UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
 
ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended March 31, 2017
 
OR  
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from          to        
 
Commission file number: 0-13063  
SCIENTIFIC GAMES CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
 
81-0422894
(State or other jurisdiction of
 
(I.R.S. Employer Identification No.)
incorporation or organization)
 
 
 
6650 S. El Camino Road, Las Vegas, Nevada 89118
(Address of principal executive offices)
(Zip Code)
 
(702) 897-7150
(Registrant’s telephone number, including area code)
 
Indicate by check mark 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  ý No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  ý No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer  ¨
 
Accelerated filer  ý
 
 
 
Non-accelerated filer  ¨
 
Smaller reporting company  ¨
(Do not check if a smaller reporting company)
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  ¨ No  ý
The registrant has the following number of shares outstanding of each of the registrant's classes of common stock as April 26, 2017 :
Class A Common Stock: 88,796,673
Class B Common Stock: None




SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
INDEX TO FINANCIAL INFORMATION
AND OTHER INFORMATION
THREE MONTHS ENDED MARCH 31, 2017
 
 
 
Page
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Notes to Condensed Consolidated Financial Statements
 
 
 
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
 
 
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
 
 
 
Item 4.
Controls and Procedures
 
 
 
OTHER INFORMATION
 
 
 
 
Item 1.
Legal Proceedings
 
 
 
Item 1A.
Risk Factors
 
 
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
 
 
 
Item 3.
Defaults Upon Senior Securities
 
 
 
Item 4.
Mine Safety Disclosures
 
 
 
Item 5.
Other Information
 
 
 
Item 6.
Exhibits



2



Glossary of Terms
 
 
 
The following terms or acronyms used in this Quarterly Report on Form 10-Q are defined below:
Term or Acronym
Definition
2016 10-K
2016 Annual Report on Form 10-K filed with the SEC on March 3, 2017
2018 Notes
8.125% senior subordinated notes due 2018 issued by SGC
2020 Notes
6.250% senior subordinated notes due 2020 issued by SGI
2021 Notes
6.625% senior subordinated notes due 2021 issued by SGI
ASC
Accounting Standards Codification
ASU
Accounting Standards Update
Annual Meeting
the annual meeting of stockholders held on June 15, 2016
B2C
business to consumer model
Barcrest
Barcrest Group Limited
Coin-in
the amount wagered
Company
refers to SGC and its consolidated subsidiaries, unless otherwise specified or the context otherwise dictates
CSG
Beijing CITIC Scientific Games Technology Co., Ltd.
CSL
China Sports Lottery
CSP
Cooperative Services Program
D&A
depreciation, amortization and impairments (excluding goodwill)
ESPP
employee stock purchase plan
EU
European Union
FASB
Financial Accounting Standards Board
F/X
foreign currency exchange
GLB
Beijing Guard Libang Technology Co., Ltd.
Guarantor Subsidiaries
refers to substantially all of SGC’s 100%-owned U.S. subsidiaries other than SGC’s 100%-owned U.S. Interactive social gaming subsidiaries
Hellenic Lotteries
Hellenic Lotteries S.A.
ITL
International Terminal Leasing
KPIs
Key Performance Indicators
LBO
licensed betting office
LNS
Lotterie Nazionali S.r.l.
Net win
coin-in less payouts
Non-Guarantor Subsidiaries
refers to SGC’s U.S. subsidiaries that are not Guarantor Subsidiaries and SGC’s foreign subsidiaries
Northstar Illinois
Northstar Lottery Group, LLC
Northstar New Jersey
Northstar New Jersey Lottery Group, LLC
Note
refers to a note in the Notes to Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q, unless otherwise indicated
Participation
with respect to our Gaming business, refers to gaming machines provided to customers through service or leasing arrangements in which we earn revenues and are paid based on: (1) a percentage of Net win; (2) fixed daily-fees; (3) a percentage of the Coin-in; or (4) a combination of a fixed daily-fee and a percentage of the Coin-in, and with respect to our Lottery business, refers to a contract or arrangement in which we earn revenues and are paid based on a percentage of retail sales
PMA
private management agreement
PPU
price-per-unit
PTG
proprietary table games
R&D
research and development
RCN
Roberts Communications Network, LLC
RFP
request for proposal
RMG
real-money gaming


3



RSU
restricted stock unit
SEC
Securities and Exchange Commission
Secured Notes
7.000% senior secured notes due 2022 issued by SGI
SG&A
selling, general and administrative
SGC
Scientific Games Corporation
SGI
Scientific Games International, Inc., a wholly-owned subsidiary of SGC
Shufflers
various models of automatic card shufflers, deck checkers and roulette chip sorters
Unsecured Notes
10.000% senior unsecured notes due 2022 issued by SGI
U.K.
United Kingdom of Great Britain and Northern Ireland
U.S.
United States of America
U.S. GAAP
accounting principles generally accepted in the U.S.
U.S. jurisdictions
the 50 states in the U.S. plus the District of Columbia and Puerto Rico
VGT
video gaming terminal
VLT
video lottery terminal
WAP
wide-area progressive

Intellectual Property Rights
 
® and ™ indicate U.S. trademarks. Marks are owned by their respective owners.



4



Forward-Looking Statements
 
Throughout this Quarterly Report on Form 10-Q, we make "forward-looking statements" within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements describe future expectations, plans, results or strategies and can often be identified by the use of terminology such as "may," "will," "estimate," "intend," "plan," "continue," "believe," "expect," "anticipate," "target," "should," "could," "potential," "opportunity," "goal" or similar terminology. The forward-looking statements contained in this Quarterly 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 statements are based upon management's current expectations, assumptions and estimates and are not guarantees of timing, future results or performance. Therefore, you should not rely on any of these forward-looking statements as predictions of future events. Actual results may differ materially from those contemplated in these statements due to a variety of risks and uncertainties and other factors, including, among other things:

•
competition;
•
U.S. and international economic and industry conditions;
•
slow growth of new gaming jurisdictions, slow addition of casinos in existing jurisdictions and declines in the replacement cycle of gaming machines;
•
ownership changes and consolidation in the gaming industry;
•
opposition to legalized gaming or the expansion thereof;
•
inability to adapt to, and offer products that keep pace with, evolving technology, including any failure of our investment of significant resources in our R&D efforts;

•
inability to develop successful products and services and capitalize on trends and changes in our industries, including the expansion of internet and other forms of interactive gaming;
•
laws and government regulations, including those relating to gaming licenses and environmental laws;
•
dependence upon key providers in our social gaming business;
•
inability to retain or renew, or unfavorable revisions of, existing contracts, and the inability to enter into new contracts;
•
protection of our intellectual property, inability to license third party intellectual property and the intellectual property rights of others;
•
security and integrity of our products and systems and reliance on or failures in information technology and other systems;
•
challenges or disruptions relating to the implementation of a new global enterprise resource planning system;
•
failure to maintain adequate internal control over financial reporting;
•
natural events that disrupt our operations or those of our customers, suppliers or regulators;
•
inability to benefit from, and risks associated with, strategic equity investments and relationships;
•
failure to achieve the intended benefits of our acquisitions;
•
incurrence of restructuring costs;
•
implementation of complex revenue recognition standards or other new accounting standards;
•
changes in estimates or judgments related to our impairment analysis of goodwill or other intangible assets;
•
fluctuations in our results due to seasonality and other factors;
•
dependence on suppliers and manufacturers;


5



•
risks relating to foreign operations, including fluctuations in foreign currency exchange rates, restrictions on the payment of dividends from earnings, restrictions on the import of products and financial instability, including the potential impact to our business resulting from the affirmative vote in the U.K. to withdraw from the EU, and the potential impact to our instant lottery game concession or VLT lease arrangements resulting from the recent economic and political conditions in Greece;
•
changes in tax laws or tax rulings, or the examination of our tax positions;
•
dependence on key employees;
•
litigation and other liabilities relating to our business, including litigation and liabilities relating to our contracts and licenses, our products and systems, our employees (including labor disputes), intellectual property, environmental laws and our strategic relationships;
•
level of our indebtedness, higher interest rates, availability or adequacy of cash flows and liquidity to satisfy indebtedness, other obligations or future cash needs;
•
inability to reduce or refinance our indebtedness;
•
restrictions and covenants in debt agreements, including those that could result in acceleration of the maturity of our indebtedness;
•
influence of certain stockholders, including decisions that may conflict with the interests of other stockholders; and
•
stock price volatility.
Additional information regarding risks and uncertainties and other factors that could cause actual results to differ materially from those contemplated in forward-looking statements is included from time to time in our filings with the SEC, including under Item 1A "Risk Factors" in our 2016 10-K. Forward-looking statements speak only as of the date they are made and, except for our ongoing obligations under the U.S. federal securities laws, we undertake no obligation to publicly update any forward-looking statements whether as a result of new information, future events or otherwise.
You should also note that this Quarterly Report on Form 10-Q may contain references to industry market data and certain industry forecasts. Industry market data and industry forecasts are obtained from publicly available information and industry publications. Industry publications generally state that the information contained therein has been obtained from sources believed to be reliable, but that the accuracy and completeness of that information is not guaranteed. Although we believe industry information to be accurate, it is not independently verified by us and we do not make any representation as to the accuracy of that information. In general, we believe there is less publicly available information concerning the international gaming, lottery and interactive gaming industries than the same industries in the U.S.



6

PART I. FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements
SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(Unaudited, in millions, except per share amounts)
 
Three Months Ended
 
March 31,
 
2017
2016
Revenue:
 
 
Services
$
362.5

$
350.3

Product sales
222.7

197.6

Instant games
140.2

134.1

Total revenue
725.4

682.0

Operating expenses:
 
 
Cost of services (1)
103.3

94.9

Cost of product sales (1)
106.6

94.4

Cost of instant games (1)
70.1

67.0

Selling, general and administrative
140.7

142.3

Research and development
42.4

49.8

Depreciation, amortization and impairments
165.1

180.6

Restructuring and other
9.2

2.7

Operating income
88.0

50.3

Other (expense) income:
 
 
Interest expense
(159.4
)
(165.7
)
Earnings from equity investments
9.5

3.2

Loss on extinguishment and modification of debt
(29.7
)
—

Other income (expense), net
7.5

0.7

     Total other expense, net
(172.1
)
(161.8
)
           Net loss before income taxes
(84.1
)
(111.5
)
Income tax (expense) benefit
(16.7
)
19.2

Net loss
$
(100.8
)
$
(92.3
)
Other comprehensive income (loss):
 
 
Foreign currency translation gain (loss)
33.6

(1.6
)
Pension and post-retirement (loss) gain, net of tax
(0.3
)
0.2

Derivative financial instruments unrealized gain (loss), net of tax
2.8

(1.0
)
Other comprehensive income (loss)
36.1

(2.4
)
Comprehensive loss
$
(64.7
)
$
(94.7
)
 
 
 
Basic and diluted net loss per share:
 

 

Basic
$
(1.14
)
$
(1.07
)
Diluted
$
(1.14
)
$
(1.07
)
 
 
 
Weighted average number of shares used in per share calculations:
 

 

Basic shares
88.2

86.6

Diluted shares
88.2

86.6

(1) Exclusive of D&A.
See accompanying notes to condensed consolidated financial statements.


7


SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited, in millions, except par value)
 
March 31, 2017
 
December 31, 2016
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
131.9

 
$
115.1

Restricted cash
27.1

 
24.7

Accounts receivable, net
463.5

 
495.0

Notes receivable, net
131.0

 
125.4

Inventories
253.5

 
242.3

Prepaid expenses, deposits and other current assets
113.2

 
114.1

Total current assets
1,120.2

 
1,116.6

Non-current assets:
 
 
 
   Restricted cash
16.8

 
17.1

   Notes receivable, net
48.7

 
48.1

   Property and equipment, net
584.7

 
612.2

   Goodwill
2,906.1

 
2,888.4

   Intangible assets, net
1,761.9

 
1,768.3

   Software, net
395.5

 
409.1

   Equity investments
187.0

 
179.9

   Other assets
52.3

 
47.7

Total assets
$
7,073.2

 
$
7,087.4

 
 
 
 
LIABILITIES AND STOCKHOLDERS' DEFICIT
 
 
 
Current liabilities:
 
 
 
Current portion of long-term debt
$
39.3

 
$
49.3

Accounts payable
182.9

 
188.9

Accrued liabilities
463.3

 
454.2

Total current liabilities
685.5

 
692.4

Deferred income taxes
75.6

 
70.2

Other long-term liabilities
238.9

 
235.6

Long-term debt, excluding current portion
8,068.4

 
8,024.9

Total liabilities
9,068.4

 
9,023.1

Commitments and contingencies (see Note 14)


 


Stockholders' deficit:
 
 
 
Class A common stock, par value $0.01 per share: 199.3 shares authorized; 105.9 and 105.2 shares issued and 88.7 and 88.0 shares outstanding, respectively
1.0

 
1.0

Additional paid-in capital
796.0

 
790.8

Accumulated loss
(2,319.5
)
 
(2,218.7
)
Treasury stock, at cost, 17.2 shares
(175.2
)
 
(175.2
)
Accumulated other comprehensive loss
(297.5
)
 
(333.6
)
Total stockholders' deficit
(1,995.2
)
 
(1,935.7
)
Total liabilities and stockholders' deficit
$
7,073.2

 
$
7,087.4

 
See accompanying notes to condensed consolidated financial statements.


8

SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in millions)
 
Three Months Ended
 
March 31,
 
2017
 
2016
Net cash provided by operating activities
$
111.0

 
$
101.1

Cash flows from investing activities:
 
 
 
Capital expenditures
(61.3
)
 
(51.2
)
Acquisition of business, net of cash acquired
(21.5
)
 
—

Distributions of capital from equity investments
1.3

 
1.5

Changes in other assets and liabilities and other
2.0

 
1.5

Net cash used in  investing activities
(79.5
)
 
(48.2
)
Cash flows from financing activities:
 
 
 
Borrowings under revolving credit facility
125.0

 
95.0

Repayments under revolving credit facility
(170.0
)
 
(110.0
)
Proceeds from issuance of senior notes and term loans
1,762.4

 
—

    Repayments of senior notes and term loans
(1,693.4
)
 
—

    Payments of debt issuance and deferred financing costs
(27.2
)
 
—

Payments on long-term debt
(1.5
)
 
(12.5
)
Payments on license obligations
(9.8
)
 
(9.6
)
Net redemptions of common stock under stock-based compensation plans
(0.6
)
 
—

Net cash used in financing activities
(15.1
)
 
(37.1
)
Effect of exchange rate changes on cash, cash equivalents and restricted cash
2.5

 
1.8

Increase in cash, cash equivalents and restricted cash
18.9

 
17.6

Cash, cash equivalents and restricted cash, beginning of period
156.9

 
166.8

Cash, cash equivalents and restricted cash, end of period
$
175.8

 
$
184.4

 
 
 
 
Supplemental cash flow information:
 
 
 
   Cash paid for interest
$
113.5

 
$
122.3

   Income taxes paid
5.7

 
2.7

Non-cash investing and financing transactions:
 
 
 
   Non-cash rollover of Term loans (see Note 10)
2,747.6

 
—

   Non-cash additions to intangible assets related to license agreements
28.1

 
86.9

 See accompanying notes to condensed consolidated financial statements.


9



SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, amounts in USD, table amounts in millions, except per share amounts)

(1) Description of the Business and Summary of Significant Accounting Policies
Description of the Business
We are a leading developer of technology‑based products and services and associated content for the worldwide gaming, lottery and interactive gaming industries. Our portfolio includes gaming machines and game content, casino management systems, table game products and services, instant and draw‑based lottery games, lottery systems, lottery content and services, interactive gaming and social casino solutions, as well as other products and services. We report our operations in three business segments—Gaming, Lottery and Interactive.
Basis of Presentation and Principles of Consolidation
The accompanying condensed consolidated financial statements have been prepared in accordance with U.S. GAAP. The accompanying condensed consolidated financial statements include the accounts of SGC and its wholly owned subsidiaries, as well as those subsidiaries in which we have a controlling financial interest. Investments in other entities in which we do not have a controlling financial interest but we exert significant influence are accounted for in our condensed consolidated financial statements using the equity method of accounting. All intercompany balances and transactions have been eliminated in consolidation.
In the opinion of management, we have made all adjustments necessary to present fairly our consolidated financial position, results of operations and comprehensive loss and cash flows for the periods presented. Such adjustments are of a normal, recurring nature. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in our 2016 10-K. Interim results of operations are not necessarily indicative of results of operations for a full year.
Significant Accounting Policies
There have been no changes to our significant accounting policies described within the Notes of our 2016 10-K.
Acquisitions

During the third quarter of 2016, we entered into a definitive agreement to acquire all of the issued and outstanding common shares of DEQ Systems Corp. (DEQ) for $22.0 million in cash consideration transferred. The transaction closed on January 18, 2017. Substantially all of the purchase price was allocated to acquired intellectual property.

Refer to Subsequent Events Note 15.
    
Revenue

The following table summarizes our revenues by type within each of our business segments:



10



 
Three Months Ended March 31,
 
2017
 
2016
Gaming
 
 
 
  Gaming operations
$
172.4

 
$
184.4

  Gaming machine sales
156.2

 
134.5

Gaming systems
61.5

 
59.7

  Table products
49.9

 
43.1

    Total
$
440.0

 
$
421.7

 
 
 
 
Lottery
 
 
 
  Instant products
$
141.7

 
$
137.3

  Lottery systems
47.4

 
50.4

    Total
$
189.1

 
$
187.7

 
 
 
 
Interactive
 
 
 
  Social Gaming - B2C
$
80.2

 
$
60.2

  Other
16.1

 
12.4

    Total
$
96.3

 
$
72.6


Deferred Revenue

The following table summarizes the deferred revenue activity for the reporting period:

 
Three Months Ended March 31,
 
2017
 
2016
Deferred revenue balance, beginning of period
$
67.4

 
$
57.8

New deferrals
45.8

 
92.9

Amounts recognized in revenue
(51.8
)
 
(85.5
)
Deferred revenue balance, end of period
$
61.4

 
$
65.2


Computation of Basic and Diluted Net Loss Per Share

Basic and diluted net loss per share were the same for all periods presented as all common stock equivalents would be anti-dilutive. We excluded 3.0 million and 1.8 million of stock options from the diluted weighted-average common shares outstanding for the three-month periods ended March 31, 2017 and 2016, respectively, and 5.0 million and 4.6 million of RSUs from the calculation of diluted weighted-average common shares outstanding for the three-month periods ended March 31, 2017 and 2016, respectively.

New Accounting Guidance - Recently Adopted

In March 2016, the FASB issued ASU No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting . The amended guidance is intended to simplify several aspects of accounting for share-based payment award transactions, including income tax consequences, accounting for forfeitures, classification of awards as either equity or liabilities and classification in the statement of cash flows. ASU 2016-09 has separate transition guidance for each element of the new standard. We adopted the guidance at the beginning of first quarter 2017. The adoption of this guidance did not result in a net cumulative-effect adjustment to accumulated loss, as the previously unrecognized excess tax benefit of $10.1 million was fully offset by an increase in the valuation allowance as of December 31, 2016. The excess tax benefit recognized in our provision for income taxes for the three months ended March 31, 2017 was immaterial. In addition, we elected to continue to account for forfeitures by estimating the expected forfeitures over the course of a vesting period.



11



In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash . ASU 2016-18 requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash or restricted cash equivalents. As a result, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. We adopted the guidance retrospectively at the beginning of first quarter 2017. The adoption of this guidance resulted in increases to the cash, cash equivalents and restricted cash beginning-of-period and end-of period line item totaling $38.1 million and $38.7 million , respectively, which now includes restricted cash, and a $0.6 million decrease in net cash used in investing activities for the three months ended March 31, 2016.
    
In January 2017, the FASB issued ASU No. 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment . ASU 2017-04 simplifies the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. Under the new amendments, an entity should perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value. We adopted this guidance prospectively at the beginning of first quarter 2017, which will simplify our future goodwill impairment testing.

New Accounting Guidance - Not Yet Adopted

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers . ASU 2014-09 combined with all subsequent amendments (collectively ASC 606) provides guidance outlining a single comprehensive revenue model in accounting for revenue from contracts with customers. ASC 606 supersedes existing revenue recognition guidance, including industry-specific guidance, and replaces it with a five-step revenue model with a core principle that "an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services." This guidance is effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. We will adopt this guidance at the beginning of the first quarter of 2018, using a modified retrospective application approach. Refer to Note 1 of our 2016 10-K for our current assessment of the anticipated impact of adopting this guidance on revenue recognition for each of our business segments.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842 ). The amended guidance is intended to increase transparency and comparability among organizations by recognizing lease assets and liabilities on the balance sheet and disclosing key information about leasing arrangements. The adoption of this guidance is expected to result in a significant portion of our operating leases, where we are the lessee, to be recognized on our Consolidated Balance Sheet. The guidance requires lessees and lessors to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. This guidance is effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years, with earlier adoption permitted. We are currently evaluating the impact and timing of adopting this guidance.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326) . The new guidance replaces the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. For trade and other receivables, loans and other financial instruments, we will be required to use a forward-looking expected loss model rather than the incurred loss model for recognizing credit losses which reflects losses that are probable. The new guidance will be effective for us beginning January 1, 2020, with early adoption permitted beginning January 1, 2018. Application of the amendments is through a cumulative-effect adjustment to retained earnings as of the effective date. We are currently evaluating the impact and timing of adopting this guidance.

In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business . The new guidance clarifies the definition of a business in order to allow for the evaluation of whether transactions should be accounted for as acquisitions or disposals of assets or businesses. The new guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, with early adoption permitted. We are currently evaluating the impact of adopting this guidance.

We do not expect that any other recently issued accounting guidance will have a significant effect on our financial statements.



12

(2) Business Segments
We report our operations in three business segments—Gaming, Lottery and Interactive—representing our different products and services. A detailed discussion regarding the products and services from which each reportable business segment derives its revenue is included in Notes 2 and 3 in our 2016 10-K.
In evaluating financial performance, we focus on operating income (loss) as a segment's measure of profit or loss. The accounting policies of our business segments are the same as those described within the Notes in our 2016 10-K. The following tables present our segment information:
 
Three Months Ended March 31, 2017
 
Gaming
 
Lottery
 
Interactive
 
Corporate (1)
 
Total
Total revenue
$
440.0

 
$
189.1

 
$
96.3

 
$
—

 
$
725.4

Depreciation, amortization and impairments
123.3

 
13.9

 
4.0

 
23.9

 
165.1

Restructuring and other
4.2

 
0.3

 
0.8

 
3.9

 
9.2

Operating income (loss)
77.5

 
56.1

 
17.2

 
(62.8
)
 
88.0

Interest expense
 
 
 
 
 
 
 
 
(159.4
)
Earnings from equity investments
 
 
 
 
 
 
 
 
9.5

Loss on extinguishment and modification of debt
 
 
 
 
 
 
 
 
(29.7
)
Other income (expense), net
 
 
 
 
 
 
 
 
7.5

Net loss before income taxes
 
 
 
 
 
 
 
 
$
(84.1
)
(1) Includes corporate amounts not allocated to the business segments.
 
Three Months Ended March 31, 2016
 
Gaming
 
Lottery
 
Interactive
 
Corporate (1)
 
Total
Total revenue
$
421.7

 
$
187.7

 
$
72.6

 
$
—

 
$
682.0

Depreciation, amortization and impairments
141.6

 
17.8

 
3.7

 
17.5

 
180.6

Restructuring and other
1.6

 
1.1

 
—

 
—

 
2.7

Operating income (loss)
43.4

 
48.0

 
11.5

 
(52.6
)
 
50.3

Interest expense
 
 
 
 
 
 
 
 
(165.7
)
Earnings from equity investments
 
 
 
 
 
 
 
 
3.2

Other income (expense), net
 
 
 
 
 
 
 
 
0.7

Net loss before income taxes
 
 
 
 
 
 
 
 
$
(111.5
)
(1) Includes corporate amounts not allocated to the business segments.
 
 

 
 

(3) Restructuring and other
Restructuring and other includes charges or expenses attributable to: (i) employee severance; (ii) management restructuring and related costs; (iii) restructuring and integration; (iv) cost savings initiatives; and (v) acquisition costs and other unusual items. The following table summarizes pre-tax restructuring and other costs for the periods presented:
 
 
Three Months Ended March 31,
 
 
2017
 
2016
Employee severance (1)
 
$
2.7

 
$
2.3

Acquisitions and related costs
 
3.4

 
—

Restructuring, integration and other
 
3.1

 
0.4

Total
 
$
9.2

 
$
2.7



13



(1) Inclusive of employee severance and termination costs associated with restructuring activities.  
On November 3, 2016, we announced that we began implementing a new business improvement initiative, which we expect will streamline our organization, increase our efficiencies, and significantly reduce our operating costs once the initiative is fully implemented. These cost savings are expected to be achieved across all our divisions and will encompass a combination of headcount reductions, facilities streamlining and reduction in other operating costs.
The following table presents a summary of restructuring charges and the changes in the restructuring accrual during 2017:     
 
 
Restructuring Accrual
Balance as of January 1, 2017
 
$
16.4

Accrual additions
 
2.2

Cash payments
 
(12.6
)
Balance as of March 31, 2017
 
$
6.0



(4) Accounts and Notes Receivable and Credit Quality of Notes Receivable
Accounts and Notes Receivable
The following summarizes the components of current and long-term accounts and notes receivable, net:
 
March 31, 2017
 
December 31, 2016
Current:
 
 
 
Accounts receivable
$
474.8

 
$
508.1

Notes receivable
146.9

 
140.0

Allowance for doubtful accounts and notes
(27.2
)
 
(27.7
)
Current accounts and notes receivable, net
$
594.5

 
$
620.4

Long-term:
 
 
 
Notes receivable, net of allowance of $0.4 and $0.4
48.7

 
48.1

  Total accounts and notes receivable, net
$
643.2

 
$
668.5

Credit Quality of Notes Receivable
The interest rates on our outstanding notes receivable ranged from 4.0% to 10.4% at March 31, 2017 and 3.3% to 10.4% at December 31, 2016.
We have certain concentrations of outstanding notes receivable in international locations that impact our assessment of the credit quality of our notes receivable. We monitor the macroeconomic and political environment in each of these locations in our assessment of the credit quality of our notes receivable. We have not identified changes in the aforementioned factors during the three months ended March 31, 2017 that require a reassessment of our receivable balances. The international locations with significant concentrations (generally deemed to be exceeding 10%) of our notes receivable are as follows:
•
Mexico - Our notes receivable, net, from certain customers in Mexico at March 31, 2017 was $30.8 million. We collected $8.1 million of outstanding receivables from these customers during the three months ended March 31, 2017 .
•
Peru - Our notes receivable, net, from certain customers in Peru at March 31, 2017 was $25.1 million . We collected $4.4 million of outstanding receivables from these customers during the three months ended March 31, 2017 .
•
Argentina - Our notes receivable, net, from customers in Argentina at March 31, 2017 was $11.8 million denominated in USD. Our customers are required to, and have continued to, pay us in pesos at the spot exchange rate on the date of payment. We collected $6.4 million of outstanding receivables from customers in Argentina during the three months ended March 31, 2017 .
In addition to the macroeconomic and political factors noted above, we also evaluated recent payments, receivables aging, any additional security or collateral we had (bills of exchange, pledge agreements, etc.) and other facts and circumstances relevant to our customers' ability to pay.


