0.24

 

Diluted

 

$

0.23

 

 

 

 

 

Pro forma net income per share:

 

 

 

Basic

 

$

0.22

 

Diluted

 

$

0.21

 

 

The Company grants stock options to employees and directors under the Company’s equity incentive plans at not less than the fair market value of the stock at the date of grant. Options granted over the last several years have been exercisable in four or five equal installments beginning on the first anniversary of the date of grant with a maximum term of ten years.

 

Stock Options

 

A summary of the changes in stock options outstanding under the Company’s equity-based compensation plans during the quarter ended March 31, 2006 is presented below:

 

 

 

Number of
Options

 

Weighed
Average
Remaining
Contract
Term
(Years)

 

Weighed
Average
Exercise
Price

 

Aggregate
Intrinsic
Value

 

 

 

(In thousand except share price and year)

 

 

 

 

 

 

 

 

 

 

 

Options outstanding at December 31, 2005

 

9,701

 

 

 

$

15.52

 

$

 

Granted

 

405

 

 

 

31.76

 

 

Exercised

 

(1,241

)

 

 

7.27

 

31,523

 

Canceled

 

(772

)

 

 

26.79

 

 

Options outstanding at March 31, 2006

 

8,093

 

7.1

 

$

16.54

 

$

149,610

 

 

 

 

 

 

 

 

 

 

 

Options excercisable at March 31, 2006

 

3,001

 

4.8

 

$

7.49

 

$

82,659

 

 

 

 

 

 

 

 

 

 

 

Weighted average per-share fair value of options granted during the period

 

$

13.16

 

 

 

 

 

 

 

 

18



 

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model. The Company’s stock options have characteristics significantly different from those of publicly traded options. The weighted average assumptions used in the model are outlined in the following table:

 

 

 

Three Months Ended
March 31, 2006

 

 

 

 

 

Weighted-average exercise price

 

$

17.16

 

Weighted-average grant date fair-value

 

$

7.98

 

 

 

 

 

Assumptions:

 

 

 

Expected volatility

 

33.5

%

Risk-free interest rate

 

4.4% - 4.7

%

Dividend yield

 

0

%

Expected life (in years)

 

6

 

 

The computation of the expected volatility is based on historical daily stock price over a term less than the expected term. A timeframe was used that provided a better representation of the current and future expected volatility. Expected life is based on annual historical employee exercise behavior of option grants with similar vesting periods and option expiration data. The risk-fee interest rate is based on the yield of zero-coupon U.S. Treasury securities. There are no dividends to be paid.

 

In the quarter ended March 31, 2006, we recognized equity-based compensation expense of approximately $3,700 related to the vesting of stock options and the related tax benefit of approximately $1,700. At March 31, 2006, the Company had 2,600 options and restricted stock units available to be granted under its equity-based compensation plans.

 

Restricted Stock Unit

 

A summary of the changes in restricted stock unit outstanding under the Company’s equity compensation plans during the quarter ended March 31, 2006 is presented below:

 

 

 

Number of
Restricted
Stock

 

Weighed
Average
Grant Date
Fair Value

 

 

 

(In thousands except share price)

 

 

 

 

 

 

 

Non-vested share at December 31, 2005

 

363

 

$

27.57

 

Granted

 

541

 

30.84

 

Vested

 

 

 

Canceled

 

(2

)

28.11

 

Non-vested share at March 31, 2006

 

902

 

$

29.53

 

 

In the quarter ended March 31, 2006, we recognized equity-based compensation expense of approximately $700 related to the vesting of restricted stock unit and the related tax benefit of approximately $300.

 

19



 

Employee Stock Purchase Plan

 

In 2002, the Company adopted, and its stockholders approved, an Employee Stock Purchase Plan (“ESPP”) under which a total of up to 1,000 shares of Class A Common Stock may be purchased by eligible employees under offerings made by the Company each January 1 and July 1. Employees participate through payroll deductions up to a maximum of 15% of eligible compensation. The term of each offering period is six months and shares are purchased on the last day of the offering period at a discount on the stock’s market value. Under an amendment to the ESPP adopted in 2005, the purchase price for offering periods beginning in 2006 will represent a 15% discount on the closing price of the stock on the last day of the offering period (rather than a 15% discount on the lower of (x) the closing price of the stock on the first day of the offering period and (y) the closing price of the stock on the last day of the offering period). No shares were issued under the ESPP during the quarter ended March 31, 2006.

