UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ý | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the fiscal year ended: December 31, 2008 |
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Or |
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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
(State or other jurisdiction of incorporation or organization) |
81-0422894
(I.R.S. Employer Identification No.) |
750 Lexington Avenue, 25th Floor
New York, New York 10022
(Address of principal executive offices)
Registrant's telephone number, including area code: (212) 754-2233
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Name of each exchange on which registered | |
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Class A Common Stock, $.01 par value | Nasdaq Global Select Market |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ý No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No ý
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 o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
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 definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ý | Accelerated filer o |
Non-accelerated filer
o
(Do not check if smaller reporting company) |
Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No ý
As of June 30, 2008 the market value of voting and non-voting common equity held by non-affiliates of the registrant was approximately $1,914,310,506(1).
Common shares outstanding as of February 25, 2009 were 92,674,210.
DOCUMENTS INCORPORATED BY REFERENCE
The following document is incorporated herein by reference:
Document | Parts Into Which Incorporated | |
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Proxy Statement for the Company's 2009 Annual Meeting of Stockholders | Part III |
EXHIBIT INDEX APPEARS ON PAGE 140
PART I
FORWARD-LOOKING STATEMENTS
Throughout this Annual Report on Form 10-K 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," "continue," "believe," "expect," "anticipate," "could," "potential," "opportunity," or similar terminology. The forward-looking statements contained in this Annual Report on Form 10-K are generally located in the material set forth under the headings "Business" and "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 future results or performance. Actual results may differ materially from those projected in these statements due to a variety of risks and uncertainties and other factors, including, among other things: competition; material adverse changes in economic and industry conditions in our markets; technological change; retention and renewal of existing contracts and entry into new contracts; availability and adequacy of cash flow to satisfy obligations and indebtedness or future needs; protection of intellectual property; security and integrity of software and systems; laws and government regulation, including those relating to gaming licenses, permits and operations; inability to identify, complete and integrate future acquisitions; seasonality; dependence on suppliers and manufacturers; factors associated with foreign operations; dependence on key personnel; failure to perform on contracts; resolution of pending or future litigation; labor matters; 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 set forth from time to time in our filings with the SEC, including under the heading "Risk Factors" in this Annual Report on Form 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 Annual Report on Form 10-K contains various references to industry market data and certain industry forecasts. The industry market data and industry forecasts were 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. Similarly, industry forecasts, while we believe them to be accurate, have not been independently verified by us and we do not make any representation as to the accuracy of that information.
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Unless otherwise specified or the context otherwise indicates, all references to the words "Scientific Games," "we," "us," "our," and "Company" refer to Scientific Games Corporation and all entities included in our consolidated financial statements. "International" refers to non-United States jurisdictions. "United States ("U.S.") jurisdictions" refers to all 50 states plus the District of Columbia and Puerto Rico. "Online" lottery refers to a computerized system in which lottery terminals in retail outlets are continuously connected to a central computer system for the sale and validation of lottery tickets and related functions. "OTB" refers to off-track betting facilities, including those owned and operated by our subsidiaries, Autotote Enterprises, Inc. (in Connecticut and Maine) and Scientific Games Racing B.V. (in the Netherlands). "Handle" is a racing industry term for dollars wagered. The "wide area gaming" market refers to a collection of video lottery and other markets in which gaming terminals are distributed across a large number of venues, with relatively few terminals per venue.
Overview
Scientific Games Corporation was incorporated in the state of Delaware on July 2, 1984. We are a leading supplier of technology-based products, systems and services to gaming markets worldwide. We believe we offer our customers the widest array of technologically advanced products and services in each market we serve. We report our operations in three business segments: Printed Products Group, Lottery Systems Group, and Diversified Gaming Group.
Printed Products Group
Our Printed Products Group is composed of our instant lottery ticket business and our prepaid phone card business.
We believe we are the leading provider of instant lottery tickets in the world. Our instant ticket customers include 40 of the 42 U.S. jurisdictions that currently sell instant lottery tickets, and we have sold instant tickets and related services to lotteries in over 50 other countries. We believe that our innovative products and services allow lotteries to increase their retail sales of instant tickets.
Instant ticket and related services include ticket design and manufacturing, as well as value-added services including game design, sales and marketing support, specialty games and promotions, inventory management and warehousing and fulfillment services. We provide lotteries with access to some of the world's most popular entertainment brands, including Deal or No Deal, Major League Baseball®, National Basketball Association, Harley-Davidson®, Wheel-of-Fortune®, Monopoly, Corvette® and World Poker Tour®. We also provide lotteries with customized partnerships, or cooperative service programs, to help lotteries efficiently and effectively manage and support their operations to achieve greater retail sales and lower operating costs.
We believe we are one of the largest suppliers of paper-based prepaid phone cards in the world. Prepaid phone cards utilize the secure process employed by us in the production of instant lottery tickets, which helps ensure the integrity and reliability of the product. Prepaid phone cards offer consumers in more than 50 countries worldwide a cost-effective way to purchase cellular airtime, without requiring wireless service providers to extend credit or consumers to commit to contracts.
Lottery Systems Group
We believe we are a leading provider of sophisticated, customized computer software, equipment and data communication services to government-sponsored and privately operated lotteries in the U.S. and internationally. This business includes the provision of transaction processing software for the accounting and validation of both instant and online lottery games, point-of-sale terminals, central site computers, communications technology, and ongoing support and maintenance for these products.
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Central computer systems, terminals and associated software are typically provided in the U.S. through facilities management contracts and internationally through outright sales. We have contracts to operate online lottery systems for 15 of the 44 U.S. jurisdictions that operate online lotteries and we believe we are the second largest online lottery provider in Europe.
Diversified Gaming Group
Our Diversified Gaming Group provides services and systems to private and public operators in the wide area gaming markets and in the pari-mutuel wagering industry. Our product offerings include server-based gaming machines (including our Nevada dual screen terminals, which can offer Great Britain regulated Category B2 or B3 content on the same machines), video lottery terminals ("VLTs"), monitor games, wagering systems for the pari-mutuel racing industry, sports betting systems and services and Great Britain regulated Category C Amusement With Prize ("AWP") and Skill With Prize ("SWP") terminals. Business units within the Diversified Gaming Group include: The Global Draw Limited and certain related companies ("Global Draw"), a leading supplier of gaming terminals, systems and monitor games to licensed bookmakers, primarily in the U.K., Austria and Mexico; Scientific Games Racing LLC, a leading worldwide supplier of computerized systems for pari-mutuel wagering; Games Media Limited ("Games Media"), our AWP and SWP terminal supplier to U.K. public house ("pub") operators; and our venue management gaming operations in Connecticut, Maine and the Netherlands.
Industry Overview
Lottery
Lotteries are operated by domestic and foreign governmental authorities and their licensees in approximately 200 jurisdictions throughout the world. Currently, 44 U.S. jurisdictions have operating lotteries. Two of those jurisdictions, North Dakota and Puerto Rico, do not offer instant lottery games. Governments typically authorize lotteries as a means of generating revenues without the imposition of additional taxes. Net lottery proceeds are frequently set aside for particular public purposes, such as education, aid to the elderly, conservation, transportation and economic development. As proceeds derived from lottery ticket sales have become a significant source of funding for such programs, many jurisdictions have come to rely on such proceeds to support some of those public purposes.
Although there are many types of lottery games worldwide, governmentally authorized lotteries may generally be categorized into three principal groups: instant ticket, online and traditional draw-type lotteries. An instant ticket lottery is typically played by removing a latex coating from a preprinted ticket to determine whether it is a winner. Online lottery games, such as Powerball®, are based on a random selection of a series of numbers. Online lottery prizes are generally based on the number of winners who share the prize pool, although set prizes are also offered. Online lotteries are conducted through a computerized system in which lottery terminals in retail outlets are continuously connected to a central computer system. Online lottery systems may also be used to validate instant tickets to confirm large prize levels and prevent duplicate payments, or separate instant ticket validation systems may be installed. In addition, lotteries may offer quick draw keno ("keno"), video lottery, sports and other lottery games. Keno is typically played every five minutes in restricted social settings such as bars and is usually offered as an extension of online lottery systems. Video lotteries are played on VLTs, featuring "line-up" and card games, typically targeted to locations such as horse and greyhound racetracks, bars, nightclubs and similar establishments. Video lotteries generally use a distinct system from an online lottery system for accounting, security and control purposes. In addition, in Oregon, several provinces in Canada and several countries outside the U.S., lotteries offer pari-mutuel or fixed odds wagers on various sports.
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During the U.S. lottery industry's fiscal year-end 2008 (which is June 30, 2008 for all but three states), U.S. online lottery retail sales totaled approximately $22.5 billion, and U.S. instant ticket lottery sales totaled approximately $30.1 billion. Based on international industry information, we estimate that international online lottery retail sales totaled approximately $166.0 billion and that international instant ticket lottery sales totaled approximately $58.3 billion during calendar year 2007. Industry data indicates that in the U.S. instant ticket retail sales have generally been growing faster than online games because of "instant" rewards rather than the delayed rewards of online games with periodic or weekly drawings, and also due to increased payouts and more frequent game introductions.
Wide Area Gaming
The wide area gaming market refers to a collection of video lottery and other gaming markets in which gaming terminals are distributed across a large number of venues, with relatively few terminals per venue. This contrasts with casino-type venues, where hundreds or even thousands of gaming machines are housed in a single venue. The wide area gaming market is large and complements our wide area technology and service expertise. One of the key benefits of wide area gaming is the downloadable, centrally determined technology that allows for easy reconfiguration of game content on each terminal. Wide area gaming includes a number of regulatory categories including VLTs, server-based gaming terminals, AWP and SWP terminals and other gaming devices that are converging as networked video gaming terminals.
Historically video lottery has included gaming terminals monitored by a central system, often accepting currency but only dispensing vouchers. In the U.S., these gaming terminals were originally deployed by lotteries in bars and restaurants and more recently in horse and greyhound racetracks (racinos). Video lottery has expanded in Europe and elsewhere to include gaming machines networked to central systems, often with game results being centrally determined. We believe our Global Draw system is highly adaptable and can be used in either publicly owned or privately operated video lottery venues.
In Great Britain, licensed bookmakers may provide up to four regulated gaming machines per licensed betting shop. Prior to September 1, 2007, there were approximately 25,000 fixed odds betting terminals ("FOBTs") installed in the U.K. In September 2007, when the substantive provisions of Great Britain's Gambling Act of 2005 (the "Gambling Act") came into effect, bookmakers were able to deploy up to four machines of two defined categories known as B2 terminals, which is the new regulatory category for FOBTs, and B3 terminals, which is a new classification of short play cycle terminals with predominantly similar content to reel-based slot machines and a £500 maximum win (otherwise referred to as "jackpot" terminals). To comply with the new Great Britain gaming requirements, we replaced all of the 9,400 FOBTs owned by Global Draw with new dual-purpose Nevada terminals prior to September 1, 2007 and placed an additional 2,800 Nevada terminals into operation during 2008, bringing the total number of terminals operated by Global Draw to approximately 12,200. In addition to B2/B3 terminals, bookmakers in Great Britain and Austria also provide customers with the ability to wager on a variety of monitor games (including keno-style content).
The wide area gaming industry in Great Britain also includes approximately 120,000 AWP terminals and 30,000 SWP terminals. Historically, nearly all of these AWP terminals were standalone, single game, analog mechanical spinning reel gaming devices. Because of the archaic nature of the analog AWP terminals, income from these machines had been declining an estimated 6-8% per year; however, in the fourth quarter of 2007, this business began to expand as analog AWP terminals started to be replaced with digital AWP terminals classified as category C or D gaming machines under the Gambling Act. The Gambling Act allows regulated category C gaming machines to be provided by suppliers to pubs on the basis of participation agreements for the first time. These new digital terminals provide players with a variety of games, which we manage through a downloadable, centrally
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determined network. The expansion of games available to play on the digital AWPs is expected to attract new players. Some AWP terminals in Europe have been already been replaced with digital versions and the majority of AWP terminals are expected to be replaced with digital versions over the next few years. During 2007 and 2008, approximately 9,400 analog machines were replaced with digital machines in the U.K.
Pari-mutuel Wagering
In pari-mutuel wagering, individuals bet against each other on horse races, greyhound races, jai alai matches and other events. Pari-mutuel wagering patrons place specific types of wagers (e.g., on a specified horse to win) and a patron's winnings are determined by dividing the total amount wagered, less a set commission, amongst the winners. Wagering is generally conducted at horse and greyhound racetracks, jai alai frontons, OTBs and casino racebooks or through licensed telephone and Internet account wagering operators. Licenses to conduct races and/or offer pari-mutuel wagering are granted by governments to private enterprises, non-profit racing associations and occasionally government organizations, including lotteries.
Pari-mutuel wagering is currently authorized in 43 states in the U.S., Puerto Rico, all provinces in Canada and approximately 65 other countries around the world. Based on industry information, we estimate that pari-mutuel wagering in North America totaled approximately $17 billion in 2008, down from approximately $19 billion in 2007. We believe the decline in North American pari-mutuel wagering is primarily due to competition from other gaming activities such as casinos, lotteries and internet gambling and competition from other forms of individual and family entertainment such as movies, restaurants and the Internet, as well as the relative difficulty of attracting younger consumers to pari-mutuel wagering.
Prepaid Phone Cards
Prepaid phone cards, which entitle cellular phone users to a defined value of airtime, offer consumers a convenient way to purchase cellular airtime. While less common in the U.S., prepaid phone cards offer consumers worldwide a cost-effective way to purchase cellular airtime without requiring phone companies to extend credit or consumers to commit to contracts. Because card access number theft is common, the security of the card is critical; our phone cards incorporate proprietary security technology originally developed for our instant lottery ticket operations.
Operational Overview
Printed Products Group
Instant Ticket and Related Services. In 1974, we introduced the first secure instant game ticket. Today, we believe we remain a leading designer, manufacturer and distributor of instant tickets worldwide. We market instant tickets and related services to domestic and foreign lottery jurisdictions and commercial (non-lottery) customers. We presently have a contract with 40 of the 42 U.S. jurisdictions that sell instant lottery tickets and we provide instant tickets to North Carolina through its contract with GTECH Corporation ("Gtech"). In addition, we have sold instant lottery tickets to customers in over 50 countries. Our instant ticket contracts typically have an initial term of three to five years and frequently include multiple renewal options, which our customers generally exercise for additional periods ranging from one to five years. We typically sell our instant tickets for a per unit price or are paid a fee equal to a percentage of the retail value of the instant tickets sold. In 2008 and 2007, we sold approximately 38.7 billion and 31.5 billion, respectively, 2 × 4 inch equivalent instant tickets, of which approximately 49% and 40%, respectively, were sold outside the U.S. Some international customers purchase instant tickets as needed rather than through multi-game supply contracts.
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The instant tickets we manufacture are typically printed on recyclable ticket stock by a series of computer-controlled presses and ink-jet imagers, which we believe incorporate the most advanced technology and security currently available in the industry. Instant tickets generally range in size from 2 inches by 3 inches to ticket sizes as large as some calendars. Instant tickets are normally played by removing a latex coating to determine if they are winning tickets.
The increased application of computer-based and communications technologies to the manufacturing and servicing of instant tickets continues to separate the printing of instant tickets from conventional forms of printing. We are generally recognized within the lottery industry as the leader in applying these technologies to the manufacturing and sale of instant tickets. In order to maintain our position as a leading innovator within the lottery industry, we intend to continue to explore and develop new technologies and their applications to instant lottery tickets and systems.
We provide lotteries with access to some of the world's most popular entertainment brands, which help increase their instant ticket sales. Our entertainment brands include themed instant games such as Betty Boop, The Pink Panther, I Love Lucy®, Harley-Davidson®, Monopoly and Wheel of Fortune® to name a few. We also provide branded merchandise prizes, advertising, promotional support, turn-key drawing management and prize fulfillment programs. Popular brands offered as non-cash prizes for lottery players include Deal or No Deal, Major League Baseball®, National Basketball Association, Corvette®, Jeopardy!® and World Poker Tour®.
We pioneered the concept of providing lotteries with customized partnership programs, our cooperative services programs, whereby we manage a lottery's instant ticket operations as a means of reducing operating costs to the lottery, while increasing the lottery's retail sales. Cooperative services contracts bundle instant tickets, systems, facilities management and/or other services, including the design and installation of game management software, telemarketing, field sales, accounting, instant ticket game design, inventory and distribution, sales staff training, managing staff and advising with respect to security, maintenance, communication network and sales agent hot-line service for lottery jurisdictions.
We have contracts for cooperative services with the U.S. jurisdictions of Arizona, Delaware, District of Columbia, Florida, Georgia, Maine, Ohio, Oklahoma, Pennsylvania, South Carolina, Tennessee and Virginia. Under such contracts, we are typically paid a percentage of the lottery authority's total instant ticket revenues. Customers designate the services they want us to perform from a menu of cooperative services offered. Beginning in 2005, we expanded our cooperative service style offerings in Germany and now have contracts with four state lotteries.
