Table of Contents

 

 

 

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 March 31, 2009

 

 

 

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 required 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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes   o  No   o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer x

 

Accelerated filer o

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

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

 

The registrant has the following number of shares outstanding of each of the registrant’s classes of common stock as of May 4, 2009:

 

Class A Common Stock:  92,449,973

Class B Common Stock:  None

 

 

 



Table of Contents

 

SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES

INDEX TO FINANCIAL INFORMATION

AND OTHER INFORMATION

THREE MONTHS ENDED MARCH 31, 2009

 

PART I.

FINANCIAL INFORMATION

2

 

 

 

Item 1.

Financial Statements

2

 

 

 

 

Consolidated Balance Sheets as of March 31, 2009 and December 31, 2008

2

 

 

 

 

Consolidated Statements of Income for the Three Months Ended March 31, 2009 and 2008

3

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2009 and 2008

4

 

 

 

 

Notes to Consolidated Financial Statements

5

 

 

 

Item 2.

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

22

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

29

 

 

 

Item 4.

Controls and Procedures

29

 

 

 

PART II.

OTHER INFORMATION

30

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

30

 

 

 

Item 5.

Other Information

30

 

 

 

Item 6.

Exhibits

31

 



Table of Contents

 

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 results 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; ability to enhance and develop successful gaming concepts; dependence on suppliers and manufacturers; liability for product defects; factors associated with foreign operations; influence of certain stockholders; 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 under the heading “Risk Factors” in 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.

 

1



Table of Contents

 

PART 1.  FINANCIAL INFORMATION

 

Item 1.  Financial Statements

 

SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

As of March 31, 2009 and December 31, 2008

(Unaudited, in thousands, except per share amounts)

 

 

 

March 31,

 

December 31,

 

 

 

2009

 

2008

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

108,703

 

$

140,639

 

Accounts receivable, net of allowance for doubtful accounts of $5,372 and $6,465 as of March 31, 2009 and December 31, 2008, respectively

 

193,596

 

212,487

 

Inventories

 

72,331

 

75,371

 

Deferred income taxes, current portion

 

14,263

 

14,360

 

Prepaid expenses, deposits and other current assets

 

65,488

 

68,921

 

Total current assets

 

454,381

 

511,778

 

Property and equipment, at cost

 

1,015,925

 

1,016,767

 

Less accumulated depreciation

 

(455,750

)

(441,288

)

Property and equipment, net

 

560,175

 

575,479

 

Goodwill, net

 

729,129

 

657,211

 

Intangible assets, net

 

116,796

 

120,946

 

Other assets and investments

 

293,051

 

317,039

 

Total assets

 

$

2,153,532

 

$

2,182,453

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Debt payments due within one year

 

$

43,152

 

$

43,384

 

Accounts payable

 

52,006

 

64,635

 

Accrued liabilities

 

235,309

 

152,665

 

Total current liabilities

 

330,467

 

260,684

 

Deferred income taxes

 

32,325

 

33,809

 

Other long-term liabilities

 

90,061

 

96,048

 

Long-term debt, excluding current installments

 

1,153,931

 

1,196,083

 

Total liabilities

 

1,606,784

 

1,586,624

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

Class A common stock, par value $0.01 per share, 199,300 shares authorized, and 92,286 and 92,601 shares outstanding as of March 31, 2009 and December 31, 2008, respectively

 

923

 

926

 

Additional paid-in capital

 

639,233

 

628,356

 

Accumulated earnings

 

32,869

 

58,059

 

Treasury stock, at cost, 3,130 and 2,608 shares held as of March 31, 2009 and December 31, 2008, respectively

 

(48,126

)

(42,586

)

Accumulated other comprehensive income

 

(78,151

)

(48,926

)

Total stockholders’ equity

 

546,748

 

595,829

 

Total liabilities and stockholders’ equity

 

$

2,153,532

 

$

2,182,453

 

 

See accompanying notes to consolidated financial statements.

 

2



Table of Contents

 

SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

Three Months Ended March 31, 2009 and 2008

(Unaudited, in thousands, except per share amounts)

 

 

 

Three Months Ended March 31,

 

 

 

2009

 

2008

 

Operating revenues:

 

 

 

 

 

Services

 

$

210,338

 

$

233,953

 

Sales

 

20,352

 

23,054

 

 

 

230,690

 

257,007

 

Operating expenses:

 

 

 

 

 

Cost of services (exclusive of depreciation and amortization)

 

125,762

 

130,378

 

Cost of sales (exclusive of depreciation and amortization)

 

15,422

 

16,844

 

Selling, general and administrative expenses

 

41,486

 

47,016

 

Employee termination costs

 

3,920

 

2,772

 

Depreciation and amortization

 

31,143

 

34,504

 

Operating income

 

12,957

 

25,493

 

Other (income) expense:

 

 

 

 

 

Interest expense

 

18,809

 

17,145

 

Equity in earnings of joint ventures

 

(15,098

)

(16,859

)

Gain on early extinguishment of debt

 

(2,288

)

 

Other income, net

 

(1,917

)

50

 

 

 

(494

)

336

 

Income before income taxes

 

13,451

 

25,157

 

Income tax expense

 

38,641

 

8,494

 

Net income (loss)

 

$

(25,190

)

$

16,663

 

 

 

 

 

 

 

Basic and diluted net income per share:

 

 

 

 

 

Basic net income (loss) per share

 

$

(0.27

)

$

0.18

 

Diluted net income (loss) per share

 

$

(0.27

)

$

0.18

 

 

 

 

 

 

 

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

 

 

 

 

 

Basic shares

 

92,539

 

93,314

 

Diluted shares

 

92,539

 

94,718

 

 

See accompanying notes to consolidated financial statements.