14

The following summarizes the components of total notes receivable, net:
 
March 31, 2017
 
Balances over 90 days past due
 
December 31, 2016
 
Balances over 90 days past due
Notes receivable:
 
 
 
 
 
 
 
Domestic
$
66.1

 
$
1.4

 
$
45.1

 
$
1.1

International
129.9

 
37.4

 
143.0

 
38.7

     Total notes receivable
196.0

 
38.8

 
188.1

 
39.8

 
 
 
 
 
 
 
 
Notes receivable allowance
 
 
 
 
 
 
 
Domestic
(2.1
)
 
(2.0
)
 
(1.0
)
 
(0.9
)
International
(14.2
)

(14.2
)
 
(14.0
)
 
(14.0
)
     Total notes receivable allowance
(16.3
)
 
(16.2
)
 
(15.0
)
 
(14.9
)
Notes receivable, net
$
179.7

 
$
22.6

 
$
173.1

 
$
24.9

At March 31, 2017 , 12.6% of our total notes receivable, net, was past due by over 90 days, compared to 14.4% at December 31, 2016.
We evaluate our exposure to credit loss on notes receivable on both a collective and individual basis. In addition, we evaluate such notes receivable on a geographic basis and take into account any other factors (such as general economic conditions, other macroeconomic considerations, etc.) that could impact our collectability of notes receivable individually or in the aggregate. Accordingly, notes receivable may be evaluated under multiple methodologies, and the resulting allowance is not determined based on one specific methodology taking all factors into consideration. The activity in our allowance for notes receivable for each of the three month periods ended March 31, 2017 and 2016 is as follows:
 
 
For the Three Months Ended March 31,
 
 
2017

 
2016

Beginning allowance for notes receivable
 
$
15.0

 
$
13.2

Provision
 
1.7

 
2.0

Charge-offs and recoveries
 
(0.4
)
 
(0.6
)
Ending allowance for notes receivable
 
$
16.3

 
$
14.6


The fair value of notes receivable is estimated by discounting expected future cash flows using current interest rates at which similar loans would be made to borrowers with similar credit ratings and remaining maturities. As of March 31, 2017 and December 31, 2016, the fair value of notes receivable, net, approximated the carrying value due to contractual terms of notes receivable generally being under 24 months.
(5) Inventories
Inventories consisted of the following as of the dates presented below:
    
 
 
March 31, 2017
 
December 31, 2016
     Parts and work-in-process
 
$
114.7

 
$
110.5

     Finished goods
 
138.8

 
131.8

          Total inventories
 
$
253.5

 
$
242.3

Parts and work-in-process include parts for gaming machines, lottery terminals and instant lottery ticket materials, as well as labor and overhead costs for work-in-process associated with the manufacturing of instant lottery games and lottery terminals. Our finished goods inventory primarily consists of gaming machines for sale, instant games for our Participation arrangements and our licensed branded merchandise.

(6) Property and Equipment, net     
 
 
 
 
 
Property and equipment, net consisted of the following:


15

 
 
March 31, 2017
 
December 31, 2016
Land
 
$
36.8

 
$
36.5

Buildings and leasehold improvements
 
185.4

 
182.2

Gaming and lottery machinery and equipment
 
983.0

 
993.3

Furniture and fixtures
 
30.3

 
28.6

Construction in progress
 
16.8

 
21.2

Other property and equipment
 
247.2

 
239.3

Less: accumulated depreciation
 
(914.8
)
 
(888.9
)
Total property and equipment, net
 
$
584.7

 
$
612.2

Depreciation expense is excluded from Cost of services, Cost of product sales, Cost of instant games and Other operating expenses and is separately presented within D&A.
 
Three Months Ended
March 31,
 
2017
 
2016
Depreciation expense
$
66.9

 
$
80.6


(7) Intangible Assets, net and Goodwill
Intangible Assets, net
The following tables present certain information regarding our intangible assets as of March 31, 2017 and December 31, 2016 .
 
March 31, 2017
 
December 31, 2016
 
Gross Carrying Value
 
Accumulated Amortization
 
Net Balance
 
Gross Carrying Value
 
Accumulated Amortization
 
Net Balance
Amortizable intangible assets:
 
 
 
 
 
 
 
 
 
 
 
Customer relationships
$
878.6

 
$
(178.5
)
 
$
700.1

 
$
875.8

 
$
(163.9
)
 
$
711.9

Intellectual property
750.7

 
(244.3
)
 
506.4

 
726.0

 
(218.2
)
 
507.8

Licenses
435.2

 
(164.8
)
 
270.4

 
413.2

 
(153.5
)
 
259.7

Brand names
125.1

 
(35.7
)
 
89.4

 
123.7

 
(32.1
)
 
91.6

Trade names
97.4

 
(9.7
)
 
87.7

 
97.4

 
(8.1
)
 
89.3

Patents and other
28.4

 
(14.7
)
 
13.7

 
28.0

 
(14.2
)
 
13.8

 
2,315.4

 
(647.7
)
 
1,667.7

 
2,264.1

 
(590.0
)
 
1,674.1

Non-amortizable intangible assets:
 
 
 
 
 
 
 
 
 
 
 
Trade names
96.3

 
(2.1
)
 
94.2

 
96.3

 
(2.1
)
 
94.2

Total intangible assets
$
2,411.7

 
$
(649.8
)
 
$
1,761.9

 
$
2,360.4

 
$
(592.1
)
 
$
1,768.3

 

The following reflects intangible amortization expense included within D&A:
 
Three Months Ended
March 31,
 
2017
 
2016
Amortization expense
$
61.9

 
$
65.6

Goodwill


16

The table below reconciles the change in the carrying value of goodwill by business segment for the period from
December 31, 2016 to March 31, 2017 .
Goodwill
 
Gaming
 
Lottery
 
Interactive
 
Totals
Balance as of December 31, 2016
 
$
2,428.6

 
$
350.0

 
$
109.8

 
$
2,888.4

Foreign currency adjustments
 
15.9

 
1.8

 
—

 
17.7

Balance as of March 31, 2017
 
$
2,444.5


$
351.8


$
109.8


$
2,906.1


(8) Software, net
Software, net consisted of the following:
    
 
 
March 31, 2017
 
December 31, 2016
Software
 
$
951.2

 
$
924.8

 Accumulated amortization
 
(555.7
)
 
(515.7
)
Software, net
 
$
395.5

 
$
409.1

The following reflects amortization of software included within D&A:

 
Three Months Ended
March 31,
 
2017
 
2016
Amortization expense
$
36.3

 
$
34.4


(9) Equity Investments
Equity investments totaled $187.0 million and $179.9 million as of March 31, 2017 and December 31, 2016, respectively. We received distributions and dividends totaling $3.7 million and $1.5 million during the three months ended March 31, 2017 and 2016, respectively.

(10) Long-Term and Other Debt
Outstanding Debt and Capital Leases


17

The following reflects our outstanding debt:
 
 
As of
 
 
March 31, 2017
 
December 31, 2016
 
 
Face value
 
Unamortized debt (discount) premium
 
Unamortized deferred financing costs
 
Book value
 
Book value
Senior Secured Credit Facilities:
 
 
 
 
 
 
 
 
 
 
Revolver, varying interest rate, due 2018
 
$
—

 
$
—

 
$
—

 
$
—

 
$
45.0

Revolver, varying interest rate, due 2020
 
—

 
—

 
—

 
—

 
—

Term Loan B-1
 
—

 
—

 
—

 
—

 
2,183.5

Term Loan B-2
 
—

 
—

 
—

 
—

 
1,905.8

Term Loan B-3
 
3,291.0

 
(16.3
)
 
(58.2
)
 
3,216.5

 
—

Senior Notes:
 
 
 
 
 
 
 
 
 
 
Secured Notes
 
2,100.0

 
67.5

 
(31.8
)
 
2,135.7

 
936.3

Unsecured Notes
 
2,200.0

 
—

 
(34.5
)
 
2,165.5

 
2,164.0

Subordinated Notes:
 
 
 
 
 
 
 
 
 
 
2018 Notes
 
—

 
—

 
—

 
—

 
248.7

2020 Notes
 
243.5

 
—

 
(2.1
)
 
241.4

 
241.2

2021 Notes
 
340.6

 
(1.4
)
 
(4.3
)
 
334.9

 
334.5

Capital lease obligations, 3.9% interest as of March 31, 2017 payable monthly through 2019
 
13.7

 
—

 
—

 
13.7

 
15.2

Total long-term debt outstanding
 
$
8,188.8

 
$
49.8

 
$
(130.9
)
 
$
8,107.7

 
$
8,074.2

Less: current portion of long-term debt
 
 
 
 
 
 
 
(39.3
)
 
(49.3
)
Long-term debt, excluding current portion
 
 
 
 
 
 
 
$
8,068.4

 
$
8,024.9

Fair value of debt (1)
 
$
8,379.2

 
 
 
 
 
 
 
$
8,221.8

(1) Fair value of our fixed rate and variable interest rate debt is classified within level 2 in the fair value hierarchy and has been calculated based on the quoted market prices of our securities.
We were in compliance with the financial covenants under our debt agreements as of March 31, 2017.
February 2017 Refinancing Transactions
On February 14, 2017, we entered into an amendment to our credit agreement which provides for a $3,291.0 million senior secured term B-3 loan facility which matures in 2021 and reduces the commitments on the revolving credit facility to $556.2 million through October 2018, with a step-down in availability at that time to $381.7 million until the extended maturity in October 2020. We also successfully completed an additional offering of our Secured Notes in the aggregate principal amount of $1.15 billion (the "additional Secured Notes"). The net proceeds of the term B-3 loan facility and the additional Secured Notes were used to (a) prepay the balances on the term B-1 and term B-2 loans and the existing revolving credit facility, (b) redeem all $250.0 million aggregate principal amount of our outstanding 2018 Notes at a redemption price equal to 100% of the principal amount of the 2018 Notes, plus accrued and unpaid interest to but not including the redemption date (which redemption was completed on March 17, 2017) and (c) pay related fees and expenses (the "February 2017 Refinancing").
In connection with the February 2017 Refinancing, we recorded $27.9 million in financing costs presented primarily as a reduction to long-term debt.
Term Loan B-3

The new term B-3 loans that were entered into as part of the February 2017 Refinancing mature in October 2021 and will amortize in equal quarterly installments in an amount equal to 1.00% per annum of the stated principal amount thereof, with the remaining balance due at final maturity.     

7.000% Senior Secured Notes due 2022



18

In connection with the February 2017 Refinancing, SGI issued $1.15 billion in aggregate principal amount of additional Secured Notes under the existing indenture governing the Secured Notes. Therefore the additional Secured Notes have the same terms as the previously issued $950.0 million in aggregate principal amount of Secured Notes initially issued in November 2014 except for the issue date and offering price. The additional Secured Notes and the initial Secured Notes will be treated as a single series of debt securities for all other purposes under the indenture governing the Secured Notes.

For additional information regarding terms of our credit agreement and Secured Notes, see Note 16 (Long-Term and Other Debt) in our 2016 10-K.

Loss on Extinguishment and Modification of Debt

The following are components of the loss on extinguishment and modification of debt for the three months ended March 31, 2017:
 
 
 
Unamortized debt discount and deferred financing costs
 
$
(25.8
)
Third party debt issuance fees
 
(3.9
)
Total loss on extinguishment and modification of debt
 
$
(29.7
)


(11) Fair Value Measurements
The fair value of our financial assets and liabilities is determined by reference to market data and other valuation techniques as appropriate. We believe the fair value of our financial instruments, which are principally cash and cash equivalents, accounts receivable, other current assets, accounts payable and accrued liabilities, approximates their recorded values. Our assets and liabilities measured at fair value on a recurring basis are described below.
Interest rate swap contracts
We record derivative financial instruments on the balance sheet at their respective fair values. We currently use swap contracts as described below to mitigate gains or losses associated with the change in expected cash flows due to fluctuations in interest rates on our variable rate debt.
We hedge a portion of our interest expense associated with our variable rate debt to effectively fix the interest rates that we pay. We have interest rate swap contracts designated as cash flow hedges under ASC 815. Under these hedges, we pay interest at a weighted-average fixed rate of 2.151% and receive interest at the greater of 1% or the prevailing three -month LIBOR rate. The total notional amount of interest rate swaps outstanding was $ 700.0 million as of both March 31, 2017 and December 31, 2016.
These hedges are highly effective in offsetting changes in our future expected cash flows due to the fluctuation in the three-month LIBOR rate associated with our variable rate debt. The effectiveness of these hedges is measured quarterly on a retrospective basis. As a result of the effective matching of the critical terms on our variable rate interest expense being hedged to the hedging instruments being used, we have not measured any hedge ineffectiveness through the date of our debt refinancing transactions as described in Note 10. Subsequent to the debt refinancing, we have measured ineffectiveness totaling $0.6 million as a result of the terms of our swaps no longer matching critical terms with the hedged forecasted interest payments; however, those hedges remain highly effective as measured by our regression analysis. We expect our interest rate swaps to continue to remain highly effective. All gains and losses from these hedges are recorded in Other comprehensive income (loss) until the future underlying payment transactions occur. Any realized gains or losses resulting from the hedges will be recognized (together with the hedged transaction) as interest expense. We estimate the fair value of our interest rate swap contracts by discounting the future cash flows of both the fixed rate and variable rate interest payments based on market yield curves. The inputs used to measure the fair value of our interest rate swap contracts are categorized as Level 2 in the fair value hierarchy.
The following table shows the (gains) losses on our interest rate swap contracts:


19

 
 
Three Months Ended
 
 
March 31,
 
 
2017
 
2016
(Gains) losses recorded in accumulated other comprehensive loss, net of tax
 
$
(2.8
)
 
$
1.0

Reclassifications of losses out of accumulated other comprehensive loss
 
2.1

 
2.1

Ineffectiveness recorded in interest expense
 
0.6

 
—

We expect to reclassify additional losses of $4.6 million from accumulated other comprehensive loss to interest expense in the next twelve months. The following table shows the fair value of our hedges:
 
March 31, 2017
 
December 31, 2016
Accrued liabilities
$
4.6

 
$
6.7

Other long-term liabilities
—

 
0.2

Total fair value
$
4.6

 
$
6.9

(12) Stock-based Compensation and Employee Benefit Plans
We provide stock-based compensation using stock options and RSUs. At the Annual Meeting, our stockholders approved the adoption of a new ESPP. The first offering period under the new ESPP commenced on January 1, 2017. The following reflects stock-based compensation expense recognized:
 
 
 
 
Three Months Ended
March 31,
2017
 
2016
Related to vesting of stock options
$
0.2

 
$
0.7

Related to vesting of RSUs
5.7

 
5.8

   Total
$
5.9

 
$
6.5


We have defined benefit pension plans for our U.K.-based union employees (the "U.K. Plan") and certain Canadian-based employees (the "Canadian Plan") as well as a 401(k) plan for U.S.-based employees, which are described in Note 19 in our 2016 10-K. We recognized no material costs in 2017 and 2016 under these plans.

    
(13) Income Taxes
As of each reporting date, management considers new evidence, both positive and negative, that could affect its view of the future realization of deferred tax assets. Upon evaluation of all available evidence, and considering the projected U.S. pre-tax losses for 2017, a valuation allowance has been contemplated as a component of the estimated annual effective tax rate for 2017. The valuation allowance to be recorded during 2017 related to the U.S. federal tax jurisdiction is incremental to the valuation allowance recorded as of December 31, 2016. The Company maintained other valuation allowances for certain non-U.S. jurisdictions with cumulative losses.
The effective income tax rates for the three months ended March 31, 2017 and 2016 were (19.9)% and 17.2% , respectively , and were determined using an estimated annual effective tax rate after considering any discrete items for such periods. The change in the effective tax rates relates primarily to an increase in the valuation allowance recorded against net deferred tax assets in the U.S. federal tax jurisdiction for the three months ended March 31, 2017. The effective income tax rate for the three months ended March 31, 2017 reflects an overall tax expense due to the application of a full valuation allowance against the U.S. pre-tax losses coupled with a tax expense on foreign pre-tax earnings. In the three months ended March 31, 2016, we have an overall tax benefit as the valuation allowance recorded during the period was only applicable to a portion of the U.S. pre-tax losses.
    



20

(14) Litigation
The Company is involved in various routine and other specific legal proceedings, including the following which are described in Note 22 within our 2016 10-K: Colombia litigation, SNAI litigation, Oregon State Lottery matter and Shuffle Tech matter . There have been no material changes to these matters since the 2016 10-K was filed with the SEC, except as described below.
We record an accrual for legal contingencies when it is both probable that a liability has been incurred and the amount or range of the loss can be reasonably estimated (although, as discussed below, there may be an exposure to loss in excess of the accrued liability). We evaluate our accruals for legal contingencies at least quarterly and, as appropriate, establish new accruals or adjust existing accruals to reflect (1) the facts and circumstances known to us at the time, including information regarding negotiations, settlements, rulings and other relevant events and developments, (2) the advice and analyses of counsel and (3) the assumptions and judgment of management. Legal costs associated with our legal proceedings are expensed as incurred. We had accrued liabilities of $4.8 million and $7.7 million for all of our legal matters that were contingencies as of March 31, 2017 and December 31, 2016, respectively.
Substantially all of our legal contingencies are subject to significant uncertainties and, therefore, determining the likelihood of a loss and/or the measurement of any loss involves a series of complex judgments about future events. Consequently, the ultimate outcomes of our legal contingencies could result in losses in excess of amounts we have accrued. We may be unable to estimate a range of possible losses for some matters pending against the Company or its subsidiaries, even when the amount of damages claimed against the Company or its subsidiaries is stated because, among other things: (1) the claimed amount may be exaggerated or unsupported; (2) the claim may be based on a novel legal theory or involve a large number of parties; (3) there may be uncertainty as to the likelihood of a class being certified or the ultimate size of the class; (4) there may be uncertainty as to the outcome of pending appeals or motions; (5) the matter may not have progressed sufficiently through discovery or there may be significant factual or legal issues to be resolved or developed; and/or (6) there may be uncertainty as to the enforceability of legal judgments and outcomes in certain jurisdictions. Other matters have progressed sufficiently that we are able to estimate a range of possible loss. For those legal contingencies disclosed below and in Note 22 in our 2016 10-K, as well as those related to the previously disclosed settlement agreement entered into in February 2015 with SNAI S.p.a., as to which a loss is reasonably possible, whether in excess of a related accrued liability or where there is no accrued liability, and for which we are able to estimate a range of possible loss, the current estimated range is up to approximately $13.0 million in excess of the accrued liabilities (if any) related to those legal contingencies. This aggregate range represents management’s estimate of additional possible loss in excess of the accrued liabilities (if any) with respect to these matters based on currently available information, including any damages claimed by the plaintiffs, and is subject to significant judgment and a variety of assumptions and inherent uncertainties. For example, at the time of making an estimate, management may have only preliminary, incomplete, or inaccurate information about the facts underlying a claim; its assumptions about the future rulings of the court or other tribunal on significant issues, or the behavior and incentives of adverse parties, regulators, indemnitors or co‑defendants, may prove to be wrong; and the outcomes it is attempting to predict are often not amenable to the use of statistical or other quantitative analytical tools. In addition, from time to time an outcome may occur that management had not accounted for in its estimate because it had considered that outcome to be remote. Furthermore, as noted above, the aggregate range does not include any matters for which the Company is not able to estimate a range of possible loss. Accordingly, the estimated aggregate range of possible loss does not represent our maximum loss exposure. Any such losses could have a material adverse impact on our results of operations, cash flows or financial condition. The legal proceedings underlying the estimated range will change from time to time, and actual results may vary significantly from the current estimate.
Shuffle Tech update
On March 24, 2017, SGC, Bally Technologies, Inc. and Bally Gaming, Inc. filed a motion for summary judgment in their favor on all claims asserted by the plaintiffs in the lawsuit. We intend to continue to vigorously defend against the claims asserted in the lawsuit.
For additional information regarding our pending litigation matters, see Note 22 in our 2016 10-K.
(15) Subsequent Events
Subsequent to March 31, 2017, we entered into a settlement and seven -year patent cross-license agreement with another party that resolved outstanding intellectual property matters between the two companies. As part of this agreement, we received a $20.0 million advance royalty payment.
On April 7, 2017, we completed the acquisition of privately held mobile and social game company Spicerack Media, Inc., acquiring all of the issued and outstanding capital stock for approximately $25.0 million in cash with the potential for


21

additional contingent consideration. We expect that a substantial portion of the purchase price will be allocated to acquired intellectual property and customer list.


(16) Financial Information for Guarantor Subsidiaries and Non-Guarantor Subsidiaries
We conduct substantially all of our business through our U.S. and foreign subsidiaries. As of March 31, 2017, SGI's obligations under the 2020 Notes, the 2021 Notes, the Secured Notes and the Unsecured Notes were fully and unconditionally and jointly and severally guaranteed by SGC and the Guarantor Subsidiaries other than SGI. We redeemed all of the outstanding 2018 Notes on March 17, 2017, but they were previously issued by SGC and fully and unconditionally and jointly and severally guaranteed by the Guarantor Subsidiaries. The guarantees of our 2020 Notes, 2021 Notes, Secured Notes and Unsecured Notes will terminate under the following customary circumstances: (1) the sale or disposition of the capital stock of the guarantor (including by consolidation or merger of the guarantor into another person); (2) the liquidation or dissolution of the guarantor; (3) the defeasance or satisfaction and discharge of the notes; (4) the release of the guarantor from any guarantees of indebtedness of SGC and SGI; and (5) the proper designation of the guarantor as an unrestricted subsidiary pursuant to the indenture governing the respective Notes. The guarantees of our 2018 Notes were released in connection with the redemption of the 2018 Notes.

During the third quarter of 2016, we designated certain of our wholly owned direct and indirect subsidiaries that hold substantially all of the assets of, and operate, our social gaming business, as “Unrestricted Subsidiaries” under our credit agreement and each of the indentures governing the 2018 Notes, 2020 Notes, 2021 Notes, Secured Notes and Unsecured Notes. As a result of these designations, our 100%-owned social gaming subsidiaries are no longer guarantors under our credit agreement and indentures. Therefore, the historical condensed consolidating financial information presented has been reclassified to show the nature of assets held, results of operations and cash flows assuming the "Unrestricted Subsidiary" designations were in effect at the beginning of all periods presented, consistent with their status as non-guarantors as of March 31, 2017. The affected subsidiaries are no longer allocated interest in this condensed consolidating financial information due to their present status as non-guarantors. Accordingly, for all periods presented, we no longer present an allocation of interest to any entities, including the Unrestricted Subsidiaries, other than the legal entity issuer of the associated debt.

Presented below is condensed consolidating financial information for (1) SGC, (2) SGI, (3) the Guarantor Subsidiaries and (4) the Non-Guarantor Subsidiaries as of March 31, 2017 and December 31, 2016 and for the three months ended March 31, 2017 and 2016. The condensed consolidating financial information has been presented to show the nature of assets held, results of operations and cash flows of SGC, SGI, the Guarantor Subsidiaries and the Non-Guarantor Subsidiaries assuming the current guarantee structures of the 2018 Notes, the 2020 Notes, the 2021 Notes, the Secured Notes and the Unsecured Notes were in effect at the beginning of the periods presented. 
     The condensed consolidating financial information reflects the investments of SGC in SGI and in the Guarantor Subsidiaries and Non-Guarantor Subsidiaries using the equity method of accounting. They also reflect the investments of the Guarantor Subsidiaries in the Non-Guarantor Subsidiaries. Net changes in intercompany due from/due to accounts are reported in the accompanying Supplemental Condensed Consolidating Statements of Cash Flows as investing activities if the applicable entities have a net investment (asset) in intercompany accounts and as a financing activity if the applicable entities have a net intercompany borrowing (liability) balance.         
            


22


SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
As of March 31, 2017
 
 
SGC (Parent and Issuer 1 )
 
SGI (Issuer 2 )
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminating
Entries
 
Consolidated
Assets
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
37.8

 
$
1.0

 
$
—

 
$
98.7

 
$
(5.6
)
 
$
131.9

Restricted cash
 
—

 
—

 
27.0

 
0.1

 
—

 
27.1

Accounts receivable, net
 
—

 
51.9

 
202.5

 
209.1

 
—

 
463.5

Notes receivable, net
 
—

 
—

 
103.6

 
27.4

 
—

 
131.0

Inventories
 
—

 
39.9

 
88.3

 
141.4

 
(16.1
)
 
253.5

Prepaid expenses, deposits and other current assets
 
5.3

 
20.7

 
48.4

 
38.8

 
—

 
113.2

Property and equipment, net
 
7.3

 
93.7

 
347.0

 
156.6

 
(19.9
)
 
584.7

Investment in subsidiaries
 
3,045.4

 
941.0

 
1,022.4

 
—

 
(5,008.8
)
 
—

Goodwill
 
—

 
188.3

 
1,932.4

 
785.4

 
—

 
2,906.1

Intangible assets, net
 
196.0

 
37.3

 
1,323.2

 
205.4

 
—

 
1,761.9

Intercompany balances
 
—

 
5,594.2

 
—

 
213.3

 
(5,807.5
)
 
—

Software, net
 
77.6

 
20.2

 
248.4

 
49.3

 
—

 
395.5

Other assets (3)
 
233.6

 
281.0

 
57.1

 
178.0

 
(444.9
)
 
304.8

Total assets
 
$
3,603.0

 
$
7,269.2

 
$
5,400.3

 
$
2,103.5

 
$
(11,302.8
)
 
$
7,073.2

Liabilities and stockholders' (deficit) equity
 
 
 
 
 
 
 
 
 
 
 
 
Current portion of long-term debt
 
$
—

 
$
32.9

 
$
—

 
$
6.4

 
$
—

 
$
39.3

Other current liabilities
 
98.9

 
198.1

 
200.0

 
156.4

 
(7.2
)
 
646.2

Long-term debt, excluding current portion
 
—

 
8,061.0

 
—

 
7.4

 
—

 
8,068.4

Other long-term liabilities
 
189.1

 
9.0

 
487.7

 
71.9

 
(443.2
)
 
314.5

Intercompany balances
 
5,310.2

 
—

 
497.3

 
—

 
(5,807.5
)
 
—

Stockholders' (deficit) equity
 
(1,995.2
)
 
(1,031.8
)
 
4,215.3

 
1,861.4

 
(5,044.9
)
 
(1,995.2
)
Total liabilities and stockholders' (deficit) equity
 
$
3,603.0

 
$
7,269.2

 
$
5,400.3

 
$
2,103.5

 
$
(11,302.8
)
 
$
7,073.2


1 - Issuer of obligations under the 2018 Notes, which were redeemed on March 17, 2017.  
2 - Issuer of obligations under the 2020 Notes, the 2021 Notes, the Secured Notes and the Unsecured Notes.  
3 - Includes $16.1 million and $0.7 million in non-current restricted cash for Guarantor Subsidiaries and Non-Guarantor Subsidiaries, respectively.  