We also applied our cooperative service programs in Italy as a member of Consorzio Lotterie Nazionali ("CLN"), a consortium consisting principally of ourselves, Lottomatica S.p.A, and Arianna 2001, a company owned by the Federation of Italian Tobacconists. CLN has a signed contract with the Italian Monopoli di Stato to be the exclusive operator of the Italian Gratta e Vinci instant ticket lottery (the "Concession"). The Concession commenced in mid-2004 and has an initial term of six years with a six-year extension at the option of the Monopoli di Stato. Under our contract with CLN, we supply instant lottery tickets, game development services, marketing support, and the instant ticket management system and systems support during the term of the Consession, including any renewal term. We participate in the profits or losses of CLN as a 20% equity owner, and assist Lottomatica S.p.A in the lottery operations. Retail sales have improved from approximately $18.5 million per week at the start of our operation with CLN to approximately $222.8 million per week currently, an overall improvement of approximately 1,104%.
In 2007, we acquired a 49% interest in a newly formed joint venture in China, which has established an instant ticket manufacturing facility that is expected to produce instant lottery tickets for sale to the China Sports Lottery for a 15-year period beginning in 2009. In addition, we entered into a separate arrangement to sell instant tickets directly to the China Sports Lottery for a temporary period
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of time between March 2008 and December 2008. During 2008, we recorded approximately $40.2 million in revenue from the China Sports Lottery as a result of this temporary arrangement. In addition, during 2007, we established a joint venture with Shandong Inspur Scientific Games Technology, Ltd. ("SIST") and began providing cooperative services support in the Shangdong Province of China in the first half of 2008.
Also during 2007, we acquired a 50% interest in Guard Libang, a leading provider of instant lottery ticket validation systems and certain cooperative services to the Chinese Welfare Lottery in China.
Phone Cards. We are a manufacturer of prepaid phone cards in Europe, which entitle cellular phone users to a defined value of airtime. Prepaid phone cards offer consumers worldwide a cost-effective way to purchase cellular airtime, without requiring phone companies to extend credit or consumers to commit to contracts. To deter fraud, our phone cards incorporate proprietary security technology originally developed for our lottery ticket operations. We sell our prepaid phone cards to phone companies for a per unit price.
Lottery Systems Group
We believe we are a leading provider of sophisticated, customized computer software, equipment and data communication services to government-sponsored and privately operated lotteries in the U.S. and internationally. In the U.S., we typically provide the necessary equipment, software and maintenance services pursuant to long-term facilities management contracts that typically have a minimum initial term of five years, under which we are generally paid a fee equal to a percentage of the lottery's total retail sales of lottery tickets. Our U.S. contracts typically contain multiple renewal options that generally have been exercised by our customers. Internationally, we typically sell point-of-sale terminals and/or computer software to lottery authorities and may provide ongoing fee-based support services under long-term contracts.
Our lottery systems utilize proprietary technology that facilitates high-speed processing of online wagers as well as validation of winning online and instant play tickets. Our lottery business includes the supply of transaction-processing software that accommodates instant ticket accounting and validation, and online lottery games, point-of-sale terminals, central site computers and communication platforms, and on-going operational support and maintenance services. We also provide software, hardware and support for sports betting systems, video lottery systems and the operation of credit card processing systems for non-lottery customers.
We have contracts to operate online lottery systems for 15 of the 44 U.S. jurisdictions that operate online lotteries and we believe we are the second largest online lottery provider in Europe. Internationally, we have lottery systems operating in Argentina, Australia, Canada, China, Dominican Republic, France, Germany, Hungary, Iceland, Latvia, the Republic of Korea, Mexico, the Netherlands, Norway, Philippines, Spain, Sweden and Switzerland. During 2008, the lottery in Connecticut awarded us a new five-year online lottery contract until 2013, at which time the contract will be subject to five additional one-year renewal options. In late 2007 and in 2008, the lotteries in South Carolina, West Virginia and South Dakota awarded new online lottery contracts to other vendors. Our contract with South Carolina ended on November 15, 2008 and our existing contracts with the West Virginia and South Dakota lotteries terminate on June 27, 2009 and August 2, 2009, respectively.
Also during 2008, the lottery in Pennsylvania initially awarded a new online contract to another vendor. The Pennsylvania lottery later suspended contract negotiations with the other vendor and, after soliciting "best and final" offers from both vendors, awarded us a new five-year online lottery contract beginning in 2009 with five one-year renewal options (the first of which the lottery exercised, which extended the term of the contract through 2014). The other vendor protested the award of the contract to us and also filed a lawsuit seeking judicial review of the procurement process leading to the award.
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The court enjoined the Pennsylvania lottery from executing the new contract until the other vendor's bid protest was administratively resolved. The administrative hearing officer denied the other vendor's protest on December 12, 2008, after which we and the lottery executed the new contract. The other vendor has appealed this decision in court. In December, the lottery also issued an emergency purchase order extending the previous contract for up to one year in the event the other vendor's appeal is successful.
In 2008, we were awarded a contract to provide the China Sports Lottery with a central instant ticket validation system on which we get paid a percentage of retail sales.
Diversified Gaming Group
Wide Area Gaming. We believe we are a leading supplier of wide area gaming systems and terminals to licensed bookmakers in the U.K. and Austria. We provide bookmakers with a turnkey offering which includes remote management of the game content and management information, wagering terminals, central computer system, data communications, and field support service. We develop game content through our own staff in Austria and Australia, and we contract with other gaming suppliers for additional content. Our contracts are for an initial period of two to four years under which we are typically paid a fee equal to a percentage of our customer's revenues generated from wagers on each terminal. Global Draw operates approximately 12,200 terminals in the U.K. We believe Global Draw's Nevada terminals achieve higher revenue levels for Global Draw's customers than those provided by the competition in part because the Nevada terminal provides customers the flexibility of switching from B2 to B3 content to enhance their revenue, along with superior field service and game content. Global Draw has recently begun to expand into Latin America, the Caribbean and Asia.
In the U.K. digital AWP and SWP industry, we develop our own game content and contract with third-party game developers and game content providers. This game content is then programmed into digital gaming terminals that are manufactured for us by a third party, and then supplied as part of a digital gaming product offering (which includes SWP terminals, digital jukeboxes and pool tables) to pubs. In late 2007, we began to offer full facilities management contracts to U.K. pub operators and now have approximately 1,450 digital AWP terminals installed to date with almost 600 pub operators.
Pari-mutuel Wagering. We believe we are a leading worldwide provider of high-volume, real-time transaction processing pari-mutuel wagering systems to licensed pari-mutuel operators. We provide our systems and services to horse and greyhound racetracks, OTBs, casinos, jai alai frontons, telephone and Internet account wagering operators and other establishments where pari-mutuel wagering is permitted.
In the United States, Germany and Ireland, we typically provide the necessary equipment, software and maintenance services pursuant to long-term facilities management contracts that typically have a minimum term of five years, under which we are generally paid a fee equal to a percentage of the amount wagered on a particular event. These fees have a weighted-average of approximately 0.36% of the amounts wagered. In addition, fees may be charged for extra equipment and services, particularly for new terminal models and equipment levels or services that exceed those originally contracted for. We have generally been successful in renewing these contracts, although, in late 2007 and late 2008, Woodbine Racetrack in Ontario, Canada and Fairgrounds Racetrack in New Orleans awarded new pari-mutuel contracts to other vendors. Internationally, we typically sell pari-mutuel wagering systems to licensed pari-mutuel operators and may provide ongoing fee-based support services under long-term contracts. Each of these systems is customized to meet the unique needs of our customers, including game designs, regulatory requirements, language preferences, network communication standards and other key system requirements.
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Our pari-mutuel systems utilize proprietary technology that facilitates high-speed processing of wagers made on a particular event over secure, high-speed communication channels and the calculation and display of betting odds on a particular event. Our systems link multiple racetracks and OTBs to one another, which enable operators to increase their revenues. Our pari-mutuel wagering business includes the supply of transaction-processing software, wagering terminals, central site computers and communication hardware, and on-going operational support and maintenance services. Our central site computers have historically been located in regional hubs or, in some cases, at the racetrack itself, depending on regulatory requirements. In 2006, we began migrating these systems into two new special purpose enterprise-level computing data centers. One data center is located in Sacramento, CA and another in Mount Laurel, NJ. By the end of the migration process, pending certain regulatory approval, we expect that all U.S.-based systems will operate from these two data centers while separate systems will remain in Canada and Puerto Rico.
Venue Management. We own and have the right to operate in perpetuity substantially all off-track pari-mutuel wagering in Connecticut, subject to our compliance with certain licensing requirements. Our Connecticut operations, with total wagers of approximately $219.0 million in 2008, consist of ten OTB facilities, including video simulcasting at three teletheaters and seven other branches, and telephone account wagering for customers in 11 states. We hold one of five OTB licenses within the state of Maine. We are also the exclusive licensed operator for all pari-mutuel wagering in the Netherlands, which totaled approximately $44 million in 2008, originating from four racetracks and 29 OTBs under a contract through June 2013. Our revenues are based on a percentage of the amounts wagered at or through our facilities, which ranges from 21% in Connecticut to 23% in the Netherlands, depending on the location of the wagering event and the type of wager made.
As previously announced, our Board of Directors has engaged a financial advisor to assist in reviewing strategic alternatives for our pari-mutuel wagering and venue management businesses. We expect to consider and evaluate available alternatives during the review including, but not limited to, the sale of those businesses. We have not set any timetable for the conclusion of this strategic review and do not intend to comment further publicly with respect to this process unless and until a specific alternative is approved by our Board. There can be no assurance that the review process will result in the announcement or consummation of any sale or other transaction.
For additional information concerning our business and geographic segments, see our Business and Geographic Segments footnote included in the notes to the consolidated financial statements.
Contract Procurement
Lottery
Government authorized lotteries in the U.S. typically operate under state-mandated public procurement regulations. See "Government Regulation." Lotteries select an instant ticket or online supplier by issuing a request for proposal, or RFP, which outlines contractual obligations as well as products and services to be delivered. An evaluation committee frequently comprised of key lottery staff evaluates responses based on various criteria. These criteria usually include quality of product and/or technical solutions, security plan and features, experience in the industry, quality of personnel and services to be delivered, and price. We believe that our product functionality, game content, the quality of our personnel, our technical expertise and our demonstrated ability to help the lotteries increase their revenues may give us an advantage relative to the competition when responding to state lottery RFPs. However, many lotteries still award the contract to the qualified vendor offering the lowest price, regardless of factors other than price. Contract awards by lottery authorities are sometimes challenged by unsuccessful competitors, which can result in protracted legal proceedings. Internationally, lottery authorities do not always utilize such a formal bidding process, but rather negotiate with one or more potential vendors.
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U.S. instant ticket lottery contracts typically have an initial term of three to five years and frequently include multiple renewal options, which our customers have generally exercised for additional periods ranging from one to five years. Our U.S. online lottery contracts typically have a minimum initial term of five years, with additional renewal options that may extend up to ten years. The length of these lottery contracts, together with their renewal options, limits the number of contracts available for bidding in any given year. The table below lists the U.S. lottery contracts for which we had executed agreements as of January 15, 2009 and certain related information. We are the exclusive provider of systems in all online and video lottery contracts and the primary supplier of instant tickets unless otherwise noted. The commencement date of the current contract is the date we began generating revenues under such contract, which for our online contracts is typically the start-up date. The table also includes instant ticket or online retail sales, as applicable, for each state or district.
State/District
|
Fiscal 2008*
State Instant Ticket or Online Retail Sales (in millions) |
Type of
Contract** |
Commencement Date of Current Contract | Expiration Date of Current Contract (Before exercise of remaining renewal options) | Current Renewal Options Remaining | ||||||
---|---|---|---|---|---|---|---|---|---|---|---|
Arizona |
$ | 252.4 | ITRS | January 2003 | January 2010 | None | |||||
California |
1,551.1 | ITRS | July 2005 | June 2009 | 4 one-year | ||||||
Colorado |
336.0 | ITRS | January 2006 | November 2010 | None | ||||||
Colorado |
169.8 | Online | April 2005 | October 2012 | 1 two-year | ||||||
Connecticut |
619.0 | ITRS | August 2007 | August 2010 | None | ||||||
Connecticut |
379.1 | Online | May 2008 | May 2013 | 5 one-year | ||||||
Delaware |
35.6 | ITRS | November 2005 | November 2011 | None | ||||||
Delaware |
89.3 | Online & Video | September 2001 | February 2010 | 5 one-year | ||||||
District of Columbia |
43.7 | ITRS | August 2005 | August 2010 | 2 one-year | ||||||
Florida |
2,368.8 | ITRS | October 2008 | September 2014 | 2 two-year | ||||||
Georgia |
2,404.9 | ITRS | September 2003 | September 2013 | None | ||||||
Idaho (2) |
84.4 | ITRS | August 2007 | September 2012 | 1 three-year | ||||||
Illinois |
1,114.5 | ITRS | December 2005 | December 2010 | None | ||||||
Indiana (2) |
525.9 | ITRS | January 2002 | December 2009 | 2 one-year | ||||||
Indiana |
296.9 | Online | January 1999 | August 2009 | None | ||||||
Iowa |
112.3 | Online | July 2001 | June 2010 | 1 one-year | ||||||
Iowa (2) |
138.0 | ITRS | January 2008 | December 2009 | 3 one-year | ||||||
Kentucky (2) |
470.9 | ITRS | September 2002 | September 2009 | None | ||||||
Louisiana |
132.0 | ITRS | February 2005 | October 2010 | None | ||||||
Maine |
63.2 | Online | July 2001 | June 2011 | None | ||||||
Maine |
164.3 | ITRS | July 2001 | June 2011 | None | ||||||
Maine |
N/A | Video | February 2005 | February 2010 | 1 five-year | ||||||
Maryland |
1,159.1 | Online | October 2005 | June 2011 | 1 five-year | ||||||
Maryland (1) |
513.9 | ITRS | July 2006 | June 2010 | 1 three-year | ||||||
Massachusetts (2) |
3,341.5 | ITRS | August 2004 | August 2009 | None | ||||||
Michigan (2) |
735.1 | ITRS | December 2006 | December 2011 | 5 one-year | ||||||
Minnesota |
398.0 | ITRS | March 2005 | February 2010 | None | ||||||
Missouri (2) |
639.9 | ITRS | April 2001 | June 2009 | 2 one-year | ||||||
Montana |
12.9 | ITRS | August 2008 | August 2013 | 7 one-year | ||||||
Nebraska |
63.7 | ITRS | May 2001 | June 2011 | None | ||||||
New Hampshire |
76.7 | Online | June 2000 | June 2010 | None | ||||||
New Hampshire |
183.1 | ITRS | June 2006 | June 2010 | 1 two-year | ||||||
New Jersey (1) |
1,284.0 | ITRS | November 2001 | April 2009 | None | ||||||
New Mexico |
86.6 | ITRS | March 2003 | March 2009 | 1 one-year | ||||||
New Mexico |
N/A | Video | December 2005 | December 2013 | None | ||||||
New York |
3,594.0 | ITRS | July 2006 | July 2009 | 2 one-year | ||||||
North Carolina (4) |
635.9 | ITRS | March 2006 | March 2013 | None | ||||||
North Dakota |
22.2 | Online | February 2004 | March 2012 | 2 one-year |
11
State/District
|
Fiscal 2008*
State Instant Ticket or Online Retail Sales (in millions) |
Type of
Contract** |
Commencement Date of Current Contract | Expiration Date of Current Contract (Before exercise of remaining renewal options) | Current Renewal Options Remaining | ||||||
---|---|---|---|---|---|---|---|---|---|---|---|
Ohio |
1,366.5 | ITRS | June 2007 | June 2009 | 3 two-year | ||||||
Oklahoma |
87.3 | ITRS | August 2005 | August 2009 | 3 one-year | ||||||
Oklahoma |
127.0 | Online | August 2005 | August 2009 | 3 one-year | ||||||
Oregon (2) |
124.7 | ITRS | May 2005 | September 2009 | 1 one-year | ||||||
Pennsylvania |
1,706.8 | ITRS | July 2007 | July 2012 | 5 one-year | ||||||
Pennsylvania |
1,382.4 | Online | January 2009 | December 2014 | 4 one-year | ||||||
Puerto Rico |
N/A | Online | September 2004 | June 2012 | None | ||||||
Rhode Island (2) |
81.5 | ITRS | July 2007 | June 2010 | 3 one-year | ||||||
South Carolina |
622.9 | ITRS | October 2006 | September 2013 | None | ||||||
South Dakota |
21.0 | ITRS | August 2005 | August 2009 | 1 one-year | ||||||
South Dakota (3) |
19.5 | Online & Video | March 1999 | August 2009 | None | ||||||
Tennessee |
795.8 | ITRS | January 2004 | April 2011 | None | ||||||
Texas |
2,783.8 | ITRS | September 2004 | August 2009 | 3 one-year | ||||||
Vermont |
24.7 | Online | July 2000 | June 2010 | None | ||||||
Vermont |
77.3 | ITRS | February 2006 | January 2010 | None | ||||||
Virginia |
694.9 | ITRS | June 2004 | June 2011 | None | ||||||
Washington |
330.5 | ITRS | March 2006 | March 2010 | 4 one-year | ||||||
West Virginia |
110.9 | ITRS | February 2006 | January 2010 | None | ||||||
West Virginia (3) |
87.1 | Online | November 1999 | June 2009 | None | ||||||
West Virginia |
N/A | Video | March 2006 | February 2012 | 4 one-year | ||||||
Wisconsin (2) |
284.1 | ITRS | July 2004 | June 2009 | None |
Wide Area Gaming
Contract awards by the major bookmakers in the U.K. often involve a competitive bid process. Major bookmakers have typically awarded the majority of their terminal installations to a single vendor. Contracts with major bookmakers are typically for a term of four years.