 

3



Table of Contents

 

SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Three Months Ended March 31, 2009 and 2008

(Unaudited, in thousands, except per share amounts)

 

 

 

Three Months Ended March 31,

 

 

 

2009

 

2008

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

(25,190

)

$

16,663

 

 

 

 

 

 

 

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

 

 

 

 

 

Depreciation and amortization

 

31,143

 

34,504

 

Change in deferred income taxes

 

35,552

 

718

 

Stock-based compensation

 

11,278

 

8,518

 

Non-cash interest expense

 

4,432

 

4,340

 

Undistributed equity in earnings of joint ventures

 

(15,098

)

(16,859

)

Gain on early extinguishment of debt

 

(2,288

)

 

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

 

 

 

 

 

Accounts receivable

 

16,523

 

5,380

 

Inventories

 

2,449

 

(5,313

)

Accounts payable

 

(10,302

)

(4,425

)

Accrued liabilities

 

655

 

(2,159

)

Other current assets

 

234

 

(5,881

)

Other

 

987

 

230

 

Net cash provided by operating activities

 

50,375

 

35,716

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Capital expenditures

 

(765

)

(3,680

)

Wagering systems expenditures

 

(14,113

)

(46,600

)

Other intangible assets and software expenditures

 

(7,525

)

(11,031

)

Proceeds from asset disposals

 

250

 

 

Change in other assets and liabilities, net

 

281

 

13

 

Business acquisitions, net of cash acquired

 

(1,129

)

(2,742

)

Net cash used in investing activities

 

(23,001

)

(64,040

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Net borrowings (repayments) under revolving credit facility

 

 

40,500

 

Proceeds from issuance of long-term debt

 

18,421

 

7,417

 

Payment on long-term debt

 

(62,139

)

 

Payment of financing fees

 

(2,906

)

 

Purchases of treasury stock

 

(5,539

)

(18,017

)

Net proceeds from issuance of common stock

 

(1,259

)

(27

)

Net cash provided by financing activities

 

(53,422

)

29,873

 

Effect of exchange rate changes on cash and cash equivalents

 

(5,888

)

972

 

Increase (decrease) in cash and cash equivalents

 

(31,936

)

2,521

 

Cash and cash equivalents, beginning of period

 

140,639

 

29,403

 

Cash and cash equivalents, end of period

 

$

108,703

 

$

31,924

 

 

See accompanying notes to consolidated financial statements.

 

4



Table of Contents

 

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, 2009, the consolidated statements of income for the three months ended March 31, 2009 and 2008, and the condensed consolidated statements of cash flows for the three months ended March 31, 2009 and 2008, have been prepared by Scientific Games Corporation and are unaudited.  When used in these notes, the terms “we,” “us,” “our” and “Company” refer to Scientific Games Corporation and all entities included in our consolidated financial statements unless otherwise specified or the context otherwise indicates.  In the opinion of management, all adjustments necessary to present fairly our consolidated financial position as of March 31, 2009, the results of our operations for the three months ended March 31, 2009 and 2008 and our cash flows for the three months ended March 31, 2009 and 2008 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 our 2008 Annual Report on Form 10-K.  The results of operations for the period ended March 31, 2009 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 months ended March 31, 2009 and 2008:

 

 

 

Three Months Ended
March 31,

 

 

 

2009

 

2008

 

Income (numerator)

 

 

 

 

 

Net income (loss)

 

$

(25,190

)

$

16,663

 

 

 

 

 

 

 

Shares (denominator)

 

 

 

 

 

Weighted-average basic common shares outstanding

 

92,539

 

93,314

 

Effect of dilutive securities-stock rights

 

 

1,404

 

Effect of dilutive shares related to convertible debentures

 

 

 

Weighted-average diluted common shares outstanding

 

92,539

 

94,718

 

 

 

 

 

 

 

Basic and diluted per share amounts

 

 

 

 

 

Basic net income (loss) per share

 

$

(0.27

)

$

0.18

 

Diluted net income (loss) per share

 

$

(0.27

)

$

0.18

 

 

During the first quarter of 2009, there were no dilutive stock rights or shares related to the convertible debentures due to the net loss reported for the period. The weighted-average diluted common shares outstanding for the three months ended March 31, 2008 excludes the effect of approximately 3,439 weighted-average stock rights outstanding, because their effect would be anti-dilutive.

 

The aggregate number of shares that we could be obligated to issue upon conversion of the remaining $226,782 in aggregate principal amount of our 0.75% convertible senior subordinated notes due 2024 (the “convertible debentures”) is approximately 7,793.  The convertible debentures provide for net share settlement upon conversion.  In December 2004, we purchased a bond hedge to mitigate the potential dilution from conversion of the Convertible Debentures during the term of the bond hedge.

 

5



Table of Contents

 

SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, in thousands, except per share amounts)

 

(1) Consolidated Financial Statements (continued)

 

During the first quarter of 2008, the average price of our common stock was lower than the conversion price of the Convertible Debentures.  Therefore, no shares related to the Convertible Debentures were included in our weighted-average diluted common shares outstanding for the three months ended March 31, 2008.

 

(2) Operating Segment Information

 

We operate in three segments.  Our Printed Products Group provides lotteries with instant ticket and related services that include 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 access to a licensed property portfolio and manufactures prepaid phone cards for cellular phone service providers.  Our Lottery Systems Group offers online, instant and video lottery products and online and instant ticket validation systems. This division also provides 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.  Our 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 of the Diversified Gaming Group include server-based gaming machines (including our Nevada™ dual screen terminals, which can offer Great Britain regulated Category B2 or B3 content on the same machines), video lottery terminals (“VLTs”), monitor games, wagering systems for the pari-mutuel racing industry, sports betting systems and services, and Great Britain regulated Category C Amusement With Prize (“AWP”) and Skill With Prize (“SWP”) terminals.  This division also includes our pari-mutuel gaming operations in Connecticut, Maine and the Netherlands.

 

6



Table of Contents

 

SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, in thousands, except per share amounts)

 

(2) Operating Segment Information (continued)

 

The following tables represent revenues, profits, depreciation, amortization and selling, general and administrative expenses for the three month periods ended March 31, 2009 and 2008, by reportable segments. Corporate expenses, including interest expense, other income, and depreciation and amortization, are not allocated to the reportable segments.