23

SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
As of December 31, 2016
 
 
SGC (Parent and Issuer 1 )
 
SGI (Issuer 2 )
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminating
Entries
 
Consolidated
Assets
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
32.7

 
$
1.7

 
$
—

 
$
81.8

 
$
(1.1
)
 
$
115.1

Restricted cash
 
—

 
—

 
24.6

 
0.1

 
—

 
24.7

Accounts receivable, net
 
—

 
61.4

 
199.2

 
234.4

 
—

 
495.0

Notes receivable, net
 
—

 
—

 
94.4

 
31.0

 
—

 
125.4

Inventories
 
—

 
40.3

 
83.1

 
138.1

 
(19.2
)
 
242.3

Prepaid expenses, deposits and other current assets
 
11.6

 
15.7

 
45.6

 
41.2

 
—

 
114.1

Property and equipment, net
 
5.6

 
98.4

 
369.3

 
154.9

 
(16.0
)
 
612.2

Investment in subsidiaries
 
3,000.7

 
926.7

 
944.0

 
—

 
(4,871.4
)
 
—

Goodwill
 
—

 
188.3

 
1,931.6

 
768.5

 
—

 
2,888.4

Intangible assets, net
 
185.8

 
37.5

 
1,343.0

 
202.0

 
—

 
1,768.3

Intercompany balances
 
—

 
5,415.1

 
—

 
116.6

 
(5,531.7
)
 
—

Software, net
 
74.7

 
21.4

 
264.6

 
48.4

 
—

 
409.1

Other assets (3)
 
233.6

 
236.5

 
50.8

 
173.5

 
(401.6
)
 
292.8

Total assets
 
$
3,544.7

 
$
7,043.0

 
$
5,350.2

 
$
1,990.5

 
$
(10,841.0
)
 
$
7,087.4

Liabilities and stockholders' (deficit) equity
 
 
 
 
 
 
 
 
 
 
 
 
Current portion of long-term debt
 
$
—

 
$
43.0

 
$
—

 
$
6.3

 
$
—

 
$
49.3

Other current liabilities
 
100.5

 
158.7

 
216.3

 
168.7

 
(1.1
)
 
643.1

Long-term debt, excluding current portion
 
248.7

 
7,767.3

 
—

 
8.9

 
—

 
8,024.9

Other long-term liabilities
 
159.0

 
12.4

 
468.8

 
67.2

 
(401.6
)
 
305.8

Intercompany balances
 
4,972.2

 
—

 
559.5

 
—

 
(5,531.7
)
 
—

Stockholders' (deficit) equity
 
(1,935.7
)
 
(938.4
)
 
4,105.6

 
1,739.4

 
(4,906.6
)
 
(1,935.7
)
Total liabilities and stockholders' (deficit) equity
 
$
3,544.7

 
$
7,043.0

 
$
5,350.2

 
$
1,990.5

 
$
(10,841.0
)
 
$
7,087.4


1 - Issuer of obligations under the 2018 Notes, which were redeemed on March 17, 2017.  
2 - Issuer of obligations under the 2020 Notes, the 2021 Notes, the Secured Notes and the Unsecured Notes.  
3 - Includes $16.4 million and $0.7 million in non-current restricted cash for Guarantor Subsidiaries and Non-Guarantor Subsidiaries, respectively.  






24

SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF
OPERATIONS AND COMPREHENSIVE LOSS
Three Months Ended March 31, 2017
 
 
SGC (Parent and Issuer 1 )
 
SGI (Issuer 2 )
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminating
Entries
 
Consolidated
Revenue
 
$
—

 
$
118.0

 
$
399.8

 
$
264.6

 
$
(57.0
)
 
$
725.4

Cost of services, cost of product sales and cost of instant games (3)
 
—

 
82.9

 
123.7

 
121.8

 
(48.4
)
 
280.0

Selling, general and administrative
 
29.7

 
9.5

 
48.8

 
62.4

 
(9.7
)
 
140.7

Research and development
 
0.5

 
1.4

 
34.2

 
6.3

 
—

 
42.4

Depreciation, amortization and impairments
 
20.3

 
7.5

 
111.9

 
27.8

 
(2.4
)
 
165.1

Restructuring and other
 
3.8

 
0.2

 
4.2

 
1.0

 
—

 
9.2

Operating (loss) income
 
(54.3
)
 
16.5

 
77.0

 
45.3

 
3.5

 
88.0

Interest expense
 
(4.5
)
 
(154.6
)
 
—

 
(0.3
)
 
—

 
(159.4
)
Loss on early extinguishment of debt
 
(1.1
)
 
(28.6
)
 
—

 
—

 
—

 
(29.7
)
Other (expense) income, net
 
(20.8
)
 
50.7

 
(25.5
)
 
12.6

 
—

 
17.0

Net (loss) income before equity in income of subsidiaries and income taxes
 
(80.7
)
 
(116.0
)
 
51.5

 
57.6

 
3.5

 
(84.1
)
Equity in income of subsidiaries
 
4.7

 
17.3

 
15.4

 
—

 
(37.4
)
 
—

Income tax (expense) benefit
 
(24.8
)
 
43.4

 
(20.6
)
 
(14.7
)
 
—

 
(16.7
)
Net (loss) income
 
$
(100.8
)
 
$
(55.3
)
 
$
46.3

 
$
42.9

 
$
(33.9
)
 
$
(100.8
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Other comprehensive income
 
36.1

 
4.0

 
21.5

 
29.5

 
(55.0
)
 
36.1

Comprehensive (loss) income
 
$
(64.7
)
 
$
(51.3
)
 
$
67.8

 
$
72.4

 
$
(88.9
)
 
$
(64.7
)

1 - Issuer of obligations under the 2018 Notes, which were redeemed on March 17, 2017.  
2 - Issuer of obligations under the 2020 Notes, the 2021 Notes, the Secured Notes and the Unsecured Notes.  
3 - Exclusive of D&A.  
 


25

SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF
OPERATIONS AND COMPREHENSIVE LOSS
Three Months Ended March 31, 2016
 
 
SGC (Parent and Issuer 1 )
 
SGI (Issuer 2 )
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminating
Entries
 
Consolidated
Revenue
 
$
—

 
$
115.3

 
$
361.5

 
$
264.4

 
$
(59.2
)
 
$
682.0

Cost of services, cost of product sales and cost of instant games (3)
 
—

 
82.9

 
96.7

 
135.9

 
(59.2
)
 
256.3

Selling, general and administrative
 
24.0

 
11.3

 
53.5

 
53.5

 
—

 
142.3

Research and development
 
0.9

 
2.3

 
35.9

 
10.7

 
—

 
49.8

Depreciation, amortization and impairments
 
12.8

 
10.7

 
126.2

 
30.9

 
—

 
180.6

Restructuring and other
 
—

 
—

 
0.8

 
1.9

 
—

 
2.7

Operating (loss) income
 
(37.7
)
 
8.1

 
48.4

 
31.5

 
—

 
50.3

Interest (expense) income
 
(5.3
)
 
(160.5
)
 
—

 
0.1

 
—

 
(165.7
)
Other (expense) income, net
 
(25.6
)
 
50.3

 
(23.1
)
 
2.3

 
—

 
3.9

Net (loss) income before equity in (loss) income of subsidiaries and income taxes
 
(68.6
)
 
(102.1
)
 
25.3

 
33.9

 
—

 
(111.5
)
Equity in (loss) income of subsidiaries
 
(45.9
)
 
18.9

 
20.9

 
—

 
6.1

 
—

Income tax benefit (expense)
 
22.2

 
—

 
—

 
(3.0
)
 
—

 
19.2

Net (loss) income
 
$
(92.3
)
 
$
(83.2
)
 
$
46.2

 
$
30.9

 
$
6.1

 
$
(92.3
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Other comprehensive (loss) income
 
(2.4
)
 
(0.3
)
 
1.9

 
2.8

 
(4.4
)
 
(2.4
)
Comprehensive (loss) income
 
$
(94.7
)
 
$
(83.5
)
 
$
48.1

 
$
33.7

 
$
1.7

 
$
(94.7
)

1 - Issuer of obligations under the 2018 Notes, which were redeemed on March 17, 2017.  
2 - Issuer of obligations under the 2020 Notes, the 2021 Notes, the Secured Notes and the Unsecured Notes.  
3 - Exclusive of D&A.  



















 
 
 
 
 
 
 
 
 
 
 
 
 




 
 
 
 
 
 
 
 
 
 
 
 
 


26

SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Three Months Ended March 31, 2017
 
 
SGC (Parent and Issuer 1 )
 
SGI (Issuer 2 )
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminating
Entries
 
Consolidated
Net cash (used in) provided by operating activities
 
$
(62.2
)
 
$
(20.9
)
 
$
104.3

 
$
94.3

 
$
(4.5
)
 
$
111.0

Cash flows from investing activities:
 
 

 
 

 
 

 
 

 
 

 
 
Capital expenditures
 
(9.3
)
 
(4.7
)
 
(26.2
)
 
(21.1
)
 
—

 
(61.3
)
Acquisition of business, net of cash acquired
 
—

 
—

 
(21.5
)
 
—

 
—

 
(21.5
)
Distributions of capital from equity investments
 
—

 
—

 
—

 
1.3

 
—

 
1.3

Changes in other assets and liabilities and other
 
—

 
—

 
—

 
2.0

 
—

 
2.0

Other, principally change in intercompany investing activities
 
—

 
(221.9
)
 
—

 
(60.6
)
 
282.5

 
—

Net cash used in investing activities
 
(9.3
)
 
(226.6
)
 
(47.7
)
 
(78.4
)
 
282.5

 
(79.5
)
Cash flows from financing activities:
 
 
 
 
 
 
 
 
 
 
 
 
Net payments of long-term debt including proceeds and repurchases of senior notes and term loans
 
(250.0
)
 
274.0

 
—

 
(1.5
)
 
—

 
22.5

Payments of debt issuance and deferred financing costs
 
—

 
(27.2
)
 
—

 
—

 
—

 
(27.2
)
Payments on license obligations
 
(9.2
)
 
—

 
(0.6
)
 
—

 
—

 
(9.8
)
Net redemptions of common stock under stock-based compensation plans
 
(0.6
)
 
—

 
—

 
—

 
—

 
(0.6
)
Other, principally change in intercompany financing activities
 
336.4

 
—

 
(53.9
)
 
—

 
(282.5
)
 
—

Net cash provided by (used in) financing activities
 
76.6

 
246.8

 
(54.5
)
 
(1.5
)
 
(282.5
)
 
(15.1
)
Effect of exchange rate changes on cash, cash equivalents and restricted cash
 
—

 
—

 
—

 
2.5

 
—

 
2.5

Increase (decrease) in cash, cash equivalents and restricted cash
 
5.1

 
(0.7
)
 
2.1

 
16.9

 
(4.5
)
 
18.9

Cash, cash equivalents and restricted cash, beginning of period
 
32.7

 
1.7

 
41.0

 
82.6

 
(1.1
)
 
156.9

Cash, cash equivalents and restricted cash end of period
 
$
37.8

 
$
1.0

 
$
43.1

 
$
99.5

 
$
(5.6
)
 
$
175.8


1 - Issuer of obligations under the 2018 Notes, which were redeemed on March 17, 2017.  
2 - Issuer of obligations under the 2020 Notes, the 2021 Notes, the Secured Notes and the Unsecured Notes.  


   


27

SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Three Months Ended March 31, 2016
 
 
SGC (Parent and Issuer 1 )
 
SGI (Issuer 2 )
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminating
Entries
 
Consolidated
Net cash (used in) provided by operating activities
 
$
(75.2
)
 
$
(36.9
)
 
$
176.0

 
$
38.0

 
$
(0.8
)
 
$
101.1

Cash flows from investing activities:
 
 
 
 
 
 
 
 
 
 
 
 
Capital expenditures
 
(5.8
)
 
(2.7
)
 
(35.5
)
 
(7.2
)
 
—

 
(51.2
)
Distributions of capital from equity investments
 
—

 
—

 
—

 
1.5

 
—

 
1.5

Changes in other assets and liabilities and other
 
—

 
—

 
1.6

 
(0.1
)
 
—

 
1.5

Other, principally change in intercompany investing activities
 
—

 
65.4

 
—

 
—

 
(65.4
)
 
—

Net cash (used in) provided by investing activities
 
(5.8
)
 
62.7

 
(33.9
)
 
(5.8
)
 
(65.4
)
 
(48.2
)
Cash flows from financing activities:
 
 
 
 
 
 
 
 
 
 
 


Net payments on long-term debt
 
—

 
(25.8
)
 
—

 
(1.7
)
 
—

 
(27.5
)
Payments on license obligations
 
(8.4
)
 
—

 
(1.2
)
 
—

 
—

 
(9.6
)
Other, principally change in intercompany financing activities
 
108.0

 
—

 
(140.8
)
 
(32.6
)
 
65.4

 
—

Net cash provided by (used in) financing activities
 
99.6

 
(25.8
)
 
(142.0
)
 
(34.3
)
 
65.4

 
(37.1
)
Effect of exchange rate changes on cash, cash equivalents and restricted cash
 
—

 
0.1

 
—

 
1.7

 
—

 
1.8

Increase (decrease) in cash, cash equivalents and restricted cash
 
18.6

 
0.1

 
0.1

 
(0.4
)
 
(0.8
)
 
17.6

Cash, cash equivalents and restricted cash, beginning of period
 
43.2

 
—

 
37.7

 
85.9

 
—

 
166.8

Cash, cash equivalents and restricted cash, end of period
 
$
61.8

 
$
0.1

 
$
37.8

 
$
85.5

 
$
(0.8
)
 
$
184.4


1 - Issuer of obligations under the 2018 Notes, which were redeemed on March 17, 2017.  
2 - Issuer of obligations under the 2020 Notes, the 2021 Notes, the Secured Notes and the Unsecured Notes.  






28

Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion is intended to enhance the reader's understanding of our operations and current business environment and should be read in conjunction with the description of our business included under Item 1 "Financial Statements" in this Quarterly Report on Form 10-Q and Item 1 "Business," Item 1A "Risk Factors" and Item 7 "Management’s Discussion and Analysis of Financial Condition and Results of Operations" included in our 2016 10-K.
This "Management's Discussion and Analysis of Financial Condition and Results of Operations" ("MD&A") contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and should be read in conjunction with the disclosures and information contained and referenced under "Forward-Looking Statements" in this Quarterly Report on Form 10-Q and "Risk Factors" included in our 2016 10-K. As used in this MD&A, the terms "we," "us," "our" and the "Company" mean SGC together with its consolidated subsidiaries.

BUSINESS OVERVIEW
We are a leading developer of technology‑based products and services and associated content for the worldwide gaming, lottery and interactive gaming industries. Our portfolio includes gaming machines and game content, casino management systems, table game products and services, instant and draw‑based lottery games, lottery systems, lottery content and services, interactive gaming and social casino solutions as well as other products and services. We also gain access to technologies and pursue global expansion through strategic acquisitions and equity investments.
Current Events
•
Successfully completed a series of refinancing transactions, including a private offering of $1.15 billion in aggregate principal amount of 7.000% senior secured notes due 2022 and an amendment to our credit agreement that extended the maturity of our term loans and revolving credit facility, and reduced the applicable interest rate on the term loans. These actions reduced the total principal value of our debt by $45.0 million, including payment of the remaining $45.0 million on our revolving credit facility, lowered our annual cash interest cost, extended the maturity to 2021 and 2022 for approximately 95 percent of our debt and significantly reduced our exposure to floating interest rates.
•
Voluntarily redeemed and cancelled all $250.0 million aggregate principal amount of our outstanding 2018 Notes.

•
Largely completed the new business improvement initiative (announced on November 3, 2016), which we expect will streamline our organization, increase our efficiencies and significantly reduce our operating costs once the initiative is fully implemented.

•
Successfully completed the acquisition of DEQ Systems Corp.

•
Subsequent to March 31, 2017, we completed the acquisition of Spicerack Media, Inc., a privately held mobile and social game company which will allow us to incorporate the successful Bingo Showdown social bingo mobile gaming app into our portfolio of games.

Segments
We report our operations in three business segments — Gaming, Lottery and Interactive — representing our different products and services. See " — Business Segments Results" below and Note 2 for additional business segment information.
Foreign Exchange
Our results are impacted by changes in foreign currency exchange rates used in the translation of foreign functional currencies into USD and the re-measurement of foreign currency transactions or balances. The impact of foreign currency exchange rate fluctuations represents the difference between current rates and prior-period rates applied to current activity. Our exposure to foreign currency volatility on revenue is as follows:


29

 
Three Months Ended
March 31,
 
2017
 
2016
(in millions)
Revenue
% Consolidated Revenue
 
Revenue
% Consolidated Revenue
Foreign Currency:
 
 
 
 
 
British Pound Sterling
$
51.4

7.1
%
 
$
55.1

8.1
%
Euro
33.1

4.6
%
 
26.5

3.9
%
Australian Dollar
23.9

3.3
%
 
17.5

2.6
%
We also have foreign currency exposure related to certain of our equity investments. See "Risk Factors" under Item 1A and "Consolidated Results — Other Factors Affecting 2016 Net Loss — Foreign exchange" under Item 7 in our 2016 Form 10-K. Foreign currency had a negative $8.1 million impact on revenue for the three months ended March 31, 2017.




30

CONSOLIDATED RESULTS
 
 
Three Months Ended 
 March 31,
 
Variance
(in millions)
 
2017
 
2016
 
2017 vs. 2016
Total revenue
 
$
725.4

 
$
682.0

 
$
43.4

 
6.4
 %
Total operating expenses
 
637.4

 
631.7

 
5.7

 
0.9
 %
Operating income
 
88.0

 
50.3

 
37.7

 
75.0
 %
Net loss before income taxes
 
(84.1
)
 
(111.5
)
 
27.4

 
(24.6
)%
Net loss
 
$
(100.8
)
 
$
(92.3
)
 
$
(8.5
)
 
9.2
 %

Three Months Ended March 31, 2017 Compared to Three Months Ended March 31, 2016     
Revenue
 
 
Three Months Ended March 31,
 
Variance
(in millions)
 
2017
 
2016
 
2017 vs. 2016
Gaming
 
$
440.0

 
$
421.7

 
$
18.3

 
4.3
%
Lottery
 
189.1

 
187.7

 
1.4

 
0.7
%
Interactive
 
96.3

 
72.6

 
23.7

 
32.6
%
Total revenue
 
$
725.4

 
$
682.0

 
$
43.4

 
6.4
%

Gaming revenue increased compared to the prior-year period primarily due to higher unit sales of gaming machines and table products, which was partially offset by a decrease in WAP and premium game service revenue. The Gaming revenue increase included the unfavorable foreign currency impact of $5.1 million in the three months ended March 31, 2017.
Lottery revenue slightly increased compared to the prior-year period primarily due to increased instant products revenue which was partially offset by a decrease in lottery systems revenue, including lower retail sales of multi-state games due to the record POWERBALL jackpot in the prior-year period. The Lottery revenue increase included the unfavorable foreign currency impact of $2.0 million.
Interactive revenue increased compared to the prior-year period primarily due to growth in our social gaming business, reflecting the ongoing popularity of Jackpot Party® Social Casino and the success of our recently launched Quick Hit® Slots and Hot Shot® Social Casino social gaming apps.
Operating expenses


31

 
Three Months Ended 
 March 31,
 
Variance
(in millions)
2017
 
2016
 
2017 vs. 2016
Operating expenses:
 
 
 
 
 
 
 
Cost of services
$
103.3

 
$
94.9

 
$
8.4

 
8.9
 %
Cost of product sales
106.6

 
94.4

 
12.2

 
12.9
 %
Cost of instant games
70.1

 
67.0

 
3.1

 
4.6
 %
Selling, general and administrative
140.7

 
142.3

 
(1.6
)
 
(1.1
)%
Research and development
42.4

 
49.8

 
(7.4
)
 
(14.9
)%
Depreciation, amortization and impairments
165.1

 
180.6

 
(15.5
)
 
(8.6
)%
Restructuring and other
9.2

 
2.7

 
6.5

 
240.7
 %
Total operating expenses
$
637.4

 
$
631.7

 
$
5.7

 
0.9
 %
Cost of revenue
Total cost of revenue for the three-month period increased compared to the prior-year period primarily due to: (1) a $12.0 million increase in the cost of Interactive services primarily related to platform fees associated with the $20.0 million increase in Interactive social gaming revenue; and (2) a $11.5 million increase in the cost of Gaming machine unit sales primarily related to the increase in units sold.
R&D
Research and development for the three-month period decreased compared to the prior-year period primarily driven by reduced spending on outside resources for certain projects which were nearing completion during the quarter and headcount reduction initiatives completed subsequent to the first quarter of 2016.
D&A     
The decrease in D&A for the three-month period as compared to the prior-year period was primarily due to certain acquired intangible assets becoming fully depreciated in the third quarter of 2016, as well as Lottery systems equipment also becoming fully depreciated during 2016.
Other Factors Affecting Net Loss
Loss on extinguishment and modification of debt
During the first quarter of 2017, we completed a series of refinancing transactions, including the redemption of $250.0 million of outstanding 2018 Notes, which resulted in $29.7 million in loss on extinguishment and modification of debt. For additional information regarding these transactions including components of the expense, see Note 10.

Income tax (expense) benefit

               We recorded an income tax expense of $16.7 million for the three months ended March 31, 2017, compared to an income tax benefit of $19.2 million for the three months ended March 31, 2016. The effective income tax rates for the three months ended March 31, 2017 and 2016 were (19.9)% and 17.2%, respectively, and were determined using an estimated annual effective tax rate after considering any discrete items for such periods. For additional information regarding the changes in our effective tax rates and the variance in our income tax benefit, see Note 13.

See " — Business Segments Results" below for a more detailed explanation of the significant changes in our components of revenue within the individual segment results of operations.

BUSINESS SEGMENTS RESULTS



32

GAMING
Our Gaming business segment designs, develops, manufactures, markets and distributes a comprehensive portfolio of gaming products and services. We provide our Gaming portfolio of products and services to commercial casinos, Native American casinos, wide-area gaming operators such as LBOs, arcade and bingo operators in the U.K. and continental Europe, and government agencies and their affiliated operators. Our equity investments in RCN and ITL are part of our Gaming business segment.
We generate Gaming revenue from both services and product sales. Our services revenue includes revenue earned from WAP, premium and daily-fee Participation gaming machines, other leased gaming machines (including VLTs and electronic table games), leased table products and services (including Shufflers), casino management technology solutions and systems, PTG licensing and other services revenues. Our product sales revenue includes the sale of new and used gaming machines, electronic table games, VLTs and VGTs, casino-management technology solutions and systems, table products, conversion kits (including game, hardware or operating system conversions) and spare parts. For additional information, refer to the Gaming primary business activities summary included within Item 7 of our 2016 10-K.

Current Year Update
    
For 2017, we expect to continue to face pricing pressure in our Gaming segment. We anticipate that replacement demand for gaming machines and constraints on capital spending by gaming operators will continue at current levels and that demand for gaming machines will continue to be negatively impacted by the continued consolidation of casino and other gaming operators. We anticipate that demand for our gaming systems products and services will continue at current levels due to fewer large, multi-site installation opportunities, system replacements and new casino anticipated openings throughout 2017. We believe that our installed base of WAP, premium and daily-fee Participation gaming machines has stabilized, benefiting from the release of a number of new games, including the launch of our new GameScape™ cabinet in the third quarter of 2016. The GameScape cabinet, a dedicated Participation platform, features a player-favorite branded WILLY WONKA WORLD OF WONKA™ game.

Results of Operations and Key Performance Indicators for Gaming
 
 
Three Months Ended 
 March 31,
 
Variance
(in millions)
 
2017
 
2016
 
2017 vs. 2016
Total revenue
 
$
440.0

 
$
421.7

 
$
18.3

 
4.3
 %
Total operating expenses
 
362.5

 
378.3

 
(15.8
)
 
(4.2
)%
Operating income
 
$
77.5

 
$
43.4

 
$
34.1

 
78.6
 %

Three Months Ended March 31, 2017 Compared to Three Months Ended March 31, 2016     
Revenue


33

 
 
Three Months Ended 
 March 31,
 
Variance
(in millions)
 
2017
 
2016
 
2017 vs. 2016
Revenue:
 
 
 
 
 
 
 
 
Gaming operations
 
$
172.4

 
$
184.4

 
$
(12.0
)
 
(6.5
)%
Gaming machine sales
 
156.2

 
134.5

 
21.7

 
16.1
 %
Gaming systems
 
61.5

 
59.7

 
1.8

 
3.0
 %
Table products
 
49.9

 
43.1

 
6.8

 
15.8
 %
Total revenue
 
$
440.0

 
$
421.7

 
$
18.3

 
4.3
 %
 
 
 
 
 
 
 
 
 
F/X impact on revenue
 
$
(5.1
)
 
$
(4.0
)
 


 


 
 
 
 
 
 
 
 
 
KPIs:
 
 
 
 
 
 
 
 
WAP, premium and daily-fee Participation units:
 
 
 
 
 
 
 
 
Installed base at period end
 
21,143

 
21,975

 
(832
)
 
(3.8
)%
Average daily revenue per unit
 
$
51.22

 
$
52.94

 
$
(1.72
)
 
(3.2
)%
 
 
 
 
 
 
 
 
 
Other Participation and leased units:
 
 
 
 
 
 
 
 
Installed base at period end
 
47,454

 
48,086

 
(632
)
 
(1.3
)%
Average daily revenue per unit
 
$
14.96

 
$
15.38

 
$
(0.42
)
 
(2.7
)%
 
 
 
 
 
 
 
 
 
Gaming machine unit sales:
 
 
 
 
 
 
 
 
U.S. and Canadian new unit shipments
 
5,862

 
4,365

 
1,497

 
34.3
 %
International new unit shipments
 
2,497

 
2,383

 
114

 
4.8
 %
   Total new unit shipments
 
8,359

 
6,748

 
1,611

 
23.9
 %
Average sales price per new unit
 
$
17,015

 
$
16,719

 
$
296

 
1.8
 %

Gaming Operations
Gaming operations revenue decreased as compared to the prior-year period primarily due to: (1) an 832-unit decrease in the installed base of WAP, premium and daily-fee Participation gaming machines; and (2) a $1.72 decrease in the average daily revenue per WAP, premium and daily-fee Participation units.    
Gaming Machine Sales

Gaming machine unit sales increased compared to the prior-year period due to higher new unit shipments primarily resulting from sales of the Pro Series WAVE and TwinStar® cabinets.
U.S. and Canadian shipments for the three months ended March 31, 2017 increased 1,497 units to 5,862 units, including 3,139 replacement units, 250 VLTs to Oregon, and 2,723 units for new casino openings and expansions, including 861 Illinois VGT units. In the prior-year period, U.S. and Canadian shipments totaled 4,365 units that comprised 3,092 replacement units, 840 VLTs to Oregon, and 433 VGTs for the Illinois market. International shipments encompassed 2,073 replacement units and 424 units for new casino openings and expansions, driven by growth in Asia, Australia and South America from 2,383 units in the prior-year period. The average sales price increased to $17,015 per unit reflecting a greater mix of higher performing premium gaming machines sold during the period.    
Gaming Systems

Gaming systems sales slightly increased compared to the prior-year period primarily due to increased hardware sales related to new casino openings.
Table Products


34


Table products revenue increased compared to the prior-year period primarily due to increased Shuffler sales and the impact of the acquisition of DEQ Systems Corp., which closed in January 2017.

Operating income
The increase in operating income from the prior-year period was primarily attributable to the following: (1) a decrease in overall operating expenses primarily due to business improvement initiatives including lower SG&A expense of $9.0 million; (2) lower D&A of $18.2 million for the three months ended March 31, 2017; partially offset by (3) a less profitable revenue mix, which was due to an increase in lower-margin Gaming machine sales revenue combined with a decline in Gaming operations revenue.