In the U.K. analog AWP and SWP industry, machine operators purchase terminals based on the relative performance of competing products, and the desires of pub operators. As this business continues to migrate to digital technology and takes on the characteristics of the U.K. bookmaker business, we expect the contract award process will be similar to that in the U.K. bookmaker business.
Pari-mutuel Wagering
Contract awards by owners of horse and greyhound racetracks, OTBs and casinos and jai alai frontons, and from state and foreign governments, often involve a lengthy competitive bid process,
12
spanning from specification development to contract negotiation and award. Our contracts for the provision of pari-mutuel systems services in North America are typically for terms of five years.
Our license to provide on-track and off-track services in the Netherlands extends through June 2013. New venue management opportunities generally occur via the privatization of existing government operated OTBs, as in the cases of Connecticut and the Netherlands, the acquisition or outsourcing of an existing private racetrack or OTB operation, as with our 2005 acquisition of the OTB in Maine and the Shoreline Star Greyhound Park and Simulcast Facility ("Shoreline") in Connecticut, or new legislation or regulation enabling new distribution channels. These opportunities occur infrequently and may be subject to public procurement bidding requirements.
Prepaid Phone Cards
Our telecommunications products customers issue purchase orders with agreed upon terms and conditions. In addition, certain customer purchase orders contain multiple delivery dates.
Research and Product Development
We believe our ability to attract new lottery, wide area gaming and pari-mutuel wagering customers and retain existing customers depends in part on our ability to continue to incorporate technological advances into, and to improve, our products, systems and related equipment. We maintain a development program directed toward systems development as well as toward the improvement and refinement of our present products and the expansion of their uses and applications. Many of our product developments and innovations have quickly become industry standards, including games for Printed Products and multiplier games for Lottery Systems.
Intellectual Property
We have a number of U.S. and foreign patents that we consider, in the aggregate, to be of material importance to our business. Patents extend for varying periods of time according to the date of patent filing or grant and the legal term of patents in the various countries where patent protection is obtained. In the U.S., the term of a patent generally expires 20 years from the date of filing. The actual protection afforded by a patent, which can vary from country to country, depends upon the type of patent, the scope of its coverage and the availability of legal remedies in the country.
Certain technology material to our lottery and pari-mutuel wagering products, processes and systems is the subject of patents issued, and patent applications currently pending, in the U.S. and certain other countries. In our lottery business, we utilize our patented and patent-pending technology for the production, secure printing, validation and distribution of instant lottery tickets. In our pari-mutuel and diversified gaming businesses, our patent-pending systems and methods provide racing and wagering data and related information. In addition, our MDI Entertainment, LLC ("MDI"), Global Draw and Games Media businesses patent and license game content as part of their businesses. Most of our material patents are not scheduled to expire until 2013 or later. We also have a number of U.S. and foreign registered trademarks and other common law trademark rights for certain of our products and services, including Delivering Serious Fun!, Winner's Choice, Play Central, SciScan Technology®, Aegis®, Wave, BetJet®, EXTREMA®, SGI-NET, QUANTUM, SAM®, STAN®, MAX, TINY TIM®, On the Wire®, Autotote® and others. Trademark protection continues in some countries, including the U.S., for as long as the mark is used and in other countries for as long as it is registered. Registrations generally are for fixed, but renewable, terms.
From time to time we become aware of potential infringement of our intellectual property by competitors and other third parties and consider what action, if any, to take in that regard, including, where appropriate, litigation. Historically, others have threatened and even brought litigation against us.
13
Production Processes, Sources and Availability of Components
Our dedicated computer-controlled printing process is specifically designed to produce secure instant lottery game tickets for government sanctioned lotteries and promotional games as well as prepaid phone cards. Our facilities are designed for efficient, secure production of instant game tickets and support high-speed variable image printing, packaging and storage of instant game tickets. Instant ticket games are delivered finished and ready for distribution by the lottery authority, or by us in the jurisdictions that are part of an instant ticket contract with cooperative services. Paper and ink are the principal raw materials consumed in our ticket manufacturing operations. We have a variety of sources for both paper and ink and, therefore, should not be dependent on any particular supplier.
Production of our lottery, wide area gaming and pari-mutuel wagering terminals and related component products primarily involves the assembly of electronic components into more complex systems and products. We produce our lottery and pari-mutuel terminals at our manufacturing facility in Ballymahon, Ireland or at our manufacturing facility in Alpharetta, Georgia. Wide area gaming terminals and certain lottery terminals are purchased from third-party vendors, as needed.
We normally have sufficient lead time between reaching an agreement to provide the required system and the commencement of operations so that we are able to provide the customer with a fully functioning system, customized to meet its requirements. In the event that current suppliers of central processing units were no longer available, we believe we would be able to adapt our application software to run on the then-available hardware in time to allow us to meet new contractual obligations, although the price competitiveness of our products might change. The lead time for obtaining most of the electronic components that we use is approximately 90 days. We believe that this is consistent with our competitors' lead times and is also consistent with the needs of our customers.
Competition
Printed Products Group
Our principal instant lottery ticket competitors in the U.S. are Pollard Banknote Limited and GTECH Printing Corp., a subsidiary of Lottomatica, SpA. Except as permitted by the applicable provisions of the North American Free Trade Agreement with respect to Canada and Mexico, it is currently illegal to import lottery tickets into the U.S. from a foreign country. Our business could be adversely affected should additional foreign competitors in Canada or Mexico export their lottery products to the U.S. or should other foreign competitors establish printing facilities in the U.S., Canada or Mexico to supply the U.S. Internationally, a few lottery instant ticket vendors compete with us including the competitors noted above.
The prepaid phone card industry is highly fragmented, but competition comes from other instant ticket lottery printers, as well as alternative printing and non-printing technologies. There are alternative technologies such as smart cards or other alternative means to provide the funding of telephone services. We have re-engineered the prepaid card to more resemble our lottery products, which in turn has allowed us to reduce production costs.
Lottery Systems Group
The online lottery business is highly competitive and continues to operate in a period of intense price-based competition.
Our principal competitors in the U.S. online lottery systems industry are Gtech, a subsidiary of Lottomatica, SpA, and Intralot Technologies, Inc. ("Intralot"), a subsidiary of Intralot, S.A. Gtech is also our major competitor in the international online lottery industry, along with Intralot and International Lottery and Totalizator Systems, Inc.
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Diversified Gaming Group
Our wide area gaming business competes with a variety of suppliers in the U.K. and internationally. Principal direct competitors in the U.K. bookmaker business include Inspired Gaming Group plc and Cyberview Technology, Inc. In the U.K. AWP/SWP industry, we compete directly with other suppliers of gaming machines, including Barcrest, a division of International Game Technology ("IGT"); Bell-Fruit Games, Ltd., a division of Gamestec Leisure Limited; Inspired Gaming Group; and Games Warehouse Limited, a division of Merit Industries, Inc. As the U.K. pub industry transitions from analog to digital, we expect to compete with both the current competitors, as well as new competitors. In emerging wide area gaming markets we compete with video lottery and other gaming terminal suppliers. Our competitors in these markets include IGT International, Lottomatica, Bally Technologies Inc., Inspired Gaming Group, Cyberview Technology, Aristocrat Leisure Ltd, Novomatic Industries, AG, Octavian International and Multimedia Games, Inc.
Our principal competitors in the North American pari-mutuel wagering systems business are AmTote International, Inc., principally owned by Magna Entertainment Corporation, and United Tote Company, a subsidiary of Youbet.com, Inc. Our competition outside of North America is more fragmented, with competition being provided by several international and regional companies. Current and future competitors in Internet-based wagering include Youbet.com, Inc. and Gemstar-TV Guide, Inc.
Our venue management business competes with other pari-mutuel operators, as well as with casinos, lotteries and other forms of legal and illegal gambling, and other forms of entertainment within our licensed jurisdictions.
Employees
As of December 31, 2008, we employed approximately 4,900 persons. Many of our U.S. pari-mutuel employees (approximately 280) involved in field operations are represented by the International Brotherhood of Electrical Workers under contract, extending through October 2009. Approximately 22 of our Canadian pari-mutuel employees are represented by the Service Employees International Union, which contract also extends through October 2009. Approximately 42 of our employees at one of our Connecticut OTB locations are represented by unions. The majority of our lottery employee groups are not represented by labor unions. However, our lottery employees in Austria are represented by a Worker's Council, which is typical of many European companies. In addition, unions represent 205 employees at our U.K. printing facility, 214 employees at our printing facility in Canada, 47 employees at our Australian printing facility and 119 employees at our printing facility in Chile.
Government Regulation
General
Lotteries, pari-mutuel wagering, sports wagering, and wide area gaming may be lawfully conducted only in jurisdictions that have enacted enabling legislation. In jurisdictions that currently permit various wagering activities, regulation is extensive and evolving but customarily includes some form of licensing of an applicant and its subsidiaries, if any. Regulators in those jurisdictions review many facets of an applicant or holder of a license including, among other items, financial stability, integrity and business experience. We believe we are currently in substantial compliance with all regulatory requirements in the jurisdictions where we operate and where appropriate maintain obligations in our supply agreements with customers to allow us to monitor and help ensure ongoing compliance. Any failure to receive a material license or the loss of a material license that we currently hold could have a material adverse effect on our overall operations and financial condition.
15
While we believe that our current and planned business activities comply with all applicable laws, law enforcement authorities in certain jurisdictions have opposed the expansion of wagering via telephone and the Internet. There can be no assurance that our activities or the activities of our customers will not become the subject of any law enforcement proceeding or that any such proceeding would not have a material adverse impact on us or our business plans.
We have developed and implemented an internal compliance program in an effort to ensure that we comply with legal requirements imposed in connection with our wagering-related activities, as well as legal requirements generally applicable to all publicly traded companies. The compliance program is run on a day-to-day basis by our Chief Compliance Officer with legal advice provided by our General Counsel and outside experts. The compliance program is overseen by the Compliance Committee of our Board of Directors, consisting of three outside directors. While we are firmly committed to full compliance with all applicable laws, there can be no assurance that such steps will prevent the violation of one or more laws or regulations, or that a violation by us or an employee will not result in the imposition of a monetary fine or suspension or revocation of one or more of our licenses.
In the last two years, new legislation was passed or has come into effect in the United States and Great Britain that may impact various aspects of our business. In Great Britain, the Gambling Act was fully implemented on September 1, 2007. Among other things, the Gambling Act requires specific licenses be obtained by operators in order to provide facilities for betting, gaming or participation in a lottery (whether conducted through remote or non-remote means) for certain "key personnel" managing the licensed activity, as well as premises licenses for pubs, betting offices and other adult gaming centers. The Gambling Act has also specified different categories of gaming machines, and the Gambling Commission has issued the technical specifications and standards with which each type of gaming machine, system and game content software must comply, through a phased implementation of third party testing. Although we are confident that Global Draw, Games Media and our sports wagering and pari-mutuel businesses hold the necessary operational licenses and are themselves supplied through properly licensed entities in compliance with the requirements of the Gambling Act, this legislation has not yet been subject to judicial interpretation and, therefore, certain aspects of the legislation remain unclear. Moreover, in addition to the risk of enforcement or investigative action in the case of any complaints received by the Gambling Commission, we are also at risk of loss of business reputation in the event of any potential legal or regulatory investigation, whether or not we are ultimately accused of or found to have committed any violations.
Similarly, in the United States, Congress passed the Unlawful Internet Gambling Enforcement Act of 2006. Among other things, the Unlawful Internet Gambling Enforcement Act prohibits the transmission of any wager, at least in part, by means of the Internet where such wager is prohibited by any applicable law where initiated, received or otherwise made. It imposes potentially severe criminal and civil sanctions on the owners and operators of such systems and on financial institutions processing wagering transactions. The law does contain a safe harbor for wagers placed within a single state (disregarding intermediate routing of the transmission) where the method of placing the bet and receiving the bet is authorized by that state's law, provided the underlying regulations establish appropriate age and location verification. The regulations implementing the law went into effect in January 2009.
In France, Germany and elsewhere in the European Union, enforcement actions and pronouncements, statutory enactments and court decisions have raised questions about the ability of European national governments to grant monopolies to lotteries or to limit extra-jurisdictional gaming where gaming is allowed in that country.
Currently, account wagering operations, through which pari-mutuel customers place wagers by phone or via the Internet on thoroughbred, harness or greyhound racing, may be conducted only from certain jurisdictions and only through licensed wagering operators in certain jurisdictions. While we believe that the activities of our pari-mutuel and gaming businesses comply with all applicable laws, law enforcement authorities in certain jurisdictions have opposed the expansion of wagering via telephone
16
and the Internet. Where state or other regulators have expressed concerns to us regarding such wagering by their citizens through our account wagering systems and the racetracks serviced by our pari-mutuel wagering systems, we have ceased operations in those jurisdictions in a manner that anticipated the safe harbor principles later adopted in the Unlawful Internet Gambling Enforcement Act. There can be no assurance that our activities or the activities of our customers will not become the subject of law enforcement proceedings or that any such proceedings would not have a material adverse impact on us or our business plans.
While we believe that we have developed the proper procedures and policies to comply with the requirements of these evolving laws and legal pronouncements, we can give no assurance that law enforcement or gaming regulatory authorities will not seek to restrict our business in their jurisdictions or even institute enforcement proceedings.
Lottery Operations
At the present time, 44 U.S. jurisdictions, all the Canadian provinces, Mexico, China and many other foreign countries, including all countries in Europe, authorize lotteries. Lottery contracts and operations of lotteries both domestically and abroad are subject to extensive regulation. Although certain of the features of a lottery, such as the percentage of gross revenues that must be paid back to players in prize money, are usually set by legislation, the various lottery regulatory authorities generally exercise significant discretion, including the determination of the types of games played, the price of each wager, the manner in which the lottery is marketed and the selection of vendors for equipment, technology and services, and retailers of lottery products. Furthermore, laws and regulations applicable to lotteries in the U.S. and foreign jurisdictions are subject to change, and the effect of such changes on our ongoing and potential operations cannot be predicted with certainty.
To ensure the integrity of the contract award and wagering process, most jurisdictions require detailed background disclosure on a continuous basis from, and conduct background investigations of, the vendor, its officers and directors, its subsidiaries and affiliates and its principal stockholders. Background investigations of the vendor's employees who will be directly responsible for the operation of the system are also generally conducted, and most states reserve the right to require the removal of employees whom they deem to be unsuitable or whose presence they believe may adversely affect the operational security or integrity of the lottery. Certain jurisdictions also require extensive personal and financial disclosure and background checks from persons and entities beneficially owning a specified percentage (typically five percent or more) of a vendor's securities. The failure of beneficial owners of our securities to submit to background checks and provide such disclosure could result in the imposition of penalties upon these beneficial owners and could jeopardize the award of a lottery contract to us or provide grounds for termination of an existing lottery contract.
From time to time we retain governmental affairs representatives in various states of the U.S. to advise legislators and the public concerning our views on lottery legislation, to monitor such legislation and to advise us in our relations with lottery authorities. We also make political contributions to various state political parties and state political candidates.
The award of lottery contracts and ongoing operations of lotteries in international jurisdictions are also extensively regulated, although this regulation usually varies from that prevailing in the U.S. Restrictions are frequently imposed on foreign corporations seeking to do business in such jurisdictions and, as a consequence, we have, in a number of instances, allied ourselves with local companies when seeking foreign lottery contracts. Laws and regulations applicable to lotteries in the U.S. and foreign jurisdictions are subject to change, and the effect of such changes on our ongoing and potential operations cannot be predicted with certainty.
17
Wide Area Gaming
The existing and emerging wide area gaming industry is governed by gaming regulations. Coin or voucher operated gambling devices offering electronic, video versions of spinning reels, poker, blackjack and similar games include VLTs, server-based gaming terminals, AWPs, and SWPs. Thirteen U.S. states authorize wagering on VLTs at state regulated and licensed facilities. Although some states currently restrict VLTs to already existing wagering facilities, others permit these devices to be placed at bars, restaurants, and specific licensed gaming facilities. In addition, all of the Canadian provinces and various other foreign countries have authorized their use.