 

 

 

Three Months Ended March 31, 2009

 

 

 

Printed
Products
Group

 

Lottery
Systems Group

 

Diversified
Gaming Group

 

Totals

 

Service revenues

 

$

110,077

 

52,068

 

48,193

 

210,338

 

Sales revenues

 

4,590

 

13,869

 

1,893

 

20,352

 

Total revenues

 

114,667

 

65,937

 

50,086

 

230,690

 

 

 

 

 

 

 

 

 

 

 

Cost of services (exclusive of depreciation and amortization)

 

67,094

 

28,875

 

29,793

 

125,762

 

Cost of sales (exclusive of depreciation and amortization)

 

2,601

 

11,808

 

1,013

 

15,422

 

Selling, general and administrative expenses

 

11,523

 

7,490

 

5,176

 

24,189

 

Employee termination costs

 

2,016

 

125

 

433

 

2,574

 

Depreciation and amortization

 

7,679

 

10,732

 

12,557

 

30,968

 

Segment operating income

 

$

23,754

 

6,907

 

1,114

 

31,775

 

Unallocated corporate costs

 

 

 

 

 

 

 

$

17,472

 

Corporate employee terminaion costs

 

 

 

 

 

 

 

$

1,346

 

Consolidated operating income

 

 

 

 

 

 

 

$

12,957

 

 

 

 

Three Months Ended March 31, 2008

 

 

 

Printed
Products
Group

 

Lottery
Systems Group

 

Diversified
Gaming Group

 

Totals

 

Service revenues

 

$

127,226

 

54,646

 

52,081

 

233,953

 

Sales revenues

 

8,671

 

7,764

 

6,619

 

23,054

 

Total revenues

 

135,897

 

62,410

 

58,700

 

257,007

 

 

 

 

 

 

 

 

 

 

 

Cost of services (exclusive of depreciation and amortization)

 

70,813

 

28,649

 

30,916

 

130,378

 

Cost of sales (exclusive of depreciation and amortization)

 

6,245

 

5,872

 

4,727

 

16,844

 

Selling, general and administrative expenses

 

14,969

 

9,278

 

6,783

 

31,030

 

Employee termination costs

 

2,772

 

 

 

2,772

 

Depreciation and amortization

 

9,976

 

14,974

 

9,285

 

34,235

 

Segment operating income

 

$

31,122

 

3,637

 

6,989

 

41,748

 

Unallocated corporate costs

 

 

 

 

 

 

 

$

16,255

 

Consolidated operating income

 

 

 

 

 

 

 

$

25,493

 

 

7



Table of Contents

 

SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, in thousands, except per share amounts)

 

(2) Operating Segment Information (continued)

 

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

 

 

 

March 31,

 

 

 

2009

 

2008

 

Reported segment operating income

 

$

31,775

 

$

41,748

 

Unallocated corporate costs

 

(17,472

)

(16,255

)

Corporate employee termination costs

 

(1,346

)

 

Consolidated operating income

 

12,957

 

25,493

 

Interest expense

 

(18,809

)

(17,145

)

Equity in income of joint ventures

 

15,098

 

16,859

 

Other income (expense), net

 

1,917

 

(50

)

Gain on early extinguishment of debt

 

2,288

 

 

Income before income taxes

 

$

13,451

 

$

25,157

 

 

In evaluating financial performance, we focus on operating income as a segment’s measure of profit or loss. Operating income is income 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 (see Note 1 of our Notes to Consolidated Financial Statements in our 2008 Annual Report on Form 10-K).

 

(3) Equity Investments in Joint Ventures

 

We are a member of Consorzio Lotterie Nazionali (“CLN”), a consortium consisting principally of us, Lottomatica S.p.A, and Arianna 2001, a company owned by the Federation of Italian Tobacconists. The consortium has a contract with the Italian Monopoli di Stato to be the exclusive operator of the Italian Gratta e Vinci instant lottery (the “Concession”).  The Concession commenced in mid-2004 and has an initial term of six years with a six-year extension option at the option of the Monopoli di Stato. Under our contract with CLN, we supply instant lottery tickets, game development services, marketing support, and the instant ticket management system and systems support during the term of the Concession, including any renewal term.  We also participate in the profits or losses of CLN as a 20% equity owner, and assist Lottomatica S.p.A in the lottery operations.  We account for this investment using the equity method of accounting.  For the three months ended March 31, 2009 and 2008, we recorded income of $14,115 and $15,116, respectively, representing our share of the earnings of CLN in each period.  In April 2009, we received a cash distribution of approximately $28.2 million from CLN.

 

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SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, in thousands, except per share amounts)

 

(4) Comprehensive Income

 

The following presents a reconciliation of net income to comprehensive income for the three month periods ended March 31, 2009 and 2008:

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2009

 

2008

 

Net income (loss)

 

$

(25,190

)

$

16,663

 

Other comprehensive income (loss)

 

 

 

 

 

Foreign currency translation gain (loss)

 

(29,117

)

14,930

 

Loss on derivative financial instruments

 

(108

)

 

Unrealized loss on investments

 

 

(181

)

Other comprehensive income

 

(29,225

)

14,749

 

Comprehensive income (loss)

 

$

(54,415

)

$

31,412

 

 

(5) Inventories

 

Inventories consist of the following:

 

 

 

March 31,

 

December 31,

 

 

 

2009

 

2008

 

Parts and work-in-process

 

$

27,861

 

$

36,449

 

Finished goods

 

44,470

 

38,922

 

 

 

$

72,331

 

$

75,371

 

 

Point of sale terminals we manufacture 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.

 

(6) Long-Term Debt

 

On March 27, 2009, we and our 100%-owned subsidiary, Scientific Games International, Inc. (“SGI”), entered into an amendment (the “Amendment”) to the credit agreement, dated as of June 9, 2008 (the “Credit Agreement”), among SGI, as borrower, the Company, as guarantor, the several lenders from time to time parties thereto and JPMorgan Chase Bank, N.A. (“JPMorgan”), as administrative agent . The purpose of the Amendment was to provide the Company with additional operating and financing flexibility.  The Company has been and as of March 31, 2009 remains in compliance with the covenants set forth in the Credit Agreement.

 

Under the Amendment, (i) up to approximately $18,800 in certain charges incurred and reserves created in the fourth quarter of 2008, (ii) up to $15,000 of certain charges that may be incurred during the 12-month period commencing on March 1, 2009, including charges in connection with cost-reduction initiatives, and (iii) certain costs and fees incurred in connection with the Amendment, will be added back to “Consolidated EBITDA” for purposes of calculating the “Consolidated Leverage Ratio” and the “Consolidated Senior Debt Ratio” (as such terms are defined under the Credit Agreement).

