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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 June 30, 1996
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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
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Scientific Games Holdings Corp.
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(Exact name of registrant as specified in its charter)
Delaware 58-1943521
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(State or other jurisdiction of (IRS identification no.)
employer)
1500 Bluegrass Lakes Parkway, Alpharetta, Georgia 30201
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (770) 664-3700
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Former name, former address and former fiscal year, if changed since last
report.
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Indicate by check x 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
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APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check X 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
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APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuergs
classes of common stock, as of the latest practicable date:
13,066,679 shares of Common Stock, $.001 Par value per share, as of June 30,
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1996.
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PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page No.
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<S> <C>
Item 1. Consolidated Condensed Financial Statements
Consolidated Condensed Balance Sheets
June 30, 1996 and December 31, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Consolidated Condensed Statements of Earnings
Three-month period ended June 30, 1996
and June 30, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Six-month period ended June 30, 1996
and June 30, 1995
Consolidated Condensed Statements of Cash Flows
Six-month period ended June 30, 1996
and June 30, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Notes to Consolidated Condensed Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . . . . . . . 8
</TABLE>
PART II - OTHER INFORMATION
<TABLE>
<S> <C>
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Item 2. Changes in Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
</TABLE>
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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>
June 30, December 31,
1996 1995
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ASSETS (unaudited) (1)
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 34,555 $ 26,413
Trade receivable, net of allowance for doubtful accounts
of $137 and $417, respectively.......................... 23,961 21,725
Inventories............................................... 7,698 6,767
Prepaid expenses and other current assets................. 607 871
Deferred income tax benefit............................... 1,280 1,280
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Total current assets........................................ 68,101 57,056
Property and equipment, at cost:
Land...................................................... 2,521 2,521
Buildings................................................. 11,714 11,598
Production and other equipment............................ 61,952 59,779
Construction-in-Progress.................................. 0 867
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76,187 74,765
Less accumulated depreciation and amortization............ (28,800) 24,673
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47,387 50,092
Other assets................................................ 3,132 3,038
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$118,620 $ 110,186
======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 3,695 $ 4,552
Accrued liabilities....................................... 5,513 6,652
Income taxes payable...................................... 2,804 539
Current portion of capital lease obligations.............. 638 596
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Total current liabilities................................... 12,650 12,339
Capital lease obligations, less current portion............. 83 376
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: 13,066,679 at June 30, 1996
and 13,064,653 at December 31, 1995..................... 13 13
Additional paid-in capital................................ 53,233 52,163
Retained earnings ........................................ 49,821 42,503
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103,067 94,679
Less notes receivable from officers for the sale
of common stock......................................... (71) (99)
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Total stockholders' equity.................................. 102,966 94,580
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$118,620 $ 110,186
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</TABLE>
(1) Derived from audited financial statements
See accompanying notes.
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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 Six-month period
ended June 30 ended June 30
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue $37,562 $39,294 $64,153 $74,284
Cost of revenues excluding depreciation and
amortization 21,790 23,682 39,949 44,785
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15,772 15,612 24,204 29,499
Selling, general and administrative expenses
excluding depreciation and amortization 4,580 3,641 8,559 7,321
Depreciation, amortization and other charges 2,215 2,729 4,370 4,497
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8,977 9,242 11,275 17,681
Interest income 326 158 580 248
Gain/(loss) on foreign currency 412 (38) 396 63
Interest expense 14 71 31 155
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Earnings before income tax 9,701 9,291 12,220 17,837
Income tax expense 3,892 3,772 4,900 7,233
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Net earnings $ 5,809 $ 5,519 $ 7,320 $10,604
======= ======= ======= =======
Earnings per common share $ 0.42 $ 0.41 $ 0.53 $ 0.78
======= ======= ======= =======
Weighted average number of common and common
equivalent shares outstanding 13,725 13,567 13,734 13,557
======= ======= ======= =======
</TABLE>
See accompanying notes.