Companies that manufacture, sell or distribute VLTs or provide the central computer systems that monitor these devices are subject to various provincial, state, county and municipal laws and regulations. The primary purposes of these rules are (1) to ensure the responsibility, financial stability and character of companies involved and their officers and directors and stockholders through licensing requirements, (2) to ensure the integrity and randomness of the machines, and (3) prohibit the use of VLTs at unauthorized locations or for the benefit of undesirable individuals or entities.
In Great Britain, the regulation of gaming activity has recently undergone significant change. The provisions of the Gambling Act were fully implemented in September 2007. Among other provisions, the Gambling Act regulates the type of licensed activity that is carried out by operators, the licensing of the various types of venues for the conduct of licensed gaming activities, the types of gaming activities, the categories and number of gaming machines allowed in each type of venue and the licensing and regulation of the supply and operation of those machines and other gaming activities. These regulations allow for some expansion of gaming in controlled environments (including the establishment of additional national and local casinos) and limits on the type of activities and number of gaming machines and gaming activities allowed in other venues. Under the Gambling Act, each category of gaming machine and individual operators are subject to regulation (including regulation covering the minimum technical specifications of machines) and specific licensing requirements.
The Gambling Act allows operators of licensed betting offices to make available for use up to a maximum of four gaming machines from two defined categories known as B2 machines and new B3 machines. Global Draw supplies state of the art proprietary Nevada terminals that provide the operator the flexibility of offering either B2 or B3 game content, increasing the variety and types of game content that are made available, including the ability to switch from one designation to the other depending on customer demand and the operator's preferences. Global Draw will also continue to offer its monitor game products (which offer fixed odds bets on virtual random number based events) under the general betting provisions of the Gambling Act.
In addition, the Gambling Act implements a regime for pubs, which will be limited to category C gaming machines (the category into which AWPs previously fell, although for the first time AWPs/category C machines can be supplied under participation agreements). This has allowed expansion into a new generation type of networked category C gaming machine operating digital content in pubs. The Gambling Act also provides some scope for other "soft" gaming activities to be conducted in pubs including some pool betting and social lotteries. Pubs will also continue to operate SWPs, which continue to fall outside of the scope of the Gambling Act.
Pari-mutuel Wagering
At present, 44 U.S. jurisdictions, all of the Canadian provinces, Mexico and many other foreign countries have authorized pari-mutuel wagering on horse races, and 16 states and many foreign countries, including Mexico, authorize pari-mutuel wagering on greyhound races. In addition, Florida and Mexico also allow pari-mutuel wagering on jai alai matches.
Companies that manufacture, distribute and/or operate pari-mutuel wagering systems in these jurisdictions are subject to the regulations of the applicable regulatory authorities in such jurisdictions.
18
These authorities generally require a company, as well as its directors, officers, certain employees and holders of five percent or more of its common stock, to obtain various licenses, permits and approvals. Regulatory authorities may also conduct background investigations of a company and its key personnel and stockholders in order to ensure the integrity of the wagering system. These authorities have the power to refuse, revoke or restrict a license for any cause they deem reasonable. The loss of a license in one jurisdiction may cause a company's licensing status to come under review in other jurisdictions as well.
In order for any of our subsidiaries to provide pari-mutuel wagering equipment and/or services to casinos in Atlantic City, New Jersey, the subsidiary must be licensed by the New Jersey Casino Control Commission, or the Casino Commission, as a gaming-related casino service industry in accordance with the New Jersey Casino Control Act, or the Casino Control Act, and by the New Jersey Racing Commission. An applicant for a gaming-related casino service industry license is required to establish, by clear and convincing evidence, financial stability, integrity and responsibility, good character, honesty and integrity, and sufficient business ability and experience to conduct a successful operation. We must also qualify under the standards of the Casino Control Act. We and any of our applicant subsidiaries may also be required to produce such information, documentation and assurances as required by the regulators to establish the integrity of all our directors, officers and financial backers, who may be required to seek qualification or waiver of qualification. For affiliates of New Jersey casinos, the Casino Commission traditionally has waived the qualification requirement for investors holding less than 15% of a debt issue. For institutional investors, the Casino Commission has traditionally waived the qualification requirement for holders if their positions are not more than 20% of the issuer's overall debt and not more than 50% of the specific debt issue. There can be no assurance, however, that the Casino Commission will waive any qualification requirement for any holder.
The Casino Commission has broad discretion in licensing matters and may at any time condition a license or suspend or revoke a license or impose fines upon a finding of disqualification or non-compliance. The Casino Commission may require that persons holding five percent or more of our Class A common stock or instruments convertible into Class A common stock qualify under the Casino Control Act. Under the Casino Control Act, a security holder is presumed to control a publicly traded corporation if the holder owns at least five percent of the corporation's equity securities; however, for passive institutional investors, qualification is generally not required for a position of less than 10% and, upon a showing of good cause, qualification may be excused for a position of 10% or more. Failure to qualify could jeopardize our license. In addition, the New Jersey Racing Commission also licenses our subsidiary and retains concurrent regulatory oversight over this subsidiary with the Casino Commission.
Our rights to operate the Connecticut OTB system are conditioned on our continuing to hold all licenses required for the operation of the system. In addition, our officers and directors and certain other employees must be licensed. Licensees are generally required to submit to background investigations and provide required disclosures. The Division of Special Revenue of the State of Connecticut, or the Division, may revoke the license to operate the system under certain circumstances, including a false statement in the licensing disclosure materials, a transfer of ownership of the licensed entity without Division approval and failure to meet financial obligations. The approval of the Connecticut regulatory authorities is required before any off-track betting facility is closed or relocated or any new branch or simulcast facility is established. Our telephone wagering operations, based in Connecticut, are subject to the Division's regulation. We have expanded the market for our "business-to-consumer" On the Wire® account wagering business through our Connecticut OTB system to 11 states.
While in the past we have been the subject of enforcement proceedings instituted by one or more regulatory bodies, we have been able to consensually resolve any such proceedings upon the implementation of remedial measures and/or the payment of settlements or monetary fines to such bodies. However, there can be no assurance that similar proceedings in the future will be similarly resolved, or that such proceedings will not have a material adverse impact on our ability to retain and renew existing licenses or to obtain new licenses in other jurisdictions.
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Application of Additional or Future Regulatory Requirements
In the future, we intend to seek the necessary licenses, approvals and findings of suitability for us, our personnel and products in other jurisdictions throughout the world wherever significant sales are anticipated to be made. There can be no assurance, however, that such licenses, approvals or findings of suitability will be obtained or, if obtained, will not be conditioned, suspended or revoked or that we will be able to obtain the necessary approvals for any future products as they are developed. If a license, approval or a finding of suitability is required by a regulatory authority and we fail to obtain the necessary license, approval or finding, we may be prohibited from selling our products for use in the respective jurisdiction or may be required to sell our products through other licensed entities at a reduced profit.
Executive Officers of the Company
Our executive officers are elected each year at the annual meeting of the Board of Directors, which follows the annual meeting of our stockholders, to hold office for a one-year term and until their successors have been elected and qualified or until their earlier death, resignation or removal.
Certain information regarding each of our executive officers is set forth below.
Name
|
Age | Position | |||
---|---|---|---|---|---|
Joseph R. Wright | 70 | Chief Executive Officer and Vice Chairman of the Board | |||
Michael R. Chambrello | 51 | President and Chief Operating Officer | |||
DeWayne E. Laird | 61 | Vice President and Chief Financial Officer | |||
Ira H. Raphaelson | 55 | Vice President, General Counsel and Secretary | |||
Larry A. Potts | 61 | Vice President, Chief Compliance Officer and Director of Security | |||
Steven M. Saferin | 60 | Vice President and President of Properties | |||
Robert C. Becker | 49 | Vice President and Treasurer | |||
Stephen L. Gibbs | 36 | Vice President, Chief Accounting Officer and Corporate Controller |
Joseph R. Wright became our Chief Executive Officer on January 1, 2009 and has served as Vice Chairman of the Board since May 1, 2008. Mr. Wright has been a member of the Board since 2004. From July 2006 through April 2008, he served as Chairman of Intelsat, Ltd., the world's largest provider of satellite services, and as Chief Executive Officer of PanAmSat Corporation from August 2001 until it was combined with Intelsat in July 2006. Mr. Wright was the Chairman of GRC International, Inc. from 1996 to March 2000 and was Executive Vice President and Vice Chairman of W.R. Grace & Co. from 1989 to 1994. Mr. Wright was a member of President Reagan's Cabinet as Director and Deputy Director of the White House Office of Management and Budget from 1982 to 1989 and was Deputy Secretary of the Department of Commerce from 1981 to 1982. He received the Distinguished Citizens Award from President Reagan in 1988. Mr. Wright is a director of Terremark Worldwide, Inc. and Federal Signal Corporation.
Michael R. Chambrello has served as President and Chief Operating Officer since July 2005. From November 2000 to June 2005, Mr. Chambrello was President and Chief Executive Officer of Environmental Systems Products Holdings, Inc. ("ESP"), which provides vehicle emissions testing systems and services to government agencies and prior to ESP he was Chief Executive Officer of Transmedia Asia Pacific, Inc. and Transmedia Europe Inc., which provide membership-based consumer and business services. Mr. Chambrello has approximately 20 years of lottery industry experience, having served as President of GTECH Corporation and Executive Vice President of GTECH Holdings Corporation.
DeWayne E. Laird has served as Vice President and Chief Financial Officer since November 1998 and served as Corporate Controller from April 1996 to December 2008. From January 1992 to March 1996, Mr. Laird was President of Laird Associates, PC, a CPA firm providing financial consulting
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services to a variety of industries. From April 1984 to December 1991, he held various senior positions with Philadelphia Suburban Corporation, including Chief Financial Officer and Treasurer.
Ira H. Raphaelson has served as Vice President and General Counsel since February 2006 and as Secretary since June 2006. Mr. Raphaelson is the chief legal officer of the Company. Prior to joining the Company, Mr. Raphaelson was a partner in the Washington D.C. office of the law firm of O'Melveny & Myers LLP where he was a member of the firm's global enforcement defense practice and litigator for ten years.
Larry A. Potts has served as Vice President, Chief Compliance Officer and Director of Security since February 2006. Mr. Potts joined the Company in September 2004 as Vice President, Security and Compliance. Previously, he was the Chief Operating Officer of an international consulting and investigative company in Washington, D.C. Prior to that, he served as a Special Agent of the Federal Bureau of Investigation for over 23 years, where he served in a number of management positions, including Deputy Director.
Steven M. Saferin has served as Vice President of Properties since June 2005 and as President of the Properties Division of Scientific Games International, Inc. since September 2003. Mr. Saferin has been with the Company since the acquisition of MDI in January 2003. Mr. Saferin founded MDI in 1986, an industry leader in licensed lottery games and promotions, where Mr. Saferin served as President and Chief Executive Officer. Prior to founding MDI, Mr. Saferin was the Director of Program Acquisitions at ESPN. In addition, Mr. Saferin held the positions of Vice President with Viacom Communications and Warner Amex Cable and was an Attorney-Advisor to the Cable Television Bureau of the Federal Communications Commission.
Robert C. Becker has served as Treasurer since October 1996 and as Vice President and Treasurer since April 2001. Prior to joining the Company, Mr. Becker served as Assistant Treasurer for the Fuller Company, a multi-national engineering and manufacturing company, from 1990 to 1994.
Stephen L. Gibbs has served as Vice President and Chief Accounting Officer since April 2006 and was additionally named Corporate Controller on January 1, 2009. Mr. Gibbs joined Scientific Games Racing, LLC, a subsidiary of the Company, in April 2005, as Vice President of Finance. Prior to joining the Company, Mr. Gibbs served as Manager of Accounting Research for The Coca-Cola Company from September 2004 to March 2005 and as Controller for TRX, Inc. from May 2004 to August 2004. Prior to that time, Mr. Gibbs served nine years in public accounting with the firms of Arthur Andersen and Deloitte & Touche.
Access to Public Filings
We file annual reports, quarterly reports, current reports, proxy statements and other documents with the Securities and Exchange Commission ("SEC") under the Securities Exchange Act of 1934, as amended. The SEC maintains an Internet website that contains reports, proxy and information statements, and other information regarding issuers, including us, that file electronically with the SEC. The public can obtain any documents that we file with the SEC at http://www.sec.gov .
We make the following information available free of charge through the Investor Relations link on our website at www.scientificgames.com :
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You should carefully consider the following information with the other information contained or incorporated by reference in this Annual Report on Form 10-K.
We operate in highly competitive industries and our success depends on our ability to effectively compete with numerous domestic and foreign businesses.
We face competition from a number of domestic and foreign businesses, some of which have substantially greater financial resources than we do, which could impact our ability to win new contracts and renew existing contracts. We continue to operate in a period of intense price-based competition, which could affect the number and the profitability of the contracts we do win.
Contract awards by lottery authorities are sometimes challenged by unsuccessful bidders, which can result in costly and protracted legal proceedings that can result in delayed implementation or cancellation of the award. In addition, the domestic lottery market has matured such that the number of states conducting lotteries is unlikely to increase in the near-term.
We believe our principal competitors in the instant ticket lottery business are increasing their production capacity, which could increase pricing pressures in the instant ticket business and adversely affect our ability to win or renew instant ticket contracts or reduce the profitability of instant ticket contracts that we do win. Our domestic U.S. instant ticket business could also be adversely affected should additional foreign competitors in Canada or Mexico export their lottery products to the United States or should other foreign competitors establish printing facilities in the United States, Canada or Mexico to supply the U.S.
We also face increased price competition in the online lottery market from our two principal competitors. In late 2007 and in 2008 the lottery authorities in South Carolina, West Virginia and South Dakota awarded new online lottery contracts to our competitors. Our contracts with South Carolina terminated on November 15, 2008, and our online contracts with West Virginia and South Dakota terminate on June 27, 2009 and August 2, 2009, respectively. We also compete in the international instant ticket lottery market with low-price, low-quality printers in a regulated environment where competition laws are being reinterpreted so as to create competition from non-traditional lottery vendors and products.
Pricing pressures and potential privatization of some lotteries may also change the manner in which online and instant ticket contracts are awarded and the profitability of those contracts. Any future success of our lottery business will also depend, in part, on the success of the lottery industry in attracting and retaining players in the face of increased competition for these players' entertainment dollars, as well as our own success in developing innovative products and systems to achieve this goal. Our failure to achieve this goal could reduce revenues from our lottery operations. As a result of pressures on state and other government budgets, other forms of gaming may be legalized that could impact our business negatively in some areas and positively in others.
We also operate in competitive markets in other parts of our business. Our pari-mutuel business faces competition from other operators, other gaming venues such as casinos and state-sponsored lotteries and other forms of legal and illegal gaming. The market for pari-mutuel wagering has seen declines over a period of years and the continuing popularity of horse and dog racing is important to the operating results of our pari-mutuel business. Our other gaming-related businesses face competition from other vendors and illegal operators, as well as changes in law and regulation that can affect our future profitability. In our prepaid phone card business, we are operating in a period of intense price-based competition, which may continue to negatively affect our operating margins. Moreover, the cellular telephone industry is undergoing technological changes such that other technologies, including electronic commerce, could impact our growth opportunities and our customer relationships.
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The current economic slowdown may adversely affect our business and financial condition in ways that we cannot predict.
The current economic slowdown may have a negative effect on our business and financial condition. We cannot predict the effect that the economic slowdown will have on us as it also impacts our customers, vendors and business partners. We believe that the lottery and wide area gaming businesses are less susceptible to reductions in consumer spending than the destination gaming business (e.g., resort/casino venues, which are typically less accessible than lottery and wide area gaming retail outlets) and other parts of the consumer sector. However, there can be no assurance that the continuation or worsening of the current economic slowdown will not negatively impact the lottery or wide area gaming businesses.
Our business is subject to evolving technology.
The markets for all of our products and services are affected by changing technology, new legislation and evolving industry standards. Our ability to anticipate or respond to such changes and to develop and introduce new and enhanced products and services on a timely basis will be a significant factor in our ability to expand, remain competitive, attract new customers and retain existing contracts.
We can give no assurance that we will achieve the necessary technological advances or have the financial resources needed to introduce new products or services on a timely basis or that we will otherwise have the ability to compete effectively in the markets we serve.
We are heavily dependent on our ability to renew our long-term contracts with our customers and we could lose substantial revenue and profits if we are unable to renew certain of our contracts.
