UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

Form 10-Q

{Mark One}

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

For the quarterly period ended June 30, 2007

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
incorporation or organization)

 

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

 

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 x  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 x

 

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 x

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of August 7, 2007:

Class A Common Stock:

92,708,518

Class B Common Stock:

None

 

 




SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
INDEX TO FINANCIAL INFORMATION
AND OTHER INFORMATION
THREE MONTHS ENDED JUNE 30, 2007

PART I.

FINANCIAL INFORMATION

 

4

 

Item 1.

Financial Statements

 

4

 

 

Consolidated Balance Sheets as of December 31, 2006 and June 30, 2007

 

4

 

 

Consolidated Statements of Income for the Three Months Ended June 30, 2006 and 2007

 

5

 

 

Consolidated Statements of Income for the Six Months Ended June 30, 2006 and 2007

 

6

 

 

Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2006 and 2007

 

7

 

 

Notes to Consolidated Financial Statements

 

8

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

27

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

37

 

Item 4.

Controls and Procedures

 

37

 

PART II.

OTHER INFORMATION

 

38

 

Item 1.

Legal Proceedings

 

38

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

38

 

Item 4.

Submission of Matters to a Vote of Security Holders

 

39

 

Item 6.

Exhibits

 

39

 

 

2




Forward-Looking Statements

Throughout this Quarterly Report on Form 10-Q we make “forward-looking statements” within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements describe future expectations, plans, results or strategies and can often be identified by the use of terminology such as “may,” “will,” “estimate,” “intend,” “continue,” “believe,” “expect,” “anticipate,” “could,” “potential,” “opportunity,” or similar terminology. The forward-looking statements contained in this Quarterly Report on Form 10-Q are generally located in the material set forth under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” but may be found in other locations as well. These statements are based upon management’s current expectations, assumptions and estimates and are not guarantees of future results or performance. Actual outcomes may differ materially from those projected in these statements due to a variety of risks and uncertainties and other factors, including, among other things: competition; material adverse changes in economic and industry conditions in our markets; technological change; retention and renewal of existing contracts and entry into new contracts; availability and adequacy of cash flow to satisfy obligations and indebtedness or future needs; protection of intellectual property; security and integrity of software and systems; laws and government regulation, including those relating to gaming licenses, permits and operations; inability to identify, complete and integrate future acquisitions; seasonality; dependence on suppliers and manufacturers; factors associated with foreign operations; dependence on key personnel; failure to perform on contracts; resolution of pending or future litigation; labor matters; and stock price volatility. Additional information regarding risks and uncertainties and other factors that could cause actual results to differ materially from those contemplated in forward-looking statements is set forth from time to time in our filings with the SEC, including our most recent Annual Report on Form 10-K. Forward-looking statements speak only as of the date they are made, and except for our ongoing obligations under the U.S. federal securities laws, we undertake no obligation to publicly update any forward-looking statements whether as a result of new information, future events or otherwise.

3




SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of December 31, 2006 and June 30, 2007
(Unaudited, in thousands, except per share amounts)

PART 1. FINANCIAL INFORMATION

Item 1.   Financial Statements

 

 

December 31,

 

June 30,

 

 

 

2006

 

2007

 

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

$

27,791

 

 

$

27,811

 

Accounts receivable, net of allowance for doubtful accounts of $5,703 and $7,168 as of December 31, 2006 and June 30, 2007, respectively

 

 

178,445

 

 

203,411

 

Inventories

 

 

59,464

 

 

82,591

 

Deferred income taxes, current portion

 

 

8,960

 

 

10,852

 

Prepaid expenses, deposits and other current assets

 

 

70,042

 

 

56,565

 

Total current assets

 

 

344,702

 

 

381,230

 

Property and equipment, at cost

 

 

803,089

 

 

884,226

 

Less accumulated depreciation

 

 

(352,429

)

 

(360,578

)

Net property and equipment

 

 

450,660

 

 

523,648

 

Goodwill, net

 

 

633,730

 

 

708,522

 

Intangible assets, net

 

 

157,251

 

 

152,580

 

Other assets and investments

 

 

173,267

 

 

216,994

 

Total assets

 

 

$

1,759,610

 

 

$

1,982,974

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Current installments of long-term debt

 

 

$

3,148

 

 

$

4,977

 

Accounts payable

 

 

60,566

 

 

59,156

 

Accrued liabilities

 

 

130,309

 

 

152,806

 

Total current liabilities

 

 

194,023

 

 

216,939

 

Deferred income taxes

 

 

43,143

 

 

45,744

 

Other long-term liabilities

 

 

81,113

 

 

80,270

 

Long-term debt, excluding current installments

 

 

913,253

 

 

1,028,295

 

Total liabilities

 

 

1,231,532

 

 

1,371,248

 

Commitments and contingencies

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

Class A common stock, par value $0.01 per share, 199,300 shares authorized, and 91,628 and 92,764 shares issued and outstanding as of December 31, 2006 and June 30, 2007, respectively

 

 

916

 

 

927

 

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

 

 

 

 

 

Additional paid-in capital

 

 

477,261

 

 

498,144

 

Accumulated earnings

 

 

33,452

 

 

83,822

 

Treasury stock, at cost, 1,140 shares held as of December 31, 2006 and June 30,
2007

 

 

(19,442

)

 

(19,442

)

Accumulated other comprehensive income

 

 

35,891

 

 

48,275

 

Total stockholders’ equity

 

 

528,078

 

 

611,726

 

Total liabilities and stockholders’ equity

 

 

$

1,759,610

 

 

$

1,982,974

 

 

See accompanying notes to consolidated financial statements.

