Pursuant to Rule 424(b)(3)
Under the Securities Act
of 1933, as amended
Prospectus Supplement No. 5
Dated May 16, 2001
to Prospectus Dated January 2, 2001,
as supplemented by
Prospectus Supplement No. 1 Dated February 15, 2001
and
Prospectus Supplement No. 2 Dated February 21, 2001
and
Prospectus Supplement No. 3 Dated March 1, 2001
and
Prospectus Supplement No. 4 Dated April 16, 2001
Registration Number 333-51000
---------------------------------------
Scientific Games Corporation
(f/k/a Autotote Corporation)
----------------------------------------
12 1/2% Senior Subordinated Notes Due 2010, Series B
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------------
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported) April 27, 2001
0-13063
(Commission File Number)
------------------------------
SCIENTIFIC GAMES CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 81-0422894
(State of Incorporation) (IRS Employer
Identification Number)
750 Lexington Avenue, New York, New York 10022
(Address of registrant's principal executive office)
(212) 754-2233
(Registrant's telephone number)
------------------------------
-2-
Item 5. Other Events.
Change of Name
On April 27, 2001, Autotote Corporation (the "Company") changed its
name to Scientific Games Corporation and changed its trading symbol on the
American Stock Exchange to "SGM". The name change was effected by the merger
with and into the Company of the Company's wholly owned subsidiary, Scientific
Games Corporation II, and the contemporaneous name change of the Company to
Scientific Games Corporation. The merger and name change was approved and
ratified by the Company's Board of Directors by unanimous written consent on
April 20, 2001 in accordance with Section 253 of the General Corporation Law of
the State of Delaware.
-3-
Index to Exhibits
Exhibit No. Description
----------- -----------
3.1 Certificate of Ownership and Merger,
effective as of April 27, 2001.
-4-
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 CORPORATION
By: /s/ Martin E. Schloss
--------------------------------
Martin E. Schloss
Vice President and Secretary
Date: April 27 , 2001
-5-
Exhibit 3.1
CERTIFICATE OF OWNERSHIP AND MERGER
OF
SCIENTIFIC GAMES CORPORATION II
(a Delaware corporation)
INTO
AUTOTOTE CORPORATION
(a Delaware corporation)
It is hereby certified that:
1. Autotote Corporation (the "Corporation") is a business corporation of the
State of Delaware.
2. The Corporation is the owner of all of the outstanding shares of each class
of stock of Scientific Games Corporation II, which is also a business
corporation of the State of Delaware.
3. On April 20th, 2001, the Board of Directors of the Corporation duly adopted
the following resolutions to merge Scientific Games Corporation II with and into
the Corporation:
RESOLVED, that Scientific Games Corporation II be merged
with and into the Corporation, and that all of the estate,
property, rights, privileges, powers and franchises of
Scientific Games Corporation II be vested in and held and
enjoyed by the Corporation as fully and entirely and without
change or diminution as the same were before held and
enjoyed by Scientific Games Corporation II in its name; and
further
RESOLVED, that the Corporation shall assume all of the
obligations of Scientific Games Corporation II; and further
RESOLVED, that the Corporation shall cause to be executed
and filed and/or recorded the documents prescribed by the
laws of the State of Delaware and by the laws of any other
appropriate jurisdiction, and shall cause to be performed
all necessary acts within the State of Delaware and within
any other appropriate jurisdiction, in connection with the
foregoing merger; and further
RESOLVED, that, as of the effective date of the foregoing
merger, the Corporation shall change its corporate name to
Scientific Games Corporation; and further
RESOLVED, that the effective time of the Certificate of
Ownership and Merger setting forth a copy of these
resolutions, and the time when the merger therein provided
for, shall become effective shall be 12:00 a.m., Eastern
Daylight Time, on the 27th day of April, 2001.
IN WITNESS WHEREOF, I have hereunto signed my name on behalf
of the Corporation, as of the 20th day of April, 2001.
AUTOTOTE CORPORATION
By: /s/ A. Lorne Weil
-------------------------
Name: A, Lorne Weil
Title: President
ATTEST:
/s/ Martin E. Schloss
---------------------------------
Name: Martin E. Schloss
Title: Vice President
2
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 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, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File number: 0-13063
SCIENTIFIC GAMES CORPORATION
(FORMERLY AUTOTOTE CORPORATION)
(Exact name of registrant as specified in its charter)
Delaware 81-0422894
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
750 Lexington Avenue, New York, New York 10022
----------------------------------------------
(Address of principal executive offices)
(Zip Code)
(212) 754-2233
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports 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 CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock as of May 11, 2001:
Class A Common Stock: 40,195,814
Class B Common Stock: None
3
SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND OTHER INFORMATION
THREE MONTHS ENDED MARCH 31, 2001
Page
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements:
Balance Sheets as of December 31, 2000
and March 31, 2001 3
Statements of Operations for the Three Months Ended
March 31, 2000 and 2001 4
Statements of Cash Flows for the Three Months Ended
March 31, 2000 and 2001 5
Notes to Consolidated Financial Statements 6-16
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
17-22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 23
Item 2. Changes in Securities and Use of Proceeds 23
Item 6. Exhibits and Reports on Form 8-K 23
4
SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited, in thousands)
December 31, March 31,
2000 2001
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents ................................................ $ 6,488 10,354
Restricted cash .......................................................... 670 691
Accounts receivable, net of allowance for doubtful accounts .............. 56,819 52,154
Inventories .............................................................. 27,608 25,262
Prepaid expenses, deposits and other current assets ...................... 15,911 15,955
--------- ---------
Total current assets ................................................ 107,496 104,416
--------- ---------
Property and equipment, at cost ............................................... 323,732 329,469
Less accumulated depreciation ............................................ 139,121 145,712
--------- ---------
Net property and equipment .......................................... 184,611 183,757
--------- ---------
Goodwill, net ................................................................. 157,591 155,448
Operating right, net .......................................................... 12,681 12,431
Other intangible assets, net .................................................. 118,598 116,750
Other assets and investments .................................................. 53,964 57,229
--------- ---------
Total assets ..................................................... $ 634,941 630,031
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt ................................... $ 6,636 7,238
Accounts payable ......................................................... 27,176 26,074
Accrued liabilities ...................................................... 59,142 58,053
Interest payable ......................................................... 11,112 6,403
--------- ---------
Total current liabilities ........................................... 104,066 97,768
--------- ---------
Deferred income taxes ......................................................... 59,093 58,647
Other long-term liabilities ................................................... 9,585 12,696
Long-term debt, excluding current installments ................................ 434,044 438,801
--------- ---------
Total liabilities ................................................... 606,788 607,912
--------- ---------
Stockholders' equity:
Convertible preferred stock, par value $1.00 per share, 2,000 shares
authorized, 1,149 and 1,166 shares outstanding at December 31,
2000 and
March 31, 2001, respectively ......................................... 1,149 1,166
Class A common stock, par value $0.01 per share, 99,300 shares authorized,
40,156 and 40,163 shares outstanding at December 31, 2000 and
March 31, 2001, respectively ......................................... 373 374
Class B non-voting common stock, par value $0.01 per share, 700 shares
authorized, none outstanding .......................................... -- --
Additional paid-in capital ............................................... 266,917 268,715
Accumulated losses ....................................................... (234,910) (239,046)
Treasury stock, at cost .................................................. (102) (105)
Accumulated other comprehensive loss ..................................... (5,274) (8,985)
--------- ---------
Total stockholders' equity .......................................... 28,153 22,119
--------- ---------
Total liabilities and stockholders' equity .......................... $ 634,941 630,031
========= =========
See accompanying notes to consolidated financial statements.