Generally, our contracts are for initial terms of one to five years, with optional renewal periods. Upon the expiration of a contract, including any extensions thereof, new contracts may be awarded through a competitive bidding process. In late 2007 and in 2008, the lottery authorities in South Carolina, West Virginia and South Dakota awarded new online lottery contracts to other vendors. Our revenues from our existing online contracts for South Carolina, West Virginia and South Dakota represented approximately $14.2 million, or 1%, of our total 2008 revenues. Excluding these contracts, approximately 30% of our online lottery contracts will expire and go out to bid during the next three years and contracts representing a substantial majority of our annual revenues from instant ticket lottery contracts are scheduled to expire or reach optional extension dates during the next three years. In addition, our contract with CLN, our largest customer, is scheduled to expire in 2010 concurrently with the scheduled expiration of CLN's contract with the Italian Monopoli di Stato under which CLN is the exclusive operator of the Italian Gratta e Vinci instant ticket lottery. Though the Italian Monopoli di Stato could renew the contract with CLN for an additional six years pursuant to its renewal option under the contract (in which case, our contract with CLN would continue during the renewal term), we cannot predict whether it will do so and it is possible that, instead of renewing the contract, the Italian Monopoli di Stato may issue a request for proposals from potential suppliers under a new contract. Contracts accounting for a majority of our current annual pari-mutuel revenues are scheduled to expire during the next five years. Contracts accounting for a majority of our wide area gaming revenues are scheduled to expire beginning in 2010.
We are also required by certain of our lottery customers to provide surety or performance bonds. There can be no assurance that we will continue to be able to obtain surety or performance bonds on commercially reasonable terms or at all. Our inability to provide such bonds would materially and adversely affect our ability to renew existing, or obtain new, lottery contracts.
There can be no assurance that our current contracts will be extended or that we will be awarded new contracts as a result of competitive bidding processes in the future. The termination, expiration or failure to renew one or more of our contracts could cause us to lose substantial revenue and profits,
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which could have an adverse effect on our ability to win or renew other contracts or pursue acquisitions or other growth initiatives.
We may not have sufficient cash flows from operating activities, cash on hand and available borrowings under our credit facilities to bid on new contracts, service our indebtedness and meet our other cash needs. These obligations require a significant amount of cash.
Our online lottery, wide area gaming and pari-mutuel contracts generally require significant up-front capital expenditures for terminal assembly, software customization and implementation, systems and equipment installation and telecommunications configuration. Historically, we have funded these up-front costs through cash flows generated from operations, available cash on hand and borrowings under our credit facilities. Our ability to continue to procure new contracts will depend on, among other things, our then present liquidity levels or our ability to obtain additional financing at commercially acceptable terms to finance the initial up-front costs. If we do not have adequate liquidity or are unable to obtain financing for these up-front costs on favorable terms or at all, we may not be able to bid on certain contracts, which could restrict our ability to grow and have a material adverse effect on our results of operations.
As of December 31, 2008, we had total indebtedness of approximately $1,259.6 million, or approximately 69% of our total capitalization, consisting primarily of senior secured term loan and revolving credit facilities under our credit agreement, senior subordinated notes and convertible senior subordinated debentures. Our ability to make payments on and to refinance our indebtedness will depend on our ability to generate cash in the future. This, to some extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control.
In addition, we estimate that, pursuant to our contractual obligations in connection with the acquisition of Global Draw, an earn-out of approximately $80.0 to $90.0 million may be payable in 2009.
If we are unable to generate sufficient cash flow from operations in the future to meet our commitments, we will be required to adopt one or more alternatives, such as refinancing or restructuring our indebtedness, selling material assets or operations or seeking to raise additional debt or equity capital. We cannot assure you that any of these actions could be affected on a timely basis or on satisfactory terms or at all, or that these actions would enable us to continue to satisfy our capital requirements. In addition, our existing or future debt agreements contain restrictive covenants that may prohibit us from adopting any of these alternatives. Our failure to comply with these covenants could result in an event of default which, if not cured or waived, could result in the acceleration of all of our debts. In addition, as described below, a substantial portion of our current long-term indebtedness may become due in 2010 unless certain actions are taken to eliminate the right of the holders of our convertible debentures to require us to redeem or repurchase such convertible debentures or our available liquidity exceeds the aggregate principal amount of such convertible debentures plus $50 million.
Our credit facilities and the indentures governing our senior subordinated notes and our convertible debentures impose certain restrictions. Failure to comply with any of these restrictions could result in acceleration of the maturity of our debt. Were this to occur, we would not have sufficient cash to pay our accelerated indebtedness.
The operating and financial restrictions and covenants in our debt agreements, including our credit facilities and the indentures governing our senior subordinated notes and our convertible debentures, may adversely affect our ability to finance future operations or capital needs or to engage in new business activities. Our credit facilities and/or indentures restrict our ability to, among other things: declare dividends or redeem or repurchase capital stock; prepay, redeem or purchase debt; make loans,
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guarantees, acquisitions and investments; incur additional indebtedness; make capital expenditures; and engage in mergers, acquisitions or asset sales.
In addition, our credit agreement requires us to maintain certain financial ratios. As a result of these financial covenants, we will be limited in the manner in which we can conduct our business, and may be unable to engage in favorable business activities or finance future operations or capital needs. Accordingly, these restrictions may limit our ability to successfully operate our business. See Note 8 to our Consolidated Financial Statements for additional information regarding these financial ratios.
We cannot assure you that our future operating results will be sufficient to enable compliance with the covenants in our credit agreements, the indentures or other indebtedness or to remedy any such default. In addition, in the event of an acceleration, we may not have or be able to obtain sufficient funds to make any accelerated payments.
The holders of our convertible debentures have the right to require us to repurchase some or all of their convertible debentures in June 2010, and our notes issued in 2004 will mature in December 2012. The maturity of borrowings under our credit agreement will be accelerated to March 2010 or September 2012, respectively, if certain conditions related to our convertible debentures or our notes issued in 2004, as applicable, are not satisfied.
Under the terms of our convertible debentures, the holders of the convertible debentures may require us to repurchase some or all of their debentures for cash on June 1, 2010 at a repurchase price equal to 100% of the principal amount of the debentures being repurchased, plus accrued and unpaid interest. If current market conditions continue and our common stock continues to trade at current levels, it is likely that the holders of the debentures will exercise this repurchase right. In connection with that repurchase right, the terms of our credit agreement provide that our term loan facility and our revolving credit facility will both mature on March 1, 2010, unless one of the following conditions is met:
In addition, our notes issued in 2004 mature on December 15, 2012. In connection with the anticipated maturity of these notes, the terms of our credit agreement provide our term loan facility and our revolving credit facility will both mature on September 15, 2012, unless one of the following conditions is met:
We intend to take the steps necessary to satisfy the conditions set forth above in a timely manner, including implementing plans to reduce operating costs and capital expenditures during 2009. However,
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we cannot assure you that we will have sufficient financial resources, or will be able to arrange financing, to satisfy the conditions set forth above or to repay any accelerated indebtedness under our credit agreement or, even if we obtain a waiver from our lenders under our credit agreement, to repurchase our convertible debentures in 2010 or such later date as such repurchase may be required, or to repay in 2012 our notes issued in 2004.
Our business depends on the protection of our intellectual property and proprietary information.
We believe that our success depends, in part, on protecting our intellectual property in the United States and in foreign countries. Our intellectual property includes certain patents and trademarks relating to our instant ticket games and wagering systems, as well as proprietary or confidential information that is not subject to patent or similar protection. Our intellectual property protects the integrity of our games, systems, products and services, which is a core value of the industries in which we operate. For example, our intellectual property is designed to ensure the security of the printing of our instant lottery tickets and prepaid phone cards and provide simple and secure validation of our lottery tickets. Competitors may independently develop similar or superior products, software, systems or business models. In cases where our intellectual property is not protected by an enforceable patent, such independent development may result in a significant diminution in the value of our intellectual property.
There can be no assurance that we will be able to protect our intellectual property. We enter into confidentiality or license agreements with our employees, vendors, consultants, and, to the extent legally permissible, our customers, and generally control access to, and the distribution of, our game designs, systems and other software documentation and other proprietary information, as well as the designs, systems and other software documentation and other information we license from others. Despite our efforts to protect these proprietary rights, unauthorized parties may try to copy our gaming products, business models or systems, use certain of our confidential information to develop competing products, or develop independently or otherwise obtain and use our gaming products or technology, any of which could have a material adverse effect on our business. Policing unauthorized use of our technology is difficult and expensive, particularly because of the global nature of our operations. The laws of other countries may not adequately protect our intellectual property.
There can be no assurance that our business activities, games, products and systems will not infringe upon the proprietary rights of others, or that other parties will not assert infringement claims against us. Any such claim and any resulting litigation, should it occur, could subject us to significant liability for damages and could result in invalidation of our proprietary rights, distract management, and/or require us to enter into costly and burdensome royalty and licensing agreements. Such royalty and licensing agreements, if required, may not be available on terms acceptable to us, or may not be available at all. In the future, we may also need to file lawsuits to defend the validity of our intellectual property rights and trade secrets, or to determine the validity and scope of the proprietary rights of others. Such litigation, whether successful or unsuccessful, could result in substantial costs and diversion of resources.
We rely on products and technologies that we license from third parties. There can be no assurance that these third-party licenses, or the support for such licenses, will continue to be available to us on commercially reasonable terms, if at all.
Our business competes on the basis of the security and integrity of our systems and products.
We believe that our success depends, in part, on providing secure products and systems to our vendors and customers. Attempts to penetrate security measures may come from various combinations of customers, retailers, vendors, employees and others. Our ability to monitor and ensure quality of our products is periodically reviewed and enhanced. Similarly, we constantly assess the adequacy of our security systems to protect against any material loss to any of our customers and the integrity of the
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product to end-users. There can be no assurance that our business will not be affected by a security breach or lapse, which could have a material adverse impact on our results of operations, business or prospects.
Our industry is subject to strict government regulations that may limit our existing operations and have a negative impact on our ability to grow.
In the United States and many other countries, lotteries, pari-mutuel and other forms of wagering must be expressly authorized by law. Once authorized, such activities are subject to extensive and evolving governmental regulation. Moreover, such gaming regulatory requirements vary from jurisdiction to jurisdiction. Therefore, we are subject to a wide range of complex gaming laws and regulations in the jurisdictions in which we are licensed. Most jurisdictions require that we be licensed, that our key personnel and certain of our security holders be found suitable or be licensed, and that our products be reviewed and approved before placement. If a license, approval or finding of suitability is required by a regulatory authority and we fail to seek or do not receive the necessary approval, license or finding of suitability, then we may be prohibited from distributing our products for use in the particular jurisdiction.
The regulatory environment in any particular jurisdiction may change in the future, and any such change could have a material adverse effect on our results of operations, business or prospects. Moreover, there can be no assurance that the operation of lotteries, pari-mutuel wagering facilities, video gaming industry machines, Internet gaming or other forms of lottery or wagering systems will be approved by additional jurisdictions or that those jurisdictions in which these activities are currently permitted will continue to permit such activities. Although we believe that we have developed procedures and policies designed to comply with the requirements of evolving laws, including the Gambling Act that took effect in Great Britain in September 2007, there can be no assurance that law enforcement or gaming regulatory authorities will not seek to restrict our business in their jurisdictions or even institute enforcement proceedings.
Moreover, in addition to the risk of enforcement action, we are also at risk of loss of business reputation in the event of any potential legal or regulatory investigation whether or not we are ultimately accused of or found to have committed any violation. For example, a software glitch affecting a type of wager known as "Quick Pick" offered on certain of our pari-mutuel wagering terminals received press reports during 2008. The California Horse Racing Board ("CHRB") conducted an investigation and found no intentional misconduct or effort to conceal the error from the public. This investigation concluded with a settlement agreement between CHRB and our subsidiary, Scientific Games Racing, LLC ("SGR"). As part of the settlement, SGR reimbursed the CHRB $50,000 for the costs of its investigation and agreed to make a voluntary payment of $150,000 to racing-related charities. Subsequently, purported class action lawsuits relating to the Quick Pick matter were filed against us, SGR and our subsidiary, Scientific Games International, Inc ("SGI"). Angel Romero filed one suit on behalf of himself and a class of similarly situated individuals in Superior Court of Los Angeles on June 2, 2008. On August 5, 2008, Jerry Jamgotchian, individually and on behalf of all others similarly situated in California, Connecticut, Delaware, Indiana, Iowa, Louisiana, Maryland, Michigan, New York, New Jersey, Ohio, Pennsylvania, Texas or Wisconsin, brought suit in the Central District of California. On October 22, 2008, the plaintiff in the Romero lawsuit moved to dismiss the complaint, which motion was granted on October 23, 2008. On October 22, 2008, our motion to dismiss the Jamgotchian lawsuit was granted by the court, without leave to refile. The plaintiff has appealed this ruling.
We are required to obtain and maintain licenses from various state and local jurisdictions in order to operate certain aspects of our pari-mutuel business and we are subject to extensive background investigations and suitability standards in our lottery business. We also will become subject to regulation in any other jurisdiction where our customers operate in the future. There can be no assurance that we
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will be able to obtain new licenses or renew any of our existing licenses, and the loss, denial or non-renewal of any of our licenses could have a material adverse effect on our results of operations, business or prospects. Lottery authorities generally conduct background investigations of the winning vendor and its employees prior to and after the award of a lottery contract. Generally, regulatory authorities have broad discretion when granting, renewing or revoking these approvals and licenses. Lottery authorities with which we do business may require the removal of any of our employees deemed to be unsuitable and are generally empowered to disqualify us from receiving a lottery contract or operating a lottery system as a result of any such investigation. Our failure, or the failure of any of our key personnel, systems or machines, in obtaining or retaining a required license or approval in one jurisdiction could negatively impact our ability (or the ability of any of our key personnel, systems or gaming machines) to obtain or retain required licenses and approvals in other jurisdictions. The failure to obtain or retain a required license or approval in any jurisdiction would decrease the geographic areas where we may operate and generate revenues, decrease our share in the gaming marketplace and put us at a disadvantage compared with our competitors.
Some jurisdictions also require extensive personal and financial disclosure and background checks from persons and entities beneficially owning a specified percentage (typically 5% or more) of our equity securities. The failure of these beneficial owners to submit to such background checks and provide required disclosure could jeopardize the award of a lottery contract to us or provide grounds for termination of an existing lottery contract. Additional restrictions are often imposed by international jurisdictions in which we market our lottery systems on foreign corporations, such as us, seeking to do business in such jurisdictions. In light of these regulations and the potential impact on our business, in 2007, the Board of Directors and our stockholders adopted an amendment to our restated certificate of incorporation that allows for the restriction of stock ownership by persons or entities who fail to comply with informational or other regulatory requirements under applicable gaming law, who are found unsuitable to hold our stock by gaming authorities or whose stock ownership adversely affect our ability to obtain, maintain, renew or qualify for a license, contract, franchise or other regulatory approval from a gaming authority. The licensing procedures and background investigations of the authorities that regulate our businesses and the amendment may inhibit potential investors from becoming significant stockholders or inhibit existing shareholders from retaining or increasing their ownership.
We have developed and implemented an internal compliance program in an effort to ensure that we comply with legal requirements imposed in connection with our wagering-related activities, as well as legal requirements generally applicable to all publicly traded corporations. The compliance program is run on a day-to-day basis by our Chief Compliance Officer with legal advice provided by our General Counsel and outside experts. The compliance program is overseen by the Compliance Committee of our Board of Directors, consisting of three outside directors. While we are firmly committed to full compliance with all applicable laws, there can be no assurance that such steps will prevent the violation of one or more laws or regulations, or that a violation by us or an employee will not result in the imposition of a monetary fine or suspension or revocation of one or more of our licenses.
Gaming opponents persist in their efforts to curtail the expansion of legalized gaming, which, if successful, could limit our existing operations.
Legalized gaming is subject to opposition from gaming opponents. There can be no assurance that this opposition will not succeed in preventing the legalization of gaming in jurisdictions where these activities are presently prohibited or prohibiting or limiting the expansion of gaming where it is currently permitted, in either case to the detriment of our business, financial condition, results and prospects.
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Our ability to complete future acquisitions of gaming and related businesses and integrate those businesses successfully could limit our future growth.
Part of our corporate strategy is to continue to pursue expansion and acquisition opportunities in gaming and related businesses, such as our acquisition of certain assets of EssNet AB ("EssNet") and our acquisitions of Global Draw and Games Media in 2006 and our acquisition of Oberthur Gaming Technologies and related companies ("OGT") in 2007, and we could face significant challenges in managing and integrating the expanded or combined operations, including acquired assets, operations and personnel. There can be no assurance that acquisition opportunities will be available on acceptable terms or at all or that we will be able to obtain necessary financing or regulatory approvals to complete potential acquisitions. Our ability to succeed in implementing our strategy will depend to some degree upon the ability of our management to identify, complete and successfully integrate commercially viable acquisitions. Acquisition transactions may disrupt our ongoing business and distract management from other responsibilities.
Our revenues fluctuate due to seasonal, weather and other variations and you should not rely upon our periodic operating results as indications of future performance.
