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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, 2000
-------------------------------------------------
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.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 13-3615274
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(STATE OR OTHER JURISDICTION OF (IRS IDENTIFICATION NO.)
EMPLOYER)
1500 BLUEGRASS LAKES PARKWAY, ALPHARETTA, GEORGIA 30004
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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 [ ]
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 [ ]
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: 11,938,082 SHARES
OF COMMON STOCK, $.001 PAR VALUE PER SHARE, AS OF AUGUST 10, 2000.
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PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page No.
--------
<S> <C> <C>
Item 1. Consolidated Condensed Financial Statements
Consolidated Condensed Balance Sheets
June 30, 2000 and December 31, 1999 .................. 4
Consolidated Condensed Statements of Income
Three-month period ended June 30, 2000
and June 30, 1999
Six-month period ended June 30, 2000
and June 30, 1999 .................................... 5
Consolidated Condensed Statements of Cash Flows
Six-month period ended June 30, 2000
and June 30, 1999 .................................... 6
Notes to Consolidated Condensed Financial Statements ...... 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations .................. 11
PART II - OTHER INFORMATION
Item 1. Legal Proceedings ......................................... 17
Item 5. Other Events .............................................. 17
Item 6. Exhibits and Reports on Form 8-K .......................... 17
SIGNATURES ......................................................... 18
</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,
2000 1999
--------- ------------
ASSETS (unaudited) (1)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents .................................. $ 11,296 $ 14,775
Trade receivables .......................................... 46,669 48,655
Inventories ................................................ 15,648 15,281
Prepaid expenses and other current assets .................. 3,500 2,706
Income taxes receivable .................................... 74 --
Deferred income tax benefits ............................... 1,100 1,053
--------- ---------
Total current assets ................................ 78,287 82,470
PROPERTY, SYSTEMS AND EQUIPMENT, AT COST:
Land ....................................................... 5,024 2,404
Buildings .................................................. 12,405 12,535
Leasehold improvements ..................................... 3,016 2,367
Production, systems and other equipment .................... 115,650 112,884
Construction-in-progress ................................... 25,759 12,089
--------- ---------
161,854 142,279
Less accumulated depreciation and amortization ............. (75,407) (69,324)
--------- ---------
86,447 72,955
OTHER ASSETS
Goodwill, net of amortization ............................. 29,819 31,473
Other assets .............................................. 18,462 16,735
--------- ---------
$ 213,015 $ 203,633
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ........................................... $ 13,457 $ 15,912
Accrued liabilities ........................................ 25,125 23,397
Income taxes payable ....................................... -- 1,827
--------- ---------
Total current liabilities ........................... 38,582 41,136
LONG-TERM LIABILITIES:
Credit facilities ......................................... 28,900 23,547
Other long-term liabilities ............................... 5,364 5,677
Deferred income taxes payable ............................. 7,471 6,727
Minority interest in consolidated subsidiaries ............ 3,238 3,004
STOCKHOLDERS' EQUITY:
Common stock par value $.001 per share:
shares authorized: 25,750,000;
issued and outstanding shares: 11,924,151 at June 30,
2000 and 11,915,702 at December 31, 1999 ................. 12 12
Additional paid-in capital ................................. 66,144 66,060
Accumulated earnings ....................................... 72,337 66,689
Accumulated other comprehensive income ..................... (999) (1,198)
Treasury stock, at cost - 509,200 shares at June 30,
2000 and December 31, 1999 ................................. (8,034) (8,021)
--------- ---------
Total stockholders' equity .......................... 129,460 123,542
--------- ---------
$ 213,015 $ 203,633
========= =========
</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 Six-month period
ended June 30, ended June 30,
2000 1999 2000 1999
-------- -------- --------- ---------
<S> <C> <C> <C> <C>
Revenues ......................................... $ 61,448 $ 57,125 $ 120,511 $ 109,790
Cost of revenues ................................. 42,973 35,576 82,616 69,294
