<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 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, 1998
------------------------------------------
OR
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 000-22298
-----------------
Scientific Games Holdings Corp.
- ------------------------------------------------------------------------
(Exact name of registrant as specifie in its charter)
Delaware 13-3615274
- ------------------------------------------------------------------------
(State or other jurisdiction of (IRS identification no.)
employer)
1500 Bluegrass Lakes Parkway, Alpharetta, Georgia 30004
- ---------------------------------------------------------------------
(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
<PAGE> 2
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: 12,321,418 shares of
Common Stock, $.001 par value per share, as of May 11, 1998.
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page No.
--------
<S> <C> <C>
Item 1. Consolidated Condensed Financial Statements
Consolidated Condensed Balance Sheets
March 31, 1998 and December 31, 1997.................4
Consolidated Condensed Statements of Earnings
Three-month period ended March 31, 1998
and March 31, 1997...................................5
Consolidated Condensed Statements of Cash Flows
Three-month period ended March 31, 1998
and March 31, 1997...................................6
Notes to Consolidated Condensed Financial Statements..........7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations..................9
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
</TABLE>
3
<PAGE> 4
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
SCIENTIFIC GAMES HOLDINGS CORP.
CONSOLIDATED BALANCE SHEETS
(In thousands except share data)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
----------- ------------
ASSETS (unaudited) (1)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents .................................. $ 6,178 $ 2,843
Trade receivables .......................................... 30,001 34,448
Inventories ................................................ 12,961 11,602
Prepaid expenses and other current assets .................. 2,732 1,853
Deferred income tax benefit ................................ 1,721 1,681
-------- ---------
Total current assets .................................. 53,593 52,427
PROPERTY AND EQUIPMENT, AT COST:
Land ....................................................... 2,521 2,521
Buildings .................................................. 11,662 11,662
Production and other equipment ............................. 96,056 90,996
Construction-in-Progress ................................... 1,087 4,035
-------- ---------
111,326 109,214
Less accumulated depreciation and amortization ............. 48,501 45,464
-------- ---------
62,825 63,750
OTHER ASSETS
Goodwill, net of amortization ............................. 34,395 34,448
Other assets .............................................. 14,436 13,785
-------- ---------
$165,249 $ 164,410
======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ........................................... $ 8,800 $ 6,505
Accrued liabilities ........................................ 17,412 19,681
Income taxes payable ....................................... 3,917 4,272
-------- ---------
Total current liabilities ............................. 30,129 30,458
LONG-TERM LIABILITIES:
Credit facility ........................................... 25,571 30,624
Other long-term liabilities ............................... 2,455 2,092
Deferred income taxes payable ............................. 3,131 3,109
STOCKHOLDERS' EQUITY:
Common stock par value $.001 per share:
shares authorized: 25,750,000;
issued and outstanding shares:12,162,957 at March 31, 1998
and 11,875,514 at December 31, 1997 ...................... 12 12
Additional paid-in capital ................................. 59,020 57,949
Retained earnings .......................................... 43,633 39,856
-------- ---------
102,665 97,817
Less notes receivable from officers for the sale
of common stock .......................................... 0 (71)
Cumulative foreign currency translation adjustment ......... 1,298 381
-------- ---------
Total stockholders' equity ............................ 103,963 98,127
-------- ---------
$165,249 $ 164,410
======== =========
</TABLE>
(1) Derived from audited financial statements
See accompanying notes.
4
<PAGE> 5
SCIENTIFIC GAMES HOLDINGS CORP.
