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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 SEPTEMBER 30, 1999
------------------------------
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
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SCIENTIFIC GAMES HOLDINGS CORP.
- -------------------------------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED 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
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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: 11,914,198 SHARES
OF COMMON STOCK, $.001 PAR VALUE PER SHARE, AS OF NOVEMBER 5, 1999.
2
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PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Item 1. Consolidated Condensed Financial Statements
Consolidated Condensed Balance Sheets
September 30, 1999 and December 31, 1998.....................4
Consolidated Condensed Statements of Income
Three-month period ended September 30, 1999
and September 30, 1998
Nine-month period ended September 30, 1999
and September 30, 1998.......................................5
Consolidated Condensed Statements of Cash Flows
Nine-month period ended September 30, 1999
and September 30, 1998.......................................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....................................................16
Item 4. Submission of Matters to a Vote of Security Holders..................16
Item 6. Exhibits and Reports on Form 8-K.....................................16
SIGNATURES....................................................................16
</TABLE>
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>
September 30, December 31,
1999 1998
------------- ------------
ASSETS (unaudited) (1)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents ........................................... $ 13,665 $ 9,270
Trade receivables ................................................... 47,528 39,445
Inventories ......................................................... 14,323 15,090
Prepaid expenses and other current assets ........................... 3,338 2,111
Income tax receivable ............................................... 3,234 0
Deferred income tax benefits ........................................ 707 1,032
--------- ---------
Total current assets ......................................... 82,795 66,948
PROPERTY AND EQUIPMENT, AT COST:
Land ................................................................ 2,521 2,521
Buildings ........................................................... 11,892 11,664
Production and other equipment ...................................... 106,816 101,098
Construction-in-progress ............................................ 4,798 2,047
--------- ---------
126,027 117,330
Less accumulated depreciation and amortization ...................... (65,459) (57,386)
--------- ---------
60,568 59,944
OTHER ASSETS
Goodwill, net of amortization ...................................... 32,326 35,282
Other assets ....................................................... 20,368 17,459
--------- ---------
$ 196,057 $ 179,633
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable .................................................... $ 14,183 $ 16,270
Accrued liabilities ................................................. 20,231 17,822
Bank debt ........................................................... 13,516 12,482
Income taxes payable ................................................ 1,923 3,932
--------- ---------
Total current liabilities .................................... 49,853 50,506
LONG-TERM LIABILITIES:
Other long-term liabilities ........................................ 8,648 8,221
Deferred income taxes payable ...................................... 6,878 6,694
Minority interest in consolidated subsidiaries ..................... 2,603 2,306
STOCKHOLDERS' EQUITY:
Common stock par value $.001 per share:
shares authorized: 25,750,000;
issued and outstanding shares: 11,914,198 at September
30, 1999 and 11,875,737 at December 31, 1998 ...................... 12 12
Additional paid-in capital .......................................... 65,886 65,551
Accumulated earnings ................................................ 62,011 46,201
Accumulated other comprehensive income .............................. 166 142
--------- ---------
Total stockholders' equity ................................... 128,075 111,906
--------- ---------
$ 196,057 $ 179,633
========= =========
</TABLE>
(1) Derived from audited financial statements
See accompanying notes.
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SCIENTIFIC GAMES HOLDINGS CORP.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Three-month period Nine-month period
ended September 30, ended September 30,
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues ......................................... $ 59,511 $ 53,928 $ 169,302 $ 153,914
Cost of revenues ................................. 39,067 33,812 108,364 98,104
--------- --------- --------- ---------
20,444 20,116 60,938 55,810
Selling, general and administrative expenses ..... 7,409 6,652 21,762 18,930
Depreciation and amortization .................... 5,039 4,306 13,934 12,833
--------- --------- --------- ---------
Operating income ................................. 7,996 9,158 25,242 24,047
Other income (expense):
Interest income ............................ 35 108 315 204
Other (expense)/income ..................... (71) 17 (40) 38
Gain/(loss) on foreign currency ............ (32) 47 239 75
Interest expense ........................... 3 272 405 1,076
Minority interest elimination .............. (59) 35 (775) 137
--------- --------- --------- ---------
Income before income taxes ....................... 7,866 9,093 24,576 23,425
Income tax expense ............................... 2,493 3,811 8,765 9,513
--------- --------- --------- ---------
Net income ....................................... $ 5,373 $ 5,282 $ 15,811 $ 13,912
========= ========= ========= =========
Basic net income per common share ................ $ 0.45 $ 0.43 $ 1.33 $ 1.14
========= ========= ========= =========
Diluted net income per common share .............. $ 0.45 $ 0.43 $ 1.32 $ 1.12
========= ========= ========= =========
Average common shares outstanding - basic ........ 11,907 12,216 11,891 12,174
Dilutive effect of stock options and
non-vested restricted stock awards ......... 142 149 116 212
--------- --------- --------- ---------
Average common shares outstanding - diluted ...... 12,049 12,365 12,007 12,386
========= ========= ========= =========
</TABLE>
See accompanying notes.