5
SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended March 31, 2000 and 2001
(Unaudited, in thousands, except per share amounts)
2000 2001
--------- ---------
Operating revenues:
Services .............................................................. $ 37,659 88,040
Sales ................................................................. 7,953 24,068
--------- ---------
45,612 112,108
--------- ---------
Operating expenses (exclusive of depreciation and amortization shown below):
Services .............................................................. 24,493 58,113
Sales ................................................................. 3,893 14,707
--------- ---------
28,386 72,820
--------- ---------
Total gross profit ............................................... 17,226 39,288
Selling, general and administrative expenses ............................... 6,731 14,625
Depreciation and amortization .............................................. 5,370 13,608
--------- ---------
Operating income ................................................. 5,125 11,055
--------- ---------
Other deductions:
Interest expense ...................................................... 4,253 13,580
Other (income) expense ................................................ (78) 244
--------- ---------
4,175 13,824
--------- ---------
Income (loss) before income tax expense (benefit) ..................... 950 (2,769)
Income tax expense (benefit) ............................................... 116 (332)
--------- ---------
Net income (loss) ..................................................... 834 (2,437)
Convertible preferred stock dividend ....................................... -- 1,699
--------- ---------
Net income (loss) available to common stockholders ......................... $ 834 (4,136)
========= =========
Basic and diluted net income (loss) per share:
Net income (loss) ..................................................... $ 0.02 (0.06)
========= =========
Net income (loss) available to common stockholders .................... $ 0.02 (0.10)
========= =========
Weighted average number of shares used in per share calculations:
Basic shares .......................................................... 36,544 40,163
========= =========
Diluted shares ........................................................ 41,888 40,163
========= =========
See accompanying notes to consolidated financial statements.
6
SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31, 2000 and 2001
(Unaudited, in thousands)
2000 2001
------- -------
Cash flows from operating activities:
Net income (loss) .................................................. $ 834 (2,437)
------- -------
Adjustments to reconcile net income (loss) to cash provided by (used
in) operating activities:
Depreciation and amortization ................................. 5,370 13,608
Changes in operating assets and liabilities ................... (7,349) (1,338)
Other ......................................................... 576 421
------- -------
Total adjustments ........................................ (1,403) 12,691
------- -------
Net cash provided by (used in) operating activities ..................... (569) 10,254
------- -------
Cash flows from investing activities:
Capital expenditures ............................................... (1,715) (1,034)
Wagering systems expenditures ...................................... (5,961) (8,316)
Increase in other assets and investment ............................ (2,301) (1,592)
------- -------
Net cash used in investing activities ................................... (9,977) (10,942)
------- -------
Cash flows from financing activities:
Net borrowings under lines of credit ............................... 8,070 7,000
Proceeds from issuance of long-term debt ........................... 952 --
Payments on long-term debt ......................................... (740) (1,509)
Proceeds from the issuance of common stock ......................... 625 37
------- -------
Net cash provided by financing activities ............................... 8,907 5,528
------- -------
Effect of exchange rate changes on cash ................................. (206) (974)
------- -------
Increase (decrease) in cash and cash equivalents ........................ (1,845) 3,866
Cash and cash equivalents, beginning of period .......................... 3,662 6,488
------- -------
Cash and cash equivalents, end of period ................................ $ 1,817 10,354
======= =======
Supplemental disclosure of cash flow information: Cash paid (recovered)
during the period for:
Interest paid ...................................................... $ 7,397 17,647
======= =======
Net income taxes (recovered) paid .................................. $ 267 (999)
======= =======
Non-cash financing activity during the period:
Convertible preferred stock paid-in-kind dividends ................. $ -- 1,699
======= =======
See accompanying notes to consolidated financial statements.
7
SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, in thousands, except per share amounts)
(1) Consolidated Financial Statements
Name Change
Effective April 27, 2001, the Company changed its corporate name from
Autotote Corporation to Scientific Games Corporation and its stock symbol to SGM
[AMEX: SGM].
Basis of Presentation
On December 20, 2000, the Company determined to change its fiscal year from
an October 31 year-end to a calendar year-end, beginning with the year ending
December 31, 2001. This report on Form 10-Q covers the first quarter of year
2001, which commenced on January 1, 2001, compared to the three-month period
January 1, 2000 to March 31, 2000.
The consolidated balance sheets as of December 31, 2000 and March 31, 2001
and the consolidated statements of operations for the three months ended March
31, 2000 and 2001, and the consolidated statements of cash flows for the three
months then ended, have been prepared by the Company without audit. In the
opinion of management, all adjustments necessary to present fairly the financial
position of the Company at December 31, 2000 and March 31, 2001 and the results
of its operations for the three months ended March 31, 2000 and 2001 and its
cash flows for the three months ended March 31, 2000 and 2001 have been made.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. These consolidated financial statements should
be read in conjunction with the financial statements and notes thereto included
in the Company's 2000 Annual Report on Form 10-K. The results of operations for
the period ended March 31, 2001 are not necessarily indicative of the operating
results for the full year.
Certain items in prior period's financial statements have been classified
to conform with the current year presentation.
Basic and Diluted Net Income (Loss) Per Share
The following represents a reconciliation of the numerator and denominator
used in computing basic and diluted net income (loss) per share for the three
months ended March 31, 2000 and 2001:
Three Months Ended March 31,
----------------------------------------
2000 2001
--------------------- -----------------
Income (loss) (numerator)
Net income (loss)............................................. $ 834 (2,437)
Convertible preferred stock dividend.......................... -- 1,699
===================== =================
Net income (loss) available to common stockholders............ $ 834 (4,136)
===================== =================
Shares (denominator)
Basic weighted average common shares outstanding.............. 36,544 40,163
Effect of diluted securities-stock options, warrants,
convertible preferred shares and deferred shares (1)..... 5,344 --
--------------------- -----------------
Diluted weighted average common shares outstanding............ 41,888 40,163
===================== =================
Basic and diluted per share amount
Net income (loss)............................................. $ 0.02 (0.06)
===================== =================
Net income (loss) available to common stockholders............ $ 0.02 (0.10)
===================== =================
(1) Potential common shares are not included in the calculation of
dilutive net loss per share in the three months ended March 31, 2001,
since the inclusion would be anti-dilutive.
8
SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited, in thousands, except per share amounts)
(1) Consolidated Financial Statements--(Continued)
At March 31, 2001, the Company had outstanding stock options, warrants,
convertible preferred shares and deferred shares, which could potentially dilute
basic earnings per share in the future. (See Notes 13 and 14 to the Consolidated
Financial Statements for the year ended October 31, 2000 in the Company's 2000
Annual Report on Form 10-K.)