 

In addition, for purposes of determining the Consolidated Leverage Ratio and the Consolidated Senior Debt Ratio as of any date prior to the earliest date on which any of the holders of convertible debentures may require the Company to repurchase their convertible debentures (currently June 1, 2010) (the “Convertible Debentures Repurchase Date”) neither (i) the earn-out payable with respect to the Company’s acquisition of Global Draw Limited (“Global Draw”) nor (ii) the principal amount of any unsecured promissory notes that may be issued in order to defer payment of up to the equivalent of $60,000 of such earn-out (provided that, among other terms of such promissory notes, no principal payment thereon is required prior to September 30, 2010), will be included as “Indebtedness” in the calculation of “Consolidated Total Debt” (as such terms are defined in the Credit Agreement).

 

If any promissory notes are issued to defer payment of the Global Draw earn-out, then the revolving credit facility and the term loan facility under the Credit Agreement will mature (if earlier than the date that would otherwise apply under the terms of the Credit Agreement) on the date that is three months prior to the earliest date that any principal payment is required in respect of such promissory notes unless on such date no such promissory notes remain outstanding or the sum of the aggregate available revolving

 

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Table of Contents

 

SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, in thousands, except per share amounts)

 

(6) Long-Term Debt (continued)

 

commitments under the Credit Agreement plus unrestricted cash and cash equivalents of SGI and the guarantors under the Credit Agreement is not less than $50,000 in excess of the amount required to repay in full such outstanding promissory notes.

 

Under the Amendment, for purposes of determining the Consolidated Leverage Ratio as of any date of determination prior to the earlier of the Convertible Debentures Repurchase Date and the date the convertible debentures are redeemed in full, unrestricted cash and cash equivalents of SGI and the guarantors up to the “Debenture Reserve Amount” at such determination date will be netted against the then outstanding principal amount of the convertible debentures (and Consolidated Total Debt will be thereby reduced to the extent of such netting).  The “Debenture Reserve Amount” is an amount equal to the net cash proceeds received by SGI or the guarantors after the date of the Amendment and prior to the Convertible Debentures Repurchase Date from (i) the issuance by the Company of shares of its capital stock (other than disqualified stock), or the issuance of “Permitted Additional Senior Indebtedness” or “Permitted Additional Subordinated Debt,” or Indebtedness under the “Incremental Facilities” (as such terms are defined in the Credit Agreement), and (ii) any “Asset Sales” (as defined in the Credit Agreement) (up to an aggregate of $125,000 of net cash proceeds) with respect to which a reinvestment notice is timely given (provided that the Debenture Reserve Amount will (A) not exceed the outstanding principal amount of the convertible debentures, (B) be reduced to zero on the Convertible Debentures Repurchase Date and (C) to the extent the Debenture Reserve Amount is increased as a result of Assets Sales, will be decreased if and to the extent that term loans under the Credit Agreement are prepaid in lieu of reinvesting the net cash proceeds there from pursuant to a reinvestment notice).

 

The Amendment will increase each of the interest rates set forth in the pricing grid in the Credit Agreement by 0.25% such that, depending upon the Consolidated Leverage Ratio, the interest rate will vary from 2.00% to 3.00% above LIBOR for eurocurrency loans, and 1.00% to 2.00% above the higher of (i) the prime rate or (ii) the Federal Funds Effective Rate plus 0.50% for base rate loans.  Notwithstanding the foregoing, from the Effective Date until the date the compliance certificate for the third fiscal quarter of 2009 is delivered pursuant to the Credit Agreement, the applicable margin for eurocurrency loans will be deemed to be 3.00% and the applicable margin for base rate loans will be deemed to be 2.00%.

 

In connection with the Amendment, SGI agreed to pay an aggregate of approximately $2,800 in fees to consenting lenders and the administrative agent.

 

Our Amended Credit Agreement is secured by a first priority, perfected lien on (1) substantially all the property and assets (real and personal, tangible and intangible) of the Company and its direct and indirect 100%-owned domestic subsidiaries and (2) 100% of our interest in the capital stock (or other equity interests) of all of our direct and indirect 100%-owned domestic subsidiaries and 65% of our interest in the capital stock (or other equity interests) of the first-tier foreign subsidiaries of SGI and the guarantors.

 

On March 31, 2009, we had $196,924 of availability under our revolving credit facility.  There were no borrowings and $53,076 in outstanding letters of credit under our revolving credit facility as of March 31, 2009.

 

The Company may, from time to time, seek to retire or purchase its outstanding debt in open market purchases, in privately negotiated transactions, or otherwise. Any such retirement or purchase of debt may be funded by cash flows from operations, borrowings or other sources and will depend upon prevailing market conditions, liquidity requirements, contractual restrictions and other factors, and the amounts involved may be material. During the three months ended March 31, 2009, we repurchased approximately $47,000 in aggregate principal amount of our convertible debentures for approximately $42,281 in cash under our previously announced convertible debenture repurchase program.  We recognized a gain on early extinguishment of debt of approximately $2,288.  Between April 1, 2009 and May 11, 2009, we have repurchased approximately $10,000 in aggregate principal amount of the Convertible Debentures for approximately $9,200 in cash under our previously announced convertible debenture repurchase program.

 

In May 2008, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position (“FSP”) No. Accounting Principles Board (“APB”) 14-1, Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Settlement) (“FSP APB 14-1”).  FSP APB 14-1 clarifies that convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement) are not addressed by paragraph 12 of APB Opinion No. 14, Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants. Additionally, FSP APB 14-1 specifies that issuers of such instruments should separately account for the liability and equity components in a manner that will reflect the entity’s nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. FSP APB 14-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years, and must be applied retrospectively to all periods presented.  We adopted FSP APB 14-1 on January 1, 2009.  The impact of adoption was an adjustment to accumulated earnings of approximately $22,600 representing the cumulative effect of a change in accounting principle as of January 1, 2007.