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SCIENTIFIC GAMES HOLDINGS CORP.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Nine-month period
ended September 30,
1998 1999
---- ----
<S> <C> <C>
CASH FLOW PROVIDED BY OPERATING ACTIVITIES
Net income ........................................................ $ 15,811 $ 13,912
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation ................................................. 8,742 9,674
Amortization of intangibles .................................. 5,192 3,159
Loss (gain) on disposal of property and equipment ............ 40 (7)
Stock compensation expense ................................... 48 809
Minority interest ............................................ 775 0
Deferred income taxes ........................................ 225 652
Changes in operating assets and liabilities:
Accounts receivable ..................................... (11,616) (1,111)
Inventories ............................................. 593 (2,270)
Prepaid expenses and other assets ....................... (4,016) (1,200)
Accounts payable ........................................ (1,899) 1,376
Accrued liabilities ..................................... 5,694 (976)
Income taxes payable .................................... (4,449) 2,675
--------- ---------
Net cash provided by operating activities ...................... 15,140 26,696
CASH FLOWS USED IN INVESTING ACTIVITIES
Proceeds from sales of property and equipment ..................... 193 148
Purchases of property and equipment ............................... (9,786) (6,544)
Other investing activities ........................................ (1,250) (633)
--------- ---------
Net cash used in investing activities .......................... (10,843) (7,029)
CASH FLOWS USED IN FINANCING ACTIVITIES
Payments on notes receivable ...................................... 0 71
Borrowings under bank debt ........................................ 29,025 2,532
Payments on bank debt and other long-term debt .................... (27,991) (13,597)
Repurchases of common stock ....................................... 0 (8,831)
Proceeds of exercise of common stock options ...................... 131 4,623
--------- ---------
Net cash provided by (used in) financing activities ............ 1,165 (15,202)
EFFECT OF EXCHANGE RATE CHANGES ON CASH ............................... (1,067) 325
--------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS ............................. 4,395 4,790
CASH AND CASH EQUIVALENTS, beginning of period ........................ 9,270 2,843
--------- ---------
CASH AND CASH EQUIVALENTS, end of period .............................. $ 13,665 $ 7,633
========= =========
SUPPLEMENTAL CASH FLOWS DISCLOSURE:
Cash paid for interest ............................................ $ 488 $ 1,024
========= =========
</TABLE>
See accompanying notes.
6
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SCIENTIFIC GAMES HOLDINGS CORP.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
Note 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 1998 Annual
Report on Form 10-K for the year ended December 31, 1998. 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 and nine month periods ended
September 30, 1999 are not necessarily indicative of the results that
may be expected for the year ended December 31, 1999.
Note 2. Inventories
Inventories consist principally of instant lottery tickets,
materials related to their production and certain electronic
components related to Systems terminals which are valued at the lower
of cost (first-in, first-out method) or market. Inventories consisted
of the following at:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- ------------
(In Thousands)
<S> <C> <C>
Finished goods................ $ 7,157 $ 7,939
Work-in-process............... 1,187 1,087
Raw materials................. 5,979 6,064
-------- --------
$ 14,323 $ 15,090
======== ========
</TABLE>
Note 3. Contingencies
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 Columbia S.A. ("Wintech"),
which formerly operated the Colombian national lottery under contract
with Empresa Colombiana de Recursos para la Salud, S.A. ("Ecosalud"),
an agency of the Columbian government. The contract projected that
certain levels of lottery ticket sales would be attained and provided
a penalty against Wintech, SGI and the other shareholders of Wintech
of up to $5,000,000 if such performance levels of lottery ticket sales
were not achieved. In addition, with respect to a further guarantee of
performance under the contract with Ecosalud, SGI delivered to
Ecosalud a $4,000,000 bond issued by a Colombian surety, Seguros del
Estado ("Seguros"). Wintech started the instant lottery in Colombia,
but, due to difficulties beyond its control, including, among other
factors, social and political unrest in Colombia, frequently
interrupted telephone service and power outages, and competition from
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<PAGE> 8
another lottery being operated in a province of Colombia in violation
of Wintech's exclusive license from Ecosalud, the projected 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 Colombia concerning various
claims among Ecosalud, Wintech and SGI, relating to the termination of
the contracts with Ecosalud (the "Colombian Litigation"). Ecosalud's
claims in the Colombian Litigation were for, among other things,
realization on the full amount of the penalty, plus interest and costs
of the bond.