Interest Rate Agreements
Statement of Financial Accounting Standards No. 133, Accounting for
Derivative Instruments and Hedging Activities ("SFAS 133"), as amended by SFAS
138, establishes accounting and reporting standards for derivative instruments
and hedging activities. It requires entities to record all derivative
instruments on the balance sheet at fair value. Changes in the fair value of
derivatives are recorded in each period in current operations or other
comprehensive income (loss), based on whether a derivative is designated as part
of a hedge transaction and the type of hedge transaction. The ineffective
portion of all hedges is recognized in operations.
Pursuant to the terms of the Company's credit facility, the Company is
required to maintain interest rate hedges for a notional amount of not less than
$140,000 for a period of not less than two years. In satisfaction of this
requirement, the Company entered into three interest rate swap agreements in
November 2000 which obligate the Company to pay a fixed LIBOR rate and entitle
the Company to receive a variable LIBOR rate on an aggregate $140,000 notional
amount of debt. The Company has structured these interest rate swap agreements
and intends to structure all such future agreements to qualify for hedge
accounting pursuant to the provisions of SFAS 133. Accumulated other
comprehensive losses resulting from the changes in fair value of the interest
rate hedge instruments were $2,395 and $5,201 at December 31, 2000 and March 31,
2001, respectively. For the three months ended March 31, 2001, the Company
recorded a $2,806 charge to other comprehensive loss for the change in fair
value of the interest rate hedge instruments.
(2) Acquisition of Scientific Games Holdings Corp.
On September 6, 2000, the Company completed the acquisition of Scientific
Games Holdings Corp. ("SGHC"), a world-leading supplier of lottery products,
integrated lottery systems and support services, and pre-paid telephone cards.
The acquisition was completed through a merger in which SGHC became a
wholly-owned subsidiary of the Company, at a cost of approximately $308,000 in
aggregate merger consideration to SGHC stockholders, plus related fees and
expenses. The acquisition was recorded using the purchase method of accounting.
The acquired assets and liabilities were recorded at their estimated fair value
at the date of acquisition. The excess of the purchase price over the fair
values of the net assets acquired was approximately $156,828 and has been
recorded as goodwill, which is being amortized over 20 years. The operating
results of SGHC's businesses have been included in the accompanying consolidated
statements of operations from the date of the acquisition. (See Notes 9 and 13
to the Consolidated Financial Statements for the year ended October 31, 2000 in
the Company's 2000 Annual Report on Form 10-K.)
9
SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited, in thousands, except per share amounts)
(2) Acquisition of Scientific Games Holdings Corp. --(Continued)
The following table presents unaudited pro forma results of operations as
if the SGHC acquisition and related financing transactions had occurred at the
beginning of the period presented after giving effect to certain adjustments,
including amortization of goodwill and other identifiable intangible assets,
additional depreciation expense, increased interest expense, convertible
preferred stock dividends and related income tax effects. These pro forma
results have been prepared for comparative purposes and do not purport to be
indicative of what would have occurred had the acquisition been made at the
beginning of the three months ended March 31, 2000 or the results which may
occur in the future.
Three Months Ended
March 31, 2000
------------------
(unaudited)
Operating revenues..................................................... $ 104,674
Operating income....................................................... 9,558
Loss before income tax benefit......................................... (3,062)
Net loss............................................................... (2,153)
Convertible preferred stock dividend................................... 1,691
----------------
Net loss available to common stockholders.............................. $ (3,844)
================
Basic and diluted loss per share:
Net loss............................................................... $ (0.06)
================
Net loss available to common stockholders.............................. $ (0.11)
================
10
SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited, in thousands, except per share amounts)
(3) Business Segments
The following tables represent revenues, profits, depreciation and assets
by business segments for the three months ended March 31, 2000 and 2001.
Corporate expenses are allocated among business segments. Interest expense and
other (income) deductions are not allocated to business segments.
Three Months Ended
March 31,
---------------------------------
2000 2001
---------------------------------
Service and sales revenue:
Lottery Group................................................ $ 2,969 56,117
Pari-mutuel Group............................................ 27,489 29,007
Venue Management Group....................................... 15,154 15,504
Telecommunications Group..................................... -- 11,480
---------------------------------
$ 45,612 112,108
=================================
Gross profit:
Lottery Group................................................ $ 915 18,276
Pari-mutuel Group............................................ 12,010 11,632
Venue Management Group....................................... 4,301 4,481
Telecommunications Group..................................... -- 4,899
---------------------------------
$ 17,226 39,288
=================================
Operating income:
Lottery Group................................................ $ (333) 1,305
Pari-mutuel Group............................................ 3,333 4,319
Venue Management Group....................................... 2,125 2,731
Telecommunications Group..................................... -- 2,700
---------------------------------
$ 5,125 11,055
=================================
Included in operating income- Depreciation and amortization:
Lottery Group................................................ $ 609 8,583
Pari-mutuel Group............................................ 4,082 3,847
Venue Management Group....................................... 679 655
Telecommunications Group..................................... -- 523
---------------------------------
$ 5,370 13,608
=================================
11
SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited, in thousands, except per share amounts)
(3) Business Segments--(Continued)
Three Months Ended
March 31,
------------------------------------
2000 2001
------------------------------------
A reconciliation of total segment operating income to consolidated
income (loss) before income tax expense (benefit) is as follows:
Total reported segments........................................ $ 5,125 11,055
Interest expense............................................... 4,253 13,580
Other (income) expense......................................... (78) 244
------------------------------------
$ 950 (2,769)
====================================
December 31, March 31, 2001
2000
------------------------------------
Assets:
Lottery Group................................................ $ 330,138 329,104
Pari-mutuel Group............................................ 232,990 232,992
Venue Management Group....................................... 34,055 33,827
Telecommunications Group..................................... 37,758 34,108
------------------------------------
$ 634,941 630,031
====================================
Three Months Ended
March 31,
------------------------------------
2000 2001
------------------------------------
Capital and wagering systems expenditures:
Lottery Group................................................ $ 749 7,469
Pari-mutuel Group............................................ 6,398 975
Venue Management Group....................................... 529 363
Telecommunications Group..................................... -- 543
------------------------------------
$ 7,676 9,350
====================================
12
SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited, in thousands, except per share amounts)
(4) Comprehensive Income (Loss)
The following presents a reconciliation of net income (loss) to
comprehensive income (loss) for the three months ended March 31, 2000 and 2001:
Three Months Ended March 31,
--------------------------------------
2000 2001
----------------- ----------------
Net income (loss).................................................... $ 834 (2,437)
Other comprehensive loss:
Foreign currency translation.................................... (389) (1,480)
Unrealized gain on investments.................................. -- 575
Unrealized loss on interest rate swap contract.................. -- (2,806)
------------- ----------------
Other comprehensive loss........................................ (389) (3,711)
------------- ----------------
Comprehensive income (loss).......................................... $ 445 (6,148)
============= ================
(5) Inventories
Inventories consist of the following:
December 31, March 31,
2000 2001
----------------- ----------------
Parts and work-in-process............................................ $ 16,193 12,992
Finished goods....................................................... 11,415 12,270
------------- -------------
$ 27,608 25,262
============ ==============
Parts and work-in-process include costs for equipment expected to be sold.