-------- -------- --------- ---------
18,475 21,549 37,895 40,496
Selling, general and administrative expenses ..... 7,510 7,617 16,058 14,357
Depreciation and amortization .................... 4,856 4,822 9,424 8,894
Plant closure costs .............................. 309 _ 2,826 _
-------- -------- --------- ---------
Operating income ................................. 5,800 9,110 9,587 17,245
Other income (expense):
Interest income .............................. 175 189 368 279
Other income ................................. 70 25 78 30
Gain/(loss) on foreign currency .............. (14) (174) (308) 273
Interest expense ............................. 337 235 622 402
Minority interest elimination ................ (118) (287) (176) (716)
-------- -------- --------- ---------
Income before income taxes ....................... 5,576 8,628 8,927 16,709
Income tax expense ............................... 2,062 3,198 3,278 6,273
-------- -------- --------- ---------
Net income ....................................... $ 3,514 $ 5,430 $ 5,649 $ 10,436
======== ======== ========= =========
Basic net income per common share ................ $ 0.31 $ 0.46 $ 0.50 $ 0.88
======== ======== ========= =========
Diluted net income per common share .............. $ 0.30 $ 0.45 $ 0.49 $ 0.87
======== ======== ========= =========
Average common shares outstanding - basic ........ 11,415 11,885 11,411 11,885
Dilutive effect of stock options and
non-vested restricted stock awards ............ 163 108 124 108
-------- -------- --------- ---------
Average common shares outstanding-diluted ........ 11,578 11,993 11,535 11,993
======== ======== ========= =========
</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,
2000 1999
-------- --------
<S> <C> <C>
CASH FLOW PROVIDED BY OPERATING ACTIVITIES
Net income ........................................... $ 5,649 $ 10,436
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation ..................................... 6,645 5,838
Amortization ..................................... 2,778 3,056
Gain on disposal of property and equipment ....... (521) (12)
Stock compensation expense ....................... 35 31
Minority interest ................................ 118 348
Deferred income taxes ............................ (32) 257
Changes in operating assets and liabilities:
Accounts receivable ........................... 1,745 (12,752)
Inventories ................................... (526) (527)
Accounts payable .............................. (2,400) 435
Other ......................................... (288) 3,520
-------- --------
Net cash provided by operating activities ......... 13,203 10,630
CASH FLOWS USED IN INVESTING ACTIVITIES
Proceeds from sales of property and equipment ........ 442 120
Purchases of property and equipment .................. (22,270) (5,956)
-------- --------
Net cash used in investing activities ............. (21,828) (5,836)
CASH FLOWS USED IN FINANCING ACTIVITIES
Borrowings under credit facilities ................... 23,891 21,265
Payments on bank credit facilities ................... (18,000) (19,771)
Repurchase of common stock ........................... (13) --
Proceeds of exercise of common stock options ......... 4 8
-------- --------
Net cash provided by financing activities ......... 5,882 1,502
EFFECT OF EXCHANGE RATE CHANGES ON CASH ................ (736) (1,834)
-------- --------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS ... (3,479) 4,462
CASH AND CASH EQUIVALENTS, beginning of period ......... 14,775 9,270
-------- --------
CASH AND CASH EQUIVALENTS, end of period ............... $ 11,296 $ 13,732
======== ========
SUPPLEMENTAL CASH FLOWS DISCLOSURE:
Cash paid for interest ............................... $ 460 $ 318
======== ========
</TABLE>
See accompanying notes.
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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 1999 Annual
Report on Form 10-K for the year ended December 31, 1999. 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 six month periods ended
June 30, 2000 are not necessarily indicative of the results that may
be expected for the year ended December 31, 2000.
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>
June 30, December 31,
2000 1999
-------- -----------
(In Thousands)
<S> <C> <C>
Finished goods .......... $ 9,015 $ 8,633
Work-in-process ......... 1,915 2,075
Raw materials ........... 4,718 4,573
------- -------
$15,648 $15,281
======= =======
</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 Colombia 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 Colombian government. The contract projected that
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Note 3. Contingencies continued
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 $5.0 million 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 $4.0 million 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 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 $1.5 million
confirmed letter of credit in favor of SGI.