SGI has consulted with Colombian counsel and been advised
that SGI has various legal defenses to Ecosalud's claims. SGI also has
certain cross indemnities and undertakings from the two other
privately held shareholders of Wintech for their respective shares of
any liability to Ecosalud. That obligation is secured in part by a
$1,500,000 confirmed letter of credit in favor of SGI.
The Colombian surety which issued a $4,000,0000 bond to
Ecosalud under the contract paid $2,400,000 to Ecosalud under the
bond, and made demand upon SGI for that amount under the indemnity
agreement entered into by the surety and SGI. SGI declined to make or
authorize any such payment and notified the surety that any payment in
response to Ecosalud's demand on the bond was at the surety's risk. 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 finally
resolved, in the event such claims result in any final liability.
On April 2, 1998, Seguros brought suit against SGI in the
United States District Court for the Northern District of Georgia,
Atlanta Division, Civil Action No. 1:98-CV-968-CAM. The plaintiff
sought $2,400,000 for sums paid by Seguros to Ecosalud under the
surety bond on November 1, 1994, plus interest at the Columbian bank
rate of interest. SGI filed a motion to dismiss based on the Colombian
statute of limitations of two years and, alternatively, sought 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 interest.
On September 29, 1999, the District Court issued an order in
which it denied various motions of SGI, including a motion to dismiss,
and granted Seguros' motion for summary judgment. On September 29,
1999, the District Court also entered judgment for Seguros in the
amount of $2,400,000 or the equivalent in Colombian pesos as of the
judgment date, plus pre-judgment interest at a rate of 38.76% per
annum, equivalent to approximately $4.6 million.
SGI intends to appeal the matters covered by the District
Court's order and judgment. SGI has posted an appeal bond in the
amount of $7 million through its existing bonding arrangements. SGI
continues to believe that it has meritorious defenses, including that
the amount paid by Seguros was improperly paid because of the default
by Ecosalud of its obligations to SGI, which claims remain the subject
of separate litigation in Colombia.
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<PAGE> 9
In addition to vigorously prosecuting its appeal of the
District Court's order and judgment, SGI continues to vigorously
defend the Colombian litigation and has been advised by counsel that
SGI has various defenses on the merits as well as procedural defenses
to the litigation (which it has asserted). Nevertheless, it is not
possible to determine the exact/ultimate outcome of the appeal of the
order and judgment granted to Seguros or the outcome of any litigation
in Colombia. While it is not feasible to predict or determine the
final outcome of these proceedings, management, based on the knowledge
of the related facts and circumstances does not believe that any
potential losses will result in a materially adverse effect on the
Company's financial position, results of operations, liquidity or
capital resources.
Note 4. Comprehensive Income
Total comprehensive income was $5.8 million and $15.8 million
for the three-month and nine-month periods ended September 30, 1999.
In comparison, total comprehensive income was $4.9 million and $14.2
million for the three-month and nine-month periods ended September 30,
1998, respectively.
Note 5. Bank Credit Facilities
The Company's current Bank Credit Agreement, an $80 million
credit facility with three banks, expires December 20, 1999. The
Company is in the final stages of negotiating a new $80 million
three-year revolving credit facility with multiple lenders and an
additional $25 million revolving 364-day credit facility with a single
lender and expects to sign the new credit agreements before the
expiration of the current Bank Credit Agreement. (Refer to the
Company's 10-K for the year ended December 31, 1998 for a description
of the Company's Bank Credit Agreement). Net borrowings under the Bank
Credit Agreement were $13.5 million at September 30, 1999.