4




SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended June 30, 2006 and 2007
(Unaudited, in thousands, except per share amounts)

 

 

Three Months Ended
June 30,

 

 

 

2006

 

2007

 

Operating revenues:

 

 

 

 

 

Services

 

$

206,809

 

$

234,661

 

Sales

 

32,828

 

34,916

 

 

 

239,637

 

269,577

 

Operating expenses:

 

 

 

 

 

Cost of services (exclusive of depreciation and amortization)

 

113,461

 

129,698

 

Cost of sales (exclusive of depreciation and amortization)

 

24,382

 

26,456

 

Selling, general and administrative expenses

 

35,346

 

40,495

 

Depreciation and amortization

 

23,525

 

32,256

 

Operating income

 

42,923

 

40,672

 

Other (income) expense:

 

 

 

 

 

Interest expense

 

11,115

 

14,274

 

Equity in earnings of joint ventures

 

(3,157

)

(11,401

)

Other (income) expense, net

 

(226

)

347

 

 

 

7,732

 

3,220

 

Income before income tax expense

 

35,191

 

37,452

 

Income tax expense

 

10,214

 

10,345

 

Net income

 

$

24,977

 

$

27,107

 

Basic and diluted net income per share:

 

 

 

 

 

Basic net income per share

 

$

0.27

 

$

0.29

 

Diluted net income per share

 

$

0.26

 

$

0.28

 

Weighted-average number of shares used in per share calculations:

 

 

 

 

 

Basic shares

 

91,202

 

92,581

 

Diluted shares

 

95,989

 

96,280

 

 

See accompanying notes to consolidated financial statements.

5




SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Six Months Ended June 30, 2006 and 2007
(Unaudited, in thousands, except per share amounts)

 

 

Six Months Ended
June 30,

 

 

 

      2006      

 

      2007      

 

Operating revenues:

 

 

 

 

 

 

 

 

 

Services

 

 

$

383,769

 

 

 

$

445,654

 

 

Sales

 

 

63,997

 

 

 

66,189

 

 

 

 

 

447,766

 

 

 

511,843

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Cost of services (exclusive of depreciation and amortization)

 

 

208,409

 

 

 

246,445

 

 

Cost of sales (exclusive of depreciation and amortization)

 

 

48,926

 

 

 

48,941

 

 

Selling, general and administrative expenses

 

 

67,738

 

 

 

79,640

 

 

Depreciation and amortization

 

 

42,817

 

 

 

61,335

 

 

Operating income

 

 

79,876

 

 

 

75,482

 

 

Other (income) expense:

 

 

 

 

 

 

 

 

 

Interest expense

 

 

18,317

 

 

 

27,166

 

 

Equity in earnings of joint ventures

 

 

(4,733

)

 

 

(23,279

)

 

Other income, net

 

 

(869

)

 

 

(44

)

 

 

 

 

12,715

 

 

 

3,843

 

 

Income before income tax expense

 

 

67,161

 

 

 

71,639

 

 

Income tax expense

 

 

19,814

 

 

 

19,773

 

 

Net income

 

 

$

47,347

 

 

 

$

51,866

 

 

Basic and diluted net income per share:

 

 

 

 

 

 

 

 

 

Basic net income per share

 

 

$

0.52

 

 

 

$

0.56

 

 

Diluted net income per share

 

 

$

0.50

 

 

 

$

0.54

 

 

Weighted-average number of shares used in per share calculations:

 

 

 

 

 

 

 

 

 

Basic shares

 

 

90,687

 

 

 

92,289

 

 

Diluted shares

 

 

94,992

 

 

 

95,605

 

 

 

See accompanying notes to consolidated financial statements.

6




SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30, 2006 and 2007
(Unaudited, in thousands, except per share amounts)

 

 

Six Months Ended
June 30,

 

 

 

2006

 

2007

 

Net cash provided by operating activities

 

$

90,199

 

$

93,411

 

Cash flows from investing activities:

 

 

 

 

 

Capital expenditures

 

(8,516

)

(18,320

)

Wagering system expenditures

 

(71,954

)

(62,572

)

Other intangible assets and software expenditures

 

(24,502

)

(18,613

)

Change in other assets and liabilities, net

 

(9,696

)

(20,083

)

Business acquisitions, net of cash acquired

 

(267,010

)

(101,893

)

Net cash used in investing activities

 

(381,678

)

(221,481

)

Cash flows from financing activities:

 

 

 

 

 

Net borrowings (repayments) under revolving credit facility

 

182,500

 

110,500

 

Net proceeds (repayments) of long-term debt

 

94,680

 

6,361

 

Excess tax benefit from equity-based compensation plan

 

4,082

 

 

Net proceeds from issuance of common stock

 

11,540

 

10,814

 

Net cash provided by financing activities

 

292,802

 

127,675

 

Effect of exchange rate changes on cash and cash equivalents

 

(6,110

)

415

 

Increase (decrease) in cash and cash equivalents

 

(4,787

)

20

 

Cash and cash equivalents, beginning of period

 

38,942

 

27,791

 

Cash and cash equivalents, end of period

 

$

34,155

 

$

27,811

 

 

See accompanying notes to consolidated financial statements.

7




SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, in thousands, except per share amounts)

Notes to Consolidated Financial Statements

(1)   Consolidated Financial Statements

Basis of Presentation

The consolidated balance sheet as of June 30, 2007, the consolidated statements of income for the three and six months ended June 30, 2006 and 2007, and the condensed consolidated statements of cash flows for the six months ended June 30, 2006 and 2007, 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 as of June 30, 2007 and the results of its operations for the three and six months ended June 30, 2006 and 2007 and its cash flows for the six months ended June 30, 2006 and 2007 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 2006 Annual Report on Form 10-K. The results of operations for the period ended June 30, 2007 are not necessarily indicative of the operating results for a 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 and six months ended June 30, 2006 and 2007:

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2006

 

2007

 

2006

 

2007

 

Income (numerator)

 

 

 

 

 

 

 

 

 

Net income

 

$

24,977

 

$

27,107

 

$

47,347

 

$

51,866

 

Shares (denominator)

 

 

 

 

 

 

 

 

 

Basic weighted-average common shares outstanding

 

91,202

 

92,581

 

90,687

 

92,289

 

Effect of dilutive securities-stock rights

 

2,793

 

2,142

 

2,889

 

2,193

 

Effect of dilutive shares related to convertible debentures

 

1,994

 

1,557

 

1,416

 

1,123

 

Diluted weighted-average common shares
outstanding

 

95,989

 

96,280

 

94,992

 

95,605

 

Basic and diluted per share amounts

 

 

 

 

 

 

 

 

 

Basic net income per share

 

$

0.27

 

$

0.29

 

$

0.52

 

$

0.56

 

Diluted net income per share

 

$

0.26

 

$

0.28

 

$

0.50

 

$

0.54

 

 

The weighted-average diluted shares outstanding for the three and six month periods ended June 30, 2007 excludes the effect of approximately 1,368 and 2,494 out-of-the-money options, respectively, as their

8




(1)   Consolidated Financial Statements (Continued)

effect would be anti-dilutive. The weighted-average diluted shares outstanding for the three and six month periods ended June 30, 2006 excludes the effect of approximately 185 and 130 out-of-the-money options, respectively, as their effect would be anti-dilutive.