The Colombian surety, which issued a $4.0 million bond to Ecosalud
under the contract, paid $2.4 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 $2.4
million for sums paid by Seguros to Ecosalud under the surety bond on
November 1, 1994, plus interest at the Colombian bank rate of
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Note 3. Contingencies continued
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 $2.4 million, 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
$2.4 million 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 has appealed 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.
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, believes that any potential
losses will not 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 $195,000 and $5.8
million for the three-month and six-month periods ended June 30, 2000
and $5.4 million and $10.0 million for the three-month and six-month
periods ended June 30, 1999, respectively.
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Note 5. Credit Facilities
The Company has two credit facilities, an $80 million revolving credit
facility with four banks which expires November 30, 2002 and a $25
million revolving 364-day credit facility with a single bank that
expires on November 29, 2000. (Refer to the Company's 10-K for the
year ended December 31, 1999 for a description of the Company's credit
facilities). Net borrowings under the credit facilities were $28.9
million at June 30, 2000.
Note 6. Segment Information
<TABLE>
<CAPTION>
OPERATING SEGMENT INFORMATION THREE MONTH PERIOD SIX MONTH PERIOD
ENDED JUNE 30 ENDED JUNE 30
(In thousands) 2000 1999 2000 1999
-------- -------- --------- ---------
<S> <C> <C> <C> <C>
Revenue from external customers:
Instant Ticket and Related Services $ 54,312 $ 45,917 $ 106,872 $ 86,673
Intersegment Revenue (1,876) (1,896) (3,784) (3,565)
Systems 7,250 11,161 13,652 23,054
Intersegment Revenue 1,876 1,896 3,784 3,565
Corporate (114) 47 (13) 63
-------- -------- --------- ---------
Total revenue from external customers 61,448 57,125 120,511 109,790
======== ======== ========= =========
Operating income
Instant Ticket and Related Services 9,302 9,729 18,968 17,604
Systems (476) 2,807 (3,510) 5,731
Corporate (3,026) (3,426) (5,871) (6,090)
Total operating income 5,800 9,110 9,587 17,245
Interest expense, net (164) (46) (254) (123)
Other (60) (436) (406) (413)
-------- -------- --------- ---------
Income before income tax $ 5,576 $ 8,628 $ 8,927 $ 16,709
======== ======== ========= =========
</TABLE>
Note 7. Plant Closure
On January 28, 2000, the Company announced plans to consolidate its
printing operations by expanding its Alpharetta, Georgia facility and
closing its instant ticket printing operation in Gilroy, California.
The severance and stay incentive plan was announced to the employees
on January 27, 2000. A total of $309,000 and $2.8 million in closure
costs were expensed for the quarter and six months ended June 30,
2000, respectively. The reserve in accrued liabilities was $2.4
million at June 30, 2000. These costs consisted of severance, stay
incentives, lease termination and asset write-downs. There are
approximately 130 employees that will be terminated including both
production and support employees at the plant. The plant stopped
printing operations on July 26, 2000 and will cease total operations
by the end of August 2000. There were $185,000 in charges taken
against the reserve during the quarter ended June 30, 2000.
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SCIENTIFIC GAMES HOLDINGS CORP.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
GENERAL
Our revenues are generated primarily from sales of our 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. We categorize our sales into two main segments: (1) Instant Ticket
and Related Services and (2) Systems.
In the Instant Ticket and Related Services segment, we primarily
supply game design, sales and marketing support, instant ticket manufacturing
and delivery, inventory management and distribution, and retailer telemarketing
and field services to our customers. In addition, this segment includes
promotional instant tickets and pull-tab tickets that we sell to both lottery
and non-lottery customers and prepaid phone cards sold to telecommunications
companies.
In the Systems segment, we primarily supply 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.
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.
For the period January 1, 2000 through June 30, 2000, we have:
- received an extension on our current Instant Ticket and Related Services
contracts with the Kentucky Lottery Corporation through September, 2002.
- been awarded a new three-year contract, with an option for an additional
three-year extension, to provide Instant Tickets and Related Services to
the Washington State Lottery.
- been awarded a new four-year contract, with an option for an additional
one-year extension, to provide Instant Tickets and Related Services to the
Colorado Lottery.