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SCIENTIFIC GAMES HOLDINGS CORP.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Six-month period
ended June 30,
1996 1995
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<S> <C> <C>
Operating activities
Net earnings................................................................. $ 7,320 $10,604
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation........................................................ 4,205 4,370
Amortization of intangibles......................................... 165 128
Gain on disposal of property and equipment.......................... 5 (4)
Stock compensation expense ......................................... 1,065 1,141
Changes in operating assets and liabilities:
Accounts receivable........................................ (2,208) (13,031)
Inventories................................................ (894) (1,289)
Prepaid expenses and other assets.......................... (74) (799)
Accounts payable........................................... (857) 550
Accrued liabilities........................................ (1,097) 2,827
Income taxes payable....................................... 2,265 0
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Net cash provided by operating activities................................... 9,895 4,497
Investing activities
Proceeds from sales of property and equipment............................... 45 5
Purchases of property and equipment......................................... (1,535) (5,673)
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Net cash used in investing activities....................................... (1,490) (5,668)
Financing activities
Payments on notes receivable from officers.................................. 28 35
Payments on capital lease obligations....................................... (293) (460)
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Net cash used in financing activities....................................... (265) (425)
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Increase/(decrease) in cash and cash equivalents............................ 8,140 (1,596)
Cash and cash equivalents at beginning of period............................ 26,415 7,493
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Cash and cash equivalents at end of period.................................. $34,555 $ 5,897
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</TABLE>
See accompanying notes.
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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 June
30, 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>
June 30, December 31,
1996 1995
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(In Thousands)
<S> <C> <C>
Finished goods................ $ 3,345 $ 3,095
Work-in process............... 1,068 334
Raw materials................. 3,285 3,338
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$ 7,698 $ 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.
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SCIENTIFIC GAMES HOLDINGS CORP.
ITEM 2. MANAGEMENTGS 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 and 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 recently
awarded contracts, and by the amount of time elapsing before the receipt and/or
recognition of revenues from the sale of 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 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
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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 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 states had aggregate ticket sales
equaling approximately 11% of the Company's ticket shipments in 1995. To date,
the Company was not the apparent successful bidder on one of the four
contracts, Virginia; the other three are in the competitive bidding process.
In contrast, management believes that lottery contracts with six domestic
states currently serviced by its competitors also expire or will not be renewed
in 1996, and it is expected that new contracts for such states also will be
awarded through the competitive procurement process in which the Company also
expects to participate. Management estimates that these six states have
aggregate ticket sales equaling approximately 20% of the tickets shipped by the
Company to its own customers in 1995. As of August 11, 1996, the Company is
the apparent successful bidder with respect to contracts for two of these
states, New York and Illinois but is not the apparent successful bidder with
respect to contracts for the states of Kansas and Montana.
Some of the lottery contracts awarded or reawarded to the Company in
1996 (and the orders thereunder) have or may have certain lower equivalent
prices than charged in the previous contracts. To the extent such contracts
actually contain lower equivalent prices, the Company's profit margins could be
adversely affected. The impact of lower equivalent prices in certain contracts,
however, may be offset, in whole or in part, by other factors, including higher
order levels from new and existing customers, increased production efficiencies
and other savings associated with economies of scale. The timing and extent,
both of lower equivalent price contracts and offsetting factors, cannot be
predicted with certainty. While Scientific Games has frequently been awarded
new contracts when its prior domestic contracts and extensions have expired,
there can be no assurance 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.
As previously reported, 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 promotional 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 (approximately U.S. $24 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.
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On July 25, 1996 the Company announced that its Board of Directors
approved the purchase in the open market over the next twelve months of up to
2.1 million shares of the Company's common stock. The timing of the future
purchases and the total number of shares actually purchased will be dependent
on future market conditions.
RESULTS OF OPERATIONS
Three-month period ended June 30, 1996 compared to three-month period ended
June 30, 1995.
Revenues for the three-month period ended June 30, 1996 declined $1.7
million, or 4.4% over the revenues for the three-month period ended June 30,
1995. The decrease was primarily due to a decrease in sales to international
instant ticket customers of $2.9 million, which was partially offset by an
increase in domestic instant ticket sales as compared to the same period in
1995.