LOTTERY

The Lottery segment is primarily comprised of our instant games business and our systems-based services and product sales business. Our instant games business generates revenue from the manufacture and sale of instant games, as well as the provision of value-added services such as game design, sales and marketing support, specialty games and promotions, inventory management, warehousing, fulfillment services, as well as full instant game category management. In addition, we provide licensed games, promotional entertainment and internet-based marketing services to the lottery industry. These revenues are presented as instant games revenue.
Our systems-based services and product sales business provides customized computer software, software support, equipment and data communication services, sports wagering systems and keno to lotteries. In the U.S., we typically provide the necessary point-of-sale terminals and equipment, software and maintenance services on a Participation basis under long-term contracts that typically have an initial term of at least five years. Internationally, we typically sell point-of-sale terminals and/or computer software to lottery authorities and may provide ongoing fee-based systems maintenance and software support services. Refer to the Lottery primary business activities summary included within Item 7 of our 2016 10-K.
Our equity investments in LNS, Northstar Illinois, Northstar New Jersey, CSG, Hellenic Lotteries and GLB are included in the Lottery segment.
Current Year Update
We believe we will continue to face intense price-based competition in our Lottery business in 2017. In the near term, we also expect to see an increase in the number of jurisdictions that seek to privatize or outsource lottery operations and to face strong competition from both traditional and new competitors with respect to these opportunities. In addition, we anticipate that lottery RFPs, specifically those for PMA arrangements and certain of our international customers, could increasingly include terms that expose us to increased risk, such as requiring the guarantee of specific income thresholds or significant upfront payments.

Results of Operations and Key Performance Indicators for Lottery
 
 
Three Months Ended 
 March 31,
 
Variance
(in millions)
 
2017
 
2016
 
2017 vs. 2016
Total revenue
 
$
189.1

 
$
187.7

 
$
1.4

 
0.7
 %
Total operating expenses
 
133.0

 
139.7

 
(6.7
)
 
(4.8
)%
Operating income
 
$
56.1

 
$
48.0

 
$
8.1

 
16.9
 %

Three Months Ended March 31, 2017 Compared to Three Months Ended March 31, 2016     
 
Revenue


35

 
 
Three Months Ended 
 March 31,
 
Variance
(in millions)
 
2017
 
2016
 
2017 vs. 2016
Revenue:
 
 
 
 
 
 
 
 
Instant products
 
$
141.7

 
$
137.3

 
$
4.4

 
3.2
 %
Lottery systems
 
47.4

 
50.4

 
(3.0
)
 
(6.0
)%
Total revenue
 
$
189.1

 
$
187.7

 
$
1.4

 
0.7
 %
 
 
 
 
 
 
 
 
 
F/X impact on revenue
 
$
(2.0
)
 
$
(3.0
)
 


 


 
 
 
 
 
 
 
 
 
KPIs:
 
 
 
 
 
 
 
 
Change in retail sales of U.S. lottery instant games customers (1)(2)
 
2.2
 %
 
8.2
%
 
(6.0)pp

 
nm

 
 
 
 
 
 
 
 
 
Change in retail sales of U.S. lottery systems contract customers (1)(3)
 
(12.9
)%
 
17.0
%
 
(29.9)pp

 
nm

 
 
 
 
 
 
 
 
 
Change in Italy retail sales of instant games (1)
 
(0.9
)%
 
2.3
%
 
3.2pp

 
nm

nm = not meaningful.
pp = percentage points.
(1) Information provided by third-party lottery operators.
(2) U.S. instant games customers' retail sales include only sales of instant games.
(3) U.S. lottery systems customers' retail sales primarily include sales of draw games, keno and instant games validated by the relevant system.
.
Primary factors affecting total Lottery revenue in the three months ended March 31, 2017 were: (1) continued strength in Participation and PPU contracts, which increased instant games revenue by $6.1 million; (2) an unfavorable foreign currency impact on revenue (primarily in the U.K.) totaling $2.0 million; (3) a decrease in Lottery systems revenue primarily driven by decreases in retail sales from multi-state games of $4.2 million impacted by prior-period sales leading up to the record POWERBALL® jackpot in January 2016; partially offset by (4) increases in product sales revenue of $1.4 million.
Operating income
Operating income increased compared to the prior-year period primarily due to a more profitable revenue mix and the following key factors: (1) a decrease in D&A totaling $3.9 million; (2) a decrease in SG&A of $2.2 million; and (3) an R&D decrease of $1.8 million in the three-month period.
INTERACTIVE
We generate Interactive gaming services revenue through our social gaming, RMG and SG Universe ™ products which are all available via desktop and mobile devices.
In our social gaming business, we generate revenue from the sale of virtual coins or chips, which players can use to play slot and table games (i.e., spin in the case of slot games, bet in the case of table games). The games are primarily our WMS® , Bally® , Barcrest ™, SHFL ® and Dragonplay ® branded games. In addition, we also offer third-party branded games as well as original content.

In our RMG business, we provide game content to real-money online casino operators, primarily in Europe. We host the play of our game content on our centrally-located servers (often referred to as remote game servers) that are integrated with the online casino operators' websites. We typically earn a percentage of the operator's net gaming revenue generated by the games we host.

Our SG Universe includes three interactive services for land based casino operators: Mobile Concierge , Play4Fun Network TM and VenueBet . Mobile Concierge provides casinos with the ability to customize marketing to players while giving players access to their loyalty reward credits and the ability to make on-property reservations. Play4Fun Network is a social casino platform delivered through a land-based casino operator’s branded website and mobile application. VenueBet is an on-property mobile RMG platform that allows casino patrons to play their favorite casino games for real money on their mobile


36

devices while anywhere on the casino property. We typically earn revenue from a combination of service fees and the sale of virtual coins.
Current Year Update
We continue to pursue our multi-product strategy in our social gaming B2C business and, late in the first quarter of 2017, we launched 88 Fortunes Slots on mobile worldwide.
Subsequent to March 31, 2017, we completed the acquisition of Spicerack Media, Inc., a privately held mobile and social game company, which will allow us to incorporate the successful Bingo Showdown social bingo mobile gaming app into our portfolio of games.
Results of Operations and Key Performance Indicators for Interactive
 
 
Three Months Ended 
 March 31,
 
Variance
(in millions)
 
2017
 
2016
 
2017 vs. 2016
Total revenue
 
$
96.3

 
$
72.6

 
$
23.7

 
32.6
%
Operating expenses
 
79.1

 
61.1

 
18.0

 
29.5
%
   Operating income
 
$
17.2

 
$
11.5

 
$
5.7

 
49.6
%

Three Months Ended March 31, 2017 Compared to Three Months Ended March 31, 2016     

Revenue
 
 
Three Months Ended 
 March 31,
 
Variance
(in millions)
 
2017
 
2016
 
2017 vs. 2016
Revenue:
 
 
 
 
 
 
 
 
Social Gaming - B2C
 
$
80.2

 
$
60.2

 
$
20.0

 
33.2
 %
Other
 
16.1

 
12.4

 
3.7

 
29.8
 %
Total revenue
 
$
96.3

 
$
72.6

 
$
23.7

 
32.6
 %
 
 
 
 
 
 
 
 
 
KPIs:
 
 
 
 
 
 
 
 
Social gaming:
 
 
 
 
 
 
 
 
Mobile Penetration (1)
 
72.0
%
 
66.0
%
 
6pp

 
nm

Average MAU (2)
 
7.7

 
8.0

 
(0.3
)
 
(3.8
)%
Average DAU (3)
 
2.4

 
2.5

 
(0.1
)
 
(4.0
)%
ARPDAU (4)
 
$
0.37

 
$
0.26

 
$
0.11

 
42.3
 %
nm = not meaningful.
pp = percentage points.
(1)
Mobile penetration as defined by percentage of B2C social gaming revenue generated from mobile platforms.
(2)
MAU = Monthly Active Users, a count of unique visitors to our sites during a month.
(3)
DAU = Daily Active Users, a count of unique visitors to our sites during a day.
(4)
ARPDAU = Average daily revenue per DAU is calculated by dividing revenue for a period by the DAU for the period by the number of days for the period.
    
The increase in revenue compared to the prior-year period is primarily attributable to social gaming B2C revenue, which grew 33%, reflecting the ongoing popularity of Jackpot Party Social Casino and the success of the recently launched Quick Hit Slots and Hot Shot Social Casino social gaming apps.

Operating income
The increase in operating income compared to the prior-year period reflects the corresponding revenue growth. SG&A expense and R&D expense increased as a result of higher marketing and player acquisition costs, coupled with new product development costs to support ongoing growth initiatives for which revenue has not yet been recognized.


37

RECENTLY ISSUED ACCOUNTING GUIDANCE
For a description of recently issued accounting pronouncements, see Note 1.  

CRITICAL ACCOUNTING ESTIMATES
For a description of our policies regarding our critical accounting estimates, see "Critical Accounting Estimates" in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" included in our 2016 10-K.
There have been no significant changes in our critical accounting estimate policies or the application of those policies to our condensed consolidated financial statements from those presented in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" included in our 2016 10-K.

LIQUIDITY, CAPITAL RESOURCES AND WORKING CAPITAL
Sources of Liquidity
As of March 31, 2017 , our principal sources of liquidity, other than cash flows provided by operating activities, were cash and cash equivalents and amounts available under our revolving credit facility discussed below under "Credit Agreement and Other Debt."
During the first quarter of 2017, we successfully completed a series of refinancing transactions, including a private offering of $1.15 billion in aggregate principal amount of 7.000% senior secured notes due 2022 and an amendment to our credit agreement which extended the maturity of our term loans and revolving credit facility, and reduced the applicable interest rate on the term loans. These actions reduced the total principal value of our debt by $45.0 million, including payment of the remaining $45.0 million on our revolving credit facility, lowered our annual cash interest cost, extended the maturity to 2021 and 2022 for approximately 95 percent of our debt and significantly reduced our interest rate exposure to floating rates (the "February 2017 Refinancing").
Cash and Available Revolver Capacity
    
 
 
As of
(in millions)
 
March 31, 2017
 
December 31, 2016
Cash and cash equivalents
 
$
131.9

 
$
115.1

Revolver capacity
 
556.2

 
592.6

Revolver capacity drawn or committed to letters of credit
 
(30.4
)
 
(76.1
)
     Total
 
$
657.7

 
$
631.6

The amount of our available cash and cash equivalents fluctuates principally based on borrowings or repayments under our credit facilities, investments, acquisitions and changes in our working capital position. The borrowing capacity under our revolving credit facility will depend on the amount of outstanding borrowings and letters of credit issued and on us remaining in compliance with the covenants under our credit agreement, including a maintenance covenant based on consolidated net first lien leverage. We were in compliance with the covenants under our credit agreement as of March 31, 2017. The February 2017 Refinancing, among other things, reduced the commitments on the revolving credit facility to $556.2 million through October 18, 2018, with a step-down to $381.7 million until the maturity in 2020.
We believe that our cash flow from operations, available cash and cash equivalents and available borrowing capacity under our existing or anticipated financing arrangements will be sufficient to meet our liquidity needs for the foreseeable future; however, we cannot assure that this will be the case. We believe that substantially all cash held outside the U.S. is free from legal encumbrances or similar restrictions that would prevent it from being available to meet our global liquidity needs.
Total cash held by our foreign subsidiaries was $81.3 million as of March 31, 2017. To the extent that a portion of our foreign cash was required to meet liquidity needs in the U.S., we might incur a tax liability to repatriate it, the timing and amount of which would depend on a variety of factors.
Our Gaming Participation and Lottery Systems businesses generally require significant upfront capital expenditures, and we may need to incur additional capital expenditures in order to retain or win new contracts. Our ability to make payments on and to refinance our indebtedness and other obligations depends on our ability to generate cash in the future. We may also, from time to time, repurchase or otherwise retire or refinance our debt, through our subsidiaries or otherwise. In the event we pursue significant acquisitions or other expansion opportunities, we may need to raise additional capital. If we do not have adequate liquidity to support these activities, we may be unable to obtain financing for these cash needs on favorable terms or


38

at all. For additional information regarding our cash needs and related risks, see Item 1A "Risk Factors" in our 2016 10-K.   
In addition, lottery customers in the U.S. generally require service providers to provide performance bonds in connection with the relevant contract. As of March 31, 2017, our outstanding performance bonds totaled $245.0 million. Our ability to obtain performance bonds on commercially reasonable terms is subject to our financial condition and to prevailing market conditions, which may be impacted by economic and political events. Although we have not experienced difficulty in obtaining such bonds to date, we cannot assure that we will continue to be able to obtain performance bonds on commercially reasonable terms, or at all.

Three Months Ended March 31, 2017 Compared to Three Months Ended March 31, 2016     

Cash Flow Summary
 
 
Three Months Ended March 31,
 
Variance
(in millions)
 
2017
 
2016
 
2017 vs. 2016
Net cash provided by operating activities
 
$
111.0

 
$
101.1

 
$
9.9

Net cash used in investing activities
 
(79.5
)
 
(48.2
)
 
(31.3
)
Net cash used in financing activities
 
(15.1
)
 
(37.1
)
 
22.0

Effect of exchange rates on cash, cash equivalents and restricted cash
 
2.5

 
1.8

 
0.7

Increase in cash, cash equivalents and restricted cash
 
$
18.9

 
$
17.6

 
$
1.3

Cash flows from operating activities
 
 
Three Months Ended March 31,
 
Variance
(in millions)
 
2017
 
2016
 
2017 vs. 2016
Net loss
 
$
(100.8
)
 
$
(92.3
)
 
$
(8.5
)
Non-cash adjustments to reconcile net loss to cash flows from operations
 
204.8

 
178.8

 
26.0

Change in working capital accounts
 
7.0

 
18.6

 
(11.6
)
Other
 
—

 
(4.0
)
 
4.0

Net cash provided by operating activities increased primarily due to the increase in incremental net earnings after reconciling adjustments for non-cash items of $204.8 million, combined with a $7.0 million positive change in working capital and other items. The changes in our working capital accounts during the three months ended March 31, 2017 were primarily driven by the following:
•
$21.5 million decrease in accounts and notes receivables due to strong collections during the quarter;
•
$13.4 million increase in inventories primarily due to the timing of orders and deployment of units in our gaming segment; and
•
$1.1 million negative net impact on cash flows from changes in other current assets and liabilities.
Cash flows from investing activities
Net cash used in investing activities increased primarily due to the acquisition of DEQ Systems Corp., combined with a $10.1 million increase in capital expenditures. Capital expenditures are composed of investments in systems, equipment and other assets related to contracts, property and equipment, intangible assets and software.
Cash flows from financing activities
Net cash used in financing activities decreased primarily due to the February 2017 Refinancing described in Note 10, which resulted in net cash generated from financing activities of $24.0 million compared to a net cash outflow from a reduction of debt of $27.5 million in the prior-year period. During the three months ended March 31, 2017 we also incurred $27.2 million in debt issuance and deferred financing costs.
Credit Agreement and Other Debt


39

For additional information regarding our credit agreement and other debt, interest rate risk and interest rate hedging instruments, see Notes 16 and 17 and Item 7A "Quantitative and Qualitative Disclosures About Market Risk" in our 2016 10-K, as well as Note 10.
Off-Balance Sheet Arrangements
As of March 31, 2017, we did not have any significant off-balance sheet arrangements.
Contractual Obligations
There have been no material changes to our contractual obligations disclosed under Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations — Liquidity, Capital Resources and Working Capital — Contractual Obligations" in our 2016 10-K, other than the acquisition described in Note 15 and the refinancing transactions described in Note 10.
    



40



Item 3. Quantitative and Qualitative Disclosures about Market Risk
There have been no material changes to the disclosure under Item 7A "Quantitative and Qualitative Disclosures about Market Risk" included in our 2016 10-K.

Item 4. Controls and Procedures
Under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of our disclosure controls and procedures as required by Exchange Act Rule 13a-15(b) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures are effective. There were no changes in our internal control over financial reporting during the quarter ended March 31, 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II.  OTHER INFORMATION
Item 1. Legal Proceedings
For a description of our legal proceedings, see Note 14 and Note 22 in our 2016 10-K.
Item 1A. Risk Factors
There have been no material changes in our risk factors from those disclosed under Item 1A "Risk Factors" included in our 2016 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
There was no stock repurchase activity during the three months ended March 31, 2017.

Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.


41

Item 6. Exhibits
Exhibit
Number
 
Description
10.1
 
Employment Agreement dated as of February 13, 2017 by and between Scientific Games Corporation and Karin-Joyce Tjon Sien Fat. *(†)
 
 
 
10.2
 
Form of Inducement Equity Award Agreement between Scientific Games Corporation and Karin-Joyce Tjon Sien Fat (incorporated by reference to Exhibit 4.4 to Scientific Games Corporation’s Registration Statement on Form S-8 (No. 333-216429) filed on March 3, 2017). *
 
 
 
10.3
 
Amended and Restated Employment Agreement dated as of February 27, 2017 by and between Scientific Games Corporation and Michael Winterscheidt. *(†)
 
 
 
10.4
 
Consulting Agreement dated as of January 1, 2017 by and between Scientific Games Corporation and Michael Gavin Isaacs. (†)
 
 
 
31.1
 
Certification of the Chief Executive Officer of the Company pursuant to Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (†)
 
 
 
31.2
 
Certification of the Chief Financial Officer of the Company pursuant to Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (†)
 
 
 
32.1
 
Certification of the Chief Executive Officer of the Company pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (†)
 
 
 
32.2
 
Certification of the Chief Financial Officer of the Company pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (†)
 
 
 
101.INS
 
XBRL Instance Document
101.SCH
 
XBRL Taxonomy Extension Schema
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase
101.DEF
 
XBRL Taxonomy Definition Label Linkbase
101.LAB
 
XBRL Taxonomy Extension Label Linkbase
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase
(†) Filed herewith.
*Management contracts and compensation plans and arrangements.









42



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/ Michael A. Quartieri
 
 
Name:
Michael A. Quartieri
 
 
Title:
Executive Vice President, Chief Financial Officer, Treasurer and Corporate Secretary
 
 
 
 
 
 
By:
/s/ Michael F. Winterscheidt
 
 
Name:
Michael F. Winterscheidt
 
 
Title:
Chief Accounting Officer
Dated:
May 1, 2017
 
 



43


EXHIBIT 10.1
 
Employment Agreement
 
This Employment Agreement (this “ Agreement ”) is made as of February 13, 2017 by and between Scientific Games Corporation, a Delaware corporation (the “ Company ”), and Karin-Joyce Tjon Sien Fat (“ Executive ”).
 
WHEREAS, the Company and Executive wish to enter into this Agreement;
 
NOW, THEREFORE, in consideration of the premises and mutual benefits to be derived herefrom and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged by the Company and Executive, the parties agree as follows.
 
1.                    Employment; Term .  The Company hereby agrees to employ Executive, and Executive hereby accepts employment with the Company, in accordance with and subject to the terms and conditions set forth in this Agreement.  This term of employment of Executive under this Agreement (the “ Term ”) shall be the period commencing on February 13, 2017 (the “ Effective Date ”) and ending on December 31, 2019, as may be extended in accordance with this Section 1 and subject to earlier termination in accordance with Section 4.  The Term shall be extended automatically without further action by either party by one (1) additional year (added to the end of the Term), and then on each succeeding annual anniversary thereafter, unless either party shall have given written notice to the other party prior to the date which is sixty (60) days prior to the date upon which such extension would otherwise have become effective electing not to further extend the Term, in which case Executive’s employment shall terminate on the date upon which such extension would otherwise have become effective, unless earlier terminated in accordance with Section 4. A notice of non-renewal of the Term by the Company pursuant to this Section 1 shall be deemed to be a termination without Cause by the Company for purposes of this Agreement as of the end of the then Term.
 
2.                    Position and Duties .  During the Term, Executive will serve as President & Chief Operating Officer of the Company and in any other officer or director position with the Company or with any subsidiary or affiliate of the Company if elected or appointed to such positions, as applicable, during the Term. In such capacities, Executive shall perform such duties and shall have such responsibilities as are normally associated with chief operating officer, and as otherwise may be assigned to Executive from time to time by the Company’s President & Chief Executive Officer. Subject to Section 4(e), Executive’s functions, duties and responsibilities are subject to reasonable changes as the Company may in good faith determine from time to time.  Executive hereby agrees to accept such employment and to serve the Company and its subsidiaries and affiliates to the best of Executive’s ability in such capacities, devoting all of Executive’s business time to such employment. Notwithstanding the foregoing, during the Term, Executive may with prior written consent of the President & Chief Executive Officer (which may be granted or denied in the President & Chief Executive Officer’s sole discretion), serve as a member of the board of directors of up to one for-profit or not-for-profit entity, so long as such activity does not materially interfere or conflict with Executive’s duties hereunder or create a potential business or fiduciary conflict.
 
3.                    Compensation .
 
(a)                                  Base Salary .  During the Term, Executive will receive a base salary of seven hundred and fifty thousand U.S. dollars (US$750,000) per annum (pro-rated for any partial year), payable in accordance with the Company’s regular payroll practices and subject to such deductions or amounts to be withheld as required by applicable law and regulations or as may be agreed to by Executive.  In the event that the Company, in its sole discretion, from time to time determines to increase Executive’s base salary, such increased amount shall, from and after the effective date of such increase, constitute the “ base salary ” of Executive for purposes of this Agreement.
 
(b)                                  Incentive Compensation .  Executive shall have the opportunity annually to earn incentive compensation (“ Incentive Compensation ”) in amounts determined by the Compensation Committee (the “ Compensation Committee ”) of the Board of Directors of the Company (the “ Board ”) in its sole discretion in accordance with the applicable incentive compensation plan of the Company as in effect from time to time (the “ Incentive Compensation Plan ”).  Under such Incentive Compensation Plan, Executive shall have the opportunity annually to earn up to 75% of Executive’s base salary as Incentive Compensation at “target opportunity” (“ Target Bonus ”) and up to 200% of Executive’s target bonus opportunity as Incentive Compensation at “maximum opportunity” on the terms and subject to the conditions of such Incentive Compensation Plan (any such Incentive Compensation to be subject to such deductions or amounts to be withheld as required by applicable law and regulations or as may be agreed to by Executive). Incentive Compensation for 2017 will be pro-rated based on the number of days Executive was employed by Company in 2017. Executive shall be entitled to guaranteed minimum Incentive Compensation equal to two hundred eighty one thousand and two hundred and fifty U.S. dollars ($281,250) for the 2017 performance period, to be paid on the same date as Incentive Compensation is paid to other senior executives of the Company.
 
(c)            Eligibility for Annual Equity Awards.   During the Term, Executive shall be eligible to receive an annual grant of stock options, restricted stock units or other equity awards with a grant date fair value equal to approximately 125% of Executive’s base salary, as measured in accordance with the Company’s standard practices of measuring equity value, and in accordance with the applicable plans and programs of the Company for senior executives of the Company and subject to the Company’s right to at any time amend or terminate any such plan or program, so long as any such change does not adversely affect any accrued or vested interest of Executive under any such plan or program.
                 
(d)                                  Expense Reimbursement .  Subject to Section 3(g), the Company shall reimburse Executive for all reasonable and necessary travel, business entertainment and other business expenses incurred by Executive in connection with the performance of Executive’s duties under this Agreement, on a timely basis upon timely submission by Executive of vouchers therefor in accordance with the Company’s standard policies and procedures.
 
(e)                                   Health and Welfare Benefits .  Executive shall be entitled to participate, without discrimination or duplication, in any and all medical insurance, group health, disability, life insurance, accidental death and dismemberment insurance, 401(k) or other retirement, deferred compensation, stock ownership and such other plans and programs which are made generally available by the Company to senior executives of the Company in accordance with the terms of such plans and programs and subject to the right of the Company (or its applicable affiliate) to at any time amend or terminate any such plan or program.  Executive shall be entitled to paid time off and holidays and any other time off in accordance with the Company’s policies in effect from time to time.
 
(f)                                    Sign-On Award .  In connection with Executive’s execution of this Agreement, the Company will grant to Executive an inducement award within ten (10) days after the Effective Date comprised of 100,000 restricted stock units (the “ Sign-On Award ”), pursuant to an equity award agreement substantially in the form attached hereto as Exhibit A , to be entered into by and between the Company and Executive (the “ Sign-On Award Agreement ”). The Sign-On Award will be granted as an employment inducement award pursuant to NASDAQ Listing Rule 5635(c)(4).  
 
(g)                                   Taxes and Internal Revenue Code 409A .  Payment of all compensation and benefits to Executive under this Agreement shall be subject to all legally required and customary withholdings.  The Company makes no representations or warranties and shall have no responsibility regarding the tax implications of the compensation and benefits to be paid to Executive under this Agreement, including under Section 409A of the Internal Revenue Code of 1986, as amended (the “ Code ”), and applicable administrative guidance and regulations (“ Section 409A ”).  Section 409A governs plans and arrangements that provide “nonqualified deferred compensation” (as defined under the Code) which may include, among others, nonqualified retirement plans, bonus plans, stock option plans, employment agreements and severance agreements.  The Company reserves the right to pay compensation and provide benefits under this Agreement (including under Section 3 and Section 4) in amounts, at times and in a manner that minimizes taxes, interest or penalties as a result of Section 409A.  In addition, in the event any benefits or amounts paid to Executive hereunder are deemed to be subject to Section 409A, Executive consents to the Company adopting such conforming amendments as the Company deems necessary, in its reasonable discretion, to comply with Section 409A (including delaying payment until six (6) months following termination of employment).  To the extent any payments of money or other benefits due to Executive hereunder could cause the application of an accelerated or additional tax under Section 409A, such payments or other benefits may be deferred if deferral will make such payment or other benefits compliant under Section 409A, or otherwise such payments or other benefits shall be restructured, to the extent permissible under Section 409A, in a manner determined by the Company that does not cause such an accelerated or additional tax.  To the extent any reimbursements or in-kind benefits due to Executive under this Agreement constitute deferred compensation under Section 409A, any such reimbursements or in-kind benefits shall be paid to Executive in a manner consistent with Treas. Reg. Section 1.409A-3(i)(1)(iv).  Each payment made under this Agreement shall be designated as a “separate payment” within the meaning of Section 409A.

(h)     Relocation . Executive shall promptly relocate to, and shall be based in, Las Vegas, Nevada at the Company’s headquarters. Executive will be reimbursed for reasonable relocation expenses in accordance with Company policies in connection with moving her primary residence from Kansas City, Missouri to the Las Vegas area, including providing temporary furnished corporate housing for up to six months from the Effective Date.
 
4.                                       Termination of Employment .  Executive’s employment may be terminated at any time prior to the end of the Term under the terms described in this Section 4, and the Term shall automatically terminate upon any termination of Executive’s employment.  For purposes of clarification, except as provided in Sections 4(e)(v), 4(f), and 5.6, all stock options, restricted stock units and other equity-based awards will be governed by the terms of the plans, grant agreements and programs under which such options, restricted stock units or other awards were granted on any termination of the Term and Executive’s employment with the Company.
 
(a)                                  Termination by Executive for Other than Good Reason .  Executive may terminate Executive’s employment hereunder for any reason or no reason upon 60 days’ prior written notice to the Company referring to this Section 4(a); provided , however , that a termination by Executive for “Good Reason” (as defined below) shall not constitute a termination by Executive for other than Good Reason pursuant to this Section 4(a).  In the event Executive terminates Executive’s employment for other than Good Reason, Executive shall be entitled only to the following compensation and benefits (the payments set forth in Sections 4(a)(i) — 4(a)(iii), collectively, the “ Standard Termination Payments ”):
 
(i)                            any accrued but unpaid base salary for services rendered by Executive to the date of such termination, payable in accordance with the Company’s regular payroll practices and subject to such deductions or amounts to be withheld as required by applicable law and regulations or as may be agreed to by Executive;
 
(ii)                         any vested non-forfeitable amounts owing or accrued at the date of such termination under benefit plans, programs and arrangements set forth or referred to in Section 3(e) in which Executive participated during the Term (which will be paid under the terms and conditions of such plans, programs, and arrangements (and agreements and documents thereunder)); and
 
(iii)                      reasonable business expenses and disbursements incurred by Executive prior to such termination will be reimbursed in accordance with Section 3(d).
 