 

(13)  Litigation

 

On March 9, 2006, we received a request for information relating to the licensing of our operation of several earth stations in our racing communications business from the enforcement bureau of the Federal Communications Commission (“FCC”).  We conducted an internal review which determined that our racing subsidiary was not in full compliance with FCC licensing requirements.  We engaged special FCC counsel to assist us in ensuring that we are in compliance with all applicable licensing requirements and responding to the FCC’s inquiry.   It is not possible to predict the outcome of this inquiry at this time.

 

On April 28, 2006, we agreed to settle the previously reported patent litigation with Oberthur Gaming Technologies Corporation (“OGT”). As part of the settlement, the parties dismissed litigation in Georgia federal court and Munich, Germany. In addition, on April 28, 2006 we obtained a non-exclusive, pre-paid license to the patents of OGT for a one-time payment of $1,750.

 

(14)  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 Credit Agreement and the Amendment 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”), (ii) the 100% owned 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, 2005 and March 31, 2006 and for the three months ended

March 31, 2005 and 2006. 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 Credit Agreement and the Amendment, 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.

 

Scientific Games Management Corporation has been reclassified from the Parent Company to the Guarantor Subsidiaries for the three months ended March 31, 2005.

 

20



 

SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES

SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET

December 31, 2005

(Unaudited, in thousands)

 

 

 

Parent
Company

 

Guarantor Subsidiaries

 

Non-
Guarantor Subsidiaries

 

Eliminating Entries

 

Consolidated

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

 

15,575

 

23,367

 

 

38,942

 

Accounts receivable, net

 

 

98,704

 

30,585

 

(39

)

129,250

 

Inventories

 

 

29,653

 

10,920

 

(425

)

40,148

 

Other current assets

 

4,938

 

22,102

 

19,173

 

 

46,213

 

Property and equipment, net

 

 

261,027

 

105,759

 

(567

)

366,219

 

Investment in subsidiaries

 

417,182

 

187,577

 

(26,482

)

(578,277

)

 

Goodwill

 

183

 

300,015

 

38,971

 

 

339,169

 

Intangible assets

 

 

74,638

 

12,651

 

 

87,289

 

Other assets

 

11,446

 

91,140

 

28,798

 

(6,101

)

125,283

 

Total assets

 

$

433,749

 

1,080,431

 

243,742

 

(585,409

)

1,172,513

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

Current installments of long-term debt

 

$

1,000

 

 

5,055

 

 

6,055

 

Current liabilities

 

(7,465

)

96,259

 

46,398

 

115

 

135,307

 

Long-term debt, excluding current installments

 

573,000

 

 

1,680

 

 

574,680

 

Other non-current liabilities

 

(13,673

)

61,143

 

22,162

 

6

 

69,638

 

Intercompany balances

 

(698,987

)

658,194

 

40,793

 

 

 

Stockholders’ equity

 

579,874

 

264,835

 

127,654

 

(585,530

)

386,833

 

Total liabilities and stockholders’ equity

 

$

433,749

 

1,080,431

 

243,742

 

(585,409

)

1,172,513

 

 

21



 

SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES

SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET

March 31, 2006

(Unaudited, in thousands)

 

 

 

Parent
Company

 

Guarantor Subsidiaries

 

Non-
Guarantor Subsidiaries

 

Eliminating Entries

 

Consolidated

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

 

6,738

 

30,467

 

 

37,205

 

Accounts receivable, net

 

 

101,342

 

39,718

 

 

141,060

 

Inventories

 

 

34,567

 

9,058

 

(425

)

43,200

 

Other current assets

 

6,610

 

23,952

 

22,810

 

 

53,372

 

Property and equipment, net

 

 

281,477

 

107,678

 

(537

)

388,618

 

Investment in subsidiaries

 

442,935

 

187,577

 

(33,804

)

(596,708

)

 

Goodwill

 

183

 

300,504

 

114,185

 

 

414,872

 

Intangible assets

 

 

86,631

 

19,588

 

 

106,219

 

Other assets

 

12,004

 

97,185

 

40,163

 

(6,073

)

143,279

 

Total assets

 

$

461,732

 

1,119,973

 