Note 6. Segment Information
<TABLE>
<CAPTION>
OPERATING SEGMENT INFORMATION THREE MONTH PERIOD NINE MONTH PERIOD
ENDED SEPTEMBER 30 ENDED SEPTEMBER 30
(In thousands) 1999 1998 1999 1998
-------------------------------------------------
<S> <C> <C> <C> <C>
Revenue from external customers:
Instant Ticket and Related Services $ 50,579 $ 43,634 $ 137,252 $ 133,303
Intersegment Revenue (1,718) (2,378) (5,283) (6,283)
Systems 8,910 10,162 31,965 20,206
Intersegment Revenue 1,718 2,378 5,283 6,283
Corporate 22 132 85 405
-------- -------- --------- ---------
Total revenue from external customers 59,511 53,928 169,302 153,914
======== ======== ========= =========
Operating income
Instant Ticket and Related Services 10,605 9,280 28,209 27,217
Systems 173 2,365 5,906 4,182
Corporate (2,782) (2,487) (8,873) (7,352)
Total operating income 7,996 9,151 25,242 24,047
Interest income (expense), net 32 (161) (90) (872)
Other (162) 103 (576) 250
======== ======== ========= =========
Income before income tax $ 7,866 $ 9,093 $ 24,576 $ 23,425
======== ======== ========= =========
</TABLE>
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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 primarily from sales of products
and services to governmentally operated or sanctioned lotteries worldwide and,
to a lesser extent, non-lottery related entities both in the United States and
worldwide. These sales are categorized into two main segments: (1) Instant
Ticket and Related Services and (2) Systems.
In the Instant Ticket and Related Services segment, the Company
primarily supplies game design, sales and marketing support, instant ticket
manufacturing and delivery, inventory management and distribution, and retailer
telemarketing and field services. In addition, this segment includes
promotional instant tickets and pull-tab tickets which are sold to both lottery
and non-lottery customers and prepaid phone cards which are sold to
telecommunications companies.
In the Systems segment, the Company primarily supplies transaction
processing software that accommodates instant ticket accounting and validation
and on-line lottery games, point-of-sale terminal hardware which connects to
these systems, central site computers and communication hardware which run
these systems, and ongoing support and maintenance services for these products.
This segment also includes software, hardware and support for sports betting
and credit card processing systems for non-lottery customers.
Instant Ticket and Related Services revenues are generally based on a
price per 1,000 tickets delivered or based upon a percentage of the lottery's
sales to the public over a contract period. Systems revenues may be based on a
fixed price for the product or service or based upon a percentage of the
lottery's sales to the public over a contract period.
Through September 30, 1999, the Company has:
- received one-year extensions on its current Instant
Ticket and Related Services contracts with the
Colorado Lottery, DC Lottery and Charitable Games
Control Board, Illinois Lottery, Iowa Lottery,
Kentucky Lottery, Minnesota State Lottery, New
Mexico Lottery, Oregon State Lottery, South Dakota
Lottery and the Washington Lottery.
- received two six-month extensions on its instant
ticket contract as an additional supplier from the
California State Lottery and several smaller orders
from new and existing international lottery and
prepaid phone card customers.
- been awarded a new two-year contract to provide
Instant Tickets and Related Services by the
Massachusetts Lottery.
- received a two-year contract to provide instant
ticket telemarketing, distribution services and
systems software and hardware to support instant
tickets to the New York State Lottery.
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<PAGE> 11
- started to supply instant tickets to the Texas
Lottery under its primary contract after the award
of the primary contract to the Company was confirmed
by the Executive Director on August 10, 1999 in her
response to the protest filed by the non-winning
bidder. The primary contract names the Company as
the primary instant ticket and related services
vendor for the Texas Lottery for three years.
- invested in and entered into a strategic alliance
with Hartford, CT-based MDI Entertainment, Inc. to
provide licensed games and promotions for lottery
products such as Harley Davidson(R), Star Trek(TM)
and James Bond 007(TM) to the Company's lottery
customers.
Subsequent to the end of the quarter, the Company repurchased 440,000
shares of its common stock totaling approximately $7.0 million. The shares
repurchased represented approximately 3.7% of the Company's total common stock
outstanding. The Company currently has approximately 11.5 million outstanding
shares of common stock.
