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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 1996
--------------------------------------------
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
- - ----- EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
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COMMISSION FILE NUMBER 000-22298
SCIENTIFIC GAMES HOLDINGS CORP.
- - ----------------------------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 58-1943521
- - ----------------------------------------------------------------------------
(STATE OR OTHER JURISDICTION OF (IRS IDENTIFICATION NO.)
EMPLOYER)
1500 BLUEGRASS LAKES PARKWAY, ALPHARETTA, GEORGIA 30201
- - ----------------------------------------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (770) 664-3700
------------------------
- - ----------------------------------------------------------------------------
FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF
CHANGED SINCE LAST REPORT.
1
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INDICATE BY CHECK 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
----- -----
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
INDICATE BY CHECK WHETHER THE REGISTRANT HAS FILED ALL DOCUMENTS AND
REPORTS REQUIRED TO BE FILED BY SECTION 12, 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 SUBSEQUENT TO THE DISTRIBUTION OF SECURITIES UNDER A PLAN
CONFIRMED BY A COURT.
YES NO
----- -----
APPLICABLE ONLY TO CORPORATE ISSUERS:
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES
OF COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE:
13,064,645 SHARES OF COMMON STOCK, $.001 PAR VALUE PER SHARE, AS OF MARCH 31,
- - ------------------------------------------------------------------------------
1996.
- - -----
2
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PART I - FINANCIAL INFORMATION
Page No.
--------
Item 1. Consolidated Condensed Financial Statements
Consolidated Condensed Balance Sheets
March 31, 1996 and December 31, 1995.................4
Consolidated Condensed Statements of Earnings
Three-month period ended March 31, 1996
and March 31, 1995...................................5
Consolidated Condensed Statements of Cash Flows
Three-month period ended March 31, 1996
and March 31, 1995...................................6
Notes to Consolidated Condensed Financial Statements......7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations..................8
PART II - OTHER INFORMATION
Item 1. Legal Proceedings........................................12
Item 2. Changes in Securities....................................12
Item 6. Exhibits and Reports on Form 8-K.........................12
3
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SCIENTIFIC GAMES HOLDINGS CORP.
CONSOLIDATED CONDENSED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
-------- ----------
ASSETS (unaudited) (1)
<S> <C> <C>
Current assets:
Cash and cash equivalents................................ $ 32,297 $ 26,413
Trade receivable, net of allowance for doubtful accounts
of $137 and $417, respectively......................... 16,394 21,725
Inventories.............................................. 8,111 6,767
Prepaid expenses and other current assets................ 850 871
Deferred income tax benefit.............................. 1,280 1,280
-------- --------
Total current assets...................................... 58,932 57,056
Property and equipment, at cost:
Land..................................................... 2,521 2,521
Buildings................................................ 11,660 11,598
Production and other equipment........................... 61,405 59,779
Construction-in-Progress................................. 0 867
-------- --------
75,586 74,765
Less accumulated depreciation and amortization........... 26,684 24,673
-------- --------
48,902 50,092
Other assets.............................................. 3,175 3,038
-------- --------
$111,009 $110,186
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable......................................... $ 4,295 $ 4,552
Accrued liabilities...................................... 5,073 6,652
Income taxes payable..................................... 1,227 539
Current portion of capital lease obligations............. 638 596
-------- --------
Total current liabilities................................. 11,233 12,339
Capital lease obligations, less current portion........... 231 376
Deferred income taxes payable............................. 2,891 2,891
Stockholders' equity:
Common stock par value $.001 per share:
shares authorized: 25,750,000;
issued and outstanding shares: 13,064,645 at March 31,
1996 and 13,064,653 at December 31, 1995............... 12 13
Additional paid-in capital............................... 52,700 52,163
Retained earnings ....................................... 44,013 42,503
-------- --------
96,725 94,679
Less notes receivable from officers for the sale
of common stock........................................ (71) (99)
-------- --------
Total stockholders' equity................................ 96,654 94,580
-------- --------
$111,009 $110,186
======== ========
</TABLE>
(1) Derived from audited financial statements
See accompanying notes.