Costs incurred for equipment associated with specific wagering system service
contracts not yet placed in service are classified as construction in progress
in property and equipment.
(6) Debt
At March 31, 2001, the Company had approximately $39,305 available for
borrowing under the Company's revolving credit facility (the "Facility"). There
were approximately $16,000 of borrowings outstanding under the Facility and
approximately $9,695 in letters of credit were issued under the Facility at
March 31, 2001. At December 31, 2000, Scientific Games's available borrowing
capacity under the facility was $46,591.
The Company's financing arrangements impose certain limitations on the
operations of the Company and its subsidiaries, including the maintenance of
certain financial, liquidity and net worth ratios. As a result of both the
financial performance of SGHC prior to the Company's acquisition of SGHC,
principally reflecting transitional and operational matters occurring through
December 31, 2000, and the timing of certain anticipated capital expenditures
and associated borrowings in 2001, in the first quarter of 2001, management and
our lenders amended certain limitations to be less restrictive. The Facility was
modified so that the planned step-downs in fixed charge coverage ratios and
leverage ratios were delayed by six months through September 30, 2002. The
Company is in compliance with the amended covenants as of March 31, 2001 and
expects to remain so during the next twelve months.
13
SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited, in thousands, except per share amounts)
(7) Financial Information for Guarantor Subsidiaries and Non-Guarantor
Subsidiaries
The Company conducts substantially all of its business through its domestic
and foreign subsidiaries. The Facility and the Company's 12 1/2% Series B Senior
Subordinated Notes due 2010 (the "Notes") issued in connection with the
acquisition of SGHC, are jointly and severally guaranteed by substantially all
of the Company's wholly owned domestic subsidiaries (the "Guarantor
Subsidiaries").
Presented below is condensed consolidating financial information for (i)
Scientific Games Corporation (the "Parent Company"), which includes the
activities of Scientific Games Management Corporation, (ii) the Guarantor
Subsidiaries and (iii) the wholly owned foreign subsidiaries and the non-wholly
owned domestic and foreign subsidiaries (the "Non-Guarantor Subsidiaries") as of
December 31, 2000 and March 31, 2001 and for the three months ended March 31,
2000 and 2001. The condensed consolidating financial information has been
presented to show the nature of assets held, results of operations and cash
flows of the Parent Company, Guarantor Subsidiaries and Non-Guarantor
Subsidiaries assuming the guarantee structure of the Notes was in effect at the
beginning of the periods presented. Separate financial statements for Guarantor
Subsidiaries are not presented based on management's determination that they
would not provide additional information that is material to investors.
The condensed consolidating financial information reflects the investments
of the Parent Company in the Guarantor and Non-Guarantor Subsidiaries using the
equity method of accounting. In addition, corporate interest and administrative
expenses have not been allocated to the subsidiaries.
14
SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
December 31, 2000
(unaudited, in thousands)
Parent Guarantor Non-Guarantor Eliminating
Company Subsidiaries Subsidiaries Entries Consolidated
-------------- -------------- -------------- -------------- ---------------
ASSETS
Cash and cash equivalents............... $ 867 (50) 5,671 -- 6,488
Accounts receivable, net................ -- 39,554 20,555 (3,290) 56,819
Inventories............................. -- 21,602 6,470 (464) 27,608
Other current assets.................... 186 13,421 2,944 30 16,581
Property and equipment, net............. 2,002 142,446 40,452 (289) 184,611
Investment in subsidiaries.............. 202,980 -- -- (202,980) --
Goodwill................................ 190 154,313 3,088 -- 157,591
Intangible assets....................... -- 109,232 22,047 -- 131,279
Other assets............................ 19,832 75,698 1,077 (42,643) 53,964
-------------- -------------- -------------- -------------- ---------------
Total assets........................ $ 226,057 556,216 102,304 (249,636) 634,941
============== ============== ============== ============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current installments of long-term debt.. $ 6,012 8 616 -- 6,636
Current liabilities..................... 25,663 51,811 22,866 (2,910) 97,430
Long-term debt, excluding current 433,180 19 5,492 (4,647) 434,044
installments...............................
Other non-current liabilities........... 5,786 56,851 21,491 (15,450) 68,678
Intercompany balances................... (272,737) 245,226 27,809 (298) --
Stockholders' equity.................... 28,153 202,301 24,030 (226,331) 28,153
-------------- -------------- -------------- --------------- --------------
Total liabilities and stockholders'
equity..................................... $ 226,057 556,216 102,304 (249,636) 634,941
============== ============== ============== =============== ==============
SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
March 31, 2001
(unaudited, in thousands)
Parent Guarantor Non-Guarantor Eliminating
Company Subsidiaries Subsidiaries Entries Consolidated
-------------- -------------- -------------- -------------- ---------------
ASSETS
Cash and cash equivalents............... $ 3,941 640 5,773 -- 10,354
Accounts receivable, net................ -- 33,352 18,802 -- 52,154
Inventories............................. -- 20,368 5,410 (516) 25,262
Other current assets.................... 1,492 11,409 3,715 30 16,646
Property and equipment, net............. 1,977 142,249 39,737 (206) 183,757
Investment in subsidiaries.............. 216,318 -- -- (216,318) --
Goodwill................................ 188 152,454 2,806 -- 155,448
Intangible assets....................... -- 129,181 -- -- 129,181
Other assets............................ 20,027 57,767 1,104 (21,669) 57,229
-------------- -------------- -------------- -------------- ---------------
Total assets........................ $ 243,943 547,420 77,347 (238,679) 630,031
============== ============== ============== ============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current installments of long-term debt.. $ 6,763 8 467 -- 7,238
Current liabilities..................... 17,940 52,839 19,233 518 90,530
Long-term debt, excluding current 438,115 16 670 -- 438,801
installments...............................
Other non-current liabilities........... 8,971 55,333 4,508 2,531 71,343
Intercompany balances................... (249,965) 226,229 24,171 (435) --
Stockholders' equity.................... 22,119 212,995 28,298 (241,293) 22,119
-------------- -------------- -------------- --------------- --------------
Total liabilities and stockholders'
equity.............................. $ 243,943 547,420 77,347 (238,679) 630,031
============== ============== ============== =============== ==============
15
SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED STATEMENT OF OPERATIONS
Three Months Ended March 31, 2000
(unaudited, in thousands)
Parent Guarantor Non-Guarantor Eliminating
Company Subsidiaries Subsidiaries Entries Consolidated
-------------- ---------------- ---------------- -------------- --------------
Operating revenues......................... $ -- 38,171 10,551 (3,110) 45,612
Operating expenses......................... -- 22,580 9,014 (3,208) 28,386
------------- ---------------- ---------------- -------------- --------------
Gross profit............................ -- 15,591 1,537 98 17,226
Selling, general and administrative expenses 2,389 3,294 1,052 (4) 6,731
Depreciation and amortization.............. 72 4,501 822 (25) 5,370
------------- ---------------- ---------------- -------------- --------------
Operating income (loss)................. (2,461) 7,796 (337) 127 5,125
Interest expense........................... 4,012 188 182 (129) 4,253
Other (income) expense..................... (116) (78) (13) 129 (78)
------------- ---------------- ---------------- -------------- --------------
Income (loss) before equity in income of
subsidiaries, (6,357) 7,686 (506) 127 950
and income taxes........................