- been awarded a new two-year secondary supply contract, with an option for
three additional one-year extensions, to provide Instant Tickets and
Related Services to the Minnesota Lottery.
- been awarded a new three-year contract, with an option for two additional
one-year extensions, to provide Instant Tickets and Related Services to
the West Virginia Lottery.
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- been awarded a new three-year contract, with an option for two additional
one-year extensions, to provide Instant Tickets and Related Services to
the South Dakota Lottery.
- received one-year extensions on our Instant Ticket and Related Services
contracts with the Illinois, New York and New Mexico Lotteries.
RESULTS OF OPERATIONS
Three-month period ended June 30, 2000 compared to three-month period ended
June 30, 1999.
Revenues for the three-month period ended June 30, 2000 increased $4.3
million, or 7.6%, over the revenues for the three-month period ended June 30,
1999. The increase was primarily due to increased Instant Tickets and Related
Services revenues of approximately $8.4 million, which represented a 19.1%
increase for the segment. This increase was mostly due to an $6.8 million
increase in sales of international pre-paid telephone cards, which represented
a 185% increase over the same period last year for this product. Partially
offsetting the increase for the period was a $3.9 million decrease in revenues
from the Systems segment due to lower sales of new systems to international
customers. Instant Ticket and Related Services revenues accounted for
approximately 85.3% and 77.1% of our total revenues for the three-month periods
ended June 30, 2000 and 1999, respectively.
On a comparative basis, gross margin decreased $3.1 million, or 14.3%,
while gross margin as a percentage of revenues decreased to 30.1% from 37.7%
for the three-month periods ended June 30, 2000 and 1999, respectively. The
margin decrease expressed in dollars was primarily due to the decreased sales
volumes in the Systems segment. The percentage margin decline was mainly
attributable to lower equivalent sales prices charged on certain instant ticket
lottery contracts awarded or extended and the decrease in Systems sales, offset
in part by continued efficiency improvements and additional sales of pre-paid
telephone cards. The lower equivalent sales prices were a result of competitive
pricing pressures in the lottery industry.
Selling, general and administrative (SG&A) expenses decreased
$107,000, or 1.4%, for the three-month period ended June 30, 2000 from the same
period of 1999. SG&A expenses decreased as a percentage of revenues to 12.2%
from 13.3%.
Depreciation and amortization expense increased for the three-month
period ended June 30, 2000 by $34,000, or 0.7%, over the comparable period of
1999.
Plant closure costs, including related severance costs, of $309,000
recorded during the current quarter are for the planned closure of our instant
ticket manufacturing facility in Gilroy, California. This closure resulted from
our decision to consolidate U.S. based production in our Alpharetta, Georgia
facility, which is being expanded to accommodate a state-of-the-art printing
press. Once the new press is operational, we
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believe the facility consolidation and equipment upgrade will produce cost
savings as well as increase our production capabilities.
Interest income for the three-month period ended June 30, 2000
decreased $14,000, or 7.4%, compared to the three-month period ended June 30,
1999. The decrease was attributable to lower average cash and cash equivalents
balances in the current period than in the same comparable period of 1999.
Gain/(loss) on foreign currency for the three-month period ended June
30, 2000 resulted in a loss of $14,000 compared with a loss of $174,000 for the
same period in 1999.
Interest expense for the three-month period ended June 30, 2000
increased $102,000 from the three-month period ended June 30, 1999. The
increase was primarily due to an increase in the average balance outstanding
under one of our credit facilities compared to the prior period.
The effective income tax rate for the three-month ended June 30, 2000
was 37.0% as compared to 37.1% for the three-month period ended June 30, 1999.
As a result of the foregoing, net income for the three-month period
ended June 30, 2000 was $3.5 million compared to $5.4 million for the
three-month period ended June 30, 1999. The decrease in net income of $1.9
million was primarily due to the Gilroy closing costs, the decrease in Systems
sales and competitive pricing pressures discussed above. Net income without the
one-time plant closing costs and associated severance costs would have been
$3.7 million.