349,863

 

(603,743

)

1,327,825

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

Current installments of long-term debt

 

$

1,000

 

 

4,798

 

 

5,798

 

Current liabilities

 

6,369

 

79,790

 

86,322

 

79

 

172,560

 

Long-term debt, excluding current installments

 

638,750

 

 

1,637

 

 

640,387

 

Other non-current liabilities

 

(13,674

)

73,973

 

23,421

 

6

 

83,726

 

Intercompany balances

 

(700,338

)

661,630

 

38,708

 

 

 

Stockholders’ equity

 

529,625

 

304,580

 

194,977

 

(603,828

)

425,354

 

Total liabilities and stockholders’ equity

 

$

461,732

 

1,119,973

 

349,863

 

(603,743

)

1,327,825

 

 

22



 

SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES

SUPPLEMENTAL CONDENSED STATEMENT OF INCOME

Three Months Ended March 31, 2005

(Unaudited, in thousands)

 

 

 

Parent
Company

 

Guarantor Subsidiaries

 

Non-
Guarantor Subsidiaries

 

Eliminating Entries

 

Consolidated

 

Operating revenues

 

$

 

141,942

 

45,104

 

(2,490

)

184,556

 

Cost of services and cost of sales (exclusive
of depreciation and amortization)

 

 

77,506

 

30,603

 

(2,586

)

105,523

 

Selling, general and administrative expenses

 

683

 

22,204

 

4,861

 

(20

)

27,728

 

Depreciation and amortization

 

(1

)

11,168

 

3,308

 

 

14,475

 

Operating income (loss)

 

(682

)

31,064

 

6,332

 

116

 

36,830

 

Interest expense

 

6,196

 

108

 

106

 

 

6,410

 

Other (income) expense, net

 

 

(122

)

(127

)

648

 

399

 

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

 

(6,878

)

31,078

 

6,353

 

(532

)

30,021

 

Equity in income of subsidiaries

 

46,337

 

 

 

(46,337

)

 

Income tax expense

 

6,532

 

1,237

 

1,237

 

 

9,006

 

Net income

 

$

32,927

 

29,841

 

5,116

 

(46,869

)

21,015

 

 

SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES

SUPPLEMENTAL CONDENSED STATEMENT OF INCOME

Three Months Ended March 31, 2006

(Unaudited, in thousands)

 

 

 

Parent
Company

 

Guarantor Subsidiaries

 

Non-
Guarantor Subsidiaries

 

Eliminating Entries

 

Consolidated

 

Operating revenues

 

$

 

154,406

 

59,570

 

(5,847

)

208,129

 

Cost of services and cost of sales (exclusive
of depreciation and amortization)

 

 

79,296

 

46,043

 

(5,847

)

119,492

 

Selling, general and administrative expenses

 

5,051

 

22,176

 

5,223

 

(58

)

32,392

 

Depreciation and amortization

 

 

14,580

 

4,712

 

 

19,292

 

Operating income (loss)

 

(5,051

)

38,354

 

3,592

 

58

 

36,953

 

Interest expense

 

6,797

 

256

 

149

 

 

7,202

 

Other (income) expense, net

 

 

(2,207

)

55

 

(67

)

(2,219

)

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

 

(11,848

)

40,305

 

3,388

 

125

 

31,970

 

Equity in income of subsidiaries

 

44,031

 

 

 

(44,031

)

 

Income tax expense

 

9,813

 

90

 

(303

)

 

9,600

 

Net income

 

$

22,370

 

40,215

 

3,691

 

(43,906

)

22,370

 

 

23



 

SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES

SUPPLEMENTAL CONDENSED STATEMENT OF CASH FLOWS

Three Months Ended March 31, 2005

(Unaudited, in thousands)

 

 

 

Parent
Company

 

Guarantor Subsidiaries

 

Non-
Guarantor Subsidiaries

 

Eliminating Entries

 

Consolidated

 

Net income

 

$

32,927

 

29,841

 

5,116

 

(46,869

)

21,015

 

Depreciation and amortization

 

(1

)

11,168

 

3,308

 

 

14,475

 

Deferred income taxes

 

4,357

 

(396

)

1,361

 

 

5,322

 

Equity in income of subsidiaries

 

(46,337

)

 

 

46,337

 

 

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

 

(451

)