4
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SCIENTIFIC GAMES HOLDINGS CORP.
CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS
(IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Three-month period
ended March 31,
1996 1995
--------- ---------
<S> <C> <C>
Revenue $ 26,575 $ 35,091
Cost of revenues excluding depreciation and
amortization 18,159 21,103
--------- ---------
8,416 13,988
Selling, general and administrative expenses
excluding depreciation and amortization 3,979 3,680
Depreciation, amortization and other charges 2,155 1,768
--------- ---------
2,282 8,540
Interest Income 254 90
Interest Expense (17) (84)
--------- ---------
Earnings before income tax 2,519 8,546
Income tax expense 1,008 3,461
--------- ---------
Net earnings 1,511 5,085
========= =========
Earnings per common share $ 0.11 $ .38
========= =========
Weighted average number of common and common
equivalent shares outstanding 13,741 13,500
========= =========
</TABLE>
See accompanying notes.
5
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SCIENTIFIC GAMES HOLDINGS CORP.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three-month period
ended March 31,
1996 1995
----- ----
<S> <C> <C>
Operating activities
Net earnings.................................................. $ 1,511 $ 5,085
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation............................................ 2,073 1,708
Amortization of intangibles............................. 82 60
Gain on disposal of property and equipment.............. 5 (4)
Stock compensation expense ............................. 533 528
Deferred income taxes...................................
Changes in operating assets and liabilities:
Accounts receivable................................... 5,359 (5,516)
Inventories........................................... (1,344) (1,384)
Prepaid expenses and other assets..................... (226) 43
Accounts payable...................................... (257) 571
Accrued liabilities................................... (1,537) 1,713
Income taxes payable.................................. 688 2,119
------- -------
Net cash provided by operating activities..................... 6,887 4,923
Investing activities
Proceeds from sales of property and equipment................. 45 5
Purchases of property and equipment........................... (933) (4,286)
------- -------
Net cash used in investing activities......................... (888) (4,281)
Financing activities
Payments on notes receivable from officers.................... 28 0
Payments on capital lease obligations......................... (145) (243)
------- -------
Net cash used in financing activities......................... (117) (243)
------- -------
Increase in cash and cash equivalents......................... 5,882 399
Cash and cash equivalents at beginning of period.............. 26,415 7,493
------- -------
Cash and cash equivalents at end of period.................... $32,297 $ 7,892
======= =======
</TABLE>
See accompanying notes.
6
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SCIENTIFIC GAMES HOLDINGS CORP.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. Basis of Presentation
The accompanying unaudited consolidated condensed financial
statements have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly,
they do not include all of the information and footnotes required by
generally accepted accounting principles for complete financial statements
and should be read in conjunction with the financial statement disclosures
contained in the Company's 1995 Annual Report on Form 10-K for the year
ended December 31, 1995. In the opinion of management, all adjustments
considered necessary for a fair presentation (which were of a normal,
recurring nature) have been included. Operating results for the three
month period ended March 31, 1996 are not necessarily indicative of the
results that may be expected for the year ended December 31, 1996.
2. Inventories
Inventories consist principally of lottery tickets and materials
related to their production, which are valued at the lower of cost (first-in,
first-out method) or market. Inventories consist of the following:
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
--------- ------------
(In Thousands)
<S> <C> <C>
Finished goods................ $ 3,354 $ 3,095
Work-in process............... 1,124 334
Raw materials................. 3,633 3,338
--------- ---------
$ 8,111 $ 6,767
========= =========
</TABLE>
3. Contingencies
Refer to the Company's Form 10-K for the year ended December 31, 1995
for a description of pending legal proceedings, with respect to which
there have been no material developments since such date.
7
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SCIENTIFIC GAMES HOLDINGS CORP.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
GENERAL
The Company's revenues are generated from the sale of instant tickets to
lotteries and promotional (commercial) customers, from the provision of
cooperative services, instant ticket hardware and software system development
and services, and from the sale of pull-tab tickets. Instant and
pull-tab ticket revenues are generally based on a price per 1,000 tickets.