Our pari-mutuel service revenues are subject to seasonal and weather variations. The first and fourth quarters of the calendar year traditionally comprise the weakest period for our pari-mutuel wagering service revenue. As a result of inclement weather during the winter months, a number of racetracks do not operate and those that do operate often experience missed racing days. Additionally, the fourth quarter is the weakest quarter for Global Draw due to reduced wagering during the holiday season. This adversely affects the amounts wagered and our corresponding service revenues. Wagering equipment sales and software license revenues usually reflect a limited number of large transactions, which may not recur on an annual basis. Consequently, revenues and operating results can vary substantially from period to period as a result of the timing of revenue recognition for major equipment sales and software license revenue. In addition, instant ticket and prepaid phone card sales may vary depending on the season and timing of contract awards, changes in customer budgets, ticket inventory levels, lottery retail sales and general economic conditions.
Our business could also be impacted by natural or man-made disasters such as Hurricane Katrina or the terrorist attack in New York on September 11, 2001. Although we have taken steps to have disaster recovery plans in place, there can be no assurance that such an event would not have a significant impact on our business.
Our success depends in part on our ability to develop, enhance and/or introduce successful gaming concepts and game content.
In the Diversified Gaming Group, our Global Draw and Games Media businesses develop and source game content both internally and through third party suppliers. Games Media also seeks to secure third party brands for incorporation into its game content. We believe creative and appealing game content produces more revenue and net win for the gaming machine customers of these businesses and provides them with a competitive advantage, which in turn enhances the revenues of Global Draw and Games Media and their ability to attract new business or to retain existing business. In our lottery business, we believe that innovative gaming concepts and game content, such as multiplier games for our Lottery Systems Group and licensed brand game content for our Printed Products Group, can enhance the revenue of our lottery customers and distinguish us from our competitors. There can be no assurance that we will be able to sustain the success of our existing game content or effectively develop or obtain from third parties new and enhanced game content that will be widely accepted both by our customers and their end users.
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We are dependent on our suppliers and contract manufacturers, and any failure of these parties to meet our performance and quality standards or requirements could cause us to incur additional costs or lose customers.
Our production of instant lottery tickets and prepaid phone cards, in particular, depends upon a continuous supply of raw materials, supplies, power and natural resources. Our operating results could be adversely affected by an interruption or cessation in the supply of these items or a serious quality assurance lapse.
We transmit certain wagering data utilizing satellite transponders, generally pursuant to long-term contracts. The technical failure of any of these satellites would require us to obtain other communication services, including other satellite access. In some cases, we employ backup systems to limit our exposure in the event of such a failure. There can be no assurance of access to such other satellites or, if available, the ability to obtain the use of such other satellites on favorable terms or in a timely manner. While satellite failures are infrequent, the operation of satellites is outside of our control.
Our contracts for the broadcast of signals are usually one-year contracts. Because of competitive and other factors, we cannot provide assurance that these broadcast contracts will be renewed. Elimination of our access to racing broadcast signals could have a material adverse affect on racing revenue as well as our ability to expand the business into new markets.
In addition, our Global Draw business has entered into a number of significant contracts whose performance depends upon our third-party suppliers delivering equipment on schedule for Global Draw to meet its contract commitments. Failure of the suppliers to meet their delivery commitments could result in Global Draw being in breach of and subsequently losing those contracts, which loss could have a material adverse affect on our results of operations.
We may be liable for product defects or other claims relating to our products.
Our products could be defective, fail to perform as designed or otherwise cause harm to our customers, their equipment or their products. If any of our products are defective, we may be required to recall the products and/or repair or replace them, which could result in substantial expenses and affect our profitability. Any problems with the performance of our products could harm our reputation, which could result in a loss of sales to customers and/or potential customers. In addition, if our customers believe that they have suffered harm caused by our products, they could bring claims against us that could result in significant liability. Any claims brought against us by customers may result in diversion of management's time and attention, expenditure of large amounts of cash on legal fees, expenses, and payment of damages, decreased demand for our products and services, and injury to our reputation. Our insurance may not sufficiently cover a large judgment against us or a large settlement payment, and is subject to customary deductibles, limits and exclusions.
We have foreign operations, which subjects us to additional risks.
We are a global business and derive a substantial and growing portion of our revenue and profits from operations outside the United States. In fiscal year ended December 31, 2008, we derived approximately 50% of our total revenues from our operations outside of the United States. Our operations in foreign markets subject us to risks customarily associated with such operations, including:
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Our consolidated financial results are significantly affected by foreign currency exchange rate fluctuations. Foreign currency exchange rate exposures arise from current transactions and anticipated transactions denominated in currencies other than U.S. dollars and from the translation of foreign currency balance sheet accounts into U.S. dollar-denominated balance sheet accounts. We are exposed to currency exchange rate fluctuations because a significant portion of our revenues is denominated in currencies other than the U.S. dollar, particularly the British pound sterling and the Euro. Exchange rate fluctuations have in the past adversely affected our operating results and cash flows and may adversely affect our results of operations and cash flows and the value of our assets outside the United States in the future.
In addition, our ability to expand successfully in foreign markets involves other risks, including difficulties in integrating our foreign operations, risks associated with entering markets in which we may have little experience and the day-to-day management of a growing and increasingly geographically diverse company. Our investment in foreign markets often entails entering into joint ventures or other business relationships with locally based entities, which can involve additional risks arising from our lack of sole decision-making authority, our reliance on a partner's financial condition, inconsistency between our business interests or goals and those of our partners and disputes between us and our partners. In particular, our investment in CLN is a minority investment in an Italian consortium whose largest equity holder is Lottomatica S.p.A, an Italian entity, and we do not control decisions relating to the governance of the consortium, including with respect to the distribution of its cash earnings.
Since December 13, 2005, we have had a contract with a lottery operator in Mexico to supply an online lottery system, software and related services. In late 2008, we entered into discussions with our lottery operator customer and its parent company to asses our strategic options with a view to potentially restructuring our arrangement. Litigation between the parties commenced in January 2009 and discussions resumed in late February 2009. Effective February 25, 2009, the parties entered into a comprehensive agreement to end all litigation and terminate the contract in an orderly manner on or before October 1, 2009, in light of a change in economic circumstances including changes in the Mexican tax structure relating to lotteries. As part of the agreement, the system, terminals and communications equipment will revert to the Company for potential later use. Accordingly, we have recorded a charge for anticipated losses during the shut-down period and a charge to write off our investment in this contract to expected net realizable value.
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Through our joint ventures and wholly owned foreign enterprises, we have lottery-related investments and business operations in China, from which we expect to derive a growing portion of income. Our business and results of operations in China are subject to a number of risks, including risks relating to the complex regulatory environment in China, the political climate in China, the Chinese economy and our joint venture and other business partners in China. Two of our joint ventures are with locally based state-owned enterprises, which can potentially heighten the joint venture-related risks described above relating to inconsistency of business interests and disputes.
We believe that our operations in China are in compliance with all applicable legal and regulatory requirements. However, we cannot assure you that legal and regulatory requirements in China will not change or that China's central or local governments will not impose new, stricter regulations or interpretations of existing regulations that would impose additional costs on our operations in China or even restrict or prohibit such operations. For example, comprehensive legislation regulating competition took effect in August 1, 2008. This new law, among other things, prohibits certain types of agreements (unless they fall within specified exemptions) and certain behavior classified as abuse of dominant market position or intellectual property rights. Although we do not believe this new law will have a material adverse effect on our results of operations, we cannot predict with certainty what impact the new law (or implementing rules or enforcement policy) will have on our business in China (including whether or to what extent, the law applies to state-owned business or joint ventures in which they participate). We may not realize the operating efficiencies, market position or financial results that we anticipate from our investments in foreign markets and our failure to effectively manage the above risks associated with our operations in foreign markets could have a material adverse effect on our results of operations, business or prospects.
We recognize significant earnings from our cooperative investment in CLN but we do not control distributions of its cash.
We are a 20% equity owner in CLN, the income from which we account for under the equity method of accounting. Our investment in CLN resulted in a significant portion of our income in 2008. For the year ended December 31, 2008, we recorded income of approximately $51.7 million attributable to our interest in CLN. Our investment in CLN is a minority investment and we do not control decisions relating to the distribution of its cash earnings. Lottomatica S.p.A., which owns one of our principal competitors, has a 63% interest in CLN. If CLN does not distribute earnings to equity holders, we may record significant income attributable to our interest in CLN but will not receive commensurate cash flow.
In addition, our contract with CLN, our largest customer, is scheduled to expire in 2010 concurrently with the scheduled expiration of CLN's contract with the Italian Monopoli di Stato under which CLN is the exclusive operator of the Italian Gratta e Vinci instant ticket lottery. Though the Italian Monopoli di Stato could renew the contract with CLN for an additional six years pursuant to its renewal option under the contract (in which case, our contract with CLN would continue during the renewal term), we cannot predict whether it will do so and it is possible that, instead of renewing the contract, the Italian Monopoli di Stato may issue a request for proposals from potential suppliers under a new contract.
Certain holders of our common stock exert significant influence over the Company and may make decisions with which other stockholders may disagree.
In August 2004, MacAndrews & Forbes Holdings Inc. was issued approximately 25% of our outstanding common stock in connection with its conversion of our then outstanding Series A Convertible Preferred Stock. According to a Form 4 filed with the SEC on January 6, 2009, this holder beneficially owns 25,985,737 shares of our common stock, or approximately 28% of our currently
32
outstanding common stock. Such holder is entitled to appoint up to four members of our Board of Directors under a stockholders' agreement with us, as supplemented, which we originally entered into with holders of the Series A Convertible Preferred Stock, and certain actions of the Company require the approval of such holder. As a result, this holder has the ability to exert significant influence over our business and may make decisions with which other stockholders may disagree, including, among other things, delaying, discouraging or preventing a change of control of the Company or a potential merger, consolidation, tender offer, takeover or other business combination.
If certain of our key personnel leave us, our business will be significantly adversely affected.
We depend on the continued performance of our senior management team, including Joseph R. Wright, our Chief Executive Officer and Vice Chairman of our Board. Lorne A. Weil relinquished the role of Chief Executive Officer effective January 1, 2009 but continues to serve as Chairman of the Board. Although no longer an executive officer, we depend on Mr. Weil for overall strategic and organization guidance and advice on business development project and mergers and acquisitions. Mr. Weil and our senior management team have extensive experience in the lottery and pari-mutuel businesses. Messrs. Wright and Weil have employment contracts with us through 2011. If we lose the services of Mr. Weil, Mr. Wright or any of our other senior officers and cannot find suitable replacements for such persons in a timely manner, it could have a material adverse effect on our business.
We could incur costs in the event of violations of or liabilities under environmental laws.
Our operations and real properties are subject to U.S. and foreign environmental laws and regulations, including those relating to air emissions, the management and disposal of hazardous substances and wastes, and the cleanup of contaminated sites. We could incur costs, including cleanup costs, fines or penalties, and third-party claims as a result of violations of or liabilities under environmental laws. Some of our operations require environmental permits and controls to prevent or reduce environmental pollution, and these permits are subject to review, renewal and modification by issuing authorities. We believe that our operations are currently in substantial compliance with all environmental laws, regulations and permits and have not historically incurred material costs for noncompliance with, or liabilities under, these requirements.
Failure to perform under our lottery contracts may result in litigation, substantial monetary liquidated damages and contract termination.
Our business subjects us to contract penalties and risks of litigation, including due to potential allegations that we have not fully performed under our contracts or that goods or services we supply are defective in some respect. Litigation is pending in Colombia arising out of the termination of certain Colombian lottery contracts in 1993. An agency of the Colombian government has asserted claims against certain parties, including our subsidiary, SGI, which owned a minority interest in the former operator of the Colombian national lottery. The claims are for, among other things, contract penalties, interest and the costs of a bond issued by a Colombian surety. For additional information regarding this litigation see "Item 3Legal Proceedings." Although we believe that any potential losses arising from this litigation will not result in a material adverse effect on our consolidated financial position or results of operations, we cannot predict the final outcome, and there can be no assurance that this litigation will not be finally resolved adversely to us or result in material liability.
In addition, our lottery contracts typically permit a lottery authority to terminate the contract at any time for material failure to perform, other specified reasons and, in many cases, for no reason at all. Lottery contracts to which we are a party also frequently contain exacting implementation schedules and performance requirements and the failure to meet these schedules and requirements may result in
33
substantial monetary liquidated damages, as well as possible contract termination. We are also required by certain of our lottery customers to provide surety or performance bonds. We have paid or incurred liquidated damages under our lottery contracts and material amounts of liquidated damages could be imposed on us in the future, which could, if imposed, have a material adverse effect on our results of operations, business or prospects.
Labor disputes may have an adverse effect on our operations.
Although we have increasingly automated our pari-mutuel field operations and created two hub centers, we have union employees in our pari-mutuel field operations in the United States and Canada. We collectively bargain with the labor unions that represent these employees. The collective bargaining agreement representing the majority of our union employees in our pari-mutuel field operations in the United States and the collective bargaining agreement relating to our Canadian racing operations expire on October 20, 2009. Notwithstanding these agreements, if we were to experience a union strike or work stoppage, it would be difficult to find sufficient replacement employees with the proper skills. Certain of our other employees are represented by unions, including certain employees at our printing facilities in Australia, Canada, Chile and United Kingdom and at one of our Connecticut OTB locations. There can be no assurance that we will not encounter any conflicts or strikes with any labor union that represents our employees, which could have an adverse effect on our business or results of operations, could cause us to lose customers or could cause our customers' operations to be affected and might have permanent effects on our business.
The price of our common stock has been volatile and may continue to be volatile.
Our stock price may fluctuate in response to a number of events and factors, such as, variations in operating results, actions by various regulatory agencies, litigation, market perceptions of our financial reporting, financial estimates and recommendation by securities analysts, rating agency reports, performance of other companies that investors or security analysts deem comparable to us, news reports relating to our business, our markets or general market conditions. During the 52-week period ending on February 27, 2009, our stock price fluctuated between a high of $34.31 and a low of $10.05. This significant stock price fluctuation may make it more difficult for our stockholders to resell their common stock when they want and at prices they find attractive.
ITEM 1B. UNRESOLVED STAFF MATTERS
No disclosure required pursuant to this Item.
Domestically, our principal facilities include approximately 355,000 square feet owned in Alpharetta, Georgia for administrative and operations offices, a manufacturing plant and warehouse space (used for the Printed Products, Lottery Systems and Diversified Gaming Groups and subject to mortgage encumbrance), approximately 57,600 square feet of leased space in Alpharetta, Georgia for a manufacturing plant and warehouse space (used for the Lottery Systems and Diversified Gaming Groups) and approximately 21,700 square feet of leased office space in New York, New York for our corporate offices.
Internationally, our principal facilities include approximately 150,000 square feet owned and 31,000 square feet leased in Leeds, England for administrative and operations offices and a manufacturing plant (used for the Printed Products Group), approximately 143,000 square feet owned and approximately 21,000 square feet leased in Montreal, Canada for administrative and operations offices and a manufacturing plant (used for the Printed Products Group), approximately 26,000 square feet
34
leased in Ballymahon, Ireland for a manufacturing plant and warehouse space (used for the Lottery Systems and Diversified Gaming Groups), approximately 60,000 square feet of leased space in Vienna, Austria for administrative and operations offices (used for the Lottery Systems and Diversified Gaming Groups) and approximately 47,000 square feet owned and approximately 76,000 square feet leased in Santiago, Chile for administrative and operations offices, a manufacturing plant and warehouse space (used for the Printed Products Group).
In addition to the above, we lease an aggregate of approximately 670,000 square feet in various locations in the United States for administration, operations and warehousing purposes in connection with our domestic Printed Products and Lottery Systems contracts. For the administration and operations of our pari-mutuel operations, including OTB facilities, we own approximately 30,000 square feet in Maine (subject to mortgage encumbrance) and 94,000 square feet in Connecticut (subject to mortgage encumbrance), and lease an aggregate of approximately 98,000 square feet in various locations in Connecticut.
We occupy many other sites internationally totaling approximately 189,000 square feet owned and approximately 167,000 square feet leased. These sites are primarily used for administration, operations or warehousing, or any combination thereof, in connection with our international Lottery Systems and Printed Products businesses, our Global Draw and Games Media businesses and our international pari-mutuel and venue management businesses.
Although we are a party to various claims and legal actions arising in the ordinary course of business, we believe, on the basis of information presently available to us, that the ultimate disposition of these matters will not likely have a material adverse effect on our consolidated financial position or results of operations.
Our subsidiary, SGI, owned a minority interest in Wintech de Colombia S.A., or Wintech (now liquidated), which formerly operated the Colombian national lottery under contract with Empresa Colombiana de Recursos para la Salud, S.A. (together with its successor agency, "Ecosalud"), an agency of the Colombian government. The contract provided a penalty against Wintech, SGI and the other shareholders of Wintech of up to $5.0 million if certain levels of lottery sales were not achieved. In addition, SGI delivered to Ecosalud a $4.0 million surety bond as a further guarantee of performance under the contract. Wintech started the instant lottery in Colombia, but, due to difficulties beyond its control, including, among other factors, social and political unrest in Colombia, frequently interrupted telephone service and power outages, and competition from another lottery being operated in a province of Colombia that we believe was in violation of Wintech's exclusive license from Ecosalud, the projected sales level was not met for the year ended June 30, 1993.