(b)                                  Termination By Reason of Death .  If Executive dies during the Term, the last beneficiary designated by Executive by written notice to the Company (or, in the absence of such designation, Executive’s estate) shall be entitled only to the Standard Termination Payments, including any benefits that may be payable under any life insurance benefit of Executive for which the Company pays premiums, in accordance with the terms of any such benefit and subject to the right of the Company (or its applicable affiliate) to at any time amend or terminate any such benefit.
 
(c)                                   Termination By Reason of Total Disability .  The Company may terminate Executive’s employment in the event of Executive’s “Total Disability.”  For purposes of this Agreement, “ Total Disability ” shall mean Executive’s (1) becoming eligible to receive benefits under any long-term disability insurance program of the Company or (2) failure to perform the duties and responsibilities contemplated under this Agreement for a period of more than 180 days during any consecutive 12-month period due to physical or mental incapacity or impairment.  In the event that Executive’s employment is terminated by the Company by reason of Total Disability, Executive shall be entitled only to the Standard Termination Payments and any amounts due under any Company disability policy.
 
(d)                                  Termination by the Company for Cause .  The Company may terminate the employment of Executive at any time for “Cause.”  For purposes of this Agreement, “ Cause ” shall mean: (i) gross neglect by Executive of Executive’s duties hereunder; (ii) Executive’s indictment for or conviction of a felony, or any non-felony crime or offense involving the property of the Company or any of its subsidiaries or affiliates or evidencing moral turpitude; (iii) willful misconduct by Executive in connection with the performance of Executive’s duties hereunder; (iv) intentional breach by Executive of any material provision of this Agreement; (v) material violation by Executive of a material provision of the Company’s Code of Business Conduct; or (vi) any other willful or grossly negligent conduct of Executive that would make the continued employment of Executive by the Company materially prejudicial to the best interests of the Company.  In the event Executive’s employment is terminated for “Cause,” Executive shall not be entitled to receive any compensation or benefits under this Agreement except for the Standard Termination Payments.
 
(e)                                   Termination by the Company without Cause or by Executive for Good Reason .  The Company may terminate Executive’s employment at any time without Cause, for any reason or no reason, and Executive may terminate Executive’s employment for “Good Reason.”  For purposes of this Agreement “ Good Reason ” shall mean that, without Executive’s prior written consent, any of the following shall have occurred:  (A) a material adverse change to Executive’s positions, titles, offices, or duties following the Effective Date from those set forth in Section 2, except, in such case, in connection with the termination of Executive’s employment for Cause or due to Total Disability, death or expiration of the Term; provided , however , that a Good Reason event shall not be deemed to have occurred, if the Company ceases to be a publicly-traded company, based on Executive’s duties changing from those of a public company chief operating officer to those of a private company chief operating officer; (B) a material decrease in base salary or material decrease in Executive’s Incentive Compensation opportunity provided under this Agreement; (C) a requirement that on a continuing basis Executive reports to anyone other than the President & Chief Executive Officer; or (D) any other material failure by the Company to perform any material obligation under, or material breach by the Company of any material provision of, this Agreement; provided , however , that a termination by Executive for Good Reason under any of clauses (A) through (D) of this Section 4(e) shall not be considered effective unless Executive shall have provided the Company with written notice of the specific reasons for such termination within thirty (30) days after she has knowledge of the event or circumstance constituting Good Reason and the Company shall have failed to cure the event or condition allegedly constituting Good Reason within thirty (30) days after such notice has been given to the Company and Executive actually terminates her employment within one (1) year following the initial occurrence of the event giving rise to Good Reason.  In the event that Executive’s employment is terminated by the Company without Cause or by Executive for Good Reason (and not, for the avoidance of doubt, in the event of a termination pursuant to Section 4(a), (b), (c) or (d) or due to a notice of non-renewal of the Term by the Executive pursuant to Section 1), the Company shall pay the following amounts, and make the following other benefits available, to Executive.
 
(i)                                      the Standard Termination Payments; and
 
(ii)                                   an amount equal to one times (1X) the sum of (A) Executive’s base salary and (B) an amount equal to the highest annual Incentive Compensation paid to Executive (if any) in respect of the two (2) most recent fiscal years of the Company but not more than Executive’s Target Bonus for the-then current fiscal year (provided if such termination occurs prior to the payment of the Incentive Compensation for fiscal year 2018, such amount shall be Executive’s Target Bonus for the-then current fiscal year) (such amount under this sub-clause (B), the “ Severance Bonus Amount ”), such amount under this clause (ii) payable over a period of twelve (12) months after such termination in accordance with Section 4(g); and
 
(iii)     in lieu of any Incentive Compensation for the year in which such termination occurs, payment of an amount equal to (A) the Incentive Compensation (if any) which would have been payable to Executive had Executive remained in employment with the Company during the entire year in which such termination occurred, multiplied by (B) a fraction the numerator of which is the number of days Executive was employed in the year in which such termination occurs and the denominator of which is the total number of days in the year in which such termination occurs, payable when bonuses are paid to other executives of the Company, but no later than March 15 following the end of the year in which such termination occurs; and
 
(iv)                               if Executive elects to continue medical coverage under the Company’s group health plan in accordance with COBRA, an amount equal to the monthly premiums for such coverage less the amount of employee contributions for similarly-situated active employees of the Company, for a period of twelve (12) months; and

(v)    subject to Section 5.6 and except to the extent otherwise provided at the time of grant under the terms of any equity award made to Executive, full vesting of any unvested stock options and any unvested restricted stock units held by Executive immediately prior to such termination (provided that any such stock options (together with any other vested stock options) held by Executive will cease being exercisable upon the earlier of ninety (90) days after such termination and the scheduled expiration date of such stock options), and, in all other respects, all stock options, restricted stock units and other equity-based awards held by Executive shall be governed by the plans and programs and the agreements and other documents pursuant to which the awards were granted; provided , however , that in the event such termination occurs prior to the Compensation Committee’s determination as to the satisfaction of any performance criteria to which any such stock options and/or restricted stock units is subject, such stock options and/or restricted stock units (as the case may be) will not vest (and, in the case of any such stock options, will not become exercisable) unless and until a determination is or has been made by the Compensation Committee that such criteria have been satisfied, at which time such stock options and/or restricted stock units will vest (and, in the case of any such stock options, will become exercisable) to the extent contemplated by the terms of such award (it being understood and agreed, for the avoidance of doubt, that such stock options or restricted stock units will immediately be forfeited to the extent contemplated by the terms of such award in the event that such criteria are determined not to have been satisfied); provided , further , however , if necessary to comply with Section 409A, settlement of any such equity-based awards shall be made on the date that is six (6) months plus one (1) day following expiration of the Term.
 
(f)                                    Termination by the Company without Cause or by Executive for Good Reason in connection with a Change in Control .  In the event Executive’s employment is terminated by the Company without Cause or by Executive for Good Reason pursuant to Section 4(e) and such termination occurs upon, or within one (1) year immediately following, a “Change in Control” (as defined below), Executive shall be entitled (without duplication) to the payments and benefits described in Section 4(e), except that, solely in the case of an amount otherwise payable under Section 4(e)(ii), such amount shall be multiplied by two (2) ( i.e. , an amount equal to two (2) multiplied by the sum of Executive’s base salary and the Severance Bonus Amount, without duplication) and such amount shall be payable over a period of twenty-four (24) months after termination in accordance with Section 4(g) of this Agreement; provided , however , to the extent that such amount under Section 4(e)(ii) is exempt from Section 409A and/or if such Change in Control constitutes a change in ownership, change in effective control or a change in ownership of a substantial portion of the assets of the Company under Regulation Section 1.409A-3(i)(5), such amount otherwise payable under Section 4(e)(ii) shall be paid in a lump sum in accordance with Section 4(g) of this Agreement.
 
For purposes of this Agreement, a “ Change in Control ” shall be deemed to have occurred if: (i) any “person” as defined in Section 3(a)(9) of the Securities Exchange Act of 1934, as amended (the “ Exchange Act ”), and as used in Sections 13(d) and 14(d) thereof, including a “group” as defined in Section 13(d) of the Exchange Act, but excluding the Company and any subsidiary or affiliate and any employee benefit plan sponsored or maintained by the Company or any subsidiary or affiliate (including any trustee of such plan acting as trustee) or any current stockholder of 20% or more of the outstanding common stock of the Company, directly or indirectly, becomes the “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act) of securities of the Company representing at least 40% of the combined voting power of the Company’s then-outstanding securities; (ii) the stockholders of the Company approve a merger, consolidation, recapitalization, or reorganization of the Company, or a reverse stock split of any class of voting securities of the Company, or the consummation of any such transaction if stockholder approval is not obtained, other than any such transaction that would result in at least 60% of the total voting power represented by the voting securities of the Company or the surviving entity outstanding immediately after such transaction being beneficially owned by persons who together beneficially owned at least 80% of the combined voting power of the voting securities of the Company outstanding immediately prior to such transaction; provided that, for purposes of this Section 4(f), such continuity of ownership (and preservation of relative voting power) shall be deemed to be satisfied if the failure to meet such 60% threshold is due solely to the acquisition of voting securities by an employee benefit plan of the Company or such surviving entity or of any subsidiary of the Company or such surviving entity; (iii) the stockholders of the Company approve a plan of complete liquidation of the Company, an agreement for the sale or disposition by the Company of all or substantially all of its assets (or any transaction having a similar effect); or (iv) during any period of two (2) consecutive years, individuals who at the beginning of such period constitute the Board, together with any new director (other than a director designated by a person who has entered into an agreement with the Company to effect a transaction described in clause (i), (ii) or (iii) above) whose election by the Board or nomination for election by the Company’s stockholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute at least a majority of the Board.
 
(g)                                   Timing of Certain Payments under Section 4 .  For purposes of Section 409A, references herein to the Executive’s “termination of employment” shall refer to Executive’s separation of services with the Company within the meaning of Treas. Reg. Section 1.409A-1(h).  If at the time of Executive’s separation of service with the Company other than as a result of Executive’s death, (i) Executive is a “specified employee” (as defined in Section 409A(a)(2)(B)(i) of the Code), (ii) one or more of the payments or benefits received or to be received by Executive pursuant to this Agreement would constitute deferred compensation subject to Section 409A, and (iii) the deferral of the commencement of any such payments or benefits otherwise payable hereunder as a result of such separation of service is necessary in order to prevent any accelerated or additional tax under Section 409A, such payments shall be made as follows: (x) no payments for a six-month period following the date of Executive’s separation of service with the Company; (y) an amount equal to the aggregate sum that would have been otherwise payable during the initial six-month period paid in a lump sum on the first payroll date following six (6) months following the date of Executive’s separation of service with the Company (subject to such deductions or amounts to be withheld as required by applicable law and regulations); and (z) during the period beginning six (6) months following Executive’s separation of service with the Company through the remainder of the applicable period, payment of the remaining amount due in equal installments in accordance with the Company’s standard payroll practices (subject to such deductions or amounts to be withheld as required by applicable law and regulations).
 
(h)                                  Mitigation .  In the event the Company terminates Executive’s employment without Cause or Executive terminates her employment for Good Reason and Executive is employed by or otherwise engaged to provide services to another person or entity at any time prior to the end of any period of payments to or on behalf of Executive contemplated by this Section 4, (i) Executive shall immediately advise the Company of such employment or engagement and her compensation therefor (including any health insurance benefits to which she is entitled in connection therewith), (ii) the Company’s obligation to make continued insurance payments to or on behalf of Executive shall be reduced by any insurance coverage obtained by Executive during the applicable period through such other employment or engagement (without regard to when such coverage is paid) and (iii) the Company’s obligation to make payments pursuant to Section 4(e)(ii) (or, as the case may be, its obligation pursuant to Section 4(f) to make payments equal to two (2) times the amount contemplated in Section 4(e)(ii)) shall be reduced by any base salary or fee arrangements or target annual bonus payable to Executive for the applicable period through such other employment or engagement in the same pay period as earned with target bonus allocated equally over the period and also including any up-front payments or deferred payments structured to avoid the obligations under this paragraph; provided , however , that in the event that any such amounts shall have been paid to Executive in a lump sum pursuant to Section 4(f), Executive shall promptly repay the Company the portion of such amounts which would not have been previously paid if the payment was structured in monthly installments as opposed to a lump sum. Executive shall promptly notify the Company of her new compensation arrangement with the new entity and respond to reasonable inquiries. Any amount improperly paid to Executive shall be promptly refunded to the Company.
 
(i)                                      Set-Off .  To the fullest extent permitted by law and provided an acceleration of income or the imposition of an additional tax under Section 409A would not result, any amounts otherwise due to Executive hereunder (including any payments pursuant to this Section 4) shall be subject to set-off with respect to any amounts Executive otherwise owes the Company or any subsidiary or affiliate thereof.
 
(j)                                     No Other Benefits or Compensation .  Except as may be specifically provided under this Agreement, under any other effective written agreement between Executive and the Company, or under the terms of any plan or policy applicable to Executive, Executive shall have no right to receive any other compensation from the Company or any subsidiary or affiliate thereof, or to participate in any other plan, arrangement or benefit provided by the Company or any subsidiary or affiliate thereof, with respect to any future period after such termination or resignation.  Executive acknowledges and agrees that she is entitled to no compensation or benefits from the Company or any of its subsidiaries or affiliates of any kind or nature whatsoever in respect of periods prior to the date of this Agreement.  Executive acknowledges and agrees that she shall not receive any fees or other compensation (including equity compensation) for service on the board of directors of the Company or any of its subsidiaries.
 
(k)                                  Release of Employment Claims; Compliance with Section 5 .  Executive agrees, as a condition to receipt of any termination payments and benefits provided for in this Section 4 (other than the Standard Termination Payments), that Executive will execute a general release agreement, in a form reasonably satisfactory to the Company, releasing any and all claims arising out of Executive’s employment and the termination of such employment.  Such release agreement will not impose upon Executive any non-competition, non-solicitation, non-disparagement or similar restrictive covenant not otherwise set forth herein or in any other agreement entered into by Executive prior to the date of the release, nor shall the release agreement impose upon Executive any post-termination restrictions or service requirements not otherwise set forth herein or in any other agreement entered into by Executive prior to the date of the release. The Company shall provide Executive with the proposed form of general release agreement referred to in the immediately preceding sentence no later than seven (7) days following the date of termination.  Executive shall thereupon have 21 days or, if required by the Older Workers Benefit Protection Act, 45 days, to consider such general release agreement and, if she executes such general release agreement, shall have seven (7) days after execution of such general release agreement to revoke such general release agreement.  Absent such revocation, such general release agreement shall become binding on Executive.  If Executive does not revoke such general release agreement, payments contingent on such general release agreement that constitute deferred compensation under Section 409A (if any) shall be paid on the later of the 60 th  day after the date of termination or the date such payments are otherwise scheduled to be paid pursuant to this Agreement.  The Company’s obligation to make any termination payments and benefits provided for in this Section 4 (other than the Standard Termination Payments) shall immediately cease if Executive willfully or materially breaches Section 5.1, 5.2 , 5.3, 5.4, or 5.8.

(l)     Section 280G . If the aggregate of all amounts and benefits due to the Executive under this Agreement or any other plan, program, agreement or arrangement of the Company or any of its affiliates, which, if received by the Executive in full, would constitute “parachute payments,” as such term is defined in and under Section 280G of the Code (collectively, “ Change in Control Benefits ”), reduced by all Federal, state and local taxes applicable thereto, including the excise tax imposed pursuant to Section 4999 of the Code, is less than the amount the Executive would receive, after all such applicable taxes, if the Executive received aggregate Change in Control Benefits equal to an amount which is $1.00 less than three (3) times the Executive's “base amount,” as defined in and determined under Section 280G of the Code, then such Change in Control Benefits shall be reduced or eliminated to the extent necessary so that the Change in Control Benefits received by the Executive will not constitute parachute payments. If a reduction in the Change in Control Benefits is necessary, reduction shall occur in the following order unless the Executive elects in writing a different order, subject to the Company's consent (which shall not be unreasonably withheld or delayed): (i) severance payment based on multiple of base salary and/or Target Bonus; (ii) other cash payments; (iii) any pro-rated bonus paid as severance; (iv) acceleration of vesting of stock options with an exercise price that exceeds the then fair market value of stock subject to the option, provided such options are not permitted to be valued under Treasury Regulations Section 1.280G-1 Q/A – 24(c); (v) any equity awards accelerated or otherwise valued at full value, provided such equity awards are not permitted to be valued under Treasury Regulations Section 1.280G-1 Q/A – 24(c); (vi) acceleration of vesting of stock options with an exercise price that exceeds the then fair market value of stock subject to the option, provided such options are permitted to be valued under Treasury Regulations Section 1.280G-1 Q/A – 24(c); (vii) acceleration of vesting of all other stock options and equity awards; and (viii) within any category, reductions shall be from the last due payment to the first.

It is possible that after the determinations and selections made pursuant to the preceding paragraph that the Executive will receive Change in Control Benefits that are, in the aggregate, either more or less than the amounts contemplated by the preceding paragraph (hereafter referred to as an “ Excess Payment ” or “ Underpayment ,” respectively). If there is an Excess Payment, the Executive shall promptly repay the Company an amount consistent with this paragraph. If there is an Underpayment, the Company shall pay the Executive an amount consistent with this paragraph.
 
5.                                       Noncompetition; Non-solicitation; Nondisclosure; etc .
 
5.1 Noncompetition; Non-solicitation .
 
(a)                                  Executive acknowledges the highly competitive nature of the Company’s business and that access to the Company’s confidential records and proprietary information renders Executive special and unique within the Company’s industries.  In consideration of the amounts that may hereafter be paid to Executive pursuant to this Agreement (including Sections 3 and 4), Executive agrees that during the Term (including any extensions thereof) and during the Covered Time (as defined in Section 5.1(e)), Executive, alone or with others, will not, directly or indirectly, engage (as owner, investor, partner, stockholder, employer, employee, consultant, advisor, director or otherwise) in any Competing Business.  For purposes of this Section 5, “ Competing Business ” shall mean any business or operations: (i) (A) involving the design, development, manufacture, production, sale, lease, license, provision, operation or management (as the case may be) of (1) instant lottery tickets or games or any related marketing, warehouse, distribution, category management or other services or programs; (2) lottery-related terminals or vending machines (whether clerk-operated, self-service or otherwise), (3) gaming machines, terminals or devices (including video or reel spinning slot machines, video poker machines, video lottery terminals and fixed odds betting terminals), (4) lottery, video gaming (including server-based gaming), sports betting or other wagering or gaming systems, regardless of whether such systems are land-based, internet-based or mobile (including control and monitoring systems, local or wide-area progressive systems and redemption systems); (5) lottery-, real money gaming- or social gaming-related proprietary or licensed content (including themes, entertainment and brands), platforms, websites and loyalty and customer relationship management programs regardless of whether any of the foregoing are land-based, internet-based or mobile-based; (6) social casino games or websites or mobile phone or tablet applications (or similar known, or hereafter existing, technologies) featuring social casino games or any related marketing, distribution, or other services or programs; (7) interactive casino gaming products or services, including interactive casino-game themed games and platforms for websites or mobile phone or tablet applications (or similar known, or hereafter existing, technologies); (8) gaming utility products (including shufflers, card-reading shoes, deck checkers and roulette chip sorters), table games (including live, simulated, online, social gaming, interactive and electronic) and related products and services; (9) slot accounting, casino management, casino marketing, player tracking, lottery, video lottery, bingo or similar gaming- or casino-related systems and related peripheral hardware, software and services; (10) prepaid cellular or other phone cards; or (11) ancillary products (including equipment, hardware, software, marketing materials, chairs and signage) or services (including field service, maintenance and support) related to any of the foregoing under sub-clauses (1) through (10) above; or (B) in which the Company is then or was within the previous 12 months engaged, or in which the Company, to Executive’s knowledge, contemplates to engage in during the Term or the Covered Time; (ii) in which Executive was engaged or involved (whether in an executive or supervisory capacity or otherwise) on behalf of the Company or with respect to which Executive has obtained proprietary or confidential information; and (iii) which were conducted anywhere in the United States or in any other geographic area in which such business was conducted or contemplated to be conducted by the Company.  Notwithstanding anything to the contrary in the foregoing, the holding of up to one percent (1%) of the outstanding equity in a publicly traded entity for passive investment purposes shall not, in and of itself, be construed as engaging in a Competing Business.
 
(b)                                  In further consideration of the amounts that may hereafter be paid to Executive pursuant to this Agreement (including Sections 3 and 4), Executive agrees that, during the Term (including any extensions thereof) and during the Covered Time, Executive shall not, directly or indirectly:  (i) solicit or attempt to induce any of the employees, agents, consultants or representatives of the Company to terminate his, her, or its relationship with the Company; (ii) solicit or attempt to induce any of the employees, agents, consultants or representatives of the Company to become employees, agents, consultants or representatives of any other person or entity; (iii) solicit or attempt to induce any customer, vendor or distributor of the Company to curtail or cancel any business with the Company; or (iv) hire any person who, to Executive’s actual knowledge, is, or was within 180 days prior to such hiring, an employee of the Company.
 
(c)                                   During the Term (including any extensions thereof) and during the Covered Time, Executive agrees that upon the earlier of Executive’s (i) negotiating with any Competitor (as defined below) concerning the possible employment of Executive by the Competitor, (ii) responding to (other than for the purpose of declining) an offer of employment from a Competitor, or (iii) becoming employed by a Competitor, (A) Executive will provide copies of Section 5 of this Agreement to the Competitor, and (B) in the case of any circumstance described in (iii) above occurring during the Covered Time, and in the case of any circumstance described in (i) or (ii) above occurring during the Term or during the Covered Time, Executive will promptly provide notice to the Company of such circumstances.  Executive further agrees that the Company may provide notice to a Competitor of Executive’s obligations under this Agreement.  For purposes of this Agreement, “ Competitor ” shall mean any person or entity (other than the Company, its subsidiaries or affiliates) that engages, directly or indirectly, in the United States in any Competing Business.
 
(d)                                  Executive understands that the restrictions in this Section 5.1 may limit Executive’s ability to earn a livelihood in a business similar to the business of the Company but nevertheless agrees and acknowledges that the consideration provided under this Agreement (including Sections 3 and 4) is sufficient to justify such restrictions. In consideration thereof and in light of Executive’s education, skills and abilities, Executive agrees that Executive will not assert in any forum that such restrictions prevent Executive from earning a living or otherwise should be held void or unenforceable.
 
(e)                                   For purposes of this Section 5.1, “ Covered Time ” shall mean the period beginning on the date of termination of Executive’s employment (the “ Date of Termination ”) and ending twelve (12) months after the Date of Termination.

(f)    In the event that a court of competent jurisdiction or arbitrator(s), as the case may be, determine that the provisions of this Section 5.1 are unenforceable for any reason, the parties acknowledge and agree that the court or arbitrator(s) is expressly empowered to reform any provision of this Section so as to make them enforceable as described in Section 10 below.
 
5.2                                Proprietary Information; Inventions.
 
(a)                                  Executive acknowledges that, during the course of Executive’s employment with the Company, Executive necessarily will have (and during any employment by, or affiliation with, the Company prior to the Term has had) access to and made use of proprietary information and confidential records of the Company.  Executive covenants that Executive shall not during the Term or at any time thereafter, directly or indirectly, use for Executive’s own purpose or for the benefit of any person or entity other than the Company, nor otherwise disclose to any person or entity, any such proprietary information, unless and to the extent such disclosure has been authorized in writing by the Company or is otherwise required by law.  The term “ proprietary information ” means:  (i) the software products, programs, applications, and processes utilized by the Company; (ii) the name and/or address of any customer or vendor of the Company or any information concerning the transactions or relations of any customer or vendor of the Company with the Company; (iii) any information concerning any product, technology, or procedure employed by the Company but not generally known to its customers or vendors or competitors, or under development by or being tested by the Company but not at the time offered generally to customers or vendors; (iv) any information relating to the Company’s computer software, computer systems, pricing or marketing methods, sales margins, cost of goods, cost of material, capital structure, operating results, borrowing arrangements or business plans; (v) any information identified as confidential or proprietary in any line of business engaged in by the Company; (vi) any information that, to Executive’s actual knowledge, the Company ordinarily maintains as confidential or proprietary; (vii) any business plans, budgets, advertising or marketing plans; (viii) any information contained in any of the Company’s written or oral policies and procedures or manuals; (ix) any information belonging to customers, vendors or any other person or entity which the Company, to Executive’s actual knowledge, has agreed to hold in confidence; and (x) all written, graphic, electronic data and other material containing any of the foregoing.  Executive acknowledges that information that is not novel or copyrighted or patented may nonetheless be proprietary information.  The term “proprietary information” shall not include information generally known or available to the public, information that becomes available to Executive on an unrestricted, non-confidential basis from a source other than the Company or any of its directors, officers, employees, agents or other representatives (without breach of any obligation of confidentiality of which Executive has knowledge, after reasonable inquiry, at the time of the relevant disclosure to Executive), or general gaming industry information to the extent not particularly related or proprietary to the Company that was already known to Executive at the time Executive commences her employment with the Company that is not subject to nondisclosure by virtue of Executive’s prior employment or otherwise.  Notwithstanding the foregoing and Section 5.3, Executive may disclose or use proprietary information or confidential records solely to the extent (A) such disclosure or use may be required or appropriate in the performance of her duties as a director or employee of the Company, (B) required to do so by a court of law, by any governmental agency having supervisory authority over the business of the Company or by any administrative or legislative body (including a committee thereof) with apparent jurisdiction to order her to divulge, disclose or make accessible such information (provided that in such case Executive shall first give the Company prompt written notice of any such legal requirement, disclose no more information than is so required and cooperate fully with all efforts by the Company to obtain a protective order or similar confidentiality treatment for such information), (C) such information or records becomes generally known to the public without her violation of this Agreement, or (D) disclosed to Executive’s spouse, attorney and/or her personal tax and financial advisors to the extent reasonably necessary to advance Executive’s tax, financial and other personal planning (each an “ Exempt Person ”); provided , however , that any disclosure or use of any proprietary information or confidential records by an Exempt Person shall be deemed to be a breach of this Section 5.2 or Section 5.3 by Executive.
 
(b)                                  Executive agrees that all processes, technologies and inventions (collectively, “ Inventions ”), including new contributions, improvements, ideas and discoveries, whether patentable or not, conceived, developed, invented or made by Executive during the Term (and during any employment by, or affiliation with, the Company prior to the Term) shall belong to the Company, provided that such Inventions grew out of Executive’s work with the Company or any of its subsidiaries or affiliates, are related in any manner to the business (commercial or experimental) of the Company or any of its subsidiaries or affiliates or are conceived or made on the Company’s time or with the use of the Company’s facilities or materials.  Executive shall further:  (i) promptly disclose such Inventions to the Company; (ii) assign to the Company, without additional compensation, all patent and other rights to such Inventions for the United States and foreign countries; (iii) sign all papers necessary to carry out the foregoing; and (iv) give testimony in support of Executive’s inventorship.  If any Invention is described in a patent application or is disclosed to third parties, directly or indirectly, by Executive within two (2) years after the termination of Executive’s employment with the Company, it is to be presumed that the Invention was conceived or made during the Term.  Executive agrees that Executive will not assert any rights to any Invention as having been made or acquired by Executive prior to the date of this Agreement, except for Inventions, if any, disclosed in Exhibit B to this Agreement.
 