RESULTS OF OPERATIONS
Three-month period ended September 30, 1999 compared to three-month period
ended September 30, 1998.
Revenues for the three-month period ended September 30, 1999 increased
$5.6 million, or 10.4% over the revenues for the three-month period ended
September 30, 1998. The increase was primarily due to additional revenues
generated from sales to new and existing Instant Ticket and Related Services
customers including sales generated by the printing of prepaid cellular
telephone cards which was partially offset by a decrease in international
promotional sales. Instant Ticket and Related Services revenues accounted for
approximately 82.1% and 76.5% of the Company's gross revenues for the
three-month periods ended September 30, 1999 and 1998, respectively. Revenues
generated from Systems sales decreased slightly from the same comparable
period.
Gross margins decreased to 34.4% for the three-month period ended
September 30, 1999 from 37.3% for the three-month period ended September 30,
1998. The margin decrease was mainly attributable to lower equivalent sales
prices charged on certain instant ticket lottery contracts awarded or extended,
lower instant ticket export sales and a decrease in Systems sales. The margin
decrease was partially offset by continued efficiency improvements and
additional sales of prepaid phone cards to international telecommunications
companies in the Company's Instant Ticket and Related Services segment. The
lower equivalent sales prices were a result of competitive pricing pressures in
the industry.
Selling, general and administrative expenses for the three-month
period ended September 30, 1999 increased $757,000 or 11.4%, over the same
period of 1998. SG&A expenses increased as a percentage of revenues to 12.5%
from 12.3%. The increase was due primarily to the additional selling, general
and administrative expenses resulting from a foreign joint venture formed in
December 1998 and additional expenses required to support increased sales
activity in new markets.
Depreciation and amortization expense increased for the three-month
period ended September 30, 1999 by $733,000 or 17.0% over the comparable period
of 1998 due primarily to additional depreciation expenses from ongoing capital
expenditures, changes in contractual agreements and goodwill amortization
related to a foreign joint venture.
Interest income for the three-month period ended September 30, 1999
decreased $73,000, or 67.6%, compared to the three-month period ended
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September 30, 1998. Interest income includes interest received and estimates of
accrued interest. The difference in the amounts recorded for the comparable
quarters is primarily due to changes in estimates of the accrued amounts.
Other (expense)/income for the three-month period ended September 30,
1999 decreased $88,000 compared to the three-month period ended September 30,
1998. The decrease during the three-month period ended September 30, 1999 was
attributable to losses incurred on the disposition of assets.
Gain/(loss) on foreign currency for the three-month period ended
September 30, 1999 resulted in a loss of $32,000 compared with a gain of
$47,000 for the same period 1998. The loss resulted primarily from fluctuations
in exchange rates on non-U.S. dollar holdings.
Interest expense for the three-month period ended September 30, 1999
decreased $269,000 from the three-month period ended September 30, 1998.
Interest expense includes interest paid and estimates of accrued interest. The
decrease in the amounts recorded for the comparable quarters is primarily due to
changes in estimates of the accrued amounts.
Income tax expense for the three-month period ended September 30, 1999
decreased $1.3 million, or 34.6% as compared to the same three-month period of
1998 due to lower taxable income and a reduction in the Company's effective
income tax rate. The effective income tax rate decreased from 41.9% to 31.7%
for the three-month periods ended September 30, 1998 and September 30, 1999,
respectively. The decrease in the effective income tax rate was mainly
attributable to additional foreign, federal and state tax credits.
As a result of the foregoing, net earnings for the three-month period
ended September 30, 1999 were $5.4 million compared to $5.3 million for the
comparable period ended September 30, 1998.
Earnings per common share (diluted) for the three-month period ended
September 30, 1999 were $0.45 compared to $0.43 for the comparable period in
1998. The increase in earnings per common share was primarily due to the
increase in net income and a decrease in the weighted-average number of common
equivalent shares outstanding.
Nine-month period ended September 30, 1999 compared to nine-month period ended
September 30, 1998.