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three-month period
ended March 31,
1998 1997
-------- --------
<S> <C> <C>
Revenue ...................................................... $ 48,419 $ 45,612
Cost of revenues ............................................. 31,557 28,649
-------- ---------
16,862 16,963
Selling, general and administrative expenses ................. 6,108 5,309
Depreciation and amortization ................................ 4,204 2,590
Interest income .............................................. 32 73
Other income ................................................. 49 0
Gain/(loss) on foreign currency .............................. (10) 151
Interest expense ............................................. 392 51
-------- ---------
Income before income taxes ................................... 6,229 9,237
Income tax expense ........................................... 2,452 3,750
-------- ---------
Net income ................................................... 3,777 5,487
======== =========
Basic net income per common share ............................ $ 0.32 $ 0.45
======== =========
Diluted net income per common share .......................... $ 0.31 $ 0.44
======== =========
Average common shares outstanding - basic .................... 11,997 12,162
Dilutive effect of stock options and
nov-vested restricted stock awards ........................ 328 434
======== =========
Average common shares outstanding - diluted .................. 12,325 12,596
======== =========
</TABLE>
See accompanying notes.
5
<PAGE> 6
SCIENTIFIC GAMES HOLDINGS CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(unaudited)
<TABLE>
<CAPTION>
Three-month period
ended March 31,
1998 1997
-------- --------
<S> <C> <C>
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES
Net earnings ............................................. $ 3,777 $ 5,487
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation ........................................ 3,155 2,132
Amortization of intangibles ......................... 1,052 325
(Gain)/loss on disposal of property and equipment ... 46 (11)
Stock compensation expense .......................... 145 327
Deferred income taxes ............................... (13) 29
Changes in operating assets and liabilities:
Accounts receivable ............................ 4,492 3,292
Inventories .................................... (1,337) (1,391)
Prepaid expenses and other assets .............. (1,299) (1,584)
Accounts payable ............................... 2,231 998
Accrued liabilities ............................ (2,575) (3,125)
Income taxes payable ........................... (305) 3,242
-------- ---------
Net cash provided by operating activities .............. 9,369 9,721
CASH FLOWS USED IN INVESTING ACTIVITIES
Proceeds from sales of property and equipment ............ 0 13
Purchases of property and equipment ...................... (2,279) (2,271)
Other investing activities ............................... (27) (102)
-------- ---------
Net cash used in investing activities .................. (2,306) (2,360)
CASH FLOWS USED IN FINANCING ACTIVITIES
Payments on notes receivable ............................. 0 16
Borrowings under credit facility ......................... 294 0
Payments on credit facility and other long-term debt ..... (5,053) (3,909)
Proceeds from the exercise of common stock options ....... 926 19
-------- ---------
Net cash used in financing activities .................. (3,833) (3,874)
-------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH ...................... 105 (129)
NET INCREASE IN CASH AND CASH EQUIVALENTS .................... 3,335 3,358
CASH AND CASH EQUIVALENTS, beginning of period ............... 2,843 6,252
-------- ---------
CASH AND CASH EQUIVALENTS, end of period ..................... $ 6,178 $ 9,610
======== =========
SUPPLEMENTAL CASH FLOWS DISCLOSURE:
Cash paid for interest ................................... 431 42
======== =========
</TABLE>
See accompanying notes.
6
<PAGE> 7
SCIENTIFIC GAMES HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements have
been prepared in accordance with generally accepted accounting
principles for interim financial information and in accordance 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 1997 Annual
Report on Form 10-K for the year ended December 31, 1997. 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,
1998 are not necessarily indicative of the results that may be expected
for the year ended December 31, 1998.
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 consisted of the
following:
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
------------- -------------
(In Thousands)
<S> <C> <C>
Finished goods ................................. $ 8,373 $ 5,841
Work-in process ................................ 961 1,827
Raw materials .................................. 3,627 3,934
-------- ---------
$ 12,961 $ 11,602
======== =========
</TABLE>
3. Contingencies
Refer to the Company's Form 10-K for the year ended December 31,
1997 for a description of pending legal proceedings, with respect to
which there has been the following material development since such
date. On April 2, 1998, Seguros del Estado ("Seguros"), the Colombian
surety which provided, on behalf of the Company, a $4,000,000 surety
bond to Empresa Colombiana de Recursos para la Salud, S.A.