The decline in revenues to international customers was due mainly to a
decline in lottery retail sales of two customers. The increase in revenues
from domestic customers was attributable to the growth in sales to a number of
the Company's existing customers, as well as sales to new domestic customers.
As discussed more fully above, lotteries can have periods of increasing and
decreasing retail sales which, in turn, can have an impact on the operating
results of the Company.
Gross margins increased to 42.0% for the three-month period ended June
30, 1996 from 39.7% for the three-month period ended June 30, 1995. The margin
improvement is related to a number of events including efficiency improvements
resulting from the 1994 and 1995 capital investment program, the absence of
the startup costs related to such program during the three-month period ended
June 30, 1996 and the movement of a higher portion of production to the lower
cost Alpharetta, Georgia plant from the Gilroy, California plant.
Selling, general and administrative ("SG&A") expenses increased
$939,000 for the three-month period of 1996 over the same period of 1995. SG&A
expenses also increased as a percentage of revenues to 12.2% from 9.3%. The
dollar increase primarily was due to an increase in domestic and international
marketing and sales expenses, including the accrual of trade show expenses,
travel costs, the cost of sample tickets for competitive bids and an increase
in overall compensation costs. The percentage increase was due to the dollar
increase SG&A expenses, as well as lower revenues in the three-month period
ended June 30, 1996 as compared to the same period in 1995.
Depreciation and amortization expenses decreased for the three-month
period ended June 30, 1996 by 18.8% or $514,000 over the comparable period of
1995. The decrease was attributable to a one time write-down in the prior
period of certain capital equipment which was taken out of service as a result
of the capital expansion program.
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Interest income for the three-month period ended June 30, 1996
exceeded the three-month period ended June 30, 1995, due to the increase in
cash and cash equivalents while interest expense decreased because of a lower
capitalized lease balance. Capitalized leases represent the Company's only
debt. Interest income for the three month-period ended June 30, 1996 increased
$168,000 from the three-month period ended June 30, 1995. The decline in
interest expense was $57,000. Gains on foreign currency increased by $450,000
due mainly to activity related to the Company's potential acquisition of Opax
International as well as net foreign currency gains related to non U.S. dollar
transactions.
Net earnings increased 5% for the three-month period ended June 30,
1996 and was $5.8 million, compared to $5.5 million for the period ended June
30, 1995. The effective tax rate for the three-month periods ended June 30,
1996 and June 30, 1995 was 40.1%.
Earnings per common share for the three-month period ended June 30,
1996, was 42 cents per share compared to 41 cents per share for the same period
in 1995. The 4% increase in earnings per share was due to a 5% increase in net
earnings. The weighted average number of shares increasing from 13.6 million
to 13.7 million.
Six-Month period ended June 30, 1996 compared to six-month period ended June
30, 1995.
Revenues for the six-month period ended June 30, 1996 declined $10.1
million, or 13.6% compared to the revenues for the six-month period ended June
30, 1995. The decrease was primarily due to a decrease in sales to
international and domestic instant ticket customers of approximately $8.0
million and $5.4 million, respectively. These decreases were partially offset
by an increase in revenues for cooperative services and commercial ticket
revenues as compared to the same period in 1995.
Approximately 86% of the decline in revenues for the six-month period
ended June 30, 1996 compared to the same period of 1995 occurred in the first
three months of the period. Although the Company's operating results can vary
significantly from period to period, management believes the decline in the
Company's revenues for this period was related to customer inventory
adjustments and a transition in marketing strategy on the part of a number of
customers. Accordingly, management believes these events do not reflect a
fundamental change in the Company's business in particular, or the lottery
industry in general, although it is expected that new contracts with either new
or existing customers will be subject to strong price competition.
Gross margins decreased to 37.7% for the six-month period ended June
30, 1996 from 39.7% for the six-month period ended June 30, 1995. The decrease
was due primarily to the loss of gross profits related to the decrease in
instant ticket revenues 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. The decrease was partially offset by a
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larger percentage of the revenues being produced in the lower cost Alpharetta
plant as compared to the Gilroy plant and the lack of new equipment start up
costs, most of which were accrued in 1995.