Earnings per common share (diluted) for the three-month period ended
June 30, 2000 were $0.30 compared to $0.45 for the comparable period in 1999.
The decrease in earnings per common share was primarily due to the Gilroy
closing costs, the decrease in Systems sales and competitive pricing pressures.
Partially offsetting the decrease was a reduction in the weighted average
number of common equivalent shares outstanding, resulting from our repurchase
of shares of our common stock during 1999. Earnings per common share without
the Gilroy closing costs would have been $.32.
Six-month period ended June 30, 2000 compared to Six-month period ended June
30, 1999.
Revenues for the six-month period ended June 30, 2000 increased $10.7
million, or 9.8%, over the revenues for the six-month period ended June 30,
1999. The increase was primarily due to increased Instant Tickets and Related
Services revenues of approximately $20.0 million, which represented a 24.0%
increase for the segment. This increase was mostly due to a $15.1 million
increase in sales of international pre-paid telephone cards, which represented
a 228% increase over the same period last year for this product. Partially
offsetting the increase for the period was a $9.2
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million decrease in revenues from the Systems segment due to lower sales of new
systems to international customers. Instant Ticket and Related Services
revenues accounted for approximately 85.5% and 75.7% of our total revenues for
the three-month periods ended June 30, 2000 and 1999, respectively.
On a comparative basis, gross margin decreased $2.6 million, or 6.4%,
while gross margin as a percentage of revenues decreased to 31.4% from 36.9%
for the six-month periods ended June 30, 2000 and 1999, respectively. The
margin decrease expressed in dollars was primarily due to the decreased sales
volumes in the Systems segment. The percentage margin decline was mainly
attributable to lower equivalent sales prices charged on certain instant ticket
lottery contracts awarded or extended and the decrease in Systems sales, offset
in part by continued efficiency improvements and additional sales of pre-paid
telephone cards. The lower equivalent sales prices were a result of competitive
pricing pressures in the lottery industry.
Selling, general and administrative (SG&A) expenses increased $1.7
million, or 11.8%, for the six-month period ended June 30, 2000 over the same
period of 1999. SG&A expenses increased as a percentage of revenues to 13.3%
from 13.1%. The increase was due primarily to severance costs related to a
management re-organization and higher selling, general and administrative
expenses required to support increased sales activity in new and existing
markets, including pre-paid telephone cards.
Depreciation and amortization expense increased for the six-month
period ended June 30, 2000 by $530,000, or 6.0%, over the comparable period of
1999 due primarily to additional depreciation expenses from capital
expenditures to support the growth in pre-paid telephone demand and for new
Instant Ticket and Related Services operations.
The Gilroy closure costs of $2.8 million recorded during the year are
for the planned closure of our instant ticket manufacturing facility in Gilroy,
California. This closure resulted from our decision to consolidate U.S. based
production in our Alpharetta, Georgia facility, which is being expanded to
accommodate a state-of-the-art printing press. Once the new press is
operational, we believe the facility consolidation and equipment upgrade will
produce cost savings as well as increase our production capabilities.
Interest income for the six-month period ended June 30, 2000 increased
$89,000, or 31.9%, compared to the six-month period ended June 30, 1999. The
increase was attributable to higher average cash and cash equivalents balances
in the current period than in the same comparable period of 1999.
Gain/(loss) on foreign currency for the six-month period ended June
30, 2000 resulted in a loss of $308,000 compared with a gain of $273,000 for
the same period in 1999. The loss primarily resulted from the negative exchange
rate effect of the strengthening U.S. dollar on certain assets denominated in
foreign currency.
Interest expense for the six-month period ended June 30, 2000
increased $220,000 from the six-month period ended June 30, 1999. The increase
was primarily due to an increase in the average balance
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outstanding under one of our credit facilities compared to the prior period.
The effective income tax rate for the six-month ended June 30, 2000
was 36.7% as compared to 37.5% for the six-month period ended June 30, 1999.
The lower effective tax rate was primarily the result of adjustments to tax
liabilities, due to the favorable resolution of certain contingencies.