("Ecosalud"), an agency of the Colombian government and former licensor
of the Colombian national lottery, brought suit against the Company in
the United States District Court for the Northern District of Georgia,
Atlanta Division. The plaintiff seeks $2,400,000 for sums paid by
Seguros to Ecosalud under the bond on November 1, 1994, plus interest
at the Colombian bank rate of interest. The Company has filed a motion
to dismiss based on the Colombian statute of limitations of two years
and, alternatively, seeking that the case be dismissed on other
grounds. Seguros filed a motion for summary judgment with the Court on
May 6, 1998 seeking
7
<PAGE> 8
summary judgment on its claim in the amount of $2,400,000, plus
$3,246,916 in accrued interest, plus interest thereafter.
4. Joint Venture Agreement
In February 1998, the Company announced that it had entered into a
joint venture agreement with La Francaise des Jeux, the operator of the
French National Lottery, to develop a new generation of on-line
terminals incorporating the Company's SciScan Technology(R). The
agreement also provides for the assumption by the joint venture of La
Francaise des Jeux's terminal and software maintenance contracts with
six German State Lottery customers. The joint venture is subject to the
approval of the French Minister of Finance and the execution of
definitive agreements for products and services.
5. Comprehensive Income
As of January 1, 1998, the Company adopted Financial Accounting
Standard No. 130, Reporting Comprehensive Income. Statement 130
establishes new rules for the reporting and display of comprehensive
income and its components; however, the adoption of this Statement had
no impact on the Company's net income or shareholders' equity.
Statement 130 requires unrealized gains or losses on the Company's
available-for-sale securities, if any, and foreign currency translation
adjustments, which prior to adoption were reported separately in
stockholders' equity to be included in other comprehensive income.
During the first quarter of 1998 and 1997, total comprehensive income
amounted to $4,694,000 and $5,144,000 respectively.
8
<PAGE> 9
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, pull-tab tickets, and on-line lottery hardware and software system
development. Instant ticket revenues are generally based on a price per 1,000
tickets. Revenues from the sale of tickets, cooperative services, software and
hardware development may be recognized based upon ticket shipments, a percentage
of the lottery's instant ticket sales to the public, a contracted price, a
license agreement, an equipment lease agreement or any combination of the
foregoing. Current on-line revenues are generated from the sale of hardware and
software to lotteries, as well as support and maintenance contracts on the
on-line systems.
To date in 1998, the Company has received a one-year extension on its current
instant ticket contract with the South Dakota Lottery, several smaller orders
from new and existing international customers and has received contracts in
Europe for promotional tickets for the 1998 World Cup.
9
<PAGE> 10
Results of Operations
Three-month period ended March 31, 1998 compared to three-month period ended
March 31, 1997.
Revenues for the three-month period ended March 31, 1998 increased $2.8
million, or 6.2% over the revenues for the three-month period ended March 31,
1997. The increase was primarily due to additional revenues of $4.4 million
generated from Scientific Games Kommunikations - und Computersysteme A.G. (SG
Austria), which was acquired in April 1997 and higher revenues of $3.3 million
from the existing domestic customer base. The increase was partially offset by
fewer sales from the United States to promotional and international customers
and a reduction in revenues from pull tab tickets as a result of the sale of
substantially all of the assets of the Company's former pull-tab subsidiary
GameTec, Inc. (GameTec) (Refer to the Company's 10-K for the year ended December
31, 1997 for a description of the SG Austria acquisition and the GameTec
disposition.)
Gross margins decreased to 34.8% for the three-month period ended March
31, 1998 from 37.2% for the three-month period ended March 31, 1997. The margin
decline was mainly attributable to lower equivalent sales prices charged on
lottery contracts awarded subsequent to March 31, 1997 and lower export sales.
The lower equivalent sales prices were a result of competitive pricing pressures
in the industry. The margin decline was partially offset by the addition of SG
Austria's operations.