Equity in income of subsidiaries........... 7,231 -- -- (7,231) --
Income tax expense (benefit)............... 40 106 (30) -- 116
------------- ---------------- ---------------- -------------- --------------
Net income (loss).......................... $ 834 7,580 (476) (7,104) 834
============= ================ ================ ============== ==============
SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED STATEMENT OF OPERATIONS
Three Months Ended March 31, 2001
(unaudited, in thousands)
Parent Guarantor Non-Guarantor Eliminating
Company Subsidiaries Subsidiaries Entries Consolidated
-------------- ---------------- ---------------- -------------- --------------
Operating revenues......................... $ -- 85,262 31,810 (4,964) 112,108
Operating expenses......................... -- 54,832 22,908 (4,920) 72,820
------------- ---------------- ---------------- -------------- --------------
Gross profit............................ -- 30,430 8,902 (44) 39,288
Selling, general and administrative expenses 2,987 8,476 3,165 (3) 14,625
Depreciation and amortization.............. 76 12,056 1,511 (35) 13,608
------------- ---------------- ---------------- -------------- --------------
Operating income (loss)................. (3,063) 9,898 4,226 (6) 11,055
Interest expense........................... 13,556 4 592 (572) 13,580
Other (income) expense..................... (49) (587) 256 624 244
------------- ---------------- ---------------- -------------- --------------
Income (loss) before equity in income of
subsidiaries (16,570) 10,481 3,378 (58) (2,769)
and income taxes........................
Equity in income of subsidiaries........... 13,508 -- -- (13,508) --
Income tax expense (benefit)............... (625) (836) 1,129 -- (332)
------------- ---------------- ---------------- -------------- --------------
Net income (loss).......................... $ (2,437) 11,317 2,249 (13,566) (2,437)
============= ================ ================ ============== ==============
16
SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED STATEMENT OF CASH FLOWS
Three Months Ended March 31, 2000
(unaudited, in thousands)
Parent Guarantor Non-Guarantor Eliminating
Company Subsidiaries Subsidiaries Entries Consolidated
-------------- -------------- --------------- -------------- --------------
Net income (loss).......................... $ 834 7,580 (476) (7,104) 834
Depreciation and amortization........... 72 4,501 822 (25) 5,370
Equity in income of subsidiaries........ (7,231) -- -- 7,231 --
Changes in operating assets and liabilities (5,371) 435 (2,413) -- (7,349)
Other non-cash adjustments.............. 284 290 2 -- 576
-------------- --------------- --------------- -------------- --------------
Net cash provided by (used in) operating (11,412) 12,806 (2,065) 102 (569)
activities.................................
-------------- --------------- --------------- -------------- --------------
Cash flows from investing activities:
Capital and wagering systems expenditures.. (14) (5,971) (1,691) -- (7,676)
Other assets and investments............ (86) (1,415) (297) (503) (2,301)
-------------- --------------- --------------- -------------- --------------
Net cash provided by (used in) investing (100) (7,386) (1,988) (503) (9,977)
activities.................................
-------------- --------------- --------------- -------------- --------------
Cash flows from financing activities:
Net borrowing under lines of credit..... 8,070 -- -- -- 8,070
Proceeds from issuance of long-term debt... -- -- 952 -- 952
Payments on long-term debt.............. -- (602) (138) -- (740)
Net proceeds from stock issue........... 626 (448) 447 -- 625
Other, principally intercompany balances... (2,525) (707) 2,831 401 --
-------------- --------------- --------------- -------------- --------------
Net cash provided by (used in) financing 6,171 (1,757) 4,092 401 8,907
activities.................................
-------------- --------------- --------------- -------------- --------------
Effect of exchange rate changes on cash.... -- (70) (136) -- (206)
-------------- --------------- --------------- -------------- --------------
Increase (decrease) in cash and cash (5,341) 3,593 (97) -- (1,845)
equivalents................................
Cash and cash equivalents, beginning of period 5,284 (4,103) 2,481 -- 3,662
-------------- --------------- --------------- -------------- --------------
Cash and cash equivalents, end of period... $ (57) (510) 2,384 -- 1,817
============== =============== =============== ============== ==============
17
SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED STATEMENT OF CASH FLOWS
Three Months Ended March 31, 2001
(unaudited, in thousands)
Parent Guarantor Non-Guarantor Eliminating
Company Subsidiaries Subsidiaries Entries Consolidated
------------- ---------------- ---------------- -------------- -------------
Net income (loss).......................... $ (2,437) 11,317 2,249 (13,566) (2,437)
Depreciation and amortization........... 76 12,056 1,511 (35) 13,608
Equity in income of subsidiaries........ (13,508) -- -- 13,508 --
Changes in operating assets and liabilities (6,004) 4,084 (1,148) 1,730 (1,338)
Other non-cash adjustments.............. 651 (354) 124 -- 421
------------- ---------------- ---------------- -------------- -------------
Net cash provided by (used in) operating
activities................................. (21,222) 27,103 2,736 1,637 10,254
------------- ---------------- ---------------- -------------- -------------
Cash flows from investing activities:
Capital and wagering systems expenditures (23) (5,970) (3,639) 282 (9,350)
Other assets and investments............ (427) (2,416) 1,450 (199) (1,592)
------------- ---------------- ---------------- -------------- -------------
Net cash provided by (used in) investing (450) (8,386) (2,189) 83 (10,942)
activities.................................
------------- ---------------- ---------------- -------------- -------------
Cash flows from financing activities:
Net borrowing under lines of credit..... 7,000 -- -- -- 7,000
Payments on long-term debt.............. (1,314) (3) (385) 193 (1,509)
Net proceeds from stock issue........... 37 50 (50) -- 37
Other, principally intercompany balances 19,023 (17,476) 366 (1,913) --
------------- ---------------- ---------------- -------------- -------------
Net cash provided by (used in) financing
activities................................. 24,746 (17,429) (69) (1,720) 5,528
------------- ---------------- ---------------- -------------- -------------
Effect of exchange rate changes on cash.... -- (598) (376) -- (974)
------------- ---------------- ---------------- -------------- -------------
Increase in cash and cash equivalents...... 3,074 690 102 -- 3,866
Cash and cash equivalents, beginning of period 867 (50) 5,671 -- 6,488
------------- ---------------- --------------- -------------- -------------
Cash and cash equivalents, end of period... $ 3,941 640 5,773 -- 10,354
============= ================ =============== ============== =============
18
SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS FOR
THE THREE MONTHS ENDED MARCH 31, 2001
Background
Effective April 27, 2001, the Company changed its corporate name from
Autotote Corporation to Scientific Games Corporation and its stock symbol to SGM
[AMEX: SGM].