On July 1, 1993, Ecosalud declared that the contract was in default and asserted various claims against Wintech, SGI and other shareholders of Wintech for, among other things, realization of the full amount of the penalty, plus interest and costs of the bond. On June 4, 1999, Ecosalud filed a collection proceeding against SGI before the Tribunal Contencioso of Cundinamarca in Colombia. In July 2002, the Tribunal denied SGI's preliminary motion to dismiss the lawsuit and the decision was upheld on appeal. SGI's procedural defense motion was also denied. As a result of these decisions, this lawsuit will be heard in due course on its merits by the Tribunal and an appeal stage will be available.
SGI believes it has various defenses on the merits against Ecosalud's claims. SGI also has certain cross indemnities and undertakings from the two other shareholders of Wintech for their respective shares of any liability to Ecosalud. No assurance can be given that the other shareholders of Wintech will, or have sufficient assets to, honor their indemnity undertakings to SGI when the claims by Ecosalud against SGI and Wintech are finally resolved, in the event such claims result in any final
35
liability. Although we believe that any potential losses arising from these claims will not result in a material adverse effect on our consolidated financial position or results of operations, it is not feasible to predict the final outcome, and there can be no assurance that these claims might not be finally resolved adversely to us or result in material liability.
On June 15, 2007, the Seattle Washington Regional Office of the Federal Trade Commission ("FTC") informed us that it was investigating our May 1, 2007 acquisition of OGT and that it was requesting our voluntary cooperation in that investigation. We were subsequently informed on November 2, 2007 that the FTC had issued formal process in that matter, in which we fully cooperated. On January 27, 2009, the FTC closed its investigation without further action.
On July 3, 2008, SGR, our subsidiary that supplies tote systems to racetracks in California and elsewhere, finalized a settlement of a regulatory inquiry by the California Horse Racing Board (the "CHRB") into a software glitch affecting a type of wager known as "Quick Pick" offered on certain of SGR's pari-mutuel wagering terminals. As part of the settlement, SGR reimbursed the CHRB $50,000 for the costs of its investigation and agreed to make a voluntary payment of $150,000 to racing related charities.
Subsequently, purported class action lawsuits relating to the Quick Pick matter were filed against us, SGR and SGI. Angel Romero filed one suit on behalf of himself and a class of similarly situated individuals in Superior Court of Los Angeles on June 2, 2008. On August 5, 2008, Jerry Jamgotchian, individually and on behalf of all others similarly situated in California, Connecticut, Delaware, Indiana, Iowa, Louisiana, Maryland, Michigan, New York, New Jersey, Ohio, Pennsylvania, Texas or Wisconsin, brought suit in the Central District of California. On October 22, 2008, the plaintiff in the Romero lawsuit moved to dismiss the complaint, which motion was granted on October 23, 2008. On October 22, 2008, our motion to dismiss the Jamgotchian lawsuit was granted by the court, without leave to refile. The plaintiff has appealed this ruling.
Since December 13, 2005, we have had a contract with a lottery operator in Mexico to supply an online lottery system, software and related services. In late 2008, we entered into discussions with our lottery operator customer and its parent company to asses our strategic options with a view to potentially restructuring our arrangement. Litigation between the parties commenced in January 2009 and discussions resumed in late February 2009. Effective February 25, 2009, the parties entered into a comprehensive agreement to end all litigation and terminate the contract in an orderly manner on or before October 1, 2009, in light of a change in economic circumstances including changes in the Mexican tax structure relating to lotteries. As part of the agreement, the system, terminals and communications equipment will revert to the Company for potential later use. Accordingly, we have recorded a charge for anticipated losses during the shut-down period and a charge to write off our investment in this contract to expected net realizable value.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of our security holders during the fourth quarter of fiscal year 2008.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our outstanding common stock is listed for trading on the Nasdaq Global Select Market under the symbol "SGMS". The following table sets forth, for the periods indicated, the range of high and low sales prices of our Class A common stock.
|
Sales Price of Scientific Games Common Stock | |||||||
---|---|---|---|---|---|---|---|---|
|
High | Low | ||||||
Fiscal 2008 (January 1, 2008December 31, 2008) |
||||||||
First Quarter |
$ | 33.69 | $ | 15.87 | ||||
Second Quarter |
$ | 34.31 | $ | 21.28 | ||||
Third Quarter |
$ | 32.89 | $ | 20.19 | ||||
Fourth Quarter |
$ | 19.48 | $ | 10.05 | ||||
Fiscal 2007 (January 1, 2007December 31, 2007) |
||||||||
First Quarter |
$ | 34.85 | $ | 28.61 | ||||
Second Quarter |
$ | 38.13 | $ | 30.49 | ||||
Third Quarter |
$ | 39.46 | $ | 31.68 | ||||
Fourth Quarter |
$ | 40.70 | $ | 30.23 |
On February 24, 2009, the last reported sale price for our common stock on the Nasdaq Global Select Market was $12.81 per share. There were approximately 1,153 holders of record of our common stock as of February 24, 2009.
We have never paid any cash dividends on our Class A common stock. Our Board of Directors presently intends to retain all earnings, if any, for use in the business. Any future determination as to payment of dividends will depend upon our financial condition and results of operations and such other factors as are deemed relevant by our Board. Further, under the terms of certain of our debt agreements, we are limited in our ability to pay cash dividends or make certain other restricted payments (other than stock dividends) on our Class A common stock.
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We have a stock repurchase program approved by our Board of Directors under which we are authorized to repurchase, from time to time in the open market, shares of our outstanding common stock in an aggregate amount up to $200.0 million. Purchases are funded by cash flows from operations, borrowings, or a combination thereof. The timing and amount of purchases is determined by management based on its evaluation of market conditions, share price and other factors, including limitations under the terms of certain of our debt agreements. The stock repurchase program may be suspended or discontinued at any time. The repurchases for the fourth quarter ended December 31, 2008 are reflected on the following table:
Period
|
Total Number
of Shares Purchased (2) |
Average
Price Paid per Share |
Total Number of Shares Purchased as Part of
Publicly Announced Plans or Programs |
Approximate Dollar Value of Shares that May Yet Be Purchased Under the
Plans or Programs (3) |
||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
10/1/200810/31/2008 |
470 | $ | 20.17 | | $ | 172.1 million | ||||||||
11/1/200811/30/2008 (1) |
468,300 | $ | 10.96 | 468,300 | $ | 167.0 million | ||||||||
12/1/200812/31/2008 |
9,535 | $ | 15.77 | | $ | 167.0 million | ||||||||
Total |
478,305 | $ | 11.07 | 468,300 | $ | 167.0 million | ||||||||
On February 25, 2009, our Board of Directors approved an increase to the amount authorized under our previously announced program for the repurchase of our convertible debentures from $50.0 million to $100.0 million in aggregate principal amount. There was approximately $273.8 million in aggregate principal amount of convertible debentures outstanding as of December 31, 2008. Purchases are expected to be funded by cash flows from operations, borrowings, or a combination thereof. The manner, timing and amount of purchases will be determined by our management based on its evaluation of market conditions, price of the convertible debentures and other factors. The program may be suspended or discontinued at any time.
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Shareholder Return Performance Graph
The following graph compares the cumulative total stockholder return over the five-year period ended December 31, 2008 of our common stock, the Nasdaq Composite and a peer group index of companies that provide services similar to ours ("Peer Group"). Our Peer Group consists of Bally Technologies Inc., Progressive Gaming International Corporation, IGT, Shuffle Master, Inc., WMS Industries Inc., and Youbet.com, Inc. The companies within our Peer Group have been weighted based upon their relative market capitalization each year. The graph assumes that $100 was invested in our common stock, the Nasdaq Composite and the Peer Group index at the beginning of the five-year period and that all dividends were reinvested. The comparisons are not intended to be indicative of future performance of our common stock.
Comparison of 5-year Cumulative Total Return
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Scientific Games Corporation, The NASDAQ Composite Index
And A Peer Group
|
12/03 | 12/04 | 12/05 | 12/06 | 12/07 | 12/08 | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Scientific Games Corporation |
100.00 | 140.48 | 160.75 | 178.14 | 195.93 | 103.36 | |||||||||||||
NASDAQ Composite |
100.00 | 110.08 | 112.88 | 126.51 | 138.13 | 80.47 | |||||||||||||
Peer Group |
100.00 | 101.05 | 90.38 | 131.14 | 137.41 | 48.71 |
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ITEM 6. SELECTED FINANCIAL DATA
Selected financial data presented below as of and for the years ended December 31, 2008, 2007, 2006, 2005 and 2004 have been derived from our audited consolidated financial statements. The following financial information reflects the acquisitions of certain businesses during the period 2004 through 2008, including the acquisition of Printpool Honsel GmbH ("Honsel") on December 31, 2004, the acquisition of the remaining 35% minority interest of Serigrafica Chilena S.A. in April 2005, the acquisition of substantially all of the online lottery assets of EssNet on March 22, 2006, the acquisition of Shoreline on April 5, 2006, the acquisition of Global Draw on April 20, 2006, the acquisition of Games Media on December 22, 2006, the acquisition of International Lotto Corp., SRL ("ILC") on December 28, 2006 and the acquisition of OGT on May 1, 2007. This data should be read in conjunction with "Item 7Management's Discussion and Analysis of Financial Condition and Results of Operations," and our Consolidated Financial Statements and the Notes thereto, included in Item 8 of this Annual Report on Form 10-K.
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FIVE YEAR SUMMARY OF SELECTED FINANCIAL DATA
(in thousands, except per share amounts)
|
Year Ended December 31, | |||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2008 (c) | 2007 (d) | 2006 (e) | 2005 (f) | 2004 (g) | |||||||||||||
Operating revenues: |
||||||||||||||||||
Services |
$ | 999,972 | $ | 922,415 | $ | 791,804 | $ | 639,327 | $ | 590,984 | ||||||||
Sales |
118,857 | 124,289 | 105,426 | 142,356 | 134,511 | |||||||||||||
|
1,118,829 | 1,046,704 | 897,230 | 781,683 | 725,495 | |||||||||||||
Operating expenses: |
||||||||||||||||||
Cost of services (exclusive of depreciation and amortization) |
594,785 | 521,433 | 432,013 | 351,430 | 318,989 | |||||||||||||
Cost of sales (exclusive of depreciation and amortization) |
85,856 | 90,347 | 77,934 | 100,621 | 92,231 | |||||||||||||
Selling, general and administrative (a) |
184,213 | 165,080 | 143,105 | 129,444 | 105,274 | |||||||||||||
Employee termination costs |
13,695 | 3,642 | 12,622 | 2,400 | | |||||||||||||
Depreciation and amortization |
218,643 | 160,366 | 106,006 | 66,794 | 61,277 | |||||||||||||
Operating income |
21,637 | 105,836 | 125,550 | 130,994 | 147,724 | |||||||||||||
Other (income) expense: |
||||||||||||||||||
Interest expense |
65,026 | 58,550 | 43,393 | 26,548 | 30,952 | |||||||||||||
Equity in net (income) loss of joint ventures (b) |
(58,570 | ) | (41,252 | ) | (7,900 | ) | 2,064 | 6,060 | ||||||||||
Early extinguishment of debt |
2,960 | | | 478 | 16,868 | |||||||||||||
Other income, net |
(4,691 | ) | (2,050 | ) | (767 | ) | (1,700 | ) | (748 | ) | ||||||||
|
4,725 | 15,248 | 34,726 | 27,390 | 53,132 | |||||||||||||
Income before income taxes |
16,912 | 90,588 | 90,824 | 103,604 | 94,592 | |||||||||||||
Income tax expense |
8,424 | 25,221 | 24,063 | 28,285 | 28,850 | |||||||||||||
Net income |
8,488 | 65,367 | 66,761 | 75,319 | 65,742 | |||||||||||||
Convertible preferred stock dividend |
| | | | 4,721 | |||||||||||||
Net income available to common stockholders |
$ | 8,488 | $ | 65,367 | $ | 66,761 | $ | 75,319 | $ | 61,021 | ||||||||
Basic and diluted net income per share: |
||||||||||||||||||
Basic net income available to common stockholders |
$ | 0.09 | $ | 0.71 | $ | 0.73 | $ | 0.84 | $ | 0.84 | ||||||||
Diluted net income available to common stockholders |
$ | 0.09 | $ | 0.68 | $ | 0.70 | $ | 0.81 | $ | 0.72 | ||||||||
Weighted average number of shares used in per share calculations: |
||||||||||||||||||
Basic shares |
92,875 | 92,566 | 91,066 | 89,327 | 73,014 | |||||||||||||
Diluted shares |
94,414 | 95,996 | 94,979 | 92,484 | 90,710 | |||||||||||||
Selected balance sheet data (end of period) |
||||||||||||||||||
Total assets |
2,183,232 | 2,100,039 | 1,759,610 | 1,172,513 | 1,093,225 | |||||||||||||
Total long-term debt, including current installments |
1,259,648 | 1,077,567 | 916,401 | 580,735 | 610,878 | |||||||||||||
Stockholders' equity |
576,427 | 661,215 | 528,078 | 386,833 | 300,564 | |||||||||||||
Ratio of earnings to fixed charges |
0.4x |
1.8x |
2.7x |
4.4x |
3.8x |
41
The following notes are an integral part of these selected historical consolidated financial data.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Summary
To present a better understanding of the overall business of Scientific Games, we begin Management's Discussion and Analysis of Financial Condition and Results of Operations with an overview of our business and major operating segments, including any significant events that have occurred in the periods presented. We then provide a discussion of our critical accounting policies, including revenue recognition policies requiring critical judgment, our policies for accounting for share-based payment, our valuation of long-lived and intangible assets and goodwill, our income tax methodology and the use of estimates and assumptions throughout our financial results. Next, we discuss our results of operations, presenting first an overall view of the financial results of the business as a whole, followed by additional discussion of our operating segments. We then review our financial condition, explaining changes in our balance sheet and cash flows, along with our outstanding debt, contractual obligations and commitments. Next we discuss the existence of any new accounting pronouncements and their impact on our financial statements.
Our results may vary significantly from period to period depending on the addition or disposition of business units in each period. The acquisition of the online lottery assets of EssNet in March 2006, the acquisitions of Shoreline and Global Draw and certain related companies in April 2006, the acquisitions of Games Media and ILC in December 2006 and the acquisition of OGT in May 2007 affect the comparability of operations from period to period.
Our results are also significantly affected by, and may vary significantly from period to period depending on, foreign currency exchange rate fluctuations.
The first and fourth quarters of the calendar year traditionally comprise the weakest season for our Diversified Gaming segment. As a result of inclement weather during the winter months, a number of racetracks do not operate and those that do operate often experience missed racing days. This adversely affects the amounts wagered and our corresponding service revenues. Additionally, the fourth quarter is the weakest quarter for Global Draw due to reduced wagering during the holiday season. Wagering and lottery equipment sales and software license revenues usually reflect a limited number of large transactions, which do not recur on an annual basis. Consequently, revenues and operating results of our Lottery Systems Group can vary substantially from period to period as a result of the timing of revenue recognition for major equipment sales and software licensing transactions. In addition, Printed Products sales may vary depending on the season and timing of contract awards, changes in customer budgets, inventory ticket levels, lottery retail sales and general economic conditions.
During the fourth quarter of 2008, we initiated a review of our contracts, organization, and operations. As part of this review, we evaluated our cost structure, product margins, and individual contract profitability in order to make performance improvements beginning in 2009. These profitability improvement and cost savings initiatives include revising certain contracts to provide for a multi-tiered pricing model that generates for the Company an incremental percent of revenue for increasing sales for the customer, entering into multi-state marketing ventures, declining to enter into any contracts or projects which offer inferior returns on invested capital and reducing headcount.
Since December 13, 2005, we have had a contract with a lottery operator in Mexico to supply an online lottery system, software and related services. Effective February 25, 2009, the parties agreed to terminate the contract in an orderly manner on or before October 1, 2009, in light of a change in economic circumstances including changes in the Mexican tax structure relating to lotteries. As part of the agreement, the system, terminals and communications equipment will revert to the Company for potential later use. Accordingly, we have recorded a charge for anticipated losses during the shut-down period and a charge to write off our investment in this contract to expected net realizable value.
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Background
We operate primarily in three business segments: Printed Products Group, Lottery Systems Group and Diversified Gaming Group. Our revenues consist of two major components: services revenues and sales revenues.