Selling, general and administrative (SG&A) expenses for the three-month
period ended March 31, 1998 increased $799,000, or 15.0%, over the same period
of 1997. SG&A expenses increased as a percentage of revenues to 12.6% from
11.6%. The increase was due primarily to the additional SG&A costs resulting
from the 1997 expansion of international operations, which were not present in
the comparable period (including the 1997 acquisition of SG Austria and the
establishment of a sales branch in South Africa).
Depreciation and amortization increased for the three-month period
ended March 31, 1998 by $1.6 million or 62.3% over the comparable period of 1997
due primarily to additional depreciation attributable to SciScan units placed in
service during the second half of 1997, increased amortization from new contract
start-up costs and amortization of goodwill related to the acquisition of SG
Austria.
Interest income for the three-month period ended March 31, 1998
decreased $41,000, or 56%, compared to the three-month period ended March 31,
1997. The decrease was attributable to lower cash and cash equivalents for the
same comparable periods. The ending balances in cash and cash equivalents
decreased by $3.4 million to $6.2 million. The decrease in cash and cash
equivalents was due to the use of funds in connection with with the financing of
the acquisition of SG Austria and the repurchase of 302,000 shares of the
Company's Common Stock during second quarter of 1997.
Other income for the three-month period ended March 31, 1998 increased
by $49,000 or 100% over the same period of 1997. The increase was attributable
to the recognition of a minority partner's share of operational expenditures of
a domestic joint venture, and was offset by a loss on the sale of certain assets
to a lottery customer in 1998.
10
<PAGE> 11
Gain/(loss) on foreign currency for the three-month period ended March
31, 1998 resulted in a loss of $10,000 compared with a gain of $151,000 for the
same period 1997. The loss resulted from fluctuations in exchange rate on
instant ticket contracts for a European customer.
Interest expense for the three-month period ended March 31, 1998
increased $341,000 from the three-month period ended March 31, 1997. The
increase was due to the increase in the balance outstanding under the Company's
Bank Credit Agreement (refer to the Company's 10-K for the year ended December
31, 1997 for a description of the Company's Bank Credit Agreement) compared to
the prior period.
Income tax expense for the period ended March 31, 1998 decreased $1.3
million, or 34.6% as compared to the same three-month period of 1997 due to a
decrease in pre-tax earnings. The effective tax rate for the three month periods
ended March 31, 1998 and March 31, 1997 was 39.4% and 40.5%, respectively.
As a result of the foregoing, net earnings for the three-month period
ended March 31, 1998 were $3.8 million compared to $5.5 million for the period
ended March 31, 1997.
Liquidity and Capital Resources
For the three-month period ended March 31, 1998, net cash provided by
operating activities decreased by $224,000 to $9.4 million from $9.6 million for
the comparable period in 1997. Working capital was positively impacted by a
decrease in accounts receivable of $4.5 million. Net cash decreased, however,
due to an increase in inventories of $1.3 million, an increase in prepaid
expenses and other assets of $1.3 million and a decrease in current liabilities
of approximately $329,000, which exceeded the contributions made to working
capital by the decrease in accounts receivable. Cash provided by operations was
used to purchase additional property and equipment and make payments on the
outstanding balance of the Bank Credit Agreement.
Net cash used in investing activities for the three-month period ended
March 31, 1998 increased by approximately $438,000 to $2.7 million from $2.3
million for the three-month period ended March 31, 1997. The increase was
attributable to the purchase of additional property and equipment and the
funding of joint venture activities.
The Company's financing activities used cash of $3.8 million and $3.9
million for the three months ended March 31 in 1998 and 1997 respectively. Cash
provided by operations for the three month period ended March 31, 1998. was used
to make payments of approximately $5.1 million on the Company's Bank Credit
Agreement. Borrowings under the Bank Credit Agreement were $25.6 million at
March 31, 1998. At March 31 and May 1, 1998, the Company had the capacity to
borrow an additional $54.4 million and $55.1 million, respectively under the
Bank Credit Agreement.
The Company believes that funds provided by operations, available
borrowings under its Bank Credit Agreement, and current amounts of cash and cash
equivalents will be sufficient to meet its capital requirements and fund future
growth for at least the next twelve months.