The Company changed its fiscal year from an October 31 year-end to a
calendar year-end, beginning with the year ending December 31, 2001. As a
result, the Company is filing this report for the first quarter of year 2001,
which commenced on January 1, 2001, compared to the three-month period January
1, 2000 to March 31, 2000.
The following discussion addresses the financial condition of the Company
as of March 31, 2001 and the results of its operations for the three-month
period ended March 31, 2001, compared to the same period in the prior year. This
discussion should be read in conjunction with Management's Discussion and
Analysis of Financial Condition and Results of Operations for the fiscal year
ended October 31, 2000, included in the Company's 2000 Annual Report on Form
10-K.
We operate in four business segments: Lottery Group, Pari-mutuel Group,
Venue Management Group and Telecommunications Group. Our Lottery Group consists
of two product lines: Instant Tickets and Related Services ("ITRS") and Lottery
Systems. ITRS includes ticket design and manufacturing as well as value-added
services, including game design, sales and marketing support, inventory
management and warehousing and fulfillment services. In addition, this division
includes promotional instant tickets and pull-tab tickets that we sell to both
lottery and non-lottery customers. Lottery Systems includes the supply of
transaction processing software for the accounting and validation of both
instant ticket and on-line lottery games, point-of-sale terminal hardware sales,
central site computers and communication hardware sales, and ongoing support and
maintenance services for these products. This product line also includes
software and hardware and support service for sports betting and credit card
processing systems.
Our Pari-mutuel Group is comprised of our North American and international
on-track, off-track and inter-track pari-mutuel services, simulcasting and
communications services, and video gaming, as well as sales of pari-mutuel
systems and equipment.
Our Venue Management Group is comprised of the Connecticut off-track
betting operations, and the Company's Netherlands on-track and off-track betting
operations.
Our Telecommunications Group is comprised of the prepaid cellular phone
cards business, which was acquired by the Company as part of the SGHC
acquisition.
In the second quarter of fiscal 2000, the Company completed the sale of its
SJC Video business, which had previously been reported as a separate segment.
In the three months ended March 31, 2000, our Lottery Group consisted
solely of the Lottery Systems product line, exclusive of sports betting and
credit card processing services. In addition, the Telecommunications Group was
not yet acquired by the Company as part of the SGHC acquisition.
The Company's revenues are derived from two principal sources: service
revenues and sales revenues. Service revenues are earned pursuant to multi-year
contracts to provide ITRS and wagering systems and services; or are derived from
wagering by customers at facilities owned or leased by the Company. Sales
revenues are derived from sales of prepaid phone cards and from contracts for
the sale of wagering systems, equipment, and software licenses.
The first calendar quarter and the fourth calendar quarter of the year
traditionally comprise the weakest season for the Company's pari-mutuel wagering
service revenue. Wagering equipment sales and software license revenues usually
reflect a limited number of large transactions that do not recur on an annual
basis. Consequently, revenues and operating results can vary substantially from
period to period as a result of the timing of revenue recognition for major
equipment sales and software license revenue. In addition, instant ticket and
prepaid phone card sales may vary depending on the size and timing of contract
awards, changes in customer budgets, inventory ticket position, lottery retail
sales and general economic conditions.
19
Operating results may also vary significantly from period to period
depending on the addition or disposition of business units in each period. The
acquisition of SGHC in 2000, which was accounted for as a purchase, affects the
comparability of operations from period to period (see Note 3 to the
Consolidated Financial Statements for the year ended October 31, 2000 included
in the Company's 2000 Annual Report on Form 10-K).
The following tables and discussion present actual data for the January 1
to March 31, 2001 and 2000, and pro forma data for the January 1 to March 31,
2000 period, as if the Company had acquired SGHC on January 1, 2000.
Results of Operations:
Three Months Ended March 31,
----------------------------
Actual Pro Forma Actual
2000 2000 2001
------- ------- -------
Lottery Group (in thousands)
Service revenue ...................................... $ 2,969 47,391 53,203
Sales revenue ........................................ -- 3,706 2,914
------- ------- -------
Total operating revenue .............................. $ 2,969 51,097 56,117
======= ======= =======
Gross Profit (excluding depreciation and amortization) $ 915 17,688 18,276
======= ======= =======
Pari-mutuel Group
Service revenue ...................................... $19,536 19,536 19,333
Sales revenue ........................................ 7,953 7,953 9,674
------- ------- -------
Total operating revenue .............................. $27,489 27,489 29,007
======= ======= =======
Gross Profit (excluding depreciation and amortization) $12,010 12,010 11,632
======= ======= =======
Venue Management Group
Service revenue ...................................... $15,154 15,154 15,504
======= ======= =======
Gross Profit (excluding depreciation and amortization) $ 4,301 4,301 4,481
======= ======= =======
Telecommunications Group
Sales revenue ........................................ $ -- 10,934 11,480
======= ======= =======
Gross Profit (excluding depreciation and amortization) $ -- 4,884 4,899
======= ======= =======
Company Total
Service revenue ...................................... $37,659 82,081 88,040
Sales revenue ........................................ 7,953 22,593 24,068
------- ------- -------
Total operating revenue .............................. $45,612 104,674 112,108
======= ======= =======
Gross Profit (excluding depreciation and amortization) $17,226 38,883 39,288
======= ======= =======
Three Months Ended March 31, 2001 compared to Three Months Ended March 31, 2000
Revenue Analysis
Lottery Group revenue of $56.1 million in the three months ended March
31, 2001 improved $53.1 million from the same period in 2000 due to the addition
of SGHC in September 2000, plus the start-up of the on-line Vermont and New
Hampshire lotteries in July 2000. On a pro forma basis, total service revenue in
the three months ended March 31, 2001 increased $5.8 million from the same
period in 2000 largely due to new on-line lottery and instant ticket cooperative
services contracts. On a pro forma basis, total sales revenue declined $0.8
million as a result of non-recurring systems and equipment sales to foreign
customers in 2000.
Pari-mutuel Group service revenue of $19.3 million in the three months
ended March 31, 2001 decreased $0.2 million from the same period in 2000. This
decrease is attributable to lower revenues in the French operations and the
effect of the lower Euro exchange rate on revenues from the German racing
operations, partially offset by revenue improvements in the North America
operations, the North American simulcasting operations and the NASRIN(TM)
service operations. Sales revenue of $9.7 million in the three months ended
March 31, 2001 increased $1.7 million from same period in 2000 due to higher
systems and equipment sales to foreign customers.
20
Venue Management Group service revenue of $15.5 million in the three months
ended March 31, 2001 was $0.4 million higher than in the same period in 2000,
reflecting Handle related revenue increases in the Connecticut OTB operations.
Telecommunications Group sales revenue of $11.5 million in the three months
ended March 31, 2001 is the result of the acquisition of SGHC in September 2000.
On a pro forma basis, revenues in the three months ended March 31, 2001
increased $0.6 million as a result of continued customer and volume growth of
this business unit.