Revenues from cooperative services, software and hardware development may be
based on a percentage of the lottery's sales to the public, a contracted price
or any combination of the foregoing.
The Company's operating results can vary significantly from period to
period. Revenues and capital expenditures can be difficult to forecast because
the Company's sales cycle can vary and depend upon factors such as the size and
timing of awarded contracts, changes in customer budgets, ticket inventory
position and general economic conditions. Contracts with governmental entities
operating newly authorized instant lotteries tend to generate higher levels of
ticket sales in the initial months. Operating results may be affected by the
working capital requirements associated with preparing facilities and
equipment, establishing a distribution system and printing tickets for a
recently awarded contract, and by the amount of time elapsing before the
receipt and/or recognition of revenues from the sale of instant lottery tickets
and the provision of cooperative services. Operating results may also be
affected by the utilization of overtime labor and the Company's ability to
smoothly integrate new and/or upgraded production equipment with its existing
production operations. Revenues from the sale of tickets, cooperative services,
software and hardware development may be recognized based upon ticket shipment,
a percentage of the lottery's sales to the public, a contracted price or any
combination of the foregoing. Accordingly, quarter to quarter fluctuations in
revenues may be expected. Additionally, circumstances encountered in
international markets, including the substantial amount of time involved in
bidding on an international contract, the evaluation of such bid and the
resultant contract award or rejection can vary significantly from that
originally anticipated when the bid is prepared. All of these factors can make
it difficult to forecast revenues and expenditures related to the Company's
operations over extended periods and can result in fluctuations in the
Company's quarterly financial results.
The Company's domestic lottery contracts typically have an initial term of
from one to three years and usually provide the customer with options to extend
the contract one or more times under the same, or mutually agreeable, terms and
conditions for additional periods generally
8
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ranging from one to three years. The Company's international lottery
contracts are less likely to have firm contract periods and, historically,
international lottery ticket customers have sought competitive bids for such
contracts more frequently. The Company's customers have seldom failed to
exercise extension options in the Company's domestic instant lottery contracts.
Upon the expiration of a contract (including any extensions which may have been
exercised), lottery authorities often award new contracts through a competitive
procurement process. During any quarter, some lottery contract is typically
expiring and/or reaching an optional extension date. The Company has four
domestic state contracts which are scheduled to expire in 1996. Management
believes new contracts for those states will be awarded through a competitive
procurement process in which the Company will participate. Management estimates
that these four states had aggregate ticket sales equaling approximately 11% of
the Company's ticket shipments in 1995. To date there have been no contracts
awarded by the domestic state lotteries scheduled to expire in 1996. In
contrast, Management believes that lottery contracts with five domestic states
currently serviced by its competitors also will expire or will not be renewed in
1996, and it is expected that new contracts for such states will be awarded
through the competitive procurement process in which the Company also expects to
participate. Management estimates that these five states have aggregate ticket
sales equaling approximately 16% of the tickets shipped to the Company's own
customers in 1995. To date the Company has been the apparent successful bidder
with respect to one of these states (New York). Management anticipates that
lottery contracts awarded or reawarded to the Company in 1996 and the orders
thereunder have the potential of lower equivalent prices than charged in the
previous contracts. The profit margin impact associated with the potential
equivalent lower prices will be dependent upon what offset the level of orders
from new and existing customers, productions efficiencies and other economies of
scale could provide. While Scientific Games has frequently been awarded new
contracts when its prior domestic contracts and extensions have expired, there
can be no assurance, however, that any of the Company's contracts will be
extended or that it will be awarded new contracts as a result of competitive
procurement processes in the future. Nor can any assurances be given with
respect to the Company's ability to offset, in whole or in part, the effects of
any intensified price competition.