Revenues for the nine-month period ended September 30, 1999 increased
$15.4 million, or 10.0% over the revenues for the nine-month period ended
September 30, 1998. The increase in revenues was due to increased Systems sales
that occurred primarily in the first six months of 1999 and increased sales in
the Company's Instant Ticket and Related Services segment. The increase in the
Company's Instant Ticket and Related
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<PAGE> 13
Services segment was mainly attributable to additional sales generated by the
printing of prepaid telephone cards. The increase in revenues from Instant
Ticket and Related Services was partially offset by a decrease in sales from
the United States to domestic and international lottery customers and from
reduced international promotional sales. Instant Ticket and Related Services
revenues accounted for approximately 77.9% and 82.5% of the Company's gross
revenues for the three-month periods ended September 30, 1999 and 1998,
respectively. The increase in the Company's Systems sales was mainly
attributable to contracts with new customers.
Gross margins decreased to 36.0% for the nine-month period ended
September 30, 1999 from 36.3% for the nine-month period ended September 30,
1998. The margin decrease was mainly attributable to lower equivalent sales
prices charged on certain instant ticket lottery contracts awarded or extended
and lower instant ticket export sales. The margin decrease was partially offset
by an increase in sales to Systems customers that occurred during the first six
months of 1999 and continued efficiency improvements in the Company's Instant
Ticket and Related Services segment. The lower equivalent sales prices were a
result of continued competitive pricing pressures in the industry.
Selling, general and administrative (SG&A) expenses for the nine-month
period ended September 30, 1999 increased $2.8 million or 15.0%, over the same
period of 1998. As a percentage of revenues, SG&A expenses increased from 12.3%
to 12.9%. The increase was due primarily to the additional selling, general and
administrative expenses resulting from a foreign joint venture formed in
December 1998 and additional expenses required to support increased sales
activity in new markets.
Depreciation and amortization expense increased for the nine-month
period ended September 30, 1999 by $1.1 million or 8.6% over the comparable
period of 1998 due primarily to additional depreciation expenses from ongoing
capital expenditures changes in contractual agreements and goodwill amortization
related to a foreign joint venture.
Interest income for the nine-month period ended September 30, 1999
increased $111,000, or 54.4%, compared to the nine-month period ended September
30, 1998. The increase was attributable to higher average cash and cash
equivalents balance during the same comparable periods.
Other income for the nine-month period ended September 30, 1999
decreased $78,000 compared to the nine-month period ended September 30, 1998.
The decrease was mainly attributable to net losses incurred on the disposition
of assets.
Gain/(loss) on foreign currency for the nine-month period ended
September 30, 1999 increased by $164,000 to $239,000, compared with a gain of
$75,000 for the comparable period in 1998. The gains primarily resulted from
fluctuations in exchange rates on non-U.S. dollar holdings.
Interest expense for the nine-month period ended September 30, 1999
decreased $671,000, or 62.4% from the nine-month period ended September 30,
1998. The decrease was mainly attributable to the decrease in the average
balance outstanding under the Company's Bank Credit Agreement compared to the
prior period. Also contributing to the decrease was the transfer of a portion
of the Company's debt to borrowings with lower interest rates.
Income tax expense for the period ended September 30, 1999 decreased
$748,000, or 8.5% as compared to the same nine-month period of 1998 due to a
reduction in the Company's effective income tax rate. The effective income tax
rate for the nine-month periods ended September 30, 1999 and September 30, 1998
was 35.7% and 40.6%, respectively. The decrease in the
13
<PAGE> 14
effective income tax rate was mainly attributable to additional foreign,
federal and state tax credits.
Earnings per common share (diluted) for the nine-month period ended
September 30, 1999 were $1.32 compared to $1.12 for the comparable period in
1998. The increase in earnings per common share was primarily due to the
increase in earnings and a decrease in the weighted-average number of common
equivalent shares outstanding.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash position remains strong. The Company's cash and
cash equivalents balance increased by approximately $4.4 million during the
nine-month period ended September 30, 1999 although the Company's net
borrowings under its Bank Credit Agreement increased by $1.0 million during the
same period.
For the nine-month period ended September 30, 1999, net cash provided
by operating activities decreased by $11.6 million to $15.1 million from $26.7
million for the comparable period in 1998. The primary contributions to cash
from operating activities during the nine-month period ended September 30, 1999
were net income, depreciation and amortization and an increase in accrued
liabilities. Accounts receivable increased from $39.4 million at December 31,
1998 to $47.5 million at September 30, 1999, and accrued liabilities increased
from $17.8 million at December 31, 1998 to $20.2 million at September 30, 1999.