The aggregate number of shares that the Company could be obligated to issue upon conversion of its $275,000, 0.75% convertible senior subordinated debentures due 2024 (the “Convertible Debentures”), which the Company sold in December 2004, is approximately 9,450. The Convertible Debentures provide for net share settlement upon exercise and the Company has purchased a bond hedge to mitigate the potential economic dilution from conversion.

During the first and second quarters of 2007, the average price of the Company’s common stock exceeded the specified conversion price. For the three and six months ended June 30, 2007, the Company has included 1,557 and 1,123 shares, respectively, related to its Convertible Debentures in its diluted weighted-average common shares outstanding. For the three and six months ended June 30, 2006, the Company has included 1,994 and 1,416 shares, respectively, related to its Convertible Debentures in its diluted weighted-average common shares outstanding. The Company has not included the offset from the bond hedge as it would be anti-dilutive; however, when the Convertible Debentures mature, the diluted share amount will decrease because the bond hedge will offset the economic dilution from conversion.

(2)   Acquisitions

On May 1, 2007, the Company acquired Oberthur Gaming Technologies and related companies (“OGT”). OGT is a manufacturer of instant lottery tickets and operates three instant ticket plants located in Montreal, Canada; Sydney, Australia and San Antonio, Texas. The purchase price was approximately $102,000 (approximately one-third of which is attributable to U.S. assets), subject to certain adjustments. The Company expects its acquisition of OGT will allow it to strengthen its international presence in Canada, Europe and Australia and offer its customers an expanded array of products and services. The Company financed the acquisition through borrowings under its revolving credit facility. Approximately $20,000 of the preliminary goodwill of approximately $59,000 resulting from the acquisition of OGT will be deductible for tax purposes. The operating results of OGT have been included in the Company’s Printed Products segment and have been consolidated in the Company’s statement of operations since the date of acquisition.

In conjunction with the purchase of substantially all of the online lottery assets of EssNet AB (“EssNet”) in March of 2006, the Company recorded approximately $26,717 in liabilities, primarily related to involuntary employee terminations, termination of leases and termination of service contracts that will result from the integration. The table below summarizes the payments made to date, adjustments and the balance of the accrued integration costs from December 31, 2006 to June 30, 2007:

 

 

Severance

 

 

 

 

 

 

 

 

 

Pay and

 

Lease

 

Contractual

 

Total

 

 

 

Benefits

 

Terminations

 

Obligations

 

Liability

 

Accrued costs as of December 31, 2006

 

 

$

3,250

 

 

 

916

 

 

 

5,382

 

 

 

9,548

 

 

Payments

 

 

(1,107

)

 

 

(191

)

 

 

(398

)

 

 

(1,696

)

 

Adjustments to goodwill

 

 

234

 

 

 

39

 

 

 

4,075

 

 

 

4,348

 

 

Accrued costs as of March 31, 2007

 

 

$

2,377

 

 

 

764

 

 

 

9,059

 

 

 

12,200

 

 

Payments

 

 

(1,149

)

 

 

(193

)

 

 

(518

)

 

 

(1,860

)

 

Accrued costs as of June 30, 2007

 

 

$

1,228

 

 

 

571

 

 

 

8,541

 

 

 

10,340

 

 

 

9




(3)   Operating Segment Information

Statement of Financial Accounting Standards (“SFAS”) No. 131, Disclosures about Segments of an Enterprise and Related Information (“SFAS 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 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.

The Printed Products Group provides lotteries with 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. Additionally, this division provides lotteries with licensed brand products and manufactures prepaid phone cards for cellular phone service providers. In addition, as a result of the acquisition of 80% of the common stock of International Lotto Corp., SRL (“ILC”) in December 2006, Printed Products now has an agreement with certain charities in Peru under which the Company participates in the operation of a lottery in Peru. 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 services and systems to private and public operators in the wide area gaming markets and the pari-mutuel wagering industry. The product offerings include fixed odds betting terminals (“FOBTs”), video lottery terminals (“VLTs”), monitor games, wagering systems for the pari-mutuel racing industry, sports betting systems and services, Amusement With Prize (“AWP”) and Skill With Prize (“SWP”) terminals and pari-mutuel gaming operations in Connecticut, Maine and the Netherlands.

Subsequent to the issuance of the 2006 financial statements management determined that certain EssNet sales revenues of approximately $7,400 and EssNet cost of sales of approximately $5,100 were classified as service revenues and cost of services in the Lottery Systems Group during the three and six months ended June 30, 2006 periods. Accordingly the amounts have been revised in the following presentation.

The following tables represent revenues, profits, depreciation, amortization and selling, general and administrative expenses for the three and six month periods ended June 30, 2006 and 2007, by current reportable segments. Corporate expenses, including interest expense, other income, and corporate depreciation and amortization are not allocated to the reportable segments.