SG&A expenses increased $1.2 million for the six-month period of 1996
over the same period of 1995. These expenses also increased as a percentage of
revenues to 13.3% from 9.9%. The dollar increase was due primarily to an
increase in domestic and international marketing and sales expenses, including
the accrual of trade show expenses, travel costs, the cost of sample tickets
for competitive bids and an increase in overall compensation costs. The
percentage increase was due to a dollar increase in SG&A expenses, as well as
lower revenues in the six-month period ended June 30, 1996 as compared to the
same period in 1995.
Depreciation and amortization expenses decreased for the six-month
period ended June 30, 1996 by 2.8% or $127,000 over the comparable period of
1995. The current level of depreciation expense is consistent with ongoing
operations. Depreciation in 1995 was at a lower rate in the first three months
of the year since significant depreciation for the capital expansion equipment
had not commenced in that period; however, the second quarter of 1995
contained a higher level of depreciation due to the write-down of certain
capital equipment which was taken out of service.
Interest income for the six-month period ended June 30, 1996 exceeded
the six-month period ended June 30, 1995 due to an increase in cash and cash
equivalents. Interest expense decreased because of a lower capitalized lease
balance. Interest income for the six-month period ended June 30, 1996 increased
$333,000 over the six-month period ended June 30, 1995. The decline in
interest expense was $124,000. Gains on foreign currency increased by $332,000,
due mainly to activity related to the Company's potential acquisition of Opax
International, as well as net foreign currency gains related to non U. S.
dollar transactions.
Net income decreased 31% for the six-month period ended June 30, 1996
and was $7.3 million, compared to $10.6 million for the period ended June 30,
1995. The effective tax rate for the six-month periods ended June 30, 1996 and
June 30, 1995 was 40.1%.
Earnings per common share for the six-month period ended June 30,
1996, was 53 cents per share compared to 78 cents per share for the same period
in 1995. The 31.9% decrease in earnings per share was due to a 31% decrease in
net earnings. The weighted average number of shares increasing from 13.6
million to 13.7 million.
LIQUIDITY AND CAPITAL RESOURCES
JUNE 30, 1996 VERSUS JUNE 30, 1995
For the six-month period ended June 30, 1996, net cash provided by
operating activities increased $5.3 million, to $9.8 million from $4.5
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million for the comparable period in 1995. The increase was due primarily to a
decrease in working capital partially offset by a decline in net income. The
decline in working capital was mostly attributable to a decline in the growth
in accounts receivable partially offset by an increase in income taxes payable.
Purchases of property and equipment for the six-month period ended June 30,
1996 were lower by $4.1 million as compared to the same period on 1995 due to
the completion of the Company's major capital expansion project. Such project
was essentially completed in the first half of 1995. The cash and cash
equivalents balance was $34.5 million as of June 30, 1996, which was $28.6
million higher than the balance at June 30, 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.
In light of the implementation of its stock buy-back program, under
which the Company may repurchase up to 2.1 million shares of its Common Stock,
and the pending purchase of Opax International, as well as other potential
investment opportunities and working capital requirements, management believes
the Company may require additional borrowing capacity. Accordingly, the Company
is seeking to replace its existing bank credit facility which is scheduled to
expire August 17, 1996, with a new facility which will provide it with
increased borrowing capacity. The Company is currently in negotiations with
three banks for a new revolving credit facility. Management anticipates the
agreement for such facility would provide $70 million of revolving credit under
an agreement with a three year term. It is anticipated that the agreement for
the new bank credit facility will be entered in the third quarter. The Company
believes that the availability of borrowing under a new bank credit facility,
along with the cash generated from operations, will be adequate to meet the
Company's liquidity and capital resource needs for the foreseeable future.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As initially reported in July 1993 and periodically reported
thereafter, the Company's Scientific Games Inc. ("SGI") subsidiary owns a
minority interest in Wintech de Colombia S.A. ("Wintech"), which has operated
the Colombian national lottery under contract with Empresa Colombiana de
Recursos para la Salud, S.A. ("Ecosalud"), an agency of the Colombian
government. As a contracting party with Ecosalud, SGI in addition to Wintech
and two other shareholders, provided a $5,000,000 joint and several guarantee
that certain levels of lottery ticket sales would be attained. In addition,
with respect to a further guarantee of sales under the contract with Ecosalud,
SGI delivered to Ecosalud a $4,000,000 bond issued by a Colombian surety.