The Company has entered into a letter of intent to purchase Opax
International Limited from Rexam PLC. Opax International is a producer of
instant lottery and commercial game tickets with an international customer base
and two printing plants in the United Kingdom. The purchase price, including
debt discharged at closing, is L.15.5 million subject to closing adjustments.
Closing of the transaction is to occur following execution of a definitive
purchase and sale agreement and customary closing conditions.
9
<PAGE> 10
RESULTS OF OPERATIONS
Three-month period ended March 31, 1996 compared to three-month period ended
March 31, 1995.
Revenues for the three-month period ended March 31, 1996 declined $8.5
million, or 24.3% over the revenues for the three-month period ended March 31,
1995. The decrease was primarily due to a decrease in sales to domestic and
international instant ticket customers of $5.0 million and $5.5 million
respectively compared to the same period in 1995. These decreases were
partially offset by increased revenues from the sale of pull-tab tickets,
cooperative services and promotional tickets.
Although the Company's operating results can vary significantly from
period to period, the Company believes the decline in revenues for the first
quarter was due to inventory adjustments by the Company's customers and a shift
in scheduling of ordering new games by some of its customers. While no
assurances can be given, Management anticipates that a majority of these
inventory adjustments and scheduling shifts will be completed in the second
quarter.
Gross margins decreased to 31.7% for the three-month period ended March
31, 1996 from 39.9% for the three-month period ended March 31, 1995. The
decline was due primarily to the loss of gross profits related to the decrease
in instant ticket shipments and sales, as described above. Margins were also
negatively impacted by the costs associated with installation of ultra violet
coating equipment on ticket printing presses at the Company's Alpharetta and
Gilroy plants.
Selling, general and administrative (SG&A) expenses increased $299,000 for
the three-month period of 1996 over the same period of 1995. SG&A expenses also
increased as a percentage of revenues to 15% from 10.5%. The dollar increase
was due primarily to an increase in the accrual of trade show expenses,
increased costs associated with higher salaries and benefits and travel
expenses relating to domestic and international sales and marketing activities.
The percentage increase was due mainly to a decrease in revenues.
Depreciation and amortization increased for the three-month period ended
March 31, 1996 by 21.9% or $387,000 over the comparable period of 1995 due to
the increase in capital expenditures for equipment and facilities resulting
from the Company's capital expansion program. The capital expansion program had
not been fully completed in the quarter ended March 31, 1995 and as a result
was not being fully depreciated in such prior period.
Interest expense for the three-month period ended March 31, 1996 decreased
$67,000 from the three-month period ended March 31, 1995. The
10
<PAGE> 11
decline was due to the decrease in the balance outstanding for
capitalized leases.
Interest income for the three-month period ended March 31, 1996 increased
$164,000 compared to the three-month period ended March 31, 1995 due to the
increase in cash and cash equivalents. The ending balances in cash and cash
equivalents increased by $25.4 million to $32.3 million.
Income tax expense declined in the period ended March 31, 1996 as compared
to the same three-month period of 1995 by $2.5 million or 70.9% due to a 70.5%
decrease in pre-tax earnings.
Net earnings for the three-month period ended March 31, 1996 were $1.5
million compared to $5.1 million for the period ended March 31, 1995.
Earnings per common share for the three-month period ended March 31, 1996,
was 11 cents per share compared to 38 cents per share for the same period
in 1995. The 71.1% decrease in earnings per share was higher than the 70.3%
decrease in net earnings due to an increase in the weighted average number
of outstanding shares and share equivalents increasing from 13.5 million to 13.7
million.
LIQUIDITY AND CAPITAL RESOURCES
MARCH 31, 1996 VERSUS MARCH 31, 1995
For the three-month period ended March 31, 1996, net cash provided by
operating activities increased by $500,000 from $4.9 million for the comparable
period in 1995 to $5.4 million. The increase was due primarily to a decrease in
working capital and an increase in depreciation expense partially offset by a
decline in net income. The decline in working capital was primarily
attributable to a decrease in accounts receivable which was partially offset
by an increase in prepaid expense and a decrease in accounts payable and accrued
liabilities. The decrease in accounts receivable was the result of the decrease
in revenues.