 

 

Three Months Ended June 30, 2006

 

 

 

Printed
Products Group

 

Lottery
Systems Group

 

Diversified
Gaming Group

 

Totals

 

Service revenues

 

 

$

100,615

 

 

 

49,236

 

 

 

56,958

 

 

206,809

 

Sales revenues

 

 

11,818

 

 

 

19,832

 

 

 

1,178

 

 

32,828

 

Total revenues

 

 

112,433

 

 

 

69,068

 

 

 

58,136

 

 

239,637

 

Cost of services (exclusive of depreciation and amortization)

 

 

52,695

 

 

 

28,560

 

 

 

32,206

 

 

113,461

 

Cost of sales (exclusive of depreciation and amortization)

 

 

9,206

 

 

 

13,995

 

 

 

1,181

 

 

24,382

 

Selling, general and administrative expenses

 

 

10,849

 

 

 

8,079

 

 

 

4,534

 

 

23,462

 

Depreciation and amortization

 

 

6,141

 

 

 

11,041

 

 

 

6,099

 

 

23,281

 

Segment operating income

 

 

$

33,542

 

 

 

7,393

 

 

 

14,116

 

 

55,051

 

Unallocated corporate costs

 

 

 

 

 

 

 

 

 

 

 

 

 

$

12,128

 

Consolidated operating income

 

 

 

 

 

 

 

 

 

 

 

 

 

$

42,923

 

 

10




(3)   Operating Segment Information (Continued)

 

 

Three Months Ended June 30, 2007

 

 

 

Printed
Products Group

 

Lottery
Systems Group

 

Diversified
Gaming Group

 

Totals

 

Service revenues

 

 

$

126,951

 

 

 

52,812

 

 

 

54,898

 

 

234,661

 

Sales revenues

 

 

10,094

 

 

 

10,466

 

 

 

14,356

 

 

34,916

 

Total revenues

 

 

137,045

 

 

 

63,278

 

 

 

69,254

 

 

269,577

 

Cost of services (exclusive of depreciation and amortization)

 

 

70,868

 

 

 

28,077

 

 

 

30,753

 

 

129,698

 

Cost of sales (exclusive of depreciation and amortization)

 

 

8,380

 

 

 

5,888

 

 

 

12,188

 

 

26,456

 

Selling, general and administrative expenses

 

 

15,724

 

 

 

7,338

 

 

 

5,214

 

 

28,276

 

Depreciation and amortization

 

 

10,123

 

 

 

15,225

 

 

 

6,679

 

 

32,027

 

Segment operating income

 

 

$

31,950

 

 

 

6,750

 

 

 

14,420

 

 

53,120

 

Unallocated corporate costs

 

 

 

 

 

 

 

 

 

 

 

 

 

$

12,448

 

Consolidated operating income

 

 

 

 

 

 

 

 

 

 

 

 

 

$

40,672

 

 

 

 

Six Months Ended June 30, 2006

 

 

 

Printed
Products Group

 

Lottery
Systems Group

 

Diversified
Gaming Group

 

Totals

 

Service revenues

 

 

$

194,194

 

 

 

101,953

 

 

 

87,622

 

 

383,769

 

Sales revenues

 

 

25,939

 

 

 

34,531

 

 

 

3,527

 

 

63,997

 

Total revenues

 

 

220,133

 

 

 

136,484

 

 

 

91,149

 

 

447,766

 

Cost of services (exclusive of depreciation and amortization)

 

 

98,986

 

 

 

56,233

 

 

 

53,190

 

 

208,409

 

Cost of sales (exclusive of depreciation and amortization)

 

 

19,979

 

 

 

25,587

 

 

 

3,360

 

 

48,926

 

Selling, general and administrative expenses

 

 

22,205

 

 

 

15,528

 

 

 

6,975

 

 

44,708

 

Depreciation and amortization

 

 

11,326

 

 

 

21,534

 

 

 

9,495

 

 

42,355

 

Segment operating income

 

 

$

67,637

 

 

 

17,602

 

 

 

18,129

 

 

103,368

 

Unallocated corporate costs

 

 

 

 

 

 

 

 

 

 

 

 

 

$

23,492

 

Consolidated operating income

 

 

 

 

 

 

 

 

 

 

 

 

 

$

79,876

 

 

11




(3)   Operating Segment Information (Continued)

 

 

Six Months Ended June 30, 2007

 

 

 

Printed
Products Group

 

Lottery
Systems Group

 

Diversified
Gaming Group

 

Totals

 

Service revenues

 

 

$

231,582

 

 

 

107,143

 

 

 

106,929

 

 

445,654

 

Sales revenues

 

 

19,356

 

 

 

21,515

 

 

 

25,318

 

 

66,189

 

Total revenues

 

 

250,938

 

 

 

128,658

 

 

 

132,247

 

 

511,843

 

Cost of services (exclusive of depreciation and amortization)

 

 

126,530

 

 

 

57,468

 

 

 

62,447

 

 

246,445

 

Cost of sales (exclusive of depreciation and amortization)

 

 

16,004

 

 

 

12,126

 

 

 

20,811

 

 

48,941

 

Selling, general and administrative expenses

 

 

27,205

 

 

 

15,335

 

 

 

10,562

 

 

53,102

 

Depreciation and amortization

 

 

18,523

 

 

 

29,356

 

 

 

13,001

 

 

60,880

 

Segment operating income

 

 

$

62,676

 

 

 

14,373

 

 

 

25,426

 

 

102,475

 

Unallocated corporate costs

 

 

 

 

 

 

 

 

 

 

 

 

 

$

26,993

 

Consolidated operating income

 

 

 

 

 

 

 

 

 

 

 

 

 

$

75,482

 

 

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

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2006

 

2007

 

2006

 

2007

 

Reported segment operating income

 

$

55,051

 

$

53,120

 

$

103,368

 

$

102,475

 

Unallocated corporate costs

 

(12,128

)

(12,448

)

(23,492

)

(26,993

)

Consolidated operating income

 

42,923

 

40,672

 

79,876

 

75,482

 

Interest expense

 

(11,115

)

(14,274

)

(18,317

)

(27,166

)

Equity in earnings of joint ventures

 

3,157

 

11,401

 

4,733

 

23,279

 

Other income

 

226

 

(347

)

869

 

44

 

Income before income tax expense

 

$

35,191

 

$

37,452

 

$

67,161

 

$

71,639

 

 

In evaluating financial performance, the Company focuses on operating profit as a segment’s measure of profit or loss. Operating income is before interest income, interest expense, equity in earnings of joint ventures, corporate expenses and income taxes. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies except for accounting for income tax contingencies (see “Critical Accounting Policies” in this Form 10-Q for the three months ended June 30, 2007 and Note 1 of the Company’s Notes to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006).