Wintech started the instant lottery in Colombia but experienced difficulties in
getting the lottery to function smoothly due to, among other factors, social
and political unrest in Colombia, frequently interrupted telephone service and
power outages, and competition from another lottery being operated in a
province of Colombia in violation of Wintech's exclusive license from Ecosalud.
As a consequence, the guaranteed sales level was not met for the year ended
June 1993. On July 1, 1993, Ecosalud adopted resolutions declaring, among
other things, that the contract was in default and asserted various claims for
compensation and penalties against Wintech, SGI and other shareholders of
Wintech. As the Company has previously disclosed in its filings with the
Commission, litigation is pending in Columbia concerning various claims among,
Ecosalud, Wintech and the Company relating to the termination of the contracts
with Ecosalud (the "Columbian Litigation"). Ecosalud's claims in the Colombian
litigation were for, among other things, realization on the full amount of the
guarantee and the bond.
SGI has consulted with Columbian counsel and been advised that SGI has
various legal defenses to Ecosalud's claims. SGI has also certain cross
indemnities and undertakings from the two other privately held shareholders of
Wintech for their respective shares of any liability to Ecosalud. Such
indemnities and undertakings were secured by letters of credit of $2,600,000,
confirmed by U.S. banks, which expired July 12, 1993. On July 9, 1993, SGI
drew on such letters of credit and received $1,500,000 under one such letter.
SGI subsequently returned the $1,500,000 to the issuing bank in exchange for a
substitute $1,500,000 confirmed letter of credit acceptable to SGI. The
confirming bank under the other letter of credit did not honor SGI's draw, and
SGI asserted a claim against such bank for wrongful dishonor, which claim was
refused by such bank. The Colombian surety which issued the $4,000,000 bond to
Ecosalud to secure performance by SGI of its obligations under the lottery
contract has made formal demand upon SGI for payment of the amount of the bond.
The Colombian surety has also reportedly paid $2,400,000 to Ecosalud under the
bond. SGI has declined to make or authorize any such payment and has notified
the surety that any payment in response to Ecosalud's demand on the bond is at
the surety's risk. The surety, through its U.S. counsel, made written demand
upon SGI in 1995 for payment of $2,400,000, plus interest and costs,
threatening to file suit to collect this amount. SGI has responded that no such
amount is due, and it intends to assert fully its defenses in the event any
such suit is filed. No such suit has been filed to date. No assurance can be
given that the other shareholders of Wintech will, or have sufficient assets
to, honor their indemnity undertakings to SGI when the claims by Ecosalud
against SGI and Wintech are resolved in the event such claims result in any
liability.
13
<PAGE> 14
On June 24, 1996, Ecosalud filed a complaint styled Empresa Colombiana
de Recursos para la Salud, S.A. v. Scientific Games, Inc. in the United States
District Court for the Northern District of Georgia, Atlanta Division, Civil
Action No. 1 96-CV-1586. The complaint subsequently was served on SGI on July
15, 1996. The complaint alleges, among other things, that under the contract
with Ecosalud, SGI, Wintech and the other shareholders of Wintech agreed to pay
Ecosalud a minimum guaranteed payment based on sales of 600,000,000 game
tickets at a price of 500 Colombian Pesos during the first year of operation of
the instant-winner lottery game, damages for failure to pay Ecosalud 30.96% of
the allegedly guaranteed gross sales and 0.92% of those sales as a commission
and SGI and the other contracting parties guaranteed a minimum first year
payment of $65,016,000 based on an exchange rate of one thousand pesos for one
U.S. Dollar. Of that alleged minimum, Ecosalud received $8,537,126 leaving an
alleged balance owed of $56,478,873. In addition, Ecosalud claims additional
"minimum payments" of $27,090,000 for the period June 26, 1993 through November
25, 1993, notwithstanding the fact that Ecosalud declared the contract in
default on July 1, 1993. Ecosalud also claims additional commissions of
$799,005 for the first year of the operation of the instant ticket game, plus a
commission of $55,389 for the period June 26, 1993 through November 25, 1993.