 

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Table of Contents

 

SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, in thousands, except per share amounts)

 

(6) Long-Term Debt (continued)

 

The adoption of FSP APB 14-1 had the following effect on our consolidated Statement of Income for the three months ended March 31, 2008:

 

 

 

Three Months Ended

 

 

 

March 31, 2008

 

 

 

Previously

 

As

 

Effect of

 

 

 

Reported

 

Adjusted

 

Change

 

 

 

 

 

 

 

 

 

Interest expense

 

$

13,884

 

$

17,145

 

$

3,261

 

Income tax expense

 

$

8,511

 

$

8,494

 

$

(17

)

Net income

 

$

19,907

 

$

16,663

 

$

(3,244

)

Basic net income per share

 

$

0.21

 

$

0.18

 

$

(0.03

)

Diluted net income per share

 

$

0.21

 

$

0.18

 

$

(0.03

)

 

The adoption of FSP APB 14-1 had the following effect on our consolidated Balance Sheet as of December 31, 2008:

 

 

 

December 31, 2008

 

 

 

Previously

 

As

 

Effect of

 

 

 

Reported

 

Adjusted

 

Change

 

 

 

 

 

 

 

 

 

Other assets and investments

 

$

317,818

 

$

317,039

 

$

(779

)

Long-term debt, excluding current installments

 

$

1,216,264

 

$

1,196,083

 

$

(20,181

)

Additional paid-in capital

 

$

561,202

 

$

628,356

 

$

67,154

 

Accumulated earnings

 

$

105,811

 

$

58,059

 

$

(47,752

)

 

As of January 1, 2008, the cumulative effect of the change in accounting principle on accumulated earnings and additional paid-in capital was approximately $34,800 and $67,200, respectively.

 

The adoption of FSP APB 14-1 had the following effect on our consolidated Statement of Cash Flows for the three months ended March 31, 2008:

 

 

 

Three Months Ended
March 31, 2008

 

 

 

Previously

 

As

 

Effect of

 

 

 

Reported

 

Adjusted

 

Change

 

 

 

 

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net income

 

$

19,907

 

$

16,663

 

$

(3,244

)

Change in deferred income taxes

 

$

735

 

$

718

 

$

(17

)

Non-cash interest expense

 

$

1,079

 

$

4,340

 

$

3,261

 

 

As of March 31, 2009 and December 31, 2008, the equity component of the convertible debentures under FSP APB 14-1 was approximately $67,673 and $68,592, respectively.  The following represents the principal amount of the liability component, the unamortized discount, and the net carrying amount of our convertible debt instruments as of March 31, 2009 and December 31, 2008, respectively:

 

 

 

March 31,

 

December 31,

 

 

 

2009

 

2008

 

Principal

 

$

226,782

 

$

273,782

 

Unamortized discount

 

(13,806

)

(20,182

)

Net carrying amount

 

$

212,976

 

$

253,600

 

 

As of March 31, 2009, the remaining discount will be amortized over a period of approximately 14 months.  The conversion price of the remaining $226,782 in aggregate principal amount of the convertible debentures is $29.10 and the number of shares on which the aggregate consideration to be delivered upon conversion is approximately 7,793.

 

The effective interest rate on the liability component of the convertible debentures is approximately 6.25% for the quarters ended March 31, 2009 and 2008.  The amount of interest cost recognized for the contractual interest coupon during the three months ended March 31, 2009 and 2008 was approximately $493 and $513, respectively.  The amount of interest cost recognized for the amortization of the discount on the liability component of the convertible debentures during the three months ended March 31, 2009 and 2008 was approximately $3,301 and $3,362, respectively.

 

(7) Derivative Financial Instruments

 

Effective October 17, 2008, SGI entered into a three-year interest rate swap agreement (the “Hedge”) with JPMorgan.  Under the Hedge, which is designated as a cash flow hedge in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 133, Accounting for Derivative Instruments and Hedging Activities,” SGI pays interest on a $100,000 notional amount of debt at a fixed rate of 3.49% and receives interest on a $100,000 notional amount of debt at the prevailing three-month LIBOR rate.  The objective of the Hedge is to eliminate the variability of cash flows attributable to the LIBOR component of interest expense paid on $100,000 of our variable-rate debt.  As of March 31, 2009, the Hedge was measured at a fair value of $5,009 using Level 2 valuation techniques of the fair value hierarchy and included in other long-term liabilities on the consolidated balance sheet.

 

          We believe we have matched the critical terms of the hedged variable-rate debt with the Hedge and expect the Hedge to be highly effective in offsetting changes in the expected cash flows due to fluctuation in the three-month LIBOR based rate over the term of the forecasted interest payments related to the $100,000 notional amount of variable-rate debt.  Hedge effectiveness is measured quarterly on a retrospective basis using the cumulative dollar-offset approach in which the cumulative changes in the cash flows of the actual swap are compared to the cumulative changes in the cash flows of the hypothetical swap.  The effective portion of the Hedge is recorded in other comprehensive income (loss) and the ineffective portion of the Hedge, if any, is recorded in the consolidated statement of operations.  During the quarter ended March 31, 2009, we recorded a loss of approximately $108 in other comprehensive income (loss).  There was no ineffective portion of the Hedge recorded in the consolidated statement of operations. Amounts recorded in other comprehensive income (loss) that were deferred on the effective hedged forecasted transactions are reclassified to earnings when the interest expense related to the hedged item affects earnings.

 

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SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, in thousands, except per share amounts)

 

(8) Goodwill and Intangible Assets

 

The following disclosure presents certain information regarding our acquired intangible assets as of March 31, 2009 and December 31, 2008.  Amortizable intangible assets are amortized over their estimated useful lives, as indicated below, with no estimated residual values.