(4)   Equity Investments in Joint Ventures

The Company is a member of Consorzio Lotterie Nazionali, a consortium consisting principally of the Company, Lottomatica S.p.A, and Arianna 2001, a company owned by the Federation of Italian Tobacconists. The consortium has a signed contract with the Italian Monopoli di Stato to be the exclusive operator of the Italian Gratta e Vinci instant lottery. The contract, which commenced in mid-2004, has an initial term of six years with a six year-extension option. Under our contract with the consortium, the Company is a supplier of instant lottery tickets, will participate in the profits or losses of the consortium as a 20% equity owner, and will assist Lottomatica S.p.A in the lottery operations. The Company accounts for this investment using the equity method of accounting. For the three months ended June 30, 2006 and

12




(4)   Equity Investments in Joint Ventures (Continued)

2007, the Company recorded income of $3,381 and $10,407, respectively, representing its share of the earnings of the consortium for the indicated periods. For the six months ended June 30, 2006 and 2007, the Company recorded income of $5,055 and $21,970, respectively, representing its share of the earnings of the consortium for the indicated periods.

Effective February 28, 2007, the Company sold its racing communications business and its 70% interest in NASRIN, its data communications business, to Roberts Communications Network, LLC (“RCN”) in exchange for a 29.4% interest in the RCN consolidated business. RCN provides communications services to racing and non-racing customers using both satellite and terrestrial services. Since the date of acquisition, the Company’s share of the earnings of RCN is reflected in the caption “Equity in earnings of joint ventures” in the Consolidated Statements of Income. The Company’s carrying value in RCN, is reflected in the caption “Other assets and investments” in the Consolidated Balance Sheets. The interest in RCN is not material to the Company’s operations.

(5)   Comprehensive Income

The following presents a reconciliation of net income to comprehensive income for the three and six month periods ended June 30, 2006 and 2007:

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2006

 

2007

 

2006

 

2007

 

Net income

 

$

24,977

 

$

27,107

 

$

47,347

 

$

51,866

 

Other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

Foreign currency translation gain

 

17,976

 

10,297

 

18,716

 

12,018

 

Unrealized gain (loss) on investments

 

264

 

252

 

(511

)

366

 

Other comprehensive income (loss)

 

18,240

 

10,549

 

18,205

 

12,384

 

Comprehensive income

 

$

43,217

 

$

37,656

 

$

65,552

 

$

64,250

 

 

(6)   Inventories

Inventories consist of the following:

 

 

December 31,

 

June 30,

 

 

 

2006

 

2007

 

Parts and work-in-process

 

 

$

23,517

 

 

$

39,408

 

Finished goods

 

 

35,947

 

 

43,183

 

 

 

 

$

59,464

 

 

$

82,591

 

 

Point of sale terminals manufactured by the Company may be sold to customers or included as part of long-term wagering system contracts. 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 and are not depreciated.

13




(7)   Long-Term Debt

On June 30, 2007, the Company had approximately $146,183 available for additional borrowing or letter of credit issuance under its revolving credit facility due 2009 (the “Revolver”) under its existing credit agreement dated as of December 23, 2004, as amended and restated as of January 24, 2007, (the “January 2007 Amended and Restated Credit Agreement”). There were $110,500 of outstanding loans and $43,317 in outstanding letters of credit under the Revolver as of June 30, 2007.

The January 2007 Amended and Restated Credit Agreement is secured by a first priority, perfected lien on: (i) substantially all the property and assets (real and personal, tangible and intangible) of the Company and 100%-owned domestic subsidiaries; (ii) 100% of the capital stock of all of the direct and indirect 100%-owned domestic subsidiaries and 65% of the Company’s interest in the capital stock of its 100%-owned first-tier foreign subsidiaries; and (iii) all inter-company indebtedness owing amongst the Company and its 100%-owned domestic subsidiaries. The January 2007 Amended and Restated Credit Agreement is supported by guarantees provided by all of the Company’s direct and indirect 100%-owned domestic subsidiaries.

The Company was in compliance with the covenants as of June 30, 2007.

The terms of the indenture governing the Convertible Debentures give holders the right to convert the Convertible Debentures at any time between July 1, 2007 and September 30, 2007. Upon conversion, the terms of such indenture require the Company to pay cash for the face amount of the Convertible Debentures which have been presented for conversion, with the value of the difference between the stated conversion price and the prevailing market price payable by the issuance of additional shares of its Class A common stock.

14




(8)   Goodwill and Intangible Assets

The following disclosure presents certain information regarding the Company’s acquired intangible assets as of December 31, 2006 and June 30, 2007. Amortizable intangible assets are amortized over their estimated useful lives, as indicated below, with no estimated residual values.

Intangible Assets

 

 

 

Weighted Average 
Amortization 
Period (Years)

 

Gross 
Carrying 
Amount

 

Accumulated 
Amortization

 

Net
Balance

 

Balance as of December 31, 2006

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortizable intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Patents

 

 

13

 

 

$

8,839

 

 

(1,207

)

 

7,632

 

Customer lists

 

 

11

 

 

28,705

 

 

(12,179

)

 

16,526

 

Customer service contracts

 

 

15

 

 

3,691

 

 

(1,889

)

 

1,802

 

Licenses

 

 

10

 

 

49,751

 

 

(12,611

)

 

37,140

 

Intellectual property

 

 

4

 

 

21,622

 

 

(4,115

)

 

17,507

 

Lottery contracts

 

 

5

 

 

34,747

 

 

(19,889

)

 

14,858

 

 

 

 

9

 

 

147,355

 

 

(51,890

)

 

95,465

 

Non-amortizable intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Trade name

 

 