11
<PAGE> 12
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains certain statements and
projections (including statements concerning plans and objectives of management
for future operations and services and statements concerning revenue
expectations), other than those covering historical information, that should be
considered forward-looking and subject to certain risks and uncertainties. Such
forward-looking statements are based on management's belief as well as
assumptions made by, and information currently available to, management pursuant
to "safe harbor" provisions of the Private Securities Litigation Reform Act of
1995. The Company's actual results might differ materiality from the plans
envisioned in, or results projected by, those statements if the Company's
assumptions prove to be incorrect or for a variety of other reasons, including
those relating to factors identified in the Company's Annual Report on Form 10-K
for the year ended December 31, 1997 as part of a Cautionary Statement for
purposes of such safe harbor. The Company cautions that such factors are not
exclusive. The Company does not undertake to update any forward-looking
statement that may be made from time to time by, or on behalf of, the Company.
12
<PAGE> 13
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Refer to the Company's Form 10-K for the year ended December 31, 1997
for a description of pending legal proceedings, with respect to which there has
been the following material development since such date. On April 2, 1998,
Seguros del Estado ("Seguros"), the Colombian surety which provided, on behalf
of the Company, a $4,000,000 surety bond to Empresa Colombiana de Recursos para
la Salud, S.A. ("Ecosalud"), an agency of the Colombian government and former
licensor of the Colombian national lottery, brought suit against the Company in
the United States District Court for the Northern District of Georgia, Atlanta
Division. The plaintiff seeks $2,400,000 for sums paid by Seguros to Ecosalud
under the bond on November 1, 1994, plus interest at the Colombian bank rate of
interest. The Company has filed a motion to dismiss based on the Colombian
statute of limitations of two years and, alternatively, seeking that the case be
dismissed on other grounds. Seguros filed a motion for summary judgment with the
Court on May 6, 1998 seeking summary judgment on its claim in the amount of
$2,400,000, plus $3,246,916 in accrued interest, plus interest thereafter.
Items 2,3,4 and 5 are not applicable and have been omitted.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
(a) Exhibits
<S> <C> <C>
#11 Computation of Per Share Earnings
#27 Financial Data Schedule (for SEC use
only)
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended
March 31, 1998.
</TABLE>
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 15, 1998 By: /s/WILLIAM G. MALLOY
-----------------------------------
William G. Malloy
President and
Chief Executive Officer
Date: May 15, 1998 By: /s/CLIFF O. BICKELL
-----------------------------------
Cliff O. Bickell
Vice President, Treasurer,
and Chief Financial Officer
13
<PAGE> 1
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,
1998 1997
-------- --------
<S> <C> <C>
Net earnings ................................................. $ 3,777 $ 5,487
Weighted average Common stock outstanding .................... 11,997 12,162
Effect of common stock equivalents (stock
options), at average market price .......................... 328 434
-------- ---------
Total ............................................... 12,325 12,596
======== =========
Net earnings per common share ................................ $ .31 $ .44
======== =========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-30-1998
<CASH> 6,178
<SECURITIES> 0
<RECEIVABLES> 30,001
<ALLOWANCES> 314
<INVENTORY> 12,961
<CURRENT-ASSETS> 53,593
<PP&E> 111,326
<DEPRECIATION> 48,501
<TOTAL-ASSETS> 165,249
<CURRENT-LIABILITIES> 30,129
<BONDS> 0
0
0
<COMMON> 12
<OTHER-SE> 103,951
<TOTAL-LIABILITY-AND-EQUITY> 165,249
<SALES> 48,419
<TOTAL-REVENUES> 48,419
<CGS> 31,557
<TOTAL-COSTS> 6,108
<OTHER-EXPENSES> 4,214
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 392
<INCOME-PRETAX> 6,229
<INCOME-TAX> 2,452
<INCOME-CONTINUING> 3,777
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,777
<EPS-PRIMARY> 0.32
<EPS-DILUTED> 0.31
</TABLE>