 

Intangible Assets

 

Gross Carrying
Amount

 

Accumulated
Amortization

 

Net Balance

 

Balance as of March 31, 2009

 

 

 

 

 

 

 

Amortizable intangible assets:

 

 

 

 

 

 

 

Patents

 

$

11,775

 

(3,063

)

8,712

 

Customer lists

 

28,250

 

(14,810

)

13,440

 

Customer service contracts

 

3,532

 

(2,331

)

1,201

 

Licenses

 

61,200

 

(34,710

)

26,490

 

Intellectual property

 

16,790

 

(12,249

)

4,541

 

Lottery contracts

 

27,616

 

(27,572

)

44

 

 

 

149,163

 

(94,735

)

54,428

 

Non-amortizable intangible assets:

 

 

 

 

 

 

 

Trade name

 

37,196

 

(2,118

)

35,078

 

Connecticut off-track betting system operating right

 

35,609

 

(8,319

)

27,290

 

 

 

72,805

 

(10,437

)

62,368

 

Total intangible assets

 

$

221,968

 

(105,172

)

116,796

 

 

 

 

 

 

 

 

 

Balance as of December 31, 2008

 

 

 

 

 

 

 

Amortizable intangible assets:

 

 

 

 

 

 

 

Patents

 

$

11,563

 

(2,871

)

8,692

 

Customer lists

 

28,772

 

(14,044

)

14,728

 

Customer service contracts

 

3,892

 

(2,505

)

1,387

 

Licenses

 

60,237

 

(32,615

)

27,622

 

Intellectual property

 

17,057

 

(11,425

)

5,632

 

Lottery contracts

 

27,926

 

(27,498

)

428

 

 

 

149,447

 

(90,958

)

58,489

 

Non-amortizable intangible assets:

 

 

 

 

 

 

 

Trade name

 

37,285

 

(2,118

)

35,167

 

Connecticut off-track betting system operating right

 

35,609

 

(8,319

)

27,290

 

 

 

72,894

 

(10,437

)

62,457

 

Total intangible assets

 

$

222,341

 

(101,395

)

120,946

 

 

The aggregate intangible amortization expense for the three months ended March 31, 2009 and 2008 was approximately $4,800 and $7,850, respectively.

 

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Table of Contents

 

SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, in thousands, except per share amounts)

 

(8) Goodwill and Intangible Assets (continued)

 

The table below reconciles the change in the carrying amount of goodwill, by reporting segment, for the period from December 31, 2008 to March 31, 2009.  In 2009, we recorded (a) a $86,348 increase in goodwill associated with the final purchase price adjustment in accordance with the Global Draw earn-out, as defined, and (b) a decrease in goodwill of $14,430 as a result of foreign currency translation.

 

Goodwill

 

Printed
Products
Group

 

Lottery
Systems

Group

 

Diversified
Gaming
Group

 

Totals

 

Balance as of December 31, 2008

 

$

324,245

 

190,341

 

142,625

 

657,211

 

Adjustments

 

(3,244

)

(8,445

)

83,607

 

71,918

 

Balance as of March 31, 2009

 

$

321,001

 

181,896

 

226,232

 

729,129

 

 

(9) Pension and Other Post-Retirement Plans

 

We have defined benefit pension plans for our U.S.-based union employees and U.K.-based union employees (the “U.S. Plan” and the “U.K. Plan”, respectively) and, with the acquisition of Oberthur Gaming Technologies and related companies in 2007 (“OGT”), certain Canadian-based employees (the “Canadian Plan”).  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 Canadian Plan are generally based on the number of years of credited service.  Our 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 months ended March 31, 2009 and 2008.

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2009

 

2008

 

Components of net periodic pension benefit cost:

 

 

 

 

 

Service cost

 

$

374

 

$

713

 

Interest cost

 

1,050

 

1,366

 

Expected return on plan assets

 

(891

)

(1,440

)

Amortization of actuarial gains/losses

 

113

 

280

 

Amortization of prior service costs

 

11

 

11

 

Net periodic cost

 

$

657

 

$

930

 

 

We have a 401(k) plan for U.S.-based employees who are not covered by a collective bargaining agreement.  Effective February 28, 2009, we reduced the matching contributions from 50 cents to 25 cents on the dollar for the first 6% of participant contributions for a match of up to 1.5% of eligible compensation.

 

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Table of Contents

 

SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, in thousands, except per share amounts)

 

(10) Income Taxes

 

The effective tax rates of 287.3% and 33.8%, respectively, for the three months ended March 31, 2009 and 2008 were determined using an estimated annual effective tax rate.  The effective tax rate for the three months ended March 31, 2009 includes the impact of a valuation allowance against the deferred tax asset related to foreign tax credits.  The effective tax rate for the three months ended March 31, 2008, was less than the federal statutory rate of 35% due to lower tax rates applicable to our earnings from operations outside the United States.

 

At December 31, 2008, the Company had a deferred tax asset for its foreign tax credit (“FTC”) carry forward of approximately $40,400.  Although the Company will continue to explore tax planning strategies to use all of its FTC at March 31, 2009, the Company established a valuation allowance of approximately $33,833 against the FTC deferred tax asset to reduce the asset to the net amount management estimates is “more likely than not” to be realized.

 

Further, the Company determined it is not “more likely than not” that the foreign taxes generated in 2009 will be realized in full against its U.S. tax liability during the FTC carry forward period.  As a result, the Company’s 2009 annual effective income tax rate is greater than the federal statutory rate because of the valuation allowance established against the deferred tax asset for a portion of the FTC generated in 2009.

 

(11) Stockholders’ Equity

 

The following demonstrates the change in the number of shares of Class A common stock outstanding during the three months ended March 31, 2009 and during the fiscal year ended December 31, 2008:

 

 

 

Three Months

 

Twelve Months

 

 

 

Ended

 

Ended

 

 

 

March 31,

 

December 31,

 

 

 

2009

 

2008

 

Shares outstanding as of beginning of period

 

92,601

 

93,414

 

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

 

207

 

655

 

Shares repurchased into treasury stock

 

(522

)

(1,468

)

Shares outstanding as of end of period

 

92,286

 

92,601

 

 

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Table of Contents

 

SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, in thousands, except per share amounts)

 

(12) Stock-Based Compensation

 

As of March 31, 2009, we had approximately 777 shares available for grants of equity awards under our equity-based compensation plans, of which 330 shares were available for grants of restricted stock units (“RSUs”).