As a result of the foregoing, net income for the six-month period
ended June 30, 2000 was $5.6 million compared to $10.4 million for the period
ended June 30, 1999. The decrease in net income of $4.8 million was primarily
due to the one-time plant closing costs, the severance costs, the decrease in
Systems sales and competitive pricing pressures discussed above. Net income
without the one-time plant closing and severance costs would have been $7.8
million.
Earnings per common share (diluted) for the six-month period ended
June 30, 2000 were $0.49 compared to $0.87 for the comparable period in 1999.
The decrease in earnings per common share was primarily due to the one-time
plant closing costs, the severance costs, the decrease in Systems sales and
competitive pricing pressures. Partially offsetting the decrease was a
reduction in the weighted average number of common equivalent shares
outstanding, resulting from our repurchase of shares of our common stock during
1999. Earnings per common share without the one-time plant closing and
severance costs would have been $.68.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents balance decreased by
approximately $3.5 million during the six-month period ended June 30, 2000.
For the six-month period ended June 30, 2000, net cash provided by
operating activities increased by $2.6 million to $13.2 million from $10.6
million for the comparable period in 1999. The primary contributions to cash
from operating activities during the period were net income and depreciation
and amortization.
Net cash used in investing activities for the six-month period ended
June 30, 2000 increased to $21.8 million from $5.8 million for the same period
in the prior year. These investments were mostly in property and equipment for
our Alpharetta, Georgia and Leeds, England operations and primarily related to
consolidation and expansion projects that were begun in 1999 and which will
continue through the fourth quarter of 2000.
The Company's financing activities generated cash of $5.9 million for
the six-month period ended June 30, 2000 compared to $1.5 million in the
six-month period ended June 30, 1999. As a result of a net increase in
borrowings for anticipated future capital expenditure requirements during the
current quarter, the balance outstanding under one of our credit facilities at
June 30, 2000 was $28.9 million.
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While we estimate we will spend over $45 million in capital
expenditures in the current year, we believe that the availability of funds
under our credit facilities, cash flows from operations and our ability to
obtain alternative sources of financing will permit us to fund our operations
and working capital requirements, as well as other potential investments and
business opportunities. In the event we have additional capital requirements
for new business opportunities, we believe we have the ability to obtain the
required capital from the capital markets.
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, 1999 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.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Refer to the Company's Form 10-K for the year-ended December 31, 1999
for a description of pending legal proceedings, with respect to which
there have been no further developments.
ITEMS 2,3 AND 4 ARE NOT APPLICABLE AND HAVE BEEN OMITTED.
ITEM 5. OTHER EVENTS
On August 8, 2000, the Company's stockholders approved the Merger
Agreement with Autotote Corporation (see Item 6(b)), whereby at the
effective time of the Merger, each share of common stock of the
Company outstanding immediately prior to the effective time of the
Merger will be converted into the right to receive $26 in cash.
Consummation of the Merger is still subject to the receipt of certain
customer consents and lottery related regulatory approvals. Also, the
Company understands that Autotote has not yet completed its financing
arrangements. Closing of the transaction currently is anticipated to
occur before the end of August 2000.
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 May 26, 2000 the Company filed a current report on Form 8-K to
report that on May 18, 2000, the Company, Autotote Corporation, a
company organized under the laws of the State of Delaware ("Autotote")
and ATX Enterprises, Inc., a corporation organized under the laws of
the State of Delaware and wholly owned subsidiary of Autotote ("Merger
Sub"), entered into an agreement and plan of merger whereby the
Company will merge (the "Merger") with and into Merger Sub, with the
Company as the surviving corporation in the Merger (the "Merger
Agreement").
On June 1, 2000, the Company filed an amendment to the Form 8-K
previously filed on May 26, 2000 in order to file a copy of the Merger
Agreement as an exhibit to such amended filing.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SCIENTIFIC GAMES HOLDINGS CORP.
Date: August 14, 2000 By: /s/WILLIAM G. MALLOY
--------------------------------
William G. Malloy
President and
Chief Executive Officer
Date: August 14, 2000 By: /s/CLIFF O. BICKELL
--------------------------------
Cliff O. Bickell
Vice President, Treasurer,
And Chief Financial Officer
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