5.3          Confidentiality and Surrender of Records .  

(a)    Executive shall not, during the Term or at any time thereafter (irrespective of the circumstances under which Executive’s employment by the Company terminates), except to the extent required by law, directly or indirectly publish, make known or in any fashion disclose any confidential records to, or permit any inspection or copying of confidential records by, any person or entity other than in the course of such person’s or entity’s employment or retention by the Company, nor shall Executive retain, and will deliver promptly to the Company, any of the same following termination of Executive’s employment hereunder for any reason or upon request by the Company.  For purposes hereof, “ confidential records ” means those portions of correspondence, memoranda, files, manuals, books, lists, financial, operating or marketing records, magnetic tape, or electronic or other media or equipment of any kind in Executive’s possession or under Executive’s control or accessible to Executive which contain any proprietary information.  All confidential records shall be and remain the sole property of the Company during the Term and thereafter.

(b)    Notwithstanding anything herein to the contrary, nothing in this Agreement shall (i) prohibit Executive from making reports of possible violations of federal law or regulation to any governmental agency or entity in accordance with the provisions of and rules promulgated under Section 21F of the Securities Exchange Act of 1934 or Section 806 of the Sarbanes-Oxley Act of 2002, or of any other whistleblower protection provisions of state or federal law or regulation, or (ii) require notification or prior approval by the Company of any reporting described in clause (i). Executive understands that activities protected by Sections 5.2 and 5.3 may include disclosure of trade secret or confidential information within the limitations permitted by the Defend Trade Secrets Act (“ DTSA ”). And, in this regard, Executive acknowledges notification that under the DTSA no individual will be held criminally or civilly liable under Federal or State trade secret law for disclosure of a trade secret (as defined in the Economic Espionage Act) that is: (A) made in confidence to a Federal, State, or local government official, either directly or indirectly, or to an attorney, and made solely for the purpose of reporting or investigating a suspected violation of law; or, (B) made in a complaint or other document filed in a lawsuit or other proceeding, if such filing is made under seal so that it is not made public. And, an individual who pursues a lawsuit for retaliation by an employer for reporting a suspected violation of the law may disclose the trade secret to the attorney of the individual and use the trade secret information in the court proceeding, if the individual files any document containing the trade secret under seal, and does not disclose the trade secret, except as permitted by court order.
 
5.4          Non-disparagement .  Executive shall not, during the Term and thereafter, disparage in any material respect the Company, any affiliate of the Company, any of their respective businesses, any of their respective officers, directors or employees, or the reputation of any of the foregoing persons or entities.  Notwithstanding the foregoing, nothing in this Agreement shall preclude Executive from making truthful statements that are required by applicable law, regulation or legal process.
 
5.5          No Other Obligations .  Executive represents that Executive is not precluded or limited in Executive’s ability to undertake or perform the duties described herein by any contract, agreement or restrictive covenant.  Executive covenants that Executive shall not employ the trade secrets or proprietary information of any other person in connection with Executive’s employment by the Company without such person’s authorization.
 
5.6          Forfeiture of Outstanding Equity Awards; “Clawback” Policies .  The provisions of Section 4 notwithstanding, if Executive willfully and materially fails to comply with Section 5.1, 5.2, 5.3, 5.4, or 5.8, all options to purchase common stock, restricted stock units and other equity-based awards granted by the Company or any of its affiliates (whether prior to, contemporaneous with, or subsequent to the date hereof) and held by Executive or a transferee of Executive shall be immediately forfeited and cancelled.  Executive acknowledges and agrees that, notwithstanding anything contained in this Agreement or any other agreement, plan or program, any incentive-based compensation or benefits contemplated under this Agreement (including Incentive Compensation and equity-based awards) shall be subject to recovery by the Company under any compensation recovery or “clawback” policy, generally applicable to senior executives of the Company, that the Company may adopt from time to time, including any policy which the Company may be required to adopt under Section 954 of the Dodd-Frank Wall Street Reform and Consumer Protection Act and the rules and regulations of the Securities and Exchange Commission thereunder or the requirements of any national securities exchange on which the Company’s common stock may be listed.
 
5.7          Enforcement .  Executive acknowledges and agrees that, by virtue of Executive’s position, services and access to and use of confidential records and proprietary information, any violation by Executive of any of the undertakings contained in this Section 5 would cause the Company immediate, substantial and irreparable injury for which it has no adequate remedy at law.  Accordingly, Executive agrees and consents to the entry of an injunction or other equitable relief by a court of competent jurisdiction restraining any violation or threatened violation of any undertaking contained in this Section 5.  Executive waives posting of any bond otherwise necessary to secure such injunction or other equitable relief.  Rights and remedies provided for in this Section 5 are cumulative and shall be in addition to rights and remedies otherwise available to the parties hereunder or under any other agreement or applicable law.
 
5.8          Cooperation with Regard to Litigation .  Executive agrees to cooperate reasonably with the Company, during the Term and thereafter (including following Executive’s termination of employment for any reason), by providing information to the Company regarding matters related to her term of employment and by being available to testify on behalf of the Company in any action, suit, or proceeding, whether civil, criminal, administrative, or investigative.  In addition, except to the extent that Executive has or intends to assert in good faith an interest or position adverse to or inconsistent with the interest or position of the Company, Executive agrees to cooperate reasonably with the Company, during the Term and thereafter (including following Executive’s termination of employment for any reason), to assist the Company in any such action, suit, or proceeding by providing information and meeting and consulting with the Board or its representatives or counsel, or representatives or counsel to the Company, in each case, as reasonably requested by the Company.  The Company agrees to pay (or reimburse, if already paid by Executive) all reasonable travel and communication expenses actually incurred in connection with Executive’s cooperation and assistance.
 
5.9          Survival .  The provisions of this Section 5 shall survive the termination of the Term and any termination or expiration of this Agreement.
 
5.10        Company .  For purposes of this Section 5, references to the “ Company ” shall include the Company and each subsidiary and/or affiliate of the Company (and each of their respective joint ventures and equity method investees).
 
6.             Code of Conduct .  Executive acknowledges that she has read the Company’s Code of Business Conduct and agrees to abide by such Code of Business Conduct, as amended or supplemented from time to time, and other policies applicable to employees and executives of the Company.
 
7.             Indemnification .  The Company shall indemnify Executive to the full extent permitted under the Company’s Certificate of Incorporation or By-Laws and pursuant to any other agreements or policies in effect from time to time in connection with any action, suit or proceeding to which Executive may be made a party by reason of Executive being an officer, director or employee of the Company or of any subsidiary or affiliate of the Company. This provision shall survive termination of employment.
 
8.             Assignability; Binding Effect .  Neither this Agreement nor the rights or obligations hereunder of the parties shall be transferable or assignable by Executive, except in accordance with the laws of descent and distribution and as specified below.  The Company may assign this Agreement and the Company’s rights and obligations hereunder to any affiliate of the Company, provided that upon any such assignment the Company shall remain liable for the obligations to Executive hereunder.  This Agreement shall be binding upon and inure to the benefit of Executive, Executive’s heirs, executors, administrators, and beneficiaries, and shall be binding upon and inure to the benefit of the Company and its successors and assigns.
 
9.             Complete Understanding; Amendment; Waiver .  This Agreement constitutes the complete understanding between the parties with respect to the employment of Executive and supersedes all other prior agreements and understandings, both written and oral, between the parties with respect to the subject matter hereof, and no statement, representation, warranty or covenant has been made by either party with respect thereto except as expressly set forth herein.  Except as contemplated by Section 3(g), this Agreement shall not be modified, amended or terminated except by a written instrument signed by each of the parties.  Any waiver of any term or provision hereof, or of the application of any such term or provision to any circumstances, shall be in writing signed by the party charged with giving such waiver.  Waiver by either party of any breach hereunder by the other party shall not operate as a waiver of any other breach, whether similar to or different from the breach waived.  No delay by either party in the exercise of any rights or remedies shall operate as a waiver thereof, and no single or partial exercise by either party of any such right or remedy shall preclude other or further exercise thereof.
 
10.          Severability .  If any provision of this Agreement or the application of any such provision to any person or circumstances shall be determined by any court of competent jurisdiction to be invalid or unenforceable to any extent, the remainder of this Agreement, or the application of such provision to such person or circumstances other than those to which it is so determined to be invalid or unenforceable, shall not be affected thereby, and each provision hereof shall be enforced to the fullest extent permitted by law.  If any provision of this Agreement, or any part thereof, is held to be invalid or unenforceable because of the scope or duration of or the area covered by such provision, the parties agree that the court making such determination shall reduce the scope, duration and/or area of such provision (and shall substitute appropriate provisions for any such invalid or unenforceable provisions) in order to make such provision enforceable to the fullest extent permitted by law and/or shall delete specific words and phrases, and such modified provision shall then be enforceable and shall be enforced.  The parties recognize that if, in any judicial proceeding, a court shall refuse to enforce any of the separate covenants contained in this Agreement, then that invalid or unenforceable covenant contained in this Agreement shall be deemed eliminated from these provisions to the extent necessary to permit the remaining separate covenants to be enforced.  In the event that any court determines that the time period or the area, or both, are unreasonable and that any of the covenants is to that extent invalid or unenforceable, the parties agree that such covenants will remain in full force and effect, first, for the greatest time period, and second, in the greatest geographical area that would not render them unenforceable.
 
11.          Survivability .  The provisions of this Agreement which by their terms call for performance subsequent to termination of Executive’s employment hereunder, or of this Agreement, shall so survive such termination, whether or not such provisions expressly state that they shall so survive.
 
12.          Governing Law; Arbitration .
 
(a)           Governing Law .  This Agreement shall be governed by and construed in accordance with the laws of the State of Nevada applicable to agreements made and to be wholly performed within that State, without regard to its conflict of laws provisions.
 
(b)           Arbitration .
 
(i)            Executive and the Company agree that, except for claims for workers’ compensation, unemployment compensation, and any other claim that is non-arbitrable under applicable law, final and binding arbitration shall be the exclusive forum for any dispute or controversy between them, including, without limitation, disputes arising under or in connection with this Agreement, Executive’s employment, and/or termination of employment, with the Company; provided , however , that the Company shall be entitled to commence an action in any court of competent jurisdiction for injunctive relief in connection with any alleged actual or threatened violation of any provision of Section 5.  Judgment may be entered on the arbitrators’ award in any court having jurisdiction.  For purposes of entering such judgment or seeking injunctive relief with regard to Section 5, the Company and Executive hereby consent to the exclusive personal jurisdiction of the state and federal courts located in Las Vegas, Nevada; provided that damages for any alleged violation of Section 5, as well as any claim, counterclaim or cross-claim brought by Executive or any third-party in response to, or in connection with any court action commenced by the Company seeking said injunctive relief shall remain exclusively subject to final and binding arbitration as provided for herein.  The Company and Executive hereby waive, to the fullest extent permitted by applicable law, any objection which either may now or hereafter have to such jurisdiction, venue and any defense of inconvenient forum.  Thus, except for the claims carved out above, this Agreement includes all common-law and statutory claims (whether arising under federal state or local law), including any claim for breach of contract, fraud, fraud in the inducement, unpaid wages, wrongful termination, and gender, age, national origin, sexual orientation, marital status, disability, or any other  protected status.
 
Any arbitration under this Agreement shall be filed exclusively with, and administered by, the American Arbitration Association in Las Vegas, Nevada before three arbitrators, in accordance with the National Rules for the Resolution of Employment Disputes of the American Arbitration Association in effect at the time of submission to arbitration.  The Company and Executive hereby agree that a judgment upon an award rendered by the arbitrators may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law.  The Company shall pay all costs uniquely attributable to arbitration, including the administrative fees and costs of the arbitrators.  Each party shall pay that party’s own costs and attorney fees, if any, unless the arbitrators rule otherwise.  Executive understands that she is giving up no substantive rights, and this Agreement simply governs forum.  The arbitrators shall apply the same standards a court would apply to award any damages, attorney fees or costs.  Executive shall not be required to pay any fee or cost that she would not otherwise be required to pay in a court action, unless so ordered by the arbitrators.
 
EXECUTIVE INITIALS: [ ]
 
COMPANY INITIALS: [ ]
 
(c)           WAIVER OF JURY TRIAL .  BY SIGNING THIS AGREEMENT, EXECUTIVE AND THE COMPANY ACKNOWLEDGE THAT THE RIGHT TO A COURT TRIAL AND TRIAL BY JURY IS OF VALUE, AND KNOWINGLY AND VOLUNTARILY WAIVE THAT RIGHT FOR ANY DISPUTE SUBJECT TO THE TERMS OF THIS ARBITRATION PROVISION.
 
13.          Titles and Captions .  All paragraph titles or captions in this Agreement are for convenience only and in no way define, limit, extend or describe the scope or intent of any provision hereof.
 
14.          Joint Drafting .  In recognition of the fact that the parties had an equal opportunity to negotiate the language of, and draft, this Agreement, the parties acknowledge and agree that there is no single drafter of this Agreement and, therefore, the general rule that ambiguities are to be construed against the drafter is, and shall be, inapplicable.  If any language in this Agreement is found or claimed to be ambiguous, each party shall have the same opportunity to present evidence as to the actual intent of the parties with respect to any such ambiguous language without any inference or presumption being drawn against any party.
 
15.          Notices .  All notices and other communications to be given or to otherwise be made to any party to this Agreement shall be deemed to be sufficient if contained in a written instrument delivered in person or duly sent by certified mail or by a recognized national courier service, postage or charges prepaid, (a) to Scientific Games Corporation, Attn: Chief Legal Officer, at 6650 S. El Camino Road, Las Vegas, NV 89118, (b) to Executive, at the last address shown in the Company’s records, or (c) to such other replacement address as may be designated in writing by the addressee to the addressor.
 
16.          Interpretation .  When a reference is made in this Agreement to a Section, such reference shall be to a Section of this Agreement unless otherwise indicated.  Whenever the words “include,” “includes” or “including” are used in this Agreement, they shall be deemed to be followed by the words “without limitation,” unless the context otherwise indicates.  When a reference in this Agreement is made to a “party” or “parties,” such reference shall be to a party or parties to this Agreement unless otherwise indicated or the context requires otherwise.  Unless the context requires otherwise, (a) the terms “hereof,” “herein,” “hereby,” “hereto”, “hereunder” and derivative or similar words in this Agreement refer to this entire Agreement, (b) the word “or” is disjunctive but not exclusive and (c) words in this Agreement using the singular or plural number also include the plural or singular number, respectively, and the use of any gender herein shall be deemed to include the other genders.  References in this Agreement to “dollars” or “$” are to U.S. dollars.  When a reference is made in this Agreement to a law, statute or legislation, such reference shall be to such law, statute or legislation as it may be amended, modified, extended or re-enacted from time to time (including any successor law, statute or legislation) and shall include any regulations promulgated thereunder from time to time.  The headings used herein are for reference only and shall not affect the construction of this Agreement.
 
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 IN WITNESS WHEREOF, each of the parties has duly executed this Agreement as of the date above written.
 
 
SCIENTIFIC GAMES CORPORATION
 
 
 
 
By:
/s/ Gary L. Melampy
 
Name:
Gary L. Melampy
 
Title:
VP, Chief HR Officer
 
 
 
 
 
 
 
 
 
EXECUTIVE
 
 
 
/s/ Karin-Joyce Tjon Sien Fat
 
Name: Karin-Joyce Tjon Sien Fat
     

 
Exhibit A
 
Sign-On Award Agreement
Exhibit B
 
Inventions
 
None.
 