Total damages claimed are "not less than $84,423,267." The complaint also
seeks reasonable attorneys' fees and costs allegedly pursuant to the contract.
As noted above, Ecosalud has already purportedly drawn $2,400,000 on a
penalty bond issued by a Columbian bonding company which is claiming a right of
reimbursement from SGI. The foregoing amounts are in dispute and, according to
counsel in Columbia, $5,000,000 is the maximum recourse available to Ecosalud
under the terms of the contract in the event that sales were below the target
sales specified in the contract if Ecosalud were to be successful in persuading
a Columbian court that SGI breached its agreements with Ecosalud. The contract
specifically provides it is governed by Columbian law.
SGI intends to vigorously defend such litigation and has been advised
by counsel that SGI has numerous defenses on the merits as well as procedural
defenses to the litigation, including the defense that a lawsuit involving the
same subject matter is pending in Colombia. The Company anticipates that it
will file a motion to dismiss and to refer the subject matter of the litigation
to arbitration. Such motion is expected to be filed in August 1996. Although
it is not possible to determine the outcome of Ecosalud's claims, either in
Georgia or Columbia, at their current stage, management believes based upon,
among other things, the advice of counsel, that adequate provision has been
made for such claims and the disposition thereof should not materially
adversely affect the Company's financial condition or results or operations.
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 material adverse affect on the Company's
consolidated financial condition or consolidated results of operations.
14
<PAGE> 15
ITEM 2. CHANGES IN SECURITIES
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
-11 Computation of Per Share Earnings
-27 Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K
None.
15
<PAGE> 16
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: August 14, 1996 By: /s/ WILLIAM G. MALLOY
-----------------------------------
William G. Malloy
President and
Chief Executive Officer
Date: August 14, 1996 By: /s/ CLIFF O. BICKELL
-----------------------------------
Cliff O. Bickell
Vice President, Treasurer,
and Chief Financial Officer
16
<PAGE> 1
EXHIBIT 11
SCIENTIFIC GAMES HOLDINGS CORP.
COMPUTATION OF PER SHARE EARNINGS
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three-month period Six-month period
ended June 30, ended June 30,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Net earnings . . . . . . . . . . . . . . . . . . . . . . . . $ 5,809 $ 5,519 $ 7,320 $10,604
Weighted average Common stock outstanding . . . . . . . . . . 13,066 12,912 13,066 12,912
Effect of Common stock equivalents (stock
options), at average market price . . . . . . . . . 659 655 668 645
------- ------- ------- -------
Total . . . . . . . . . . . . . . . . . . . 13,725 13,567 13,734 13,557
======= ======= ======= =======
Net earnings per common share . . . . . . . . . . . . . . . . $ 0.42 $ 0.41 $ 0.53 $ 0.78
======= ======= ======= =======
</TABLE>
17
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF SCIENTIFIC GAMES HOLDINGS CORP. FOR THE SIX MONTHS ENDED
JUNE 30, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINACIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 34,555
<SECURITIES> 0
<RECEIVABLES> 24,098
<ALLOWANCES> 137
<INVENTORY> 7,698
<CURRENT-ASSETS> 68,101
<PP&E> 76,187
<DEPRECIATION> 28,800
<TOTAL-ASSETS> 118,620
<CURRENT-LIABILITIES> 12,650
<BONDS> 0
0
0
<COMMON> 13
<OTHER-SE> 102,953
<TOTAL-LIABILITY-AND-EQUITY> 118,620
<SALES> 64,153
<TOTAL-REVENUES> 64,153
<CGS> 39,949
<TOTAL-COSTS> 39,949
<OTHER-EXPENSES> 12,929
<LOSS-PROVISION> (280)
<INTEREST-EXPENSE> 31
<INCOME-PRETAX> 12,220
<INCOME-TAX> 4,900
<INCOME-CONTINUING> 7,320
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,320
<EPS-PRIMARY> .53
<EPS-DILUTED> .53
</TABLE>