 

Stock Options

 

A summary of the changes in stock options outstanding under our equity-based compensation plans during 2009 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, 2008

 

7,378

 

6.0

 

$

21.03

 

$

21,516

 

Granted

 

850

 

 

 

12.23

 

 

 

Exercised

 

(23

)

 

 

5.88

 

146

 

Cancelled

 

(115

)

 

 

22.89

 

 

 

Options outstanding as of March 31, 2009

 

8,090

 

6.0

 

$

20.12

 

$

10,927

 

 

 

 

 

 

 

 

 

 

 

Options exercisable as of March 31, 2009

 

4,501

 

4.0

 

$

17.56

 

$

10,927

 

 

The weighted-average grant date fair value of options granted during the three months ended March 31, 2009 was $5.74.  For the three months ended March 31, 2009 and 2008, we recognized equity-based compensation expense of approximately $4,800 and $4,100, respectively, related to the vesting of stock options and the related tax benefit of approximately $1,600 and $1,200, respectively. As of March 31, 2009, we had unearned compensation of approximately $26,700 relating to stock option awards that will be amortized over a weighted-average period of approximately two years.

 

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Table of Contents

 

SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, in thousands, except per share amounts)

 

(12) Stock-Based Compensation (continued)

 

Restricted Stock Units

 

A summary of the changes in RSUs outstanding under our equity-based compensation plans during 2009 is presented below:

 

 

 

Number of
Restricted
Stock

 

Weighted
Average Grant
Date Fair
Value Per
Share

 

Non-vested units as of December 31, 2008

 

1,673

 

$

28.30

 

Granted

 

973

 

$

12.06

 

Vested

 

(273

)

$

28.16

 

Cancelled

 

(13

)

$

26.24

 

Non-vested units as of March 31, 2009

 

2,360

 

$

21.88

 

 

For the three months ended March 31, 2009 and 2008, we recognized equity-based compensation expense of approximately $6,400 and $4,400, respectively, related to the vesting of RSUs and the related tax benefit of approximately $2,500 and $1,300, respectively.  As of March 31, 2009, we had unearned compensation of approximately $39,300 relating to RSUs that will be amortized over a weighted-average period of approximately two years.

 

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

 

We conduct substantially all of our business through our domestic and foreign subsidiaries.  SGI’s obligations under the Credit Agreement and the 2008 Notes are fully and unconditionally and jointly and severally guaranteed by Scientific Games Corporation (the “Parent Company”) and our 100%-owned domestic subsidiaries other than SGI (the “Guarantor Subsidiaries”).  Our 2004 Notes and our Convertible Debentures, which were issued by the Parent Company, are fully and unconditionally and jointly and severally guaranteed by our 100%-owned domestic subsidiaries, including SGI.

 

Presented below is condensed consolidating financial information for (i) the Parent Company, (ii) SGI, (iii) the 100%-owned Guarantor Subsidiaries other than SGI and (iv) the 100%-owned foreign subsidiaries and the non-100%-owned domestic and foreign subsidiaries (the “Non-Guarantor Subsidiaries”) as of March 31, 2009 and December 31, 2008 and for the three months ended March 31, 2009 and 2008. 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, SGI, the Guarantor Subsidiaries and the Non-Guarantor Subsidiaries assuming the guarantee structures of the Credit Agreement, the 2008 Notes, the Convertible Debentures and the 2004 Notes were in effect at the beginning of the periods presented.

 

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.

 

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Table of Contents

 

SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, in thousands, except per share amounts)

 

SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES

SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET

March 31, 2009

 

 

 

Parent
Company

 

SGI

 

Guarantor
Subsidiaries

 

Non-
Guarantor
Subsidiaries

 

Eliminating
Entries

 

Consolidated

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

11,983

 

492

 

 

99,299

 

(3,071

)

108,703

 

Accounts receivable, net

 

 

87,781

 

39,070

 

66,745

 

 

193,596

 

Inventories

 

 

30,814

 

17,461

 

24,056

 

 

72,331

 

Other current assets

 

26,234

 

16,332

 

8,813

 

28,372

 

 

79,751

 

Property and equipment, net

 

2,200

 

185,587

 

127,121

 

245,267

 

 

560,175

 

Investment in subsidiaries

 

407,491

 

554,206

 

7,222

 

 

(968,919

)

 

Goodwill

 

 

273,656

 

74,452

 

381,021

 

 

729,129

 

Intangible assets

 

 

44,437

 

59,734

 

12,625

 

 

116,796

 

Intercompany balances

 

572,808

 

 

18,526

 

 

(591,334

)

 

Other assets

 

10,058

 

182,231

 

14,983

 

91,880

 

(6,101

)

293,051

 

Total assets

 

$

1,030,774

 

1,375,536

 

367,382

 

949,265

 

(1,569,425

)

2,153,532

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

 

 

 

 

 

 

Current installments of long-term debt

 

$

 

5,500

 

 

37,652

 

 

43,152

 

Current liabilities

 

28,730

 

51,033

 

42,968

 

167,645

 

(3,061

)

287,315

 

Long-term debt, excluding current

 

412,976

 

739,000

 

 

1,955

 

 

1,153,931

 

Other non-current liabilities

 

42,320

 

10,575

 

16,326

 

53,159

 

6

 

122,386

 

Intercompany balances

 

 

378,368

 

 

212,976

 

(591,344

)

 

Stockholders’ equity

 

546,748

 

191,060

 

308,088

 

475,878

 

(975,026

)

546,748

 

Total liabilities and stockholders’ equity

 

$

1,030,774

 

1,375,536

 

367,382

 

949,265

 

(1,569,425

)

2,153,532

 

 

17



Table of Contents

 

SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, in thousands, except per share amounts)

 

SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES

SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET

December 31, 2008

 

 

 

Parent
Company

 

SGI

 

Guarantor
Subsidiaries

 

Non-
Guarantor
Subsidiaries

 

Eliminating
Entries

 

Consolidated

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

62,948

 

204

 

 

79,016

 

(1,529

)

140,639

 

Accounts receivable, net

 

 

85,395

 

45,032

 

82,060

 

 

212,487

 

Inventories

 

 

28,877

 

16,909

 

30,010

 

(425

)

75,371

 

Other current assets

 

27,063

 

19,403

 

7,337

 

29,478

 

 

83,281

 

Property and equipment, net

 

2,294

 

185,560

 

133,024

 

255,201

 

(600

)

575,479

 

Investment in subsidiaries

 

421,781

 