Gross Profit Analysis
The total gross profit earned, exclusive of depreciation and amortization,
of $39.3 million in the three months ended March 31, 2001 increased $22.1
million from the same period in 2000 as a result of the acquisition of SGHC in
September 2000. On a pro forma basis, the gross profit earned, exclusive of
depreciation and amortization, increased $0.4 million primarily because of
improved gross margins in the service businesses and the Telecommunications
Group, which were partially offset by lower margins on sales revenues reflecting
the change in the mix of equipment and systems sold to foreign customers in the
two periods.
On a pro forma basis, gross profit as a percentage of service revenues
decreased to 34% in the three months ended March 31, 2001, compared to 35% in
the same period in 2000. This gross profit decrease results primarily from lower
margins on European Pari-mutuel service revenue and instant ticket revenues,
partially offset by revenue improvements and cost control measures in the North
American Pari-mutuel business. On a pro forma basis, gross profit as a
percentage of sales revenues was 39% in the three months ended March 31, 2001
compared to 45% in the same period in 2000, reflecting the change in the mix of
systems and equipment sold in the two periods.
The Lottery Group gross profit of $18.3 million, or 33% of revenues,
decreased slightly on a pro-forma basis in the three months ended March 31, 2001
from $17.7 million or 35% of revenues in the same period in 2000. Gross margin
improvements were realized as a result of revenue improvements in instant ticket
cooperative services and the addition of the Vermont and New Hampshire lottery
contracts, which commenced operations in July 2000. These margin improvements
were partially offset by non-recurring 2000 systems and equipment sales, and
higher cost of ticket paper and other printing supplies.
Pari-mutuel Group gross profit of $11.6 million or 40% of revenues in the
three months ended March 31, 2001, decreased $0.4 million from $12.0 million or
44% of revenues in the same period in 2000. This decrease is primarily
attributable to lower margins on systems and equipment sales to foreign
customers, partially offset by continued growth of the North American operations
and benefits from on-going cost reduction programs.
Venue Management Group gross profit of $4.5 million or 29% of revenues in
the three months ended March 31, 2001, improved $0.2 million from $4.3 million
or 28% of revenues in the same period in 2000. This improvement primarily
reflects higher Handle and reduced operating costs in the Connecticut OTB
operation.
The Telecommunications Group gross profit of $4.9 million in the three
months ended March 31, 2001 was equal on a pro-forma basis to the gross profit
in the same period in 2000. Gross profit in the three months ended March 31,
2001 was 43% of revenues as compared on a pro forma basis with 45% of revenues
in the same period in 2000 as the effects of cost saving initiatives implemented
in fiscal 2000 were offset by increased freight expenses.
Expense Analysis
Selling, general and administrative expenses, including certain software
development costs, of $14.6 million in the three months ended March 31, 2001
were $7.9 million higher than in the same period in 2000 primarily as a result
of the acquisition of SGHC in September 2000. On a pro forma basis, selling,
general and administrative expenses were $2.9 million lower in the three months
ended March 31, 2001 than in the same period in 2000 primarily as a result of
cost reduction programs and merger-related synergies.
Depreciation and amortization expense of $13.6 million in the three months
ended March 31, 2001 increased $8.2 million from $5.4 million in the same period
in 2000 as a result of the SGHC acquisition, coupled with the expanded domestic
lottery business. On a pro forma basis, depreciation and amortization expenses
were $3.7 million higher in the three months ended March 31, 2001 than in the
same period in 2000, primarily as a result of SGHC acquisition-related goodwill
and intangible amortization.
Interest expense of $13.6 million in the three months ended March 31, 2001
increased $9.3 million from $4.3 million in the same period in 2000 as a result
of higher debt levels, interest rates and financing costs incurred in connection
with the acquisition of SGHC.
21
Income Tax Expense (Benefit)
Income tax benefit was $0.3 million in the three months ended March 31,
2001 compared to an expense of $0.1 million in the same period in 2000. The
benefit primarily reflects the reversal of deferred taxes provided in connection
with the acquisition of SGHC and an anticipated recovery of previously paid
federal taxes, partially offset by federal alternative minimum tax, state taxes
and foreign taxes. No current tax benefit has been recognized on domestic
operating losses in either period.
Liquidity, Capital Resources and Working Capital
In order to finance the SGHC acquisition and refinance substantially all of
the then existing indebtedness of the Company, we conducted a series of
financings. As a result, our capital structure changed significantly and, among
other things, we are a significantly leveraged company. As a result of the
acquisition and debt refinancing, we have total indebtedness outstanding of
approximately $446.0 million at March 31, 2001. We have also recorded a
substantial increase in goodwill and other intangible assets in connection with
the SGHC acquisition and a corresponding increase in amortization expense.
At March 31, 2001, the Company's available cash and borrowing capacity
totaled $49.7 million compared to $53.1 million at December 31, 2000. Net cash
provided by operating activities was $10.3 million for the three months ended
March 31, 2001. In this period, we spent $9.4 million for wagering systems and
capital expenditures, $1.5 million in software expenditures and repaid $1.5
million on long-term debt. These cash expenditures were funded primarily with
net cash provided by operating activities and borrowings under our revolving
credit facility.
A substantial portion of our cash flows from operations must be used to pay
our interest expense and repay our indebtedness, which will reduce the funds
that would otherwise be available to us for our operations and capital
expenditures. We believe that our cash flow from operations, available cash and
available borrowings under our revolving credit facility will be sufficient to
meet our liquidity needs, including anticipated capital expenditures, for the
foreseeable future; however, we cannot assure you that this will be the case. We
also may need to refinance all or part of our indebtedness, including the Notes,
on or before their maturity; however, we cannot assure you that we will able to
refinance any of our indebtedness, including our Facility and the Notes, on
commercially reasonable terms or at all.
The Company's financing arrangements impose certain limitations on the
operations of the Company and its subsidiaries, including the maintenance of
certain financial, liquidity and net worth ratios. As a result of both the
financial performance of SGHC prior to the Company's acquisition of SGHC,
principally reflecting transitional and operational matters occurring through
December 31, 2000, and the timing of certain anticipated capital expenditures
and associated borrowings in 2001, in the first quarter of 2001, management and
our lenders amended certain limitations to be less restrictive. The Facility was
modified so that the planned step-downs in fixed charge coverage ratios and
leverage ratios were delayed by six months through September 30, 2002. The
Company is in compliance with the amended covenants as of March 31, 2001 and
expects to remain so during the next twelve months.
Forward-Looking Statements
Throughout this Report on Form 10-Q we make "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). Forward-looking statements include the words
"may," "will," "estimate," "intend," "continue," "believe," "except" or
"anticipate" and other similar words. The forward-looking statements contained
in this Report on Form 10-Q are generally located in the material set forth
under the heading "Management's Discussion and Analysis of Financial Condition
and Results of Operations" but may be found in other locations as well. These
forward-looking statements generally relate to plans and objectives for future
operations and are based upon management's reasonable estimates of future
results or trends. Although we believe that the plans and objectives reflected
in or suggested by such forward-looking statements are reasonable, such plans or
objectives may not be achieved.