Printed Products Group
We provide instant tickets and related services. Instant ticket and related services include ticket design and manufacturing as well as value-added services, including game design, sales and marketing support, inventory management and warehousing and fulfillment services. Additionally, this division provides lotteries with over 100 licensed brand products, including Deal or No Deal TM , Major League Baseball®, National Basketball Association, Harley-Davidson®, Wheel-of-Fortune®, Monopoly TM , Corvette® and World Poker Tour®. This division also includes promotional instant tickets and pull-tab tickets that we sell to both lottery and non-lottery customers.
We are a worldwide manufacturer of prepaid phone cards, which entitle cellular phone users to a defined value of airtime. Prepaid phone cards offer consumers a cost-effective way to purchase cellular airtime, without requiring phone companies to extend credit or consumers to commit to contracts.
Prepaid phone cards utilize the secure process that we employ in the production of instant lottery tickets. This helps to ensure integrity and reliability of the product, thus providing consumers in more than 50 countries with access to prepaid cellular phone service.
On May 1, 2007, we acquired OGT. OGT is a manufacturer of instant lottery tickets and operates three instant ticket plants located in Montreal, Canada and Sydney, Australia. During the fourth quarter of 2007, we closed OGT's instant ticket printing plant in San Antonio, Texas as part of our integration efforts related to our purchase of OGT.
In 2007, we entered into an arrangement to sell instant tickets directly to the China Sports Lottery for a temporary period of time between March 2008 and December 2008. During 2008, we recorded approximately $40.2 million in revenues from the China Sports Lottery as a result of this temporary arrangement.
During the third quarter of 2007, we made a strategic business decision to rationalize our global Printed Products Group operations during the fourth quarter of 2007. As a result, in 2007, we recorded impairment charges of approximately $26.3 million primarily related to long-lived assets in Peru and fixed assets in Germany. The impairment charges are included in depreciation and amortization expense in our Consolidated Statements of Operations for the year ended December 31, 2007. During the fourth quarter of 2007, we entered an agreement to sell our interest in International Lotto Corp., SRL ("ILC"), a company engaged in the lottery business in Peru (which sale agreement was officially registered with a public notary in January 2008), and recorded charges of approximately $2.8 million related to business and legal costs related to the sale, and we incurred $3.6 million of reduction in force charges in Germany, which charges are included in selling, general and administrative expense. In April 2008, the buyers of ILC informed us that they were voiding the sale agreement for certain specified reasons. We objected to their position and are now in arbitration in Peru with the buyers and are assessing our other legal rights and obligations
In the fourth quarter of 2008, as part of our cost savings initiative, we recorded employee termination costs of approximately $7.2 million, which are included in employee termination costs in our Consolidated Statement of Operations for the year ended December 31, 2008. Also in the fourth quarter of 2008, we recorded impairment charges of approximately $6.4 million primarily related to long-lived assets in the U.S. The impairment charges are reported in the Printed Products Group and are included in depreciation and amortization expense in our Consolidated Statement of Operations for the year ended December 31, 2008.
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Lottery Systems Group
Our lottery systems business includes the supply of transaction processing software for the accounting and validation of instant ticket and online lottery games, point-of-sale terminal hardware sales, central site computers and communication hardware sales, and ongoing support and maintenance services for these products. This business also includes software and hardware and support services for sports betting and operation of credit card processing systems.
In the fourth quarter of 2008, as part of our cost savings initiative, we recorded employee termination costs in the Lottery Systems Group of approximately $2.6 million, which are included in employee termination costs in our Consolidated Statement of Operations for the year ended December 31, 2008.
Also in the fourth quarter of 2008, we recorded loss accruals of approximately $7.8 million and long-lived asset impairment charges of approximately $64.1 million primarily related to underperforming contracts in Mexico and Oklahoma. The loss accruals are included in cost of services and the impairment charges are included in depreciation and amortization in our Consolidated Statement of Operations for the year ended December 31, 2008.
Diversified Gaming Group
Our Diversified Gaming Group provides services and systems to private and public operators in the wide area gaming markets and in the pari-mutuel wagering industry. Our product offering includes server-based gaming machines (including our Nevada TM dual screen terminals, which can offer Great Britain regulated Category B2 or B3 content on the same machines), VLTs, monitor games, wagering systems for the pari-mutuel racing industry, sports betting systems and services and Great Britain regulated Category C AWP and SWP terminals. Business units within the Diversified Gaming Group include Global Draw, a leading supplier of gaming terminals, systems and monitor games to licensed bookmakers, primarily in the U.K., Austria and Mexico; Scientific Games Racing LLC, a leading worldwide supplier of computerized systems for pari-mutuel wagering; Games Media, our AWP and SWP terminal supplier in the U.K. pub market; and our pari-mutuel gaming operations in Connecticut, Maine and the Netherlands.
Effective February 28, 2007, we sold our racing communications business and its 70% interest in NASRIN, our data communications business, to Roberts Communications Network, LLC ("RCN") in exchange for a 29.4% interest in the RCN consolidated business. RCN provides communications services to racing and non-racing customers using both satellite and terrestrial services. Since the date of acquisition, our share of the earnings of RCN is reflected in the caption "Equity in (income) loss of joint ventures" in the Consolidated Statements of Operations. Our carrying value in RCN is reflected in the caption "Other assets and investments" in our Consolidated Balance Sheets. The acquisition of the interest in RCN was not material to our operations.
In the fourth quarter of 2008, as part of our cost savings initiative, we recorded employee termination costs in the Diversified Gaming Group of approximately $1.2 million, which are included in employee termination costs in our Consolidated Statement of Operations for the year ended December 31, 2008. Also in the fourth quarter of 2008, we recorded long-lived asset impairment charges of approximately $2.6 million primarily related to obsolete hardware in our racing business. The impairment charges are included in depreciation and amortization expenses in our Consolidated Statement of Operations for the year ended December 31, 2008.
In 2008, we recorded a charge of $4.4 million as a result of the Global Draw earn-out. The charge is reported in the Diversified Gaming Group and is included in selling, general and administrative expense in our Consolidated Statement of Operations for the year ended December 31, 2008.
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Critical Accounting Policies
The SEC defines "critical accounting policies" as those that require application of management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods.
The following is not intended to be a comprehensive list of all of our accounting policies. Our significant accounting policies are more fully described in Note 1 to the Consolidated Financial Statements. In many cases, the accounting treatment of a particular transaction is specifically dictated by accounting principles generally accepted in the United States of America, with no need for management's judgment in their application. There are also areas in which management's judgment in selecting an available alternative would not produce a materially different result.
Revenue recognition
We recognize revenue when it is realized or realizable and earned. As described below, the determination of when to recognize revenue for certain revenue transactions requires judgment. Revenue from licensed branded property coupled with a service component whereby we purchase and distribute merchandise prized on behalf of the lottery authorities to identified winners is recognized on a proportional performance method as this method best reflects the pattern in which the obligations to customer are fulfilled. A performance measure is used based on total estimated cost allocated to a specific contract. By accumulating costs for services as they are incurred, and dividing such costs by the total contract costs which is estimated based on a budget prior to contract inception, a percentage is determined. The percentage determined is applied to the total fixed price of the contract and that proportionate amount of revenue is recognized on a monthly basis.
Revenue from the sale of lottery and pari-mutuel systems that require the production and delivery of terminals and customized software is recognized using cost-to-cost measure of the percentage-of-completion method of accounting. The percentage-of-completion method recognizes income as work on a contract progresses. The use of the percentage-of-completion method depends on our ability to make reasonably dependable cost estimates for the design, manufacture, and delivery of our products. Estimation of these costs requires the use of judgment. Revenues under percentage-of-completion contracts are recorded as costs are incurred.
Stock-based compensation
We measure compensation cost for stock awards at fair value and recognize compensation over the service period for awards expected to vest. The fair value of restricted stock units is determined based on the number of shares granted and the quoted price of our common stock, and the fair value of stock options is determined using the Black-Scholes valuation model. The estimation of stock awards that will ultimately vest requires judgment and, to the extent actual results or updated estimates differ from our current estimates, such amounts will be recorded as a cumulative adjustment in the period estimates are revised. We consider many factors when estimating expected forfeitures, including types of awards, employee class, and historical experience. Actual results, and future changes in estimates, may differ substantially from our current estimates.
Valuation of long-lived and intangible assets and goodwill
We assess the recoverability of long-lived assets and intangible assets whenever events or changes in circumstances indicate that the carrying value of the asset may not be recoverable. We assess the impairment of goodwill annually or more frequently if events or changes in circumstances indicate the
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carrying value of goodwill may not be recoverable. Factors we consider important that could trigger an impairment review include:
We evaluate goodwill for impairment by comparing the carrying value of each reporting unit to its fair value using a two-step impairment test. If the carrying amount of reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. When we determine that the carrying value of the long-lived assets, intangible assets and goodwill may not be recoverable based upon the existence of one or more of the above indicators of impairment, we measure any impairment based on the projected discounted cash flow, using a discount rate equal to our weighted average cost of capital, or by a comparison to third party indications of fair market value. The estimate of a reporting unit's fair value requires the use of assumptions and estimates regarding the reporting unit's future cash flows, growth rates and weighted average cost of capital. Any significant adverse changes in key assumptions about these businesses and their prospects or an adverse change in market conditions may cause a change in the estimation of fair value and could result in an impairment charge. Given the significance of goodwill, an adverse change to the estimated fair value could result in an impairment charge that could be material to our financial statements.
Significant judgment is required in the forecasting of future operating results, which are used in the preparation of projected cash flows. Due to uncertain market conditions and potential changes in our strategy and products, it is possible that forecasts used to support our goodwill and trademark may change in the future which could result in significant non-cash charges that would adversely affect our results of operations.
Income Taxes and Deferred Income Taxes
We account for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes ("SFAS 109"). Under SFAS 109, deferred tax assets and liabilities are determined based on the difference between the book and tax bases of assets and liabilities, using enacted tax rates in effect for the year in which the differences are expected to reverse. Deferred tax assets are recognized if it is more likely than not that the assets will be realized in future years. We establish a valuation allowance for deferred tax assets for which realization is unlikely. We have established a valuation allowance for foreign loss carryforwards, as we believe that it is more likely than not that the tax benefits of these items will not be realized. When we establish or reduce the valuation allowance, against our deferred tax assets, our income tax expense will increase or decrease, respectively, in the period such determination is made.
On January 1, 2007, we began accounting for income tax contingencies in accordance with the Financial Accounting Standards Board ("FASB") Interpretation No. 48 Accounting for Uncertainty in Income Taxes ("FIN 48"). Prior to the adoption of FIN 48, we accounted for income tax contingencies in accordance with SFAS No. 5, Accounting for Contingencies .
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Results of Operations
Year Ended December 31, 2008 Compared to Year Ended December 31, 2007
The following analysis compares the results of operations for the year ended December 31, 2008 to the results of operations for the year ended December 31, 2007.
Overview
Revenue Analysis
For the year ended December 31, 2008, total revenue was $1,118.8 million compared to $1,046.7 million for the year ended December 31, 2007, an increase of $72.1 million or 7%. Our service revenue for the year ended December 31, 2008 was $1,000.0 million compared to $922.4 million for the year ended December 31, 2007, an increase of $77.6 million, or 8%. The increase was primarily attributable to an additional four months of service revenue from OGT, which was acquired in May 2007 ($30.7 million), the sale of instant lottery tickets to the China Sports Lottery ($40.2 million), revenue from instant ticket validation services in China ($18.9 million) and increased revenue from Global Draw and Games Media. The increases were partially offset by the impact of the 2007 re-priced Pennsylvania cooperative services contract ($12.3 million), the impact of the re-priced Florida cooperative services contract, which began impacting revenue during the fourth quarter 2008 ($5.5 million), decreased revenues from sales of our licensed games ($7.5 million), the strengthening of the U.S. dollar ($2.2 million), decreased revenue from ILC as a result of the disposal of the business in the fourth quarter of 2007, decreased revenue from the South Carolina contract, decreased revenue resulting from the absence of the Korea contract and decreased revenue from our venue management business due to lower handle.
Our sales revenue for the year ended December 31, 2008 was $118.9 million compared to $124.3 million in the year ended December 31, 2007, a decrease of $5.4 million or 4%. The decrease was primarily due to decreased sales from Games Media reflecting the expected decline in sales of analog AWP terminals as a result of the roll-out of digital AWP terminals, which are being deployed under revenue participation agreements, lower phone card sales revenue as a result of a change in our product offering to a lower price and cost structure and decreased sales in Germany. The decrease was partially offset by the sale of Wave TM terminals in Italy, the sale of instant ticket vending machines in Pennsylvania, the sale of VLT hardware in West Virginia and an up-front license fee for Global Draw games software.
Expense Analysis
Cost of services of $594.8 million for the year ended December 31, 2008 was $73.4 million or 14% higher than for the year ended December 31, 2007. The increase was primarily related to an additional four months of costs from OGT which was acquired in May 2007, the production and shipment of instant lottery tickets to China, including costs for air freight and duty on delivery of instant lottery tickets, costs associated with instant ticket validation services in China, costs associated with increased revenue from Global Draw and Games Media and contract loss accruals on Lottery Systems contracts in Mexico ($4.4 million) and Oklahoma ($3.4 million). The increase was partially offset by lower costs in our licensed games business and reduced costs from ILC as a result of our disposal of the business in the fourth quarter of 2007.
Cost of sales of $85.9 million for the year ended December 31, 2008 was $4.4 million or 5% lower than for the year ended December 31, 2007 primarily reflecting lower costs in our phone card business as a result of a change in our product offering, the decline of sales in Germany and reduced sales from Games Media, partially offset by costs associated with the sale of Wave TM terminals in Italy, the sale of instant ticket vending machines in Pennsylvania and the sale of VLT hardware in West Virginia.
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Selling, general and administrative expense of $184.2 million for the year ended December 31, 2008 was $19.1 million or 12% higher than for the year ended December 31, 2007. The increase was primarily attributable to increased legal, compliance and business development costs for our expanded business in China and costs from the Global Draw earn-out ($4.4 million). The increase was partially offset by cost savings initiatives from the shut down of the OGT plant in San Antonio during early 2008 and no costs from ILC as a result of our disposal of the business in the fourth quarter of 2007.
Employee termination costs of $13.7 million for the year ended December 31, 2008 were a result of our cost reduction initiatives. Employee termination costs of $3.6 million for the year ended December 31, 2007 were primarily incurred in Germany during 2007 as a result of the rationalization of our global Printed Products Group operations during the fourth quarter of 2007.
Depreciation and amortization expense of $218.6 million for the year ended December 31, 2008 increased $58.2 million or 36% from the year ended December 31, 2007, as a result of long-lived asset impairment charges of approximately $76.2 million primarily related to underperforming contracts in Mexico ($38.5 million) and Oklahoma ($14.1 million) and the impairment of obsolete hardware ($12.8 million). The increase was also caused by higher depreciation from Global Draw, Games Media and our domestic pari-mutuel business as a result of new contracts. The increase was partially offset by asset impairment charges of $26.3 million in the year ended December 31, 2007 for the impairment of long-lived assets in Peru and fixed assets in Germany.
Interest expense of $65.0 million for the year ended December 31, 2008 increased $6.4 million or 11% from the same period in 2007, primarily attributable to increased borrowings, partially offset by a decline in interest rates.
Equity in earnings of joint ventures primarily reflects our share of the earnings from CLN in connection with the operation of the Italian Gratta e Vinci instant lottery, our share of the equity of RCN and our interest in Guard Libang. For the year ended December 31, 2008, our share of CLN's income totaled $51.7 million compared to $37.7 million for the year ended December 31, 2007 as a result of continued growth of instant ticket sales in Italy. For the year ended December 31, 2008, our share of the earnings of RCN was $3.9 million compared to $3.3 million in for the year ended December 31, 2007. For the year ended December 31, 2008, our share of the earnings of Guard Libang was $3.4 million compared to $0.3 million in for the year ended December 31, 2007, which reflects growth of the validation business in China.
Early extinguishment of long-term debt of $3.0 million for the year ended December 31, 2008 reflects the write-off of unamortized deferred financing fees related to our old credit agreement, which was terminated and replaced with our new credit agreement.
Income tax expense was $8.4 million for the year ended December 31, 2008 versus $25.2 million for the year ended December 31, 2007. The effective tax rate increased in 2008 to 49.81% from 27.8% in 2007. The increase in the 2008 effective tax rate results primarily from the impairment charge related to the Mexico contract. The tax benefit of the Mexico loss is fully offset by a valuation allowance as the realizability of the deferred tax asset created by the impairment charge is uncertain.
Segment Overview
Printed Products
For the year ended December 31, 2008, total revenue for Printed Products was $580.3 million compared to $537.1 million in the year ended December 31, 2007, an increase of $43.2 million or 8%. For the year ended December 31, 2008, service revenue for Printed Products was $548.3 million compared to $498.2 million for the year ended December 31, 2007, an increase of $50.1 million or 10%. The increase was primarily attributable to an additional four months of service revenue from OGT, which was acquired in May 2007 ($30.7 million), the sale of instant lottery tickets to the China
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Sports Lottery ($40.2