278,500

 

2,264

 

(931

)

(701,614

)

 

Goodwill

 

 

273,656

 

74,453

 

309,102

 

 

657,211

 

Intangible assets

 

 

44,774

 

61,036

 

15,136

 

 

120,946

 

Intercompany balances

 

562,105

 

 

 

 

(562,105

)

 

Other assets

 

45,266

 

165,601

 

15,042

 

97,230

 

(6,100

)

317,039

 

Total assets

 

$

1,121,457

 

1,081,970

 

355,097

 

896,302

 

(1,272,373

)

2,182,453

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

 

 

 

 

 

 

Current installments of long-term debt

 

$

 

5,500

 

 

37,884

 

 

43,384

 

Current liabilities

 

24,537

 

49,065

 

48,699

 

96,534

 

(1,535

)

217,300

 

Long-term debt, excluding current installments

 

453,601

 

740,375

 

 

2,107

 

 

1,196,083

 

Other non-current liabilities

 

47,490

 

9,971

 

16,821

 

55,569

 

6

 

129,857

 

Intercompany balances

 

 

239,744

 

96,393

 

225,966

 

(562,103

)

 

Stockholders’ equity

 

595,829

 

37,315

 

193,184

 

478,242

 

(708,741

)

595,829

 

Total liabilities and stockholders’ equity

 

$

1,121,457

 

1,081,970

 

355,097

 

896,302

 

(1,272,373

)

2,182,453

 

 

18



Table of Contents

 

SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, in thousands, except per share amounts)

 

SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES

SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF INCOME

 Three Months Ended March 31, 2009

 

 

 

Parent
Company

 

SGI

 

Guarantor
Subsidiaries

 

Non-
Guarantor
Subsidiaries

 

Eliminating
Entries

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating revenues

 

$

 

98,628

 

32,183

 

100,634

 

(755

)

230,690

 

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

 

 

30,179

 

54,962

 

56,786

 

(743

)

141,184

 

Selling, general and administrative expenses

 

15,717

 

12,635

 

3,721

 

9,422

 

(9

)

41,486

 

Employee termination costs

 

1,346

 

1,546

 

433

 

595

 

 

3,920

 

Depreciation and amortization

 

174

 

8,714

 

8,837

 

13,418

 

 

31,143

 

Operating income

 

(17,237

)

45,554

 

(35,770

)

20,413

 

(3

)

12,957

 

Interest expense

 

7,932

 

10,122

 

11

 

744

 

 

18,809

 

Other income

 

(22,777

)

17,100

 

(11,470

)

(2,153

)

(3

)

(19,303

)

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

 

(2,392

)

18,332

 

(24,311

)

21,822

 

 

13,451

 

Equity in income (loss) of subsidiaries

 

14,537

 

(5,512

)

 

 

(9,025

)

 

Income tax expense

 

37,335

 

(16

)

95

 

1,227

 

 

38,641

 

Net income

 

$

(25,190

)

12,836

 

(24,406

)

20,595

 

(9,025

)

(25,190

)

 

SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES

SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF INCOME

Three Months Ended March 31, 2008

 

 

 

Parent
Company

 

SGI

 

Guarantor
Subsidiaries

 

Non-
Guarantor
Subsidiaries

 

Eliminating
Entries

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating revenues

 

$

 

119,732

 

35,795

 

102,861

 

(1,381

)

257,007

 

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

 

 

29,552

 

55,836

 

63,200

 

(1,366

)

147,222

 

Selling, general and administrative expenses

 

15,858

 

16,395

 

4,010

 

10,773

 

(20

)

47,016

 

Employee termination costs

 

 

 

 

2,772

 

 

2,772

 

Depreciation and amortization

 

269

 

12,854

 

8,285

 

13,096

 

 

34,504

 

Operating income (loss)

 

(16,127

)

60,931

 

(32,336

)

13,020

 

5

 

25,493

 

Interest expense

 

16,880

 

55

 

19

 

191

 

 

17,145

 

Other (income) expense

 

(943

)

47,789

 

(63,626

)

(34

)

5

 

(16,809

)

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

 

(32,064

)

13,087

 

31,271

 

12,863

 

 

25,157

 

Equity in income (loss) of subsidiaries

 

56,213

 

30,539

 

 

 

(86,752

)

 

Income tax expense

 

7,486

 

 

225

 

783

 

 

8,494

 

Net income

 

$

16,663

 

43,626

 

31,046

 

12,080

 

(86,752

)

16,663

 

 

19



Table of Contents

 

SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, in thousands, except per share amounts)

 

SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES

SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

Three Months Ended March 31, 2009

 

 

 

Parent
Company

 

SGI

 

Guarantor
Subsidiaries

 

Non-
Guarantor
Subsidiaries

 

Eliminating
Entries

 

Consolidated

 

Net cash provided by operating activities

 

$

(28,777

)

34,119

 

3,032

 

41,986

 

15

 

50,375

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital and wagering systems expenditures

 

 

(6,566

)

(3,602

)

(4,710

)

 

(14,878

)

Business acquisitions, net of cash acquired

 

 

 

(58

)

(1,071

)

 

(1,129

)

Other assets and investments

 

(307

)

(139,258

)

(7,331

)

(23,824

)

163,726

 

(6,994

)

Net cash provided by (used in) investing activities

 

(307

)

(145,824

)

(10,991

)

(29,605

)

163,726

 

(23,001

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net proceeds (payments) on long-term debt

 

(42,281

)

(1,375

)

 

(62

)

 

(43,718

)

Net proceeds from stock issue

 

(1,259

)

(3,074

)

139,812

 

26,988

 

(163,726

)

(1,259

)

Purchase of treasury stock

 

(5,539

)

 

 

 

 

(5,539

)

Payment of financing fees

 

 

(2,906

)

 

 

 

(2,906

)

Other, principally intercompany balances

 

27,198

 

119,348

 

(133,393

)

(13,848

)

695

 

 

Net cash provided by (used in) financing activities

 

(21,881

)

111,993

 

6,419

 

13,078

 

(163,031

)

(53,422

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Effect of exchange rate changes on cash

 

 

 

 

(5,178

)

(710

)

(5,888

)