Purchases of property and equipment were lower by $3.4 million or 278%
compared to 1995 because of lower capital expenditures for expansion of the
Company's printing facility in Alpharetta, Georgia. This project was
essentially completed in the first half of 1995. The cash and cash equivalents
balance was $32.3 million as of March 31, 1996 which was $25.4 million higher
than the balance as of the same period in 1995.
The Company expects that its cash balance, cash flows from operations and
the availability of funds from its Bank Credit Agreement should permit it to
meet anticipated acquisitions, capital expenditures, working capital and fund
future growth as new business opportunities arise.
11
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Refer to the Company's Form 10-K for the year ended December 31, 1995
for a description of pending legal proceedings, with respect to which
there have been no material developments since such date.
Although it is not possible to determine the outcome of these
proceedings and claims at their current stage, management believes based
upon, among other things, the advice of counsel, that the disposition of
these matters should not have a materially adverse affect on the Company's
consolidated financial condition or consolidated results of operations.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
#10.46 Key employee stock option plan
(previously filed with the Company's
definitive Proxy Statement for its
Annual Shareholder Meeting held on May 3,
1996, filed with the Commission on
April 1, 1996.)
#11 Computation of Per Share Earnings
#27 Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K
A Form 8-K was filed on March 19, 1996 related to signing of a letter
of intent to purchase Opax International Limited from Rexam PLC, a United
Kingdom corporation.
12
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SCIENTIFIC GAMES HOLDINGS CORP.
Date: May 14, 1996 By: /s/ WILLIAM G. MALLOY
---------------------------------
William G. Malloy
President and
Chief Executive Officer
Date: May 14, 1996 By: /s/ CLIFF O. BICKELL
---------------------------------
Cliff O. Bickell
Vice President, Treasurer,
and Chief Financial Officer
13
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EXHIBIT 11
SCIENTIFIC GAMES HOLDINGS CORP. EXHIBIT 11
COMPUTATION OF PER SHARE EARNINGS
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three-month period
ended March 31,
1996 1995
------- -------
<S> <C> <C>
Net earnings .................................................... $ 1,511 $ 5,085
Weighted average Common stock outstanding........................ 13,065 12,841
Effect of common stock equivalents (stock
options), at average market price............................ 676 659
------- -------
Total..................................................... 13,741 13,500
======= =======
Net earnings per common share.................................... $ .11 $ .38
======= =======
</TABLE>
14
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL
STATEMENTS OF SCIENTIFIC GAMES HOLDINGS CORP. FOR THE THREE MONTHS ENDED MARCH
31, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 32,297
<SECURITIES> 0
<RECEIVABLES> 16,394
<ALLOWANCES> 137
<INVENTORY> 8,111
<CURRENT-ASSETS> 58,932
<PP&E> 75,586
<DEPRECIATION> 26,684
<TOTAL-ASSETS> 111,009
<CURRENT-LIABILITIES> 11,233
<BONDS> 0
0
0
<COMMON> 13
<OTHER-SE> 96,641
<TOTAL-LIABILITY-AND-EQUITY> 111,009
<SALES> 26,575
<TOTAL-REVENUES> 26,575
<CGS> 18,159
<TOTAL-COSTS> 18,159
<OTHER-EXPENSES> 6,134
<LOSS-PROVISION> (284)<F1>
<INTEREST-EXPENSE> 17
<INCOME-PRETAX> 2,519
<INCOME-TAX> 1,008
<INCOME-CONTINUING> 1,511
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,511
<EPS-PRIMARY> .11
<EPS-DILUTED> 0
<FN>
<F1>AN ACCOUNT RECEIVABLE WHICH HAD BEEN FULLY RESERVED IN A PRIOR PERIOD PAID IN
FULL THIS QUARTER, THEREFORE, THERE WAS A NET CREDIT BALANCE IN THE PROVISION
FOR DOUBTFUL ACCOUNTS.
</FN>
</TABLE>