22,831

 

(5,014

)

(1,054

)

16,312

 

Other non-cash adjustments

 

4,437

 

581

 

4

 

 

5,022

 

 

 

 

 

 

 

 

 

 

 

 

 

Net cash provided by (used in) operating activities

 

(5,068

)

64,025

 

4,775

 

(1,586

)

62,146

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

 

 

 

Capital and wagering systems expenditures

 

 

(12,475

)

(10,813

)

 

(23,288

)

Business acquisitions, net of cash acquired

 

 

(2,927

)

 

 

(2,927

)

Other assets and investments

 

406

 

(4,399

)

(4,427

)

628

 

(7,792

)

 

 

 

 

 

 

 

 

 

 

 

 

Net cash provided by (used in) investing activities

 

406

 

(19,801

)

(15,240

)

628

 

(34,007

)

 

 

 

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

 

 

 

Net borrowings (repayments) on long-term debt

 

(22,250

)

 

(223

)

 

(22,473

)

Net proceeds from issuance of common stock

 

2,778

 

 

648

 

(648

)

2,778

 

Other, principally intercompany balances

 

24,426

 

(57,767

)

41,195

 

(7,854

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Net cash provided by (used in) financing activities

 

4,954

 

(57,767

)

41,620

 

(8,502

)

(19,695

)

 

 

 

 

 

 

 

 

 

 

 

 

Effect of exchange rate changes on cash

 

(292

)

(144

)

(10,702

)

9,460

 

(1,678

)

 

 

 

 

 

 

 

 

 

 

 

 

Increase (decrease) in cash and cash equivalents

 

 

(13,687

)

20,453

 

 

6,766

 

Cash and cash equivalents, beginning of period

 

 

41,515

 

24,605

 

 

66,120

 

Cash and cash equivalents, end of period

 

$

 

27,828

 

45,058

 

 

72,886

 

 

24



 

SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES

SUPPLEMENTAL CONDENSED STATEMENT OF CASH FLOWS

Three Months Ended March 31, 2006

(Unaudited, in thousands)

 

 

 

Parent
Company

 

Guarantor Subsidiaries

 

Non-
Guarantor Subsidiaries

 

Eliminating Entries

 

Consolidated

 

Net income

 

$

22,370

 

40,215

 

3,691

 

(43,906

)

22,370

 

Depreciation and amortization

 

 

14,580

 

4,712

 

 

19,292

 

Deferred income taxes

 

(1,434

)

(131

)

(1,313

)

 

(2,878

)

Equity in income of subsidiaries

 

(44,031

)

 

 

44,031

 

 

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

 

12,162

 

(13,949

)

(6,398

)

(217

)

(8,402

)

Other

 

5,705

 

(2,005

)

82

 

 

3,782

 

 

 

 

 

 

 

 

 

 

 

 

Net cash provided by (used in) operating activities

 

(5,228

)

38,710

 

774

 

(92

)

34,164

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

 

 

 

Capital and wagering systems expenditures

 

 

(30,908

)

(4,579

)

 

(35,487

)

Business acquisitions, net of cash acquired

 

 

 

(57,564

)

 

(57,564

)

Other assets and investments

 

(70,275

)

(20,448

)

7,680

 

62,835

 

(20,208

)

 

 

 

 

 

 

 

 

 

 

 

 

Net cash used in investing activities

 

(70,275

)

(51,356

)

(54,463

)

62,835

 

(113,259

)

 

 

 

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

 

 

 

Net borrowings (repayments) on long-term debt

 

65,750

 

 

(314

)

 

65,436

 

Net proceeds from issuance of common stock

 

8,602

 

 

62,885

 

(62,885

)

8,602

 

Excess tax benefit from equity-based compensation plan

 

2,814

 

 

 

 

2,814

 

Other, principally intercompany balances

 

(1,663

)

3,909

 

(4,284

)

2,038

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net cash provided by (used in) financing activities

 

75,503

 

3,909

 

58,287

 

(60,847

)

76,852

 

 

 

 

 

 

 

 

 

 

 

 

 

Effect of exchange rate changes on cash

 

 

(100

)

2,502

 

(1,896

)

506

 

 

 

 

 

 

 

 

 

 

 

 

 

Increase (decrease) in cash and cash equivalents

 

 

(8,837

)

7,100