 

 

 

38,115

 

 

(2,118

)

 

35,997

 

Connecticut off-track betting system operating right

 

 

 

 

 

34,108

 

 

(8,319

)

 

25,789

 

 

 

 

 

 

 

72,223

 

 

(10,437

)

 

61,786

 

Total intangible assets

 

 

 

 

 

$

219,578

 

 

(62,327

)

 

157,251

 

Balance as of June 30, 2007

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortizable intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Patents

 

 

14

 

 

$

8,892

 

 

(1,508

)

 

7,384

 

Customer lists

 

 

11

 

 

29,045

 

 

(14,325

)

 

14,720

 

Customer service contracts

 

 

15

 

 

3,782

 

 

(2,061

)

 

1,721

 

Licenses

 

 

10

 

 

53,138

 

 

(17,869

)

 

35,269

 

Intellectual property

 

 

4

 

 

22,102

 

 

(6,894

)

 

15,208

 

Lottery contracts

 

 

5

 

 

39,825

 

 

(24,025

)

 

15,800

 

 

 

 

9

 

 

156,784

 

 

(66,682

)

 

90,102

 

Non-amortizable intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Trade name

 

 

 

 

 

38,257

 

 

(2,118

)

 

36,139

 

Connecticut off-track betting system operating right

 

 

 

 

 

34,658

 

 

(8,319

)

 

26,339

 

 

 

 

 

 

 

72,915

 

 

(10,437

)

 

62,478

 

Total intangible assets

 

 

 

 

 

$

229,699

 

 

(77,119

)

 

152,580

 

 

The aggregate intangible amortization expense for the three month periods ended June 30, 2006 and 2007 was approximately $5,400 and $8,400, respectively. The aggregate intangible amortization expense for the six month periods ended June 30, 2006 and 2007 was approximately $8,200 and $15,700, respectively.

The table below reconciles the change in the carrying amount of goodwill, by reporting segment, for the period from December 31, 2006 to June 30, 2007. In 2007, the Company recorded (a) a $58,667  increase in goodwill associated with the acquisition of OGT, (b) a $1,338 increase in goodwill associated with the purchase price valuation and allocation adjustments associated with the acquisition of Games Media Limited (“Games Media”), (c) a $1,178 increase in goodwill associated with the final purchase price valuation and allocation adjustments associated with the acquisition of the Global Draw Limited (“Global Draw”), (d) a $4,218 increase in goodwill associated with the final purchase price valuation and allocation

15




(8)   Goodwill and Intangible Assets (Continued)

adjustments associated with the acquisition of substantially all of the online lottery assets of EssNet, (e) a $624 increase in goodwill associated with the purchase price valuation and allocation adjustments associated with the acquisition of 80% of the common stock of ILC, (f) a $213 increase in goodwill associated with the purchase price valuation and allocation adjustments associated with the acquisition of Printpool Honsel GmbH (“Honsel”), (g) a $5 increase in goodwill associated with the purchase price valuation and allocation adjustments associated with certain other acquisitions and (h) an increase in goodwill of $8,549 as a result of foreign currency translation.

Goodwill

 

 

 

Printed
Products 
Group

 

Lottery
Systems 
Group

 

Diversified
Gaming
Group

 

Totals

 

Balance as of December 31, 2006

 

$

259,710

 

184,509

 

 

189,511

 

 

633,730

 

Adjustments

 

60,974

 

6,469

 

 

7,349

 

 

74,792

 

Balance as of June 30, 2007

 

$

320,684

 

190,978

 

 

196,860

 

 

708,522

 

 

(9)   Pension and Other Post-Retirement Plans

The Company has defined benefit pension plans for its U.S. and U.K. based union employees (the “U.S. Plan” and the “U.K. Plan”) and, with the acquisition of OGT, certain Canadian based employees (the “OGT Plans”). Retirement benefits under the U.S. Plan are based upon the number of years of credited service up to a maximum of 30 years for the majority of the employees. Retirement benefits under the U.K. Plan are based on an employee’s average compensation over the two years preceding retirement. Retirement benefits under the OGT Plans are based on the number of years of credited service for the majority of its employees. The Company’s policy is to fund the minimum contribution permissible by the respective tax authorities.

The following table sets forth the combined amount of net periodic benefit cost recognized for the three and six month periods ended June 30, 2006 and 2007.

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2006

 

2007

 

2006

 

2007

 

Components of net periodic pension benefit cost:

 

 

 

 

 

 

 

 

 

Service cost

 

$

548

 

$

697

 

$

1,095

 

$

1,173

 

Interest cost

 

551

 

1,070

 

1,102

 

1,845

 

Expected return on plan assets

 

(561

)

(1,192

)

(1,123

)

(2,060

)

Amortization of actuarial gains/losses

 

290

 

256

 

580

 

496

 

Amortization of transition asset

 

 

(23

)

 

(23

)

Amortization of prior service costs

 

6

 

25

 

11

 

36

 

Net periodic cost

 

$

834

 

$

833

 

$

1,665

 

$

1,467

 

 

The Company has a 401(k) plan covering all U.S. based employees who are not covered by a collective bargaining agreement. Under the plan, participants are eligible to receive matching contributions of 50 cents on the dollar from the Company for the first 6% of participant contributions for a match of up to 3% of eligible compensation. The Company has a 401(k) plan for all U.S. based union employees which does not provide for Company contributions. With the acquisition of OGT, the Company has a 401(k) plan covering certain U.S. based employees. Under the plan, participants are eligible to receive matching contributions of 50 cents on the dollar from the Company for the first 4% of participant contributions.