22
Actual results may differ from projected results due, but not limited, to
unforeseen developments, including developments relating to the following:
o the availability and adequacy of our cash flow to satisfy our obligations,
including our debt service obligations and our need for additional funds
required to support capital improvements and development;
o economic, competitive, demographic, business and other conditions in our
local and regional markets;
o changes or developments in the laws, regulations or taxes in the gaming and
lottery industries;
o actions taken or omitted to be taken by third parties, including customers,
suppliers, competitors, members and shareholders, as well as legislative,
regulatory, judicial and other governmental authorities;
o changes in business strategy, capital improvements, development plans,
including those due to environmental remediation concerns, or changes in
personnel or their compensation, including federal, state and local minimum
wage requirements; and
o the loss of any license or permit, including the failure to obtain an
unconditional renewal of a required gaming license on a timely basis.
Actual future results may be materially different from what we expect. We
will not update forward-looking statements even though our situation may change
in the future.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our products and services are sold to a diverse group of customers
throughout the world. As such, we are subject to certain risks and
uncertainties as a result of changes in general economic conditions, sources of
supply, competition, foreign exchange rates, tax reform, litigation and
regulatory developments. The diversity and breadth of our products and
geographic operations mitigate the risk that adverse changes in any event would
materially affect our financial position. Additionally, as a result of the
diversity of our customer base, we do not consider ourselves exposed to
concentration of credit risks. These risks are further minimized by setting
credit limits, ongoing monitoring of customer account balances, and assessment
of the customers' financial strengths.
Inflation has not had an abnormal or unanticipated effect on our
operations. Inflationary pressures would be significant to our business if raw
materials used for instant lottery ticket production, prepaid phone card
production or terminal manufacturing are significantly affected. Available
supply from the paper and electronics industries tends to fluctuate and prices
may be affected by supply.
For fiscal 2000, inflation was not a significant factor in our results of
operations, and we were not impacted by significant pricing changes in our
costs, except for personnel related expenditures. We are unable to forecast the
prices or supply of substrate, component parts or other raw materials for the
balance of 2001, but we currently do not anticipate any substantial changes that
will materially affect our operating results.
In certain limited cases, our lottery contracts with our customers contain
provisions to adjust for inflation on an annual basis, but we cannot be assured
that this adjustment would cover raw material price increases or other costs of
services. While we have long-term and generally satisfactory relationships with
most of our suppliers, we also believe alternative sources to meet our raw
material and production needs are available.
In the normal course of business, the Company is exposed to fluctuations in
interest rates and equity market risks as the Company seeks debt and equity
capital to sustain its operations. At March 31, 2001, approximately one-third
of the Company's debt was in fixed rate instruments. We consider the fair value
of all financial instruments to be not materially different from their carrying
value at year-end. The following table provides information about the Company's
financial instruments that are sensitive to changes in interest rates. The
table presents principal cash flows and related weighted-average interest rates
by expected maturity dates.
Principal Amount by Expected Maturity - Average Interest Rate
March 31, 2001
Expected Maturity Date (dollars in $000)
There-
2001 2002 2003 2004 2005 after Total Fair value
------------ ---------- ----------- --------- --------- ---------- ---------- -----------
Long-term debt:
Fixed interest rate debt $ 150,000 150,000 139,500
Interest rate 12.5%
Variable interest rate debt $ 4,650 8,950 11,950 14,950 17,200 236,250 293,950 293,950
Average interest rate 10.12% 10.00% 9.93% 9.89% 9.87% 10.70% 10.55%
23
In November 2000, to reduce the risks associated with fluctuations in
market interest rates and in response to requirements in the Facility (see Note
9 to the Consolidated Financial Statements for the year ended October 31, 2000
in the Company's 2000 Annual Report on Form 10-K) the Company entered into three
interest rate swap contracts for an aggregate notional amount of $140,000. The
following table provides information about the Company's derivative financial
instruments. The table presents notional amounts and weighted-average swap rates
by contractual maturity dates. The Company does not hold any market risk
instruments for trading purposes.
Notional Amount by Expected Maturity - Average Swap Rate
Expected Maturity Date (dollars in $000)
There-
2001 2002 2003 2004 2005 After Total Fair value
---------- --------- ---------- --------- ---------- ---------- --------- ------------
Interest rate swaps:
Fixed to variable $ - - 140,000 - - - 140,000 134,799
Receive fixed-3-month
LIBOR - - 6.52% - - - 6.52%
The Company is also exposed to fluctuations in foreign currency exchange
rates as the financial results of its foreign subsidiaries are translated into
U.S. dollars in consolidation. Assets and liabilities outside the United States
are primarily located in the United Kingdom, Germany, Netherlands, France and
Austria. The Company's investment in foreign subsidiaries with a functional
currency other than the U.S. dollar are generally considered long-term
investments. Accordingly, the Company does not hedge these net investments.
Translation gains and losses historically have not been material. We manage our
foreign currency exchange risks on a global basis by one or more of the
following: (i) securing payment from our customers in U.S. dollars, when
possible, (ii) utilizing borrowings denominated in foreign currency, and (iii)
entering into foreign currency exchange contracts. In addition, a significant
portion of the cost attributable to our foreign operations is incurred in the
local currencies. We believe that a 10% adverse change in currency exchange
rates would not have a significant adverse effect on the net earnings or cash
flows of the Company. We may, from time to time, enter into foreign currency
exchange or other contracts to hedge the risk associated with certain firm sales
commitments, anticipated revenue streams and certain assets and liabilities
denominated in foreign currencies. We do not engage in currency speculation.
Our cash and cash equivalents and investments are in high-quality
securities placed with a wide array of financial institutions with high credit
ratings. This investment policy limits our exposure to concentration of credit
risks.
24
SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
Three Months Ended March 31, 2001
PART II. Other Information
Item 1. Legal Proceedings
No significant changes have occurred with respect to legal proceedings as
disclosed in Part I, Item 3, of the Company's 2000 Annual Report on Form 10-K.
Item 2. Changes in Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Stockholders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.29 Warrant To Purchase Class A Common Stock dated as of October
2, 2000, issued by the Company to Ramius Securities, LLC
10.30 Warrant Registration Rights Agreement dated as of October 2,
2000 by and between the Company and Ramius Securities, LLC
Reports on Form 8-K
No current reports on Form 8-K were filed during the three months ended
March 31, 2001. A current report on Form 8-K was filed on April 30, 2001,
regarding the change in the Company's name, effective April 27, 2001, from
Autotote Corporation to Scientific Games Corporation and the change in its stock
exchange symbol to SGM [AMEX:SGM]. A current report on Form 8-K was filed on
April 16, 2001, regarding the first amendment dated as of March 30, 2001, to the
Company's Amended and Restated Credit Agreement.
25
SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
Three Months Ended March 31, 2001
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 CORPORATION
----------------------------
(Registrant)
By: /s/ DeWayne E. Laird
---------------------
Name: DeWayne E. Laird
Title: Vice President & Chief Financial Officer
(principal financial and accounting officer)
Dated: May 15, 2001
26