1


EXHIBIT 10.3

Amended and Restated
Employment Agreement
This Amended and Restated Employment Agreement (this “ Agreement ”) is made as of February 27, 2017 (the “ Effective Date ”), and amends and restates that certain Employment Agreement (the “Former Agreement ”), dated as of July 11, 2016, by and between Scientific Games Corporation, a Delaware corporation (the “ Company ”), and Michael Winterscheidt (“ Executive ”).
WHEREAS, the Company and Executive wish to enter into this Agreement setting forth terms and conditions of Executive’s employment.
NOW, THEREFORE, in consideration of the premises and mutual benefits to be derived herefrom and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged by the Company and Executive, the Former Agreement is superseded in its entirety by this Agreement and the parties agree as follows.
1.     Employment; Term . The Company hereby agrees to employ Executive, and Executive hereby accepts employment with the Company, in accordance with and subject to the terms and conditions set forth in this Agreement. This term of employment of Executive under this Agreement (the “ Term ”) shall be the period commencing on the Effective Date and ending on February 27, 2018, as may be extended in accordance with this Section 1 and subject to earlier termination in accordance with Section 4. The Term shall be extended automatically without further action by either party by one (1) additional year (added to the end of the Term), and then on each succeeding annual anniversary thereafter, unless either party shall have given written notice to the other party prior to the date which is sixty (60) days prior to the date upon which such extension would otherwise have become effective electing not to further extend the Term, in which case Executive’s employment shall terminate on the date upon which such extension would otherwise have become effective, unless earlier terminated in accordance with Section 4.
2.     Position and Duties . During the Term, Executive will serve as Chief Accounting Officer of the Company and as an officer or director of any subsidiary or affiliate of the Company if elected or appointed to such positions, as applicable, during the Term. In such capacities, Executive shall perform such duties and shall have such responsibilities as are normally associated with such positions, and as otherwise may be assigned to Executive from time to time by the Company’s Executive Vice President, Chief Financial Officer and Company Secretary or upon the authority of the board of directors of the Company (the “ Board ”). Subject to Section 4(e), Executive’s functions, duties and responsibilities are subject to reasonable changes as the Company may in good faith determine from time to time. Executive hereby agrees to accept such employment and to serve the Company and its subsidiaries and affiliates to the best of Executive’s ability in such capacities, devoting all of Executive’s business time to such employment.
3.     Compensation .
(a)     Base Salary . During the Term, Executive will receive a base salary of four hundred and twenty five thousand U.S. dollars (US$425,000) per annum (pro-rated for any partial year), payable in accordance with the Company’s regular payroll practices and subject to such deductions or amounts to be withheld as required by applicable law and regulations or as may be agreed to by Executive. In the event that the Company, in its sole discretion, from time to time determines to increase Executive’s base salary, such increased amount shall, from and after the effective date of such increase, constitute the “ base salary ” of Executive for purposes of this Agreement.
(b)     Incentive Compensation .  Executive shall have the opportunity annually to earn incentive compensation (“ Incentive Compensation ”) during the Term in amounts determined by the Compensation Committee of the Board (the “ Compensation Committee ”) in its sole discretion in accordance with the applicable incentive compensation plan of the Company as in effect from time to time (the “ Incentive Compensation Plan ”). Under such Incentive Compensation Plan, Executive shall have the opportunity annually to earn up to 50% of Executive’s base salary as Incentive Compensation at “target opportunity” (“ Target Bonus ”) on the terms and subject to the conditions of such Incentive Compensation Plan (any such Incentive Compensation to be subject to such deductions or amounts to be withheld as required by applicable law and regulations or as may be agreed to by Executive). Executive’s 2016 Incentive Compensation will be pro-rated based on the number of months he worked during 2016.
(c)     Eligibility for Annual Equity Awards .  During the Term, Executive shall be eligible to receive an annual grant of stock options, restricted stock units or other equity awards in the sole discretion of the Compensation Committee and in accordance with the applicable plans and programs of the Company for executives of the Company and subject to the Company’s right to at any time amend or terminate any such plan or program, so long as any such change does not adversely affect any accrued or vested interest of Executive under any such plan or program.
(d)     Expense Reimbursement . Subject to Section 3(f), during the Term the Company shall reimburse Executive for all reasonable and necessary travel and other business expenses incurred by Executive in connection with the performance of Executive’s duties under this Agreement, on a timely basis upon timely submission by Executive of vouchers therefor in accordance with the Company’s standard policies and procedures.
(e)     Employee Benefits . During the Term, Executive shall be entitled to participate, without discrimination or duplication, in any and all medical insurance, group health, disability, life insurance, accidental death and dismemberment insurance, 401(k) or other retirement, deferred compensation, stock ownership and such other plans and programs which are made generally available by the Company to similarly situated executives of the Company in accordance with the terms of such plans and programs and subject to the right of the Company (or its applicable affiliate) to at any time amend or terminate any such plan or program. Executive shall be entitled to paid vacation, holidays and any other time off in accordance with the Company’s policies in effect from time to time.
(f)     Taxes and Internal Revenue Code 409A . Payment of all compensation and benefits to Executive under this Agreement shall be subject to all legally required and customary withholdings. The Company makes no representations regarding the tax implications of the compensation and benefits to be paid to Executive under this Agreement, including, without limitation, under Section 409A of the Internal Revenue Code of 1986, as amended (the “ Code ”), and applicable administrative guidance and regulations (“ Section 409A ”). Section 409A governs plans and arrangements that provide “nonqualified deferred compensation” (as defined under the Code) which may include, among others, nonqualified retirement plans, bonus plans, stock option plans, employment agreements and severance agreements. The Company reserves the right to provide compensation and benefits under any plan or arrangement in amounts, at times and in a manner that minimizes taxes, interest or penalties as a result of Section 409A. In addition, in the event any benefits or amounts paid to Executive hereunder are deemed to be subject to Section 409A, Executive consents to the Company adopting such conforming amendments as the Company deems necessary, in its reasonable discretion, to comply with Section 409A (including, but not limited to, delaying payment until six (6) months following termination of employment). Notwithstanding anything herein to the contrary, if (i) at the time of Executive’s “separation from service” (as defined in Treas. Reg. Section 1.409A-1(h)) with the Company other than as a result of Executive’s death, (ii) Executive is a “specified employee” (as defined in Section 409A(a)(2)(B)(i) of the Code), (iii) one or more of the payments or benefits received or to be received by Executive pursuant to this Agreement would constitute deferred compensation subject to Section 409A, and (iv) the deferral of the commencement of any such payments or benefits otherwise payable hereunder as a result of such separation of service is necessary in order to prevent any accelerated or additional tax under Section 409A, then the Company will defer the commencement of the payment of any such payments or benefits hereunder to the extent necessary (without any reduction in such payments or benefits ultimately paid or provided to Executive) until the date that is six (6) months following Executive’s separation from service with the Company (or the earliest date as is permitted under Section 409A). Any remaining payments or benefits shall be made as otherwise scheduled hereunder. Furthermore, to the extent any payments of money or other benefits due to Executive hereunder could cause the application of an accelerated or additional tax under Section 409A, such payments or other benefits shall be deferred if deferral will make such payment or other benefits compliant under Section 409A, or otherwise such payments or other benefits shall be restructured, to the extent permissible under Section 409A, in a manner determined by the Company that does not cause such an accelerated or additional tax. To the extent any reimbursements or in-kind benefits due to Executive under this Agreement constitute deferred compensation under Section 409A, any such reimbursements or in-kind benefits shall be paid to Executive in a manner consistent with Treas. Reg. Section 1.409A-3(i)(1)(iv). Each payment made under this Agreement shall be designated as a “separate payment” within the meaning of Section 409A.
4.     Termination of Employment . Executive’s employment may be terminated at any time prior to the end of the Term under the terms described in this Section 4, and the Term shall automatically terminate upon any termination of Executive’s employment. For purposes of clarification, except as provided in Section 5.6, all stock options, restricted stock units and other equity-based awards will be governed by the terms of the plans, grant agreements and programs under which such options, restricted stock units or other awards were granted on any termination of the Term and Executive’s employment with the Company.
(a)     Termination by Executive for Other than Good Reason . Executive may terminate Executive’s employment hereunder for any reason or no reason upon 60 days’ prior written notice to the Company referring to this Section 4(a); provided , however , that a termination by Executive for “Good Reason” (as defined below) shall not constitute a termination by Executive for other than Good Reason pursuant to this Section 4(a). In the event Executive terminates Executive’s employment for other than Good Reason, Executive shall be entitled only to the following compensation and benefits (the payments set forth in Sections 4(a)(i) – 4(a)(iii), collectively, the “ Standard Termination Payments ”):
(i)    any accrued but unpaid base salary for services rendered by Executive to the date of such termination, payable in accordance with the Company’s regular payroll practices and subject to such deductions or amounts to be withheld as required by applicable law and regulations or as may be agreed to by Executive;
(ii)    any vested non-forfeitable amounts owing or accrued at the date of such termination under benefit plans, programs and arrangements set forth or referred to in Section 3(e) in which Executive participated during the Term (which will be paid under the terms and conditions of such plans, programs, and arrangements (and agreements and documents thereunder)); and
(iii)    reasonable business expenses and disbursements incurred by Executive prior to such termination will be reimbursed in accordance with Section 3(d).
(b)     Termination By Reason of Death . If Executive dies during the Term, the last beneficiary designated by Executive by written notice to the Company (or, in the absence of such designation, Executive’s estate) shall be entitled only to the Standard Termination Payments, including any benefits that may be payable under any life insurance benefit of Executive for which the Company pays premiums, in accordance with the terms of any such benefit and subject to the right of the Company (or its applicable affiliate) to at any time amend or terminate any such benefit.
(c)     Termination By Reason of Total Disability . The Company may terminate Executive’s employment in the event of Executive’s “Total Disability.” For purposes of this Agreement, “ Total Disability ” shall mean Executive’s (1) becoming eligible to receive benefits under any long-term disability insurance program of the Company or (2) failure to perform the duties and responsibilities contemplated under this Agreement for a period of more than 180 days during any consecutive 12-month period due to physical or mental incapacity or impairment. In the event that Executive’s employment is terminated by the Company by reason of Total Disability, Executive shall not be entitled to receive any compensation or benefits under this Agreement except for the Standard Termination Payments; provided , however , that the Executive may separately be entitled to disability payments pursuant to a disability plan sponsored or maintained by the Company or any of its affiliates providing benefits to Executive.
(d)     Termination by the Company for Cause . The Company may terminate the employment of Executive at any time for “Cause.” For purposes of this Agreement, “ Cause ” shall mean: (i) gross neglect by Executive of Executive’s duties hereunder; (ii) Executive’s indictment for or conviction of a felony, or any non-felony crime or offense involving the property of the Company or any of its subsidiaries or affiliates or evidencing moral turpitude; (iii) willful misconduct by Executive in connection with the performance of Executive’s duties hereunder; (iv) intentional breach by Executive of any material provision of this Agreement; (v) material violation by Executive of a material provision of the Company’s Code of Business Conduct; or (vi) any other willful or grossly negligent conduct of Executive that would make the continued employment of Executive by the Company materially prejudicial to the best interests of the Company. In the event Executive’s employment is terminated for “Cause,” Executive shall not be entitled to receive any compensation or benefits under this Agreement except for the Standard Termination Payments.
(e)     Termination by the Company without Cause or by Executive for Good Reason . The Company may terminate Executive’s employment at any time without Cause, for any reason or no reason, and Executive may terminate Executive’s employment for “Good Reason.” For purposes of this Agreement “ Good Reason ” shall mean that, without Executive’s prior written consent, any of the following shall have occurred: (A) a material adverse change to Executive’s positions, titles, offices, or duties following the Effective Date from those set forth in Section 2, except, in such case, in connection with the termination of Executive’s employment for Cause or due to Total Disability, death or expiration of the Term; (B) a material decrease in base salary or material decrease in Executive’s Incentive Compensation opportunity provided under this Agreement; or (C) any other material failure by the Company to perform any material obligation under, or material breach by the Company of any material provision of, this Agreement; provided , however , that a termination by Executive for Good Reason under any of clauses (A) through (C) of this Section 4(e) shall not be considered effective unless Executive shall have provided the Company with written notice of the specific reasons for such termination within thirty (30) days after Executive has knowledge of the event or circumstance constituting Good Reason and the Company shall have failed to cure the event or condition allegedly constituting Good Reason within thirty (30) days after such notice has been given to the Company and Executive actually terminates his employment within one (1) year following the initial occurrence of the event giving rise to Good Reason. In the event that Executive’s employment is terminated by the Company without Cause or by Executive for Good Reason (and not, for the avoidance of doubt, in the event of a termination pursuant to Section 4(a), (b), (c) or (d) or due to or upon the expiration of the Term), the Company shall pay or provide the following amounts to Executive:
(i)    the Standard Termination Payments; and
(ii)    an amount equal to the Executive’s base salary payable in accordance with the Company’s normal payroll practices over a period of twelve (12) months after such termination in accordance with Section 4(g).
(f)     Expiration of Term of Agreement. In the event Executive’s employment is terminated by the Company at the end of the Term, Executive shall receive an amount equal to Executive’s base salary, payable in accordance with the Company’s normal payroll practices over a period of twelve (12) months after such termination in accordance with Section 4(g).
(g)     Timing of Certain Payments under Section 4 . For purposes of Section 409A, references herein to the Executive’s “termination of employment” shall refer to Executive’s separation of services with the Company within the meaning of Treas. Reg. Section 1.409A-1(h). If at the time of Executive’s separation of service with the Company other than as a result of Executive’s death, (i) Executive is a “specified employee” (as defined in Section 409A(a)(2)(B)(i) of the Code), (ii) one or more of the payments or benefits received or to be received by Executive pursuant to this Agreement would constitute deferred compensation subject to Section 409A, and (iv) the deferral of the commencement of any such payments or benefits otherwise payable hereunder as a result of such separation of service is necessary in order to prevent any accelerated or additional tax under Section 409A, such payments may be made as follows: (i) no payments for a six-month period following the date of Executive’s separation of service with the Company; (ii) an amount equal to the aggregate sum that would have been otherwise payable during the initial six-month period paid in a lump sum on the first payroll date following six (6) months following the date of Executive’s separation of service with the Company (subject to such deductions or amounts to be withheld as required by applicable law and regulations); and (iii) during the period beginning six (6) months following Executive’s separation of service with the Company through the remainder of the applicable period, payment of the remaining amount due in equal installments in accordance with the Company’s standard payroll practices (subject to such deductions or amounts to be withheld as required by applicable law and regulations).
(h)     Mitigation . In the event the Executive’s employment is terminated in accordance with Section 4(e) or (f) and Executive is employed by or otherwise engaged to provide services to another person or entity at any time prior to the end of any period of payments to or on behalf of Executive contemplated by this Section 4, Executive shall immediately advise the Company of such employment or engagement and his compensation therefor and the Company’s obligation to make payments pursuant to Section 4(e) or (f) shall be reduced by any base compensation payable to Executive during the applicable period through such other employment or engagement.
(i)     Set-Off . To the fullest extent permitted by law and provided an acceleration of income or the imposition of an additional tax under Section 409A would not result, any amounts otherwise due to Executive hereunder (including any payments pursuant to this Section 4) shall be subject to set-off with respect to any amounts Executive otherwise owes the Company or any subsidiary or affiliate thereof.
(j)     No Other Benefits or Compensation .  Except as may be specifically provided under this Agreement, under any other effective written agreement between Executive and the Company, or under the terms of any plan or policy applicable to Executive, Executive shall have no right to receive any other compensation from the Company or any subsidiary or affiliate thereof, or to participate in any other plan, arrangement or benefit provided by the Company or any subsidiary or affiliate thereof, with respect to any future period after such termination or resignation. Executive acknowledges and agrees that Executive is entitled to no compensation or benefits from the Company or any of its subsidiaries or affiliates of any kind or nature whatsoever in respect of periods prior to the date of this Agreement.
(k)     Release of Employment Claims; Compliance with Section 5 . Executive agrees, as a condition to receipt of any termination payments provided for in this Section 4 (other than the Standard Termination Payments), that Executive will execute a general release agreement, in a form reasonably satisfactory to the Company, releasing any and all claims arising out of Executive’s employment and the termination of such employment. The Company shall provide Executive with the proposed form of general release agreement referred to in the immediately preceding sentence no later than five (5) days following the date of termination. Executive shall thereupon have at least 21 days to consider such general release agreement and, if Executive executes such general release agreement, shall have seven (7) days after execution of such general release agreement to revoke such general release agreement. Absent such revocation, such general release agreement shall become binding on Executive. If Executive does not revoke such general release agreement, payments contingent on such general release agreement that constitute deferred compensation under Section 409A (if any) shall be paid on the later of 60 th day after the date of termination or the date such payments are otherwise scheduled to be paid pursuant to this Agreement. The Company’s obligation to make any termination payments and benefits provided for in this Section 4 (other than the Standard Termination Payments) shall immediately cease if Executive willfully and materially breaches Section 5.1, 5.2 , 5.3, 5.4, or 5.8.
5.     Noncompetition; Non-solicitation; Nondisclosure; etc .
5.1 Noncompetition; Non-solicitation .
(a)    Executive acknowledges the highly competitive nature of the Company’s business and that access to the Company’s confidential records and proprietary information renders Executive special and unique within the Company’s industries. In addition to the protection of confidential records and proprietary information covered in Section 5.2, the provisions set forth in this Section 5.1 are necessary in order to protect the goodwill of the Company and the relationships developed by the Company with employees, customers and suppliers. In consideration of the amounts that may hereafter be paid to Executive pursuant to this Agreement (including, without limitation, Sections 3 and 4), Executive agrees that during the Term (including any extensions thereof) and during the Covered Time (as defined in Section 5.1(e)), Executive, alone or with others, will not, directly or indirectly, on behalf of a Competing Business (defined below), perform job duties of the type conducted, authorized, offered, or provided by Executive within two (2) years prior to the date of termination of Executive’s employment. Executive acknowledges that Company has gaming and lottery customers in almost every single state as well as numerous countries throughout the world and Executive has global responsibilities. Therefore, this restriction covers any geographic area where the Company does business. For purposes of this Section 5, “Competing Business” shall mean any business or operations that competes with the Company: (i) related to (A) design, development, manufacturing, production, sales, leasing, licensing, provisioning, operational or management activities (as the case may be) related to the (1) lottery industry, (2) the land-based gaming industry, (3) the interactive gaming industry, and (4) the social gaming industry; or (B) in which the Company is then or was within the previous 12 months engaged, or in which the Company, to Executive’s knowledge, contemplates to engage in during the Term or the Covered Time, (ii) in which Executive was engaged or involved on behalf of the Company or with respect to which Executive has obtained proprietary or confidential information; and (iii) which were conducted anywhere in the United States or in any other geographic area in which such business was conducted or the Company contemplates conducting such business. Notwithstanding the foregoing, it is understood and agreed that Executive may have a beneficial ownership of not more than one (1) percent of the outstanding shares of a corporation with capital stock listed on any national or regional securities exchange or quoted in the daily listing of over-the-counter market securities and in which Executive does not undertake a management, operational, or advisory role.
(b)    In further consideration of the amounts that may hereafter be paid to Executive pursuant to this Agreement (including, without limitation, Sections 3 and 4), Executive agrees that, during the Term (including any extensions thereof) and during the Covered Time, Executive shall not, directly or indirectly: (i) solicit or attempt to induce any of the employees, agents, consultants or representatives of the Company to terminate his, her, or its relationship with the Company; (ii) solicit or attempt to induce any of the employees, agents, consultants or representatives of the Company to become employees, agents, consultants or representatives of any other person or entity; or (iii) solicit or attempt to induce any customer, vendor or distributor of the Company to curtail or cancel any business with the Company; or (iv) hire any person who, to Executive’s actual knowledge, is, or was within 180 days prior to such hiring, an employee of the Company. Sections (i) and (ii) are limited to employees, agents, consultants and representatives with whom Executive had material contact for the purpose of performing Executive’s job duties or about whom Executive obtained confidential information during Executive’s employment. Section (iii) is limited to customers, vendors and distributors with whom Executive had material contact for the purpose of performing his job duties, or about whom Executive obtained confidential information during his employment.
(c)    During the Term (including any extensions thereof) and during the Covered Time, Executive agrees that upon the earlier of Executive’s (i) negotiating with any Competitor (as defined below) concerning the possible employment of Executive by the Competitor, (ii) responding to (other than for the purpose of declining) an offer of employment from a Competitor, or (iii) becoming employed by a Competitor, (A) Executive will provide copies of Section 5 of this Agreement to the Competitor, and (B) in the case of any circumstance described in (iii) above occurring during the Covered Time, and in the case of any circumstance described in (i) or (ii) above occurring during the Term or during the Covered Time, Executive will promptly provide notice to the Company of such circumstances. Executive further agrees that the Company may provide notice to a Competitor of Executive’s obligations under this Agreement. For purposes of this Agreement, “ Competitor ” shall mean any person or entity (other than the Company, its subsidiaries or affiliates) that engages, directly or indirectly, in the United States or any other geographic area in any Competing Business.
(d)    Despite the restrictions in this Section 5.1, Executive acknowledges that Executive is not precluded from meaningful opportunities for employment where Executive’s skills can be utilized gainfully and Executive acknowledges that the consideration provided under this Agreement (including, without limitation, Sections 3 and 4) is sufficient to justify such restrictions. In consideration thereof and in light of Executive’s education, skills and abilities, Executive agrees that Executive will not assert in any forum that such restrictions prevent Executive from earning a living or otherwise should be held void or unenforceable.
(e)    For purposes of this Section 5.1, “ Covered Time ” shall mean the period beginning on the date of termination of Executive’s employment and ending twelve (12) months thereafter.
(f)    In the event that a court of competent jurisdiction or arbitrator(s), as the case may be, determine that the provisions of this Section 5.1 are unenforceable for any reason, the parties acknowledge and agree that the court or arbitrator(s) is expressly empowered to reform any provision of this Section so as to make them enforceable as described in Section 10 below.
5.2    Proprietary Information; Inventions.
(a)    Executive acknowledges that, during the course of Executive’s employment with the Company, Executive necessarily will have (and during any employment by, or affiliation with, the Company prior to the Term has had) access to and make use of proprietary information and confidential records of the Company. Executive covenants that Executive shall not during the Term or at any time thereafter, directly or indirectly, use for Executive’s own purpose or for the benefit of any person or entity other than the Company, nor otherwise disclose to any person or entity, any such proprietary information, unless and to the extent such disclosure has been authorized in writing by the Company or is otherwise required by law. The term “ proprietary information ” means: (i) the software products, programs, applications, and processes utilized by the Company; (ii) the name and/or address of any customer or vendor of the Company or any information concerning the transactions or relations of any customer or vendor of the Company with the Company; (iii) any information concerning any product, technology, or procedure employed by the Company but not generally known to its customers or vendors or competitors, or under development by or being tested by the Company but not at the time offered generally to customers or vendors; (iv) any information relating to the Company’s computer software, computer systems, pricing or marketing methods, sales margins, cost of goods, cost of material, capital structure, operating results, borrowing arrangements or business plans; (v) any information identified as confidential or proprietary in any line of business engaged in by the Company; (vi) any information that, to Executive’s actual knowledge, the Company ordinarily maintains as confidential or proprietary; (vii) any business plans, budgets, advertising or marketing plans; (viii) any information contained in any of the Company’s written or oral policies and procedures or manuals; (ix) any information belonging to customers, vendors or any other person or entity which the Company, to Executive’s actual knowledge, has agreed to hold in confidence; and (x) all written, graphic, electronic data and other material containing any of the foregoing. Executive acknowledges that information that is not novel or copyrighted or patented may nonetheless be proprietary information. The term “proprietary information” shall not include information generally known or available to the public, information that becomes available to Executive on an unrestricted, non-confidential basis from a source other than the Company or any of its directors, officers, employees, agents or other representatives (without breach of any obligation of confidentiality of which Executive has knowledge, after reasonable inquiry, at the time of the relevant disclosure by Executive), or general lottery, land-based gaming, interactive gaming or social gaming industry information to the extent not particularly related or proprietary to the Company that was already known to Executive at the time Executive commences his employment by the Company that is not subject to nondisclosure by virtue of Executive’s prior employment or otherwise. Notwithstanding the foregoing and Section 5.3, Executive may disclose or use proprietary information or confidential records solely to the extent (A) such disclosure or use may be required or appropriate in the performance of his duties as a director or employee of the Company, (B) required to do so by a court of law, by any governmental agency having supervisory authority over the business of the Company or by any administrative or legislative body (including a committee thereof) with apparent jurisdiction to order him to divulge, disclose or make accessible such information (provided that in such case Executive shall first give the Company prompt written notice of any such legal requirement, disclose no more information than is so required and cooperate fully with all efforts by the Company to obtain a protective order or similar confidentiality treatment for such information), (C) such information or records becomes generally known to the public without his violation of this Agreement, or (D) disclosed to Executive’s spouse, attorney and/or his personal tax and financial advisors to the extent reasonably necessary to advance Executive’s tax, financial and other personal planning (each an “ Exempt Person ”); provided , however , that any disclosure or use of any proprietary information or confidential records by an Exempt Person shall be deemed to be a breach of this Section 5.2 or Section 5.3 by Executive.
(b)    Executive agrees that all processes, technologies and inventions (collectively, “ Inventions ”), including new contributions, improvements, ideas and discoveries, whether patentable or not, conceived, developed, invented or made by Executive during the Term (and during any employment by, or affiliation with, the Company prior to the Term) shall belong to the Company, provided that such Inventions grew out of Executive’s work with the Company or any of its subsidiaries or affiliates, are related in any manner to the business (commercial or experimental) of the Company or any of its subsidiaries or affiliates or are conceived or made on the Company’s time or with the use of the Company’s facilities or materials. Executive shall further: (i) promptly disclose such Inventions to the Company; (ii) assign to the Company, without additional compensation, all patent and other rights to such Inventions for the United States and foreign countries; (iii) sign all papers necessary to carry out the foregoing; and (iv) give testimony in support of Executive’s inventorship. If any Invention is described in a patent application or is disclosed to third parties, directly or indirectly, by Executive within two (2) years after the termination of Executive’s employment with the Company, it is to be presumed that the Invention was conceived or made during the Term. Executive agrees that Executive will not assert any rights to any Invention as having been made or acquired by Executive prior to the date of this Agreement, except for Inventions, if any, disclosed in Exhibit A to this Agreement.
5.3     Confidentiality and Surrender of Records .  Executive shall not, during the Term or at any time thereafter (irrespective of the circumstances under which Executive’s employment by the Company terminates), except to the extent required by law, directly or indirectly publish, make known or in any fashion disclose any confidential records to, or permit any inspection or copying of confidential records by, any person or entity other than in the course of such person’s or entity’s employment or retention by the Company, nor shall Executive retain, and will deliver promptly to the Company, any of the same following termination of Executive’s employment hereunder for any reason or upon request by the Company. For purposes hereof, “ confidential records ” means those portions of correspondence, memoranda, files, manuals, books, lists, financial, operating or marketing records, magnetic tape, or electronic or other media or equipment of any kind in Executive’s possession or under Executive’s control or accessible to Executive which contain any proprietary information. All confidential records shall be and remain the sole property of the Company during the Term and thereafter.
Notwithstanding anything herein to the contrary, nothing in this Agreement shall (i) prohibit Executive from making reports of possible violations of federal law or regulation to any governmental agency or entity in accordance with the provisions of and rules promulgated under Section 21F of the Securities Exchange Act of 1934 or Section 806 of the Sarbanes-Oxley Act of 2002, or of any other whistleblower protection provisions of state or federal law or regulation, or (ii) require notification or prior approval by the Company of any reporting described in clause (i).

5.4     Non-disparagement . Executive shall not, during the Term and thereafter, disparage in any material respect the Company, any affiliate of the Company, any of their respective businesses, any of their respective officers, directors or employees, or the reputation of any of the foregoing persons or entities. Notwithstanding the foregoing, nothing in this Agreement shall preclude Executive from making truthful statements that are required by applicable law, regulation or legal process.
5.5     No Other Obligations . Executive represents that Executive is not precluded or limited in Executive’s ability to undertake or perform the duties described herein by any contract, agreement or restrictive covenant. Executive covenants that Executive shall not employ the trade secrets or proprietary information of any other person in connection with Executive’s employment by the Company without such person’s authorization.
5.6     Forfeiture of Outstanding Equity Awards; “Clawback” Policies . The other provisions of this Agreement notwithstanding, if Executive willfully and materially fails to comply with Section 5.1, 5.2, 5.3, 5.4, or 5.8, all options to purchase common stock, restricted stock units and other equity-based awards granted by the Company or any of its affiliates (whether prior to, contemporaneous with, or subsequent to the date hereof) and held by Executive or a transferee of Executive shall be immediately forfeited and cancelled. Executive acknowledges and agrees that, notwithstanding anything contained in this Agreement or any other agreement, plan or program, any incentive-based compensation or benefits contemplated under this Agreement (including, without limitation, Incentive Compensation and equity-based awards) shall be subject to recovery by the Company under any compensation recovery or “clawback” policy, generally applicable to executives of the Company, that the Company may adopt from time to time, including any policy which the Company may be required to adopt under Section 954 of the Dodd-Frank Wall Street Reform and Consumer Protection Act and the rules and regulations of the Securities and Exchange Commission thereunder or the requirements of any national securities exchange on which the Company’s common stock may be listed.
5.7     Enforcement . Executive acknowledges and agrees that, by virtue of Executive’s position, services and access to and use of confidential records and proprietary information, any violation by Executive of any of the undertakings contained in this Section 5 would cause the Company immediate, substantial and irreparable injury for which it has no adequate remedy at law. Accordingly, Executive agrees and consents to the entry of an injunction or other equitable relief by a court of competent jurisdiction restraining any violation or threatened violation of any undertaking contained in this Section 5. Executive waives posting of any bond otherwise necessary to secure such injunction or other equitable relief. Rights and remedies provided for in this Section 5 are cumulative and shall be in addition to rights and remedies otherwise available to the parties hereunder or under any other agreement or applicable law.
5.8     Cooperation with Regard to Litigation . Executive agrees to cooperate reasonably with the Company, during the Term and thereafter (including following Executive’s termination of employment for any reason), by being available to testify on behalf of the Company in any action, suit, or proceeding, whether civil, criminal, administrative, or investigative. In addition, except to the extent that Executive has or intends to assert in good faith an interest or position adverse to or inconsistent with the interest or position of the Company, Executive agrees to cooperate reasonably with the Company, during the Term and thereafter (including following Executive’s termination of employment for any reason), to assist the Company in any such action, suit, or proceeding by providing information and meeting and consulting with the Board or its representatives or counsel, or representatives or counsel to the Company, in each case, as reasonably requested by the Company. The Company agrees to pay (or reimburse, if already paid by Executive) all reasonable expenses actually incurred in connection with Executive’s cooperation and assistance including reasonable fees and disbursements of counsel, if any, chosen by Executive if Executive reasonably determines in good faith, on the advice of counsel, that the Company’s counsel may not ethically represent Executive in connection with such action, suit or proceeding due to actual or potential conflicts of interests.
5.9     Survival . The provisions of this Section 5 shall survive the termination of the Term and any termination or expiration of this Agreement.
5.10     Company . For purposes of this Section 5, references to the “ Company ” shall include the Company and each subsidiary and/or affiliate of the Company (and each of their respective joint ventures and equity method investees).
6.     Code of Conduct . Executive acknowledges that Executive has read the Company’s Code of Business Conduct and agrees to abide by such Code of Business Conduct, as amended or supplemented from time to time, and other policies applicable to employees and executives of the Company.
7.     Indemnification .  The Company shall indemnify Executive to the full extent permitted under the Company’s Certificate of Incorporation or By-Laws and pursuant to any other agreements or policies in effect from time to time in connection with any action, suit or proceeding to which Executive may be made a party by reason of Executive being an officer, director or employee of the Company or of any subsidiary or affiliate of the Company.
8.     Assignability; Binding Effect .  Neither this Agreement nor the rights or obligations hereunder of the parties shall be transferable or assignable by Executive, except in accordance with the laws of descent and distribution and as specified below. The Company may assign this Agreement and the Company’s rights and obligations hereunder to any affiliate of the Company, provided that upon any such assignment the Company shall remain liable for the obligations to Executive hereunder. This Agreement shall be binding upon and inure to the benefit of Executive, Executive’s heirs, executors, administrators, and beneficiaries, and shall be binding upon and inure to the benefit of the Company and its successors and assigns.
9.     Complete Understanding; Amendment; Waiver . This Agreement constitutes the complete understanding between the parties with respect to the employment of Executive and supersedes all other prior agreements and understandings, both written and oral, between the parties with respect to the subject matter hereof, including, without limitation, superseding any entitlements to benefits or payments pursuant to any severance plan, policy, practice or arrangement maintained by the Company or any affiliate thereof as of the Effective Date, and no statement, representation, warranty or covenant has been made by either party with respect thereto except as expressly set forth herein. Executive’s Prior Employment Agreement shall terminate and be of no further force or effect as of the Effective Date. Except as contemplated by Sections 3(f), 5.1(f) and 10, this Agreement shall not be modified, amended or terminated except by a written instrument signed by each of the parties. Any waiver of any term or provision hereof, or of the application of any such term or provision to any circumstances, shall be in writing signed by the party charged with giving such waiver. Waiver by either party of any breach hereunder by the other party shall not operate as a waiver of any other breach, whether similar to or different from the breach waived. No delay by either party in the exercise of any rights or remedies shall operate as a waiver thereof, and no single or partial exercise by either party of any such right or remedy shall preclude other or further exercise thereof.
10.     Severability . If any provision of this Agreement or the application of any such provision to any person or circumstances shall be determined by any court of competent jurisdiction to be invalid or unenforceable to any extent, the remainder of this Agreement, or the application of such provision to such person or circumstances other than those to which it is so determined to be invalid or unenforceable, shall not be affected thereby, and each provision hereof shall be enforced to the fullest extent permitted by law. If any provision of this Agreement, or any part thereof, is held to be invalid or unenforceable because of the scope or duration of or the area covered by such provision, the parties agree that the court making such determination shall reduce the scope, duration and/or area of such provision (and shall substitute appropriate provisions for any such invalid or unenforceable provisions) in order to make such provision enforceable to the fullest extent permitted by law and/or shall delete specific words and phrases, and such modified provision shall then be enforceable and shall be enforced. The parties recognize that if, in any judicial proceeding, a court shall refuse to enforce any of the separate covenants contained in this Agreement, then that invalid or unenforceable covenant contained in this Agreement shall be deemed eliminated from these provisions to the extent necessary to permit the remaining separate covenants to be enforced. In the event that any court determines that the time period or the area, or both, are unreasonable and that any of the covenants is to that extent invalid or unenforceable, the parties agree that such covenants will remain in full force and effect, first, for the greatest time period, and second, in the greatest geographical area that would not render them unenforceable.
11.     Survivability . The provisions of this Agreement which by their terms call for performance subsequent to termination of Executive’s employment hereunder, or of this Agreement, shall so survive such termination, whether or not such provisions expressly state that they shall so survive.
12.     Governing Law; Arbitration .
(a)     Governing Law . This Agreement shall be governed by and construed in accordance with the laws of the State of Nevada applicable to agreements made and to be wholly performed within that State, without regard to its conflict of laws provisions.
(b)     Arbitration . 
(i)    Executive and the Company agree that, except for claims for workers’ compensation, unemployment compensation, and any other claim that is non-arbitrable under applicable law, final and binding arbitration shall be the exclusive forum for any dispute or controversy between them, including, without limitation, disputes arising under or in connection with this Agreement, Executive’s employment, and/or termination of employment, with the Company; provided , however , that the Company shall be entitled to commence an action in any court of competent jurisdiction for injunctive relief in connection with any alleged actual or threatened violation of any provision of Section 5. For purposes of entering judgment on an arbitrators award or seeking injunctive relief with regard to Section 5, the Company and Executive hereby consent to the exclusive personal jurisdiction in the state and federal courts located in Las Vegas, Nevada; provided that damages for any alleged violation of Section 5, as well as any claim, counterclaim or cross-claim brought by Executive or any third-party in response to, or in connection with any court action commenced by the Company seeking said injunctive relief shall remain exclusively subject to final and binding arbitration as provided for herein. The Company and Executive hereby waive, to the fullest extent permitted by applicable law, any objection which either may now or hereafter have to such jurisdiction, venue and any defense of inconvenient forum. Thus, except for the claims carved out above, this Agreement includes all common-law and statutory claims (whether arising under federal state or local law), including any claim for breach of contract, fraud, fraud in the inducement, unpaid wages, wrongful termination, and gender, age, national origin, sexual orientation, marital status, disability, or any other  protected status.
(ii)    Any arbitration under this Agreement shall be filed exclusively with, and administered by, the American Arbitration Association in Las Vegas, Nevada before three arbitrators, in accordance with the National Rules for the Resolution of Employment Disputes of the American Arbitration Association in effect at the time of submission to arbitration. The Company and Executive hereby agree that a judgment upon an award rendered by the arbitrators may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. The Company shall pay all costs uniquely attributable to arbitration, including the administrative fees and costs of the arbitrators.  Each party shall pay that party’s own costs and attorney fees, if any, unless the arbitrators rule otherwise. Executive understands that Executive is giving up no substantive rights, and this Agreement simply governs forum. The arbitrators shall apply the same standards a court would apply to award any damages, attorney fees or costs. Executive shall not be required to pay any fee or cost that Executive would not otherwise be required to pay in a court action, unless so ordered by the arbitrators.
EXECUTIVE INITIALS:_______         COMPANY INITIALS:_______
(c)     WAIVER OF JURY TRIAL . BY SIGNING THIS AGREEMENT, EXECUTIVE AND THE COMPANY ACKNOWLEDGE THAT THE RIGHT TO A COURT TRIAL AND TRIAL BY JURY IS OF VALUE, AND KNOWINGLY AND VOLUNTARILY WAIVE THAT RIGHT FOR ANY DISPUTE SUBJECT TO THE TERMS OF THIS ARBITRATION PROVISION.
13.     Titles and Captions .  All paragraph titles or captions in this Agreement are for convenience only and in no way define, limit, extend or describe the scope or intent of any provision hereof.
14.     Joint Drafting . In recognition of the fact that the parties had an equal opportunity to negotiate the language of, and draft, this Agreement, the parties acknowledge and agree that there is no single drafter of this Agreement and, therefore, the general rule that ambiguities are to be construed against the drafter is, and shall be, inapplicable.  If any language in this Agreement is found or claimed to be ambiguous, each party shall have the same opportunity to present evidence as to the actual intent of the parties with respect to any such ambiguous language without any inference or presumption being drawn against any party hereto.
15.     Notices . All notices and other communications to be given or to otherwise be made to any party to this Agreement shall be deemed to be sufficient if contained in a written instrument delivered in person or duly sent by certified mail or by a recognized national courier service, postage or charges prepaid, (a) to Scientific Games Corporation, Attn: Legal Department, 6650 S. El Camino Road, Las Vegas, NV 89118, (b) to Executive, at the last address shown in the Company’s records, or (c) to such other replacement address as may be designated in writing by the addressee to the addressor.
16.     Interpretation . When a reference is made in this Agreement to a Section, such reference shall be to a Section of this Agreement unless otherwise indicated. Whenever the words “include,” “includes” or “including” are used in this Agreement, they shall be deemed to be followed by the words “without limitation,” unless the context otherwise indicates. When a reference in this Agreement is made to a “party” or “parties,” such reference shall be to a party or parties to this Agreement unless otherwise indicated or the context requires otherwise. Unless the context requires otherwise, the terms “hereof,” “herein,” “hereby,” “hereto”, “hereunder” and derivative or similar words in this Agreement refer to this entire Agreement. Unless the context requires otherwise, words in this Agreement using the singular or plural number also include the plural or singular number, respectively, and the use of any gender herein shall be deemed to include the other genders. References in this Agreement to “dollars” or “$” are to U.S. dollars. When a reference is made in this Agreement to a law, statute or legislation, such reference shall be to such law, statute or legislation as it may be amended, modified, extended or re-enacted from time to time (including any successor law, statute or legislation) and shall include any regulations promulgated thereunder from time to time. The headings used herein are for reference only and shall not affect the construction of this Agreement.
[ remainder of page intentionally left blank ]
IN WITNESS WHEREOF, each of the parties has duly executed this Agreement as of the date above written.
 