16




(10)   Income Taxes

On January 1, 2007, the Company adopted Financial Accounting Standards Board (“FASB”) Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”), which prescribes a recognition threshold and measurement process for recording in the financial statements uncertain tax positions taken or expected to be taken in a tax return. Additionally, FIN 48 provides guidance on the derecognition, classification, accounting in interim periods and disclosure requirements for uncertain tax positions. As a result of the implementation of FIN 48, the Company recognized an increase in the liability for unrecognized tax benefits of approximately $1,376, which was accounted for as a reduction to the Company’s accumulated earnings as of January 1, 2007.  The total amount of unrecognized tax benefits as of January 1, 2007 was approximately $4,113. Of this amount, approximately $3,607, if recognized, would be included in the Company’s statement of operations and have an impact on the Company’s effective tax rate. Also as a result of the implementation of FIN 48, the Company recognized accrued interest related to unrecognized tax benefits of $120, which was accounted for as a reduction to the Company’s accumulated earnings as of January 1, 2007. The Company recognizes interest accrued for unrecognized tax benefits in interest expense and recognizes penalties in income tax expense. As of the date of adoption of FIN 48, the Company had accrued approximately $259 for the payment of interest and penalties.

The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction, and various states and foreign jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years before 2001. The Company does not believe that the amount of uncertain tax positions will change by a significant amount within the next 12 months. In the event of subsequent recognition, the entire amount recognized would impact the effective tax rate.

The effective tax rate for the three and six months ended June 30, 2007 of 27.6% was determined using an estimated annual effective tax rate, which was less than the federal statutory rate of 35% due to lower tax rates applicable to the increase in the Company’s earnings from operations outside the United States and the tax benefit of the 2004 debt restructuring. The effective tax rates for the three and six months ended June 30, 2006 of 29.0% and 29.5%, respectively, were determined using an estimated annual effective tax rate, which was less than the federal statutory rate of 35% due to lower tax rates applicable to the increase in the Company’s earnings from operations outside the United States and the tax benefit of the 2004 debt restructuring.

(11)   Stockholders’ Equity

As of June 30, 2007, 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.

17




(11)   Stockholders’ Equity (Continued)

The Company has two classes of common stock, consisting of Class A common stock and Class B non-voting common stock. All shares of Class A common stock and Class B common stock entitle holders to the same rights and privileges except that the Class B common stock is non-voting. Each share of Class B common stock is convertible into one share of Class A common stock. The following demonstrates the change in the number of Class A common shares outstanding during the fiscal year ended December 31, 2006 and during the three months ended June 30, 2007:

 

 

Twelve Months

 

Three Months

 

 

 

Ended

 

Ended

 

 

 

December 31,

 

June 30,

 

 

 

2006

 

2007

 

Shares issued and outstanding as of beginning of period

 

 

89,869

 

 

 

92,510

 

 

Shares issued as part of equity-based compensation plans and the ESPP, net of RSUs surrendered for taxes

 

 

2,054

 

 

 

164

 

 

Other shares issued

 

 

29

 

 

 

 

 

Shares repurchased into treasury stock

 

 

(324

)

 

 

 

 

Shares issued and outstanding as of end of period

 

 

91,628

 

 

 

92,674

 

 

 

On December 15, 2006, the Company entered into a licensing agreement with Hasbro, Inc. (“Hasbro”) for the use of certain Hasbro brands in multiple lottery platforms. Under the terms of the agreement, on February 28, 2007, the Company issued to Hasbro warrants (the “Warrants”) to purchase 40 shares of the Company’s Class A common stock for $32.98 per share. The Warrants may be exercised at any time before February 28, 2012. The fair value of the Warrants on the date of grant was $480. Such amount is reflected in the caption “Other assets and investments” in the Consolidated Balance Sheets.

(12)   Stock-Based Compensation

As of June 30, 2007, the Company had approximately 1,600 stock options or restricted stock units authorized to be granted under its equity-based compensation plans.

Stock Options

A summary of the changes in stock options outstanding under the Company’s equity-based compensation plans during 2007 is presented below:

 

 

Number of 
Options

 

Weighted 
Average 
Remaining 
Contract Term 
(Years)

 

Weighted 
Average
Exercise 
Price 
Per Share

 

Aggregate 
Intrinsic 
Value

 

Options outstanding as of December 31, 2006

 

 

6,972

 

 

 

6.3

 

 

 

$

16.89

 

 

$

117,732

 

Granted

 

 

635

 

 

 

 

 

 

 

33.86

 

 

 

Exercised

 

 

(810

)

 

 

 

 

 

 

11.54

 

 

16,509

 

Canceled

 

 

(14

)

 

 

 

 

 

 

26.01

 

 

 

Options outstanding as of March 31, 2007

 

 

6,783

 

 

 

6.7

 

 

 

$

19.10

 

 

$

93,156

 

Granted

 

 

15

 

 

 

 

 

 

 

32.82

 

 

 

Exercised

 

 

(121

)

 

 

 

 

 

 

17.10

 

 

2,324

 

Canceled

 

 

(19

)

 

 

 

 

 

 

22.99

 

 

 

Options excercisable as of June 30, 2007

 

 

6,658

 

 

 

6.4

 

 

 

$

18.62

 

 

$

108,863

 

Weighted-average per share fair value of options granted during the three months ended:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2007

 

 

$

13.70

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2007

 

 

$

13.45

 

 

 

 

 

 

 

 

 

 

 

 

 

18




(12)   Stock-Based Compensation (Continued)

For the three months ended June 30, 2006 and 2007, the Company recognized equity-based compensation expense of approximately $3,500 and $2,300, respectively, related to the vesting of stock options and the related tax benefit of approximately $800 and $600, respectively. For the six months ended June 30, 2006 and 2007, the Company recognized equity-based compensation expense of approximately $7,200 and $6,200, respectively, related to the vesting of stock options and the related tax benefit of approximately $2,200 and $1,700, respectively. As of June 30, 2007, the Company had unearned compensation of approximately $28,600 relating to stock option awards that will be amortized over a weighted-average period of approximately two years.