The increase in accounts receivable and accrued liabilities are primarily due
to activity related to Systems projects in Australia, Canada, France and
Greece. Cash provided by operations was used to fund working capital
requirements, purchase additional property and equipment, invest in new
strategic alliances and make payments on the outstanding balance under the Bank
Credit Agreement.
Net cash used in investing activities for the nine-month period ended
September 30, 1999 increased by approximately $3.8 million to $10.8 million
from $7.0 million for the nine-month period ended September 30, 1998. Cash was
used to acquire additional property and equipment at the Company's domestic and
international facilities. In addition, the Company also invested approximately
$1.3 million in connection with a new strategic alliance with MDI
Entertainment, Inc. The Company expects to increase its investment levels in
its domestic and international facilities by $14.0 million during the fourth
quarter of 1999.
The Company's financing activities generated cash of $1.2 million for
the nine months ended September 30, 1999 and used cash of $15.2 million in the
nine months ended September 30, 1998. The Company increased the balance
outstanding under the Bank Credit Agreement at September 30, 1999 by a net
amount of approximately $1.0 million compared to the balance at December 31,
1999. Net borrowings under the Bank Credit Agreement were $13.5 million at
September 30, 1999.
Subsequent to the end of the quarter, the Company repurchased 440,000
shares of its common stock totaling approximately $7.0 million. The shares
repurchased represented approximately 3.7% of the Company's total common stock
outstanding. The Company currently has approximately 11.5 million outstanding
shares of common stock. Purchases may be made from time to time in the open
market, and the funding of any such purchases may come from operating cash flow
and existing bank facilities.
The Company believes that funds provided by operations, available
borrowings under its current and anticipated Bank Credit Agreements and the
ability to obtain alternative sources of financing should permit the Company to
fund its operations, working capital requirements and obligations, as well as
other potential investment or business opportunities.
14
<PAGE> 15
IMPACT OF YEAR 2000
Refer to the Company's Form 10-K for the year ended December 31, 1998
for a description of the Company's Year 2000 ("Y2K") program, business systems,
interfaces with third parties, estimated Y2K costs and contingency planning,
with respect to which there have been the following developments since such
date. The Company spent approximately $585,000 on Y2K compliance costs during
the nine-month period ended September 30, 1999. These costs included capital
expenditures and internal labor costs which management believes would have
otherwise been incurred as part of the Company's regular program of
modernization and improvement. The Company now estimates that its total Y2K
compliance costs (including software, systems and equipment) incurred since
1997 have been approximately $1.8 million. The Company believes that completed
and planned modifications and conversions of its internal systems and equipment
will allow it to be Y2K ready prior to December 31, 1999.
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 may differ materially 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, 1998 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.
15
<PAGE> 16
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Refer to the Company's Form 8-K filed on September 29, 1999
for a description of pending legal proceedings with which
there have been the following developments since such date.
On October 13, 1999, the Company filed its notice of appeal
with the United States Court of Appeals for the Eleventh
Circuit and posted and appeal bond in the amount of $7
million in connection with such appeal.
ITEMS 2,3,4 AND 5 ARE NOT APPLICABLE AND HAVE BEEN OMITTED.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
#27 Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K
On September 29, 1999 a Form 8-K was filed with respect to
legal proceedings initially reported in July 1993 and
periodically reported thereafter, to report an order issued
by the United States District Court for the Northern District
of Georgia, Atlanta Division, in the suit styled Seguros del
Estado v. Scientific Games Inc., Civil Action No.
1:98-CV-968-CAM.
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: November 15, 1999 By: /s/WILLIAM G. MALLOY
--------------------------------
William G. Malloy
President and
Chief Executive Officer
Date: November 15, 1999 By: /s/CLIFF O. BICKELL
--------------------------------
Cliff O. Bickell
Vice President,Treasurer,
and Chief Financial Officer
16
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF SCIENTIFIC GAMES, INC. FOR THE NINE MONTH PERIOD ENDED
SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<EXCHANGE-RATE> 1,000
<CASH> 13,665
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<RECEIVABLES> 47,528
<ALLOWANCES> 243
<INVENTORY> 14,323
<CURRENT-ASSETS> 82,795
<PP&E> 126,027
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<SALES> 169,302
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<OTHER-EXPENSES> 35,182
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