 
SCIENTIFIC GAMES CORPORATION
 
 
 
 
By:
/s/ Gary L. Melampy
 
 
Gary L. Melampy
 
 
VP, Chief Human Resources Officer
 
 
 
 
 
 
 
 
 
EXECUTIVE
 
 
 
/s/ Michael Winterscheidt
 
Michael Winterscheidt

Exhibit A
Inventions


 

EXHIBIT 10.4

CONSULTING AGREEMENT

This Consulting Agreement is entered into as of January 1, 2017 (this “ Agreement ”) by and between SCIENTIFIC GAMES CORPORATION, a Delaware corporation, with offices located at 6650 S. El Camino Road, Las Vegas, Nevada 89118 (the “ Company ”), and Michael Gavin Isaacs, an individual (the “ Consultant ” and, together with the Company, the “ Parties ”).

RECITALS

WHEREAS, the Company seeks to engage the Consultant as an independent contractor in a manner consistent with the Company’s commitment to ethics and in compliance with all applicable Laws (as defined below); and

WHEREAS, this Agreement, including its effectiveness, is subject to the terms of the Modification Agreement between the Parties dated as of August 4, 2016 (the “ Modification Agreement ”).

NOW, THEREFORE, in consideration of the mutual promises, covenants, representations and warranties made herein and intending to be legally bound, the Parties hereto agree as follows:
Section 1     Interpretation
1.1     Certain Terms . As used herein, the following terms have the following meanings:
“ Affiliate ” means a Person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, a specified Person. A Person shall be deemed to control another Person if such first Person possesses, directly or indirectly, the power to direct, or cause the direction of, the management and policies of such other Person, whether through the ownership of voting securities, by contract or otherwise.
“ Code ” means the Internal Revenue Code of 1986, as amended.
“ Governmental Authority ” means any national, supranational, foreign, federal, state, provincial, tribal, peripheral, regional, municipal or local government or any agency, instrumentality or political subdivision thereof, including any legislative, executive, judicial, regulatory or other governmental board, department, agency, authority, commission, administration, court or other body, or any official of any of the foregoing (including any gaming- or lottery-related Governmental Authority).
“ Intellectual Property Rights ” means all patents, copyrights, trademarks, trade secrets and other intellectual property rights.
“ Law ” means any order, writ, injunction, decree, judgment, law, ordinance, decision, opinion, ruling, policy, statute, code, rule, regulation or administrative or other requirement of any Governmental Authority, in each case, as may be amended from time to time.
“ Person ” means any individual (including the heirs, beneficiaries, trusts, executors, legal representatives or administrators thereof), corporation, partnership, joint venture, trust, limited liability company, limited partnership, joint stock company, unincorporated association or other entity. For the avoidance of doubt, the term includes a Government Authority.




“ Representative ” means, with respect to any Person, any director, officer, employee, partner, member, manager, owner, agent, lawyer, accountant, auditor, professional advisor, consultant or other representative.
“ Work Product ” means all writings, computer program documentation, software, works of authorship, technology, inventions, discoveries, processes, techniques, methods, ideas, concepts, research, proposals, materials and all other work product of any nature whatsoever, that are created, prepared, produced, authored, edited, amended, conceived or reduced to practice by the Consultant (individually or jointly with any other Persons) during the Term (as defined below) and resulting from to relating to the Services or relating (or applicable to or useful with) the business, products or services of the Company or any of its Affiliates or otherwise delivered by the Consultant to the Company or any of its Affiliates, including in each case all rights and claims related to any of the foregoing, and all printed, physical and electronic copies and other tangible embodiments thereof.
1.2     Incorporation . The Annexes to this Agreement are incorporated by reference into, and form an integral part of, this Agreement.
Section 2      Engagement
2.1     Services . Upon the terms and subject to the conditions of this Agreement, the Company hereby engages the Consultant, and the Consultant hereby accepts such engagement, as an independent contractor to provide the services set forth in Annex A (collectively, the “ Services ”). Unless otherwise expressly specified in Annex A , the Consultant shall furnish, at Consultant’s own expense, any equipment, supplies and other materials necessary or advisable to perform the Services. Subject to the provisions of this Agreement, the Company shall not control the manner or means by which the Consultant performs the Services.
2.2     Relationship of Parties . The Consultant is an independent contractor of the Company, and this Agreement shall not be construed to create any association, partnership, joint venture, employee or agency relationship between the Consultant and the Company (or any of its Affiliates) for any purpose. Except to the extent specifically authorized in advance by the Company in writing, the Consultant (a) shall have no authority (and shall not hold himself out as having authority) to bind or act on behalf or in the name of the Company or any of its Affiliates, (b) shall not make any agreements or representations on behalf of the Company or any of its Affiliates and (c) without limiting the generality of the foregoing, shall not represent the Company or any of its Affiliates as a lobbyist or agent to any Governmental Authority. Without limiting the generality of the foregoing, the Consultant will not be eligible to participate in any vacation, group medical or life insurance, disability, profit sharing or retirement benefits or any other fringe benefits or benefit plans offered by the Company or any of its Affiliates to its employees, and the Company will not make any insurance contributions, including unemployment or disability, or obtain worker's compensation insurance on behalf of the Consultant. Any Persons employed by the Consultant in connection with the performance of the Services shall be the employees of the Consultant and the Consultant shall be fully responsible for them. The Consultant may not utilize any subcontractor or engage any other Person in connection with the performance of the Services without the Company’s prior written consent. The Consultant shall be fully responsible for any such subcontractors or other Persons and in no event shall the Consultant be relieved of his obligations under this Agreement as a result of his use or engagement of any such subcontractors or other Persons.


Section 3      Compensation

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3.1     Fees . As full consideration for the provision of Services and the rights granted to the Company under this Agreement, the Company shall pay the Consultant the consulting fee set forth in Annex B (pro-rated for any partial period).
3.2     Expense Reimbursement . The Company agrees to reimburse the Consultant for reasonable and appropriately documented out-of-pocket expenses actually incurred and paid by the Consultant but only to the extent (a) directly related to the Consultant’s performance of the Services and (b) incurred in accordance with the Company’s expense reimbursement policies.
3.3     Withholding, etc . Amounts payable under this Agreement shall be without deduction or withholding of any kind other than any tax or other deduction or withholding determined by the Company to be required by Law. Consultant shall be responsible for, and shall indemnify the Company against, any taxes or contributions, including penalties and interest, owed by Consultant.
3.4     Taxes and Internal Revenue Code 409A . The Company makes no representations or warranties and shall have no responsibility regarding the tax implications of the compensation and benefits to be paid to the Consultant under this Agreement, including under Section 409A of the Code, and applicable administrative guidance and regulations (“ Section 409A ”). Section 409A governs plans and arrangements that provide “nonqualified deferred compensation” (as defined under the Code) which may include, among others, nonqualified retirement plans, bonus plans, stock option plans, employment agreements and severance agreements. The Company reserves the right to pay compensation and provide benefits under this Agreement in amounts, at times and in a manner that minimizes taxes, interest or penalties as a result of Section 409A. In addition, in the event any benefits or amounts paid to the Consultant hereunder are deemed to be subject to Section 409A, the Consultant consents to the Company adopting such conforming amendments as the Company deems necessary, in its reasonable discretion, to comply with Section 409A. To the extent any payments of money or other benefits due to the Consultant hereunder could cause the application of an accelerated or additional tax under Section 409A, such payments or other benefits may be deferred if deferral will make such payment or other benefits compliant under Section 409A, or otherwise such payments or other benefits shall be restructured, to the extent permissible under Section 409A, in a manner determined by the Company that does not cause such an accelerated or additional tax. To the extent any reimbursements or in-kind benefits due to the Consultant under this Agreement constitute deferred compensation under Section 409A, any such reimbursements or in-kind benefits shall be paid to the Consultant in a manner consistent with Treas. Reg. Section 1.409A-3(i)(1)(iv). Each payment made under this Agreement shall be designated as a “separate payment” within the meaning of Section 409A.
For purposes of Section 409A, references herein to the Consultant’s termination of services shall refer to Executive’s separation of services with the Company within the meaning of Treas. Reg. Section 1.409A-1(h). Anything in this Agreement to the contrary notwithstanding, if at the time of the Consultant’s separation from service within the meaning of Section 409A of the Code this Agreement is covered by Section 409A and the Company determines that the Consultant is a “specified employee” within the meaning of Section 409A(a)(2)(B)(i) of the Code, then to the extent any payment or benefit that the Consultant becomes entitled to under this Agreement on account of the Consultant’s separation from service would be considered deferred compensation, such payment shall not be payable and such benefit shall not be provided until the date that is the earlier of (i) six months and one day after the Consultant’s separation from service, or (ii) the Consultant’s death. If any such delayed cash payment is otherwise payable on an installment basis, the first payment shall include a catch-up payment covering amounts that would otherwise have been paid during the six-month period but for the application of this provision, and the balance of the installments shall be payable in accordance with their original schedule.

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Section 4      Certain Agreements
4.1     Restrictive Covenants . The Consultant acknowledges that he has continuing obligations to the Company as set forth in Section 5 of his Employment Agreement dated June 9, 2014, as modified and amended (the “ Employment Agreement ”), which continue in full force and effect after his separation from employment with the Company according to their terms and shall apply during the Term of this Agreement.
4.2     Intellectual Property . The Company is and shall be, the sole and exclusive owner of all right, title and interest throughout the world in and to all of the Work Product, including all Intellectual Property Rights therein. The Consultant acknowledges and agrees that all Work Product is “work made for hire” for the Company under the copyright Laws of the U.S. or analogous provisions of applicable Laws outside the U.S. If, for any reason, any of the Work Product does not constitute a “work made for hire,” the Consultant hereby irrevocably transfers, assigns and coveys to the Company, in each case without additional consideration and free and clear of all liens, claims or other encumbrances, all right, title and interest throughout the world in and to the Work Product, including all Intellectual Property Rights therein. Any assignment of copyrights under this Agreement includes all rights of paternity, integrity, disclosure and withdrawal and any other rights that may be known as “moral rights” (collectively, “ Moral Rights ”). The Consultant hereby irrevocably waives, to the fullest extent permitted by applicable Law, any and all claims the Consultant may now or hereafter have in any jurisdiction to any Moral Rights with respect to the Work Product. The Consultant shall make full and prompt disclosure to the Company of all Work Product. The Consultant shall not disclose to any Person (other than the Company or any of its Affiliates) the nature or details of any Work Product without the prior written consent of the Company. Upon the request of the Company, the Consultant shall promptly take such further actions, including execution and delivery of all appropriate instruments of conveyance, as may be necessary to assist the Company (or its designated Affiliates) to prosecute, register, perfect, record or enforce its rights in any Work Product. In the event the Company is unable, after reasonable effort, to obtain the Consultant’s signature on any such documents, the Consultant hereby irrevocably designates and appoints the Company as the Consultant’s agent and attorney-in-fact, to act for and on the Consultant’s behalf solely to execute and file any such application or other document and do all other lawfully permitted acts to further the prosecution and issuance of patents, copyrights or other intellectual property related to the Work Product with the same legal force and effect as if the Consultant had executed them. The Consultant agrees that such power of attorney is coupled with an interest. The Consultant has no right or license to (a) use, publish, reproduce, prepare derivative works based upon, distribute, perform, or display any Work Product or (b) use the trademarks, service marks, trade names, logos, symbols or brand names of the Company or any of its Affiliates. The Consultant shall require each of the Consultant’s employees or subcontractors (if applicable) to execute written agreements securing for the Company the rights provided for in this Section 4.2 prior to such employee or subcontractor providing (or being involved in the provision of) any Services under this Agreement.
4.3     Regulatory Compliance . The Consultant acknowledges that the Company and/or its Affiliates are subject to gaming, lottery or similar licensing requirements of various jurisdictions. The Consultant shall cooperate fully with the Company and its Affiliates in providing to them any information of whatever nature that any of them deems necessary or appropriate in assuring itself that the Consultant possesses the good character, honesty, integrity, and reputation applicable to those engaged in the gaming and lottery industries. If, during the Term, the Company (or any of its Affiliates) is notified (formally or informally) by any Governmental Authority that the engagement of, or conducting business with, the Consultant may or will jeopardize any license or ability to be licensed of the Company (or any of its Affiliates) or if the Company (or any of its Affiliates) concludes that the Consultant may fail to meet the above criteria (or

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the compliance committee of the Company or any of its Affiliates otherwise raises an objection with respect to the Consultant), the Company may immediately terminate this Agreement upon written notice to the Consultant.
Section 5      Termination
5.1     Term of Agreement . The term of this Agreement shall commence on January 1, 2017 and shall continue until June 30, 2018, unless earlier terminated in accordance with Section 5.2 (the “ Term ”). The term of the Agreement can be extended if agreed to by both parties in writing.
5.2     Termination . Either party may terminate this Agreement upon at least 30 days’ prior written notice of termination, with or without cause, and the Company may terminate this Agreement effective upon written notice to the Consultant as contemplated by Section 4.3, subject to payment for Services authorized and completed as of such date of termination. The Company also may terminate this Agreement effective upon written notice to the Consultant, in the event the Consultant has an event which constitutes “Cause”, as defined in the Employment Agreement.
5.3     Effect of Termination . Notwithstanding the foregoing, (a) Sections 1, 2.2, 4, 5.3, 5.4 and 6 and any other Sections of this Agreement that expressly or by implication are intended to continue in effect after the expiration or earlier termination of this Agreement, shall continue in effect after the expiration or earlier termination of this Agreement in accordance with their terms, and (b) any termination of this Agreement shall not affect any accrued rights or liabilities of either Party.
5.4     Payments Upon Termination . In the event that the Consultant terminates this Agreement pursuant to the first sentence of Section 5.2 or the Company terminates this Agreement pursuant to the second sentence of Section 5.2, all future payments due hereunder shall cease as of the date of such termination. In the event the Company otherwise terminates this Agreement and Consultant timely delivers to the Company a release in such form as required by the Company and does not revoke such release, the Company shall continue to pay the Consultant the monthly fee through June 30, 2018 as liquidated damages without any obligation of Consultant to mitigate such amounts and no offset for any other amounts earned.
Section 6      Miscellaneous
6.1     Notice . All notices, approvals and other communications required or contemplated under this Agreement shall be in writing and shall be deemed to have been duly given (a) when received if delivered personally, (b) when sent by cable, telecopy, telegram or facsimile (which is confirmed by the intended recipient), and (c) when sent by overnight courier service or when mailed by certified or registered mail, return receipt requested, with postage prepaid, to the Parties at the following addresses:
In the case of Consultant:     to the last address on the books of the Company    

In the case of the Company:    Scientific Games Corporation
6650 S. El Camino Road
Las Vegas, NV 89118
Attention: Chief Legal Officer

or such other persons or addresses as either Party may from time to time designate by notice to the other.

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6.2     Assignment; Binding Effect . No Party shall assign or transfer or purport to assign or transfer any of its rights or obligations under this Agreement without the prior written consent of the other Party; provided , however , that the Company shall be permitted to (a) assign or transfer any of its rights or obligations hereunder to any Affiliate of the Company and (b) pledge its rights or interest under this Agreement. This Agreement shall inure to the benefit of the Parties and their respective permitted successors and assigns and is binding upon the Parties and their respective successors and assigns.
6.3     Amendment; Waiver . This Agreement may be amended, changed or supplemented only by a written agreement executed and delivered by the Parties. Any waiver of, or consent to depart from, the requirements of any provision of this Agreement shall be effective only if it is in writing and signed by the Party giving it, and only in the specific instance and for the specific purpose for which it has been given. Except as otherwise provided by this Agreement, no failure on the part of any Party to exercise, and no delay in exercising any right under this Agreement shall operate as a waiver of such right except to the extent that such failure including the failure to provide notice as and when required by this Agreement, has prejudiced the rights and remedies of the other Party. No single or partial exercise of any such right shall preclude any other or further exercise of such right or the exercise of any other right.
6.4     Entire Agreement . This Agreement (including the Annexes) constitutes the entire agreement between the Parties pertaining to the subject matter hereof and supersedes all prior agreements, negotiations, discussions and understandings, written or oral, between the Parties with respect to such subject matter. The parties acknowledge that this Agreement does not supersede any terms of the Employment Agreement that continue after such agreement’s termination, any releases entered into between Consultant and the Company or the Modification Agreement, including the provisions thereof related to the effectiveness of this Agreement.
6.5     Severability . If any term or provision of this Agreement is invalid, illegal or unenforceable in any jurisdiction, such invalidity, illegality or unenforceability shall not affect any other term or provision of this Agreement or invalidate or render unenforceable such term or provision in any other jurisdiction. The Parties shall negotiate in good faith to amend this Agreement to give effect to the purpose and intent of the provision found to be invalid, illegal or unenforceable.
6.6     Governing Law; Dispute Resolution . This Agreement shall be governed by and construed in accordance with the laws of the State of New York applicable to agreements made and to be wholly performed within that State, without regard to its conflict of laws provisions. The parties agree that any controversy or claim not resolved by the Parties arising out of or relating to this Agreement shall be settled by arbitration in accordance with the Rules of the American Arbitration Association. Venue for the conduct of the arbitration shall be New York, New York, except that, at the direction of the arbitral tribunal or with the consent of the Parties, particular hearings in aid of such arbitration may be held in other places. Judgment upon any award rendered by the arbitrator(s) may be entered in any court having jurisdiction there. The Parties agree that the factual findings of the arbitral tribunal shall be final absent manifest or material error and rulings on questions of Law or mixed questions of fact and Law shall be reviewed under the “clearly erroneous” standard of review and not under a “manifest disregard of the law” or other standard, notwithstanding any Law concerning such standard to the contrary. Except as contemplated by Section 6.8, the remedies expressly provided herein shall constitute the parties’ sole and exclusive remedies, and all other remedies which might be otherwise available under the Law of any jurisdiction are hereby waived by both parties.

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6.7     Costs . Except as otherwise provided in this Agreement, each Party is responsible for its own costs and expenses incurred in connection with performing and observing its obligations and covenants under this Agreement.
6.8     Remedies . The Consultant expressly acknowledges and agrees that the terms of this Agreement are reasonable and necessary for the protection of the legitimate business interests of the Company. The Consultant acknowledges and agrees that the Company would be irreparably harmed by a breach of this Agreement by the Consultant and that money damages are an inadequate remedy for an actual or threatened breach of this Agreement. Therefore, the Consultant agrees to the granting of specific performance of this Agreement and injunctive or other equitable relief in favor of the Company as a remedy for any such breach, without proof of actual damages, and the Consultant further waives any requirement for the securing or posting of any bond in connection with any such remedy. Such remedy shall not be deemed to be the exclusive remedy for any such breach, but shall be in addition to all other remedies available at Law or equity to the Company.
6.9     Counterparts . This Agreement may be executed in any number of counterparts which, taken together, constitute one and the same agreement.
6.10     No Third Party Beneficiaries . Except as expressly contemplated by this Agreement, nothing in this Agreement shall confer any rights upon any Person other than the Parties and their respective successors and permitted assigns.
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 IN WITNESS WHEREOF, the Company and the Consultant have each caused this Agreement to be duly executed pursuant to due authorization, all as of the day and year first above written.



 
 
SCIENTIFIC GAMES CORPORATION

 
 
 
 
By:
/s/ Richard M. Haddrill
 
Name:
 
 
Title:
 
 
 
 
 
 
 
 
 
 
CONSULTANT
 
 
 
 
 
/s/ Michael Gavin Isaacs
 
Name: Michael Gavin Isaacs






Annex A
Services

The Consultant will serve as Vice Chairman of the Company while elected as a director by the shareholders of the Company and Vice Chairman by the board of directors of the Company (the “ Board ”). Consultant hereby agrees to stand for election for such positions. In addition, the Consultant will provide consulting services as follows, in each case as requested by the Company’s Chief Executive Officer or the Chairman of the Board or either of their respective designees: (i) sales calls and other calls introducing the new Chief Executive Officer to customers; (ii) internal business and strategy meetings; (iii) specific strategic and other initiatives; and (iv) external industry events.

During the Term, the Consultant shall be available to dedicate up to thirty-four (34) hours a month on average at the Company’s request for the performance of the Services hereunder. The Company and the Consultant intend and anticipate that (i) as of December 31, 2016, the Consultant shall have a “separation from service” (within the meaning of Section 409A of the Internal Revenue Code of 1986, as amended (the “Code”)) from the Company, and (ii) the amount of time the Consultant shall provide the Services during the Term shall be no more than twenty percent (20%) of the average level of bona fide services performed by the Consultant for the Company during the thirty-six (36) month period preceding the Effective Date.

In the event the Consultant commences bona fide full-time employment with another employer, he may provide the Services under this Agreement outside normal business hours and the Company will use reasonable business efforts to accommodate Consultant’s obligations to his full-time employer.


Equipment

The Company agrees to provide a laptop computer, email account, and Gambling Compliance subscription and cell phone for use by the Consultant solely for business purposes under this Agreement. The Company also agrees to provide Consultant with appropriate office space and secretarial support, as determined by the Company in its sole discretion.





Annex B
Fees

The Company will pay the Consultant $83,333.33 per month for the Services provided hereunder, subject to and in accordance with the terms of this Agreement.

Consultant shall be eligible to be considered for a discretionary bonus for 2017, with the amount of any such bonus, if any such bonus is provided, to be determined in the sole discretion of the Compensation Committee of the Board (the “ Compensation Committee ”).

During the Term, including any extensions thereof, the Consultant is eligible for continued equity vesting for equity previously granted to Consultant by the Company during his employment that has not yet vested. Other than Consultant being eligible for continued vesting after his termination of employment from the Company, all other terms and conditions of the equity grant agreements between the Company and Consultant, including but not limited to any performance criteria, will continue to apply. All equity agreements shall be deemed amended to provide that any unvested equity awards as of June 30, 2018 shall become fully vested on June 30, 2018 if the Consultant is then providing services to the Company; provided, however, that if June 30, 2018 is prior to the Compensation Committee’s determination as to the satisfaction of any performance criteria to which any such awards are subject, such awards will not vest unless and until a determination is or has been made by the Compensation Committee that such criteria have been satisfied, at which time such awards will vest to the extent contemplated by the terms of such award (it being understood and agreed, for the avoidance of doubt, that such awards will immediately be forfeited to the extent contemplated by the terms of such awards in the event that such criteria are determined not to have been satisfied). In the event the Consultant is entitled to liquidated damages as provided in Section 5.4 hereof, the Consultant shall for purposes of the preceding sentence be treated as if he continued providing services through June 30, 2018.

If the Consultant timely elects to continue medical coverage under the Company’s group health plan in accordance with COBRA, the Company will reimburse the Consultant for the monthly premiums for such coverage less the amount of employee contributions for similarly-situated active employees of the Company, for the Term of this Agreement, while the Consultant is eligible for COBRA coverage.





Annex C
Certifications and Covenants

The Consultant certifies and covenants to the Company as follows:


1.
Consultant shall, in connection with this Agreement, (a) maintain complete and accurate books and records and (b) comply with all applicable laws, rules and regulations, including, but not limited to, those relating to anti-corruption, anti-money laundering, competition, licensing and registration; and

2.
Consultant has not offered or paid, and will not offer or pay, directly or indirectly, (a) anything of value to any public official or candidate for political office, or any relative or agent thereof, for purposes of obtaining any official action or benefit relating in any way to this Agreement or (b) any commission or finder’s or referral fee to any person or entity in connection with this Agreement or any activities on behalf of the Company.

In the event the Company has reason to believe any of the foregoing has been violated, Consultant shall (a) promptly provide the Company (or its representatives) with access to Consultant’s books and records to enable the Company (or its representatives) to assess any potential non-compliance and (b) reasonably cooperate in any related investigation, including making any employees reasonably available for interviews.

The Consultant hereby acknowledges receipt of a copy of the Company’s (or its applicable Affiliate’s) Code of Business Conduct. The Consultant agrees and certifies that the Consultant will abide by such Code of Business Conduct and will not take any action (or omit to take any action) in connection with this Agreement or the performance under this Agreement that would conflict with such Code of Business Conduct.





    
Annex D
Whistleblower Hotline Information

The Company is committed to ethical and compliant business practices throughout the world. As a consultant for the Company, you are required to conduct yourself in an ethical manner, comply with all Laws and comply with the Company’s Code of Business Conduct.

If you discover events of a questionable, fraudulent or illegal nature that are, or that you believe in good faith may be, a violation of Law, the guidelines set forth in the Company’s Code of Business Conduct, or other Company policy, you should report the matter immediately to the Chief Compliance Officer (212-318-9199). In addition, you may call the Scientific Games Business Hotline (the “Hotline”), which is available 24 hours a day, seven days a week, at 1-866-384-4277 or log on to www.ethicspoint.com and click on “File a Report.”

To the extent permitted by Law, you may choose to remain anonymous in reporting any possible violation of the Code of Conduct to the Chief Compliance Officer or by calling the Hotline.

As a consultant for the Company, you have a duty to cooperate truthfully and fully in the investigation of any alleged violation of Law or the Company’s Code of Conduct.

Failure to comply with the requirements of this Annex D will be grounds for the Company to terminate the Agreement in accordance with the first sentence of Section 5.2.






Exhibit 31.1
 
Certification by Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
I, Kevin Sheehan, certify that:
 
1.   I have reviewed this Quarterly Report on Form 10-Q of Scientific Games Corporation;
 
2.   Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3.   Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4.   The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
a)   Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
b)   Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
c)   Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
d)   Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
 
5.   The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
 
a)   All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
b)   Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 
Date: May 1, 2017
 
/s/ Kevin Sheehan
Kevin Sheehan
Chief Executive Officer





Exhibit 31.2
 
Certification by Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
I, Michael A. Quartieri, certify that:
 
1.   I have reviewed this Quarterly Report on Form 10-Q of Scientific Games Corporation;
 
2.   Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3.   Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4.   The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
a)   Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
b)   Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
c)   Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
d)   Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
 
5.   The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
 
a)   All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
b)   Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 
Date: May 1, 2017
 
/s/ Michael A. Quartieri
Michael A. Quartieri
Chief Financial Officer





Exhibit 32.1
 
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
 
In connection with the Quarterly Report of Scientific Games Corporation (the “Company”) on Form 10-Q for the period ended March 31, 2017 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Kevin Sheehan, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
 
(1)                                   The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
 
(2)                                   The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
 
A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
 
 
/s/ Kevin Sheehan
 
Kevin Sheehan
 
Chief Executive Officer
 
May 1, 2017





Exhibit 32.2
 
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
 
In connection with the Quarterly Report of Scientific Games Corporation (the “Company”) on Form 10-Q for the period ended March 31, 2017 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I,
Michael A. Quartieri, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002, that:
 
(1)                                   The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
 
(2)                                   The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
 
A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
 
 
/s/ Michael A. Quartieri
 
Michael A. Quartieri
 
Chief Financial Officer
 
May 1, 2017