Restricted Stock Units

A summary of the changes in restricted stock units outstanding under the Company’s equity compensation plans during 2007 is presented below:

 

 

Number of 
Restricted 
Stock

 

Weighted 
Average Grant 
Date Fair 
Value Per 
Share

 

Non-vested units as of December 31, 2006

 

 

977

 

 

 

$

30.93

 

 

Granted

 

 

376

 

 

 

$

33.54

 

 

Vested

 

 

(100

)

 

 

$

30.68

 

 

Canceled

 

 

(3

)

 

 

$

27.77

 

 

Non-vested units as of March 31, 2007

 

 

1,250

 

 

 

$

31.74

 

 

Granted

 

 

228

 

 

 

$

34.48

 

 

Vested

 

 

(31

)

 

 

$

36.16

 

 

Canceled

 

 

(1

)

 

 

$

27.68

 

 

Non-vested units as of June 30, 2007

 

 

1,446

 

 

 

$

32.11

 

 

 

For the three months ended June 30, 2006 and 2007, the Company recognized equity-based compensation expense of approximately $1,500 and $2,600, respectively, related to the vesting of restricted stock units and the related tax benefit of approximately $600 and $700, respectively. For the six months ended June 30, 2006 and 2007, the Company recognized equity-based compensation expense of approximately $2,200 and $5,800, respectively, related to the vesting of restricted stock units and the related tax benefit of approximately $900 and $1,600, respectively. As of June 30, 2007, the Company had unearned compensation of approximately $37,000 relating to restricted stock units that will be amortized over a weighted-average period of approximately two years.

(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 Company’s 6.25% senior subordinated notes due 2012 (“2004 Notes”), the Convertible Debentures and the January 2007 Amended and Restated Credit Agreement 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 (collectively, the “Non-Guarantor Subsidiaries”) as of December 31, 2006 and June 30, 2007 and for the three and six months ended June 30, 2006 and 2007. The condensed consolidating financial information has been

19




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

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 January 2007 Amended and Restated Credit Agreement, 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 CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
December 31, 2006
(Unaudited, in thousands)

 

 

Parent
Company

 

Guarantor
Subsidiaries

 

Non-Guarantor
Subsidiaries

 

Eliminating
Entries

 

Consolidated

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

 

 

4,070

 

 

 

23,721

 

 

 

 

 

 

27,791

 

 

Accounts receivable, net

 

 

 

125,598

 

 

 

52,847

 

 

 

 

 

 

178,445

 

 

Inventories

 

 

 

45,801

 

 

 

14,088

 

 

 

(425

)

 

 

59,464

 

 

Other current assets

 

36,937

 

 

20,511

 

 

 

21,554

 

 

 

 

 

 

79,002

 

 

Property and equipment, net

 

 

 

294,952

 

 

 

156,308

 

 

 

(600

)

 

 

450,660

 

 

Investment in subsidiaries

 

574,579

 

 

194,556

 

 

 

130,743

 

 

 

(899,878

)

 

 

 

 

Goodwill

 

183

 

 

302,144

 

 

 

331,403

 

 

 

 

 

 

633,730

 

 

Intangible assets

 

 

 

106,605

 

 

 

50,646

 

 

 

 

 

 

157,251

 

 

Other assets

 

43,630

 

 

109,738

 

 

 

25,947

 

 

 

(6,048

)

 

 

173,267

 

 

Total assets

 

$

655,329

 

 

1,203,975

 

 

 

807,257

 

 

 

(906,951

)

 

 

1,759,610

 

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current installments of long-term
debt

 

$

2,500

 

 

 

 

 

648

 

 

 

 

 

 

3,148

 

 

Current liabilities

 

15,779

 

 

90,423

 

 

 

84,594

 

 

 

79

 

 

 

190,875

 

 

Long-term debt, excluding current installments

 

912,000

 

 

 

 

 

1,253

 

 

 

 

 

 

913,253

 

 

Other non-current liabilities

 

5,069

 

 

86,652

 

 

 

32,529

 

 

 

6

 

 

 

124,256

 

 

Intercompany balances

 

(808,097

)

 

740,091

 

 

 

68,006

 

 

 

 

 

 

 

 

Stockholders’ equity

 

528,078

 

 

286,809

 

 

 

620,227

 

 

 

(907,036

)

 

 

528,078

 

 

Total liabilities and stockholders’ equity

 

$

655,329

 

 

1,203,975

 

 

 

807,257

 

 

 

(906,951

)

 

 

1,759,610

 

 

 

20




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

SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
June 30, 2007
(Unaudited, in thousands)

 

 

Parent
Company

 

Guarantor
Subsidiaries

 

Non-Guarantor
Subsidiaries

 

Eliminating
Entries

 

Consolidated

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

 

 

(1,985

)

 

 

29,796

 

 

 

 

27,811

 

 

Accounts receivable, net

 

 

 

139,303

 

 

 

64,108

 

 

 

 

203,411

 

 

Inventories

 

 

 

58,581

 

 

 

24,435

 

 

(425

)

 

82,591

 

 

Other current assets

 

21,977

 

 

14,748

 

 

 

30,692

 

 

 

 

67,417

 

 

Property and equipment, net

 

 

 

310,611

 

 

 

213,637

 

 

(600

)

 

523,648

 

 

Investment in subsidiaries

 

842,325

 

 

196,720

 

 

 

222,684

 

 

(1,261,729

)

 

 

 

Goodwill

 

183

 

 

332,826

 

 

 

375,513

 

 

 

 

708,522

 

 

Intangible assets

 

 

 

107,502

 

 

 

45,078

 

 

 

 

152,580

 

 

Other assets

 

42,877

 

 

139,908

 

 

 

40,310

 

 

(6,101

)

 

216,994

 

 

Total assets

 

$

907,362

 

 

1,298,214

 

 

 

1,046,253

 

 

(1,268,855

)

 

1,982,974

 

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current installments of long-term debt

 

$

4,500

 

 

 

 

 

477

 

 

 

 

4,977

 

 

Current liabilities

 

33,311

 

 

80,577

 

 

 

97,981

 

 

93

 

 

211,962

 

 

Long-term debt, excluding current installments

 

1,027,250

 

 

 

 

 

1,045

 

 

 

 

1,028,295

 

 

Other non-current liabilities

 

7,122

 

 

84,550

 

 

 

34,336

 

 

6

 

 

126,014

 

 

Intercompany balances

 

(776,547

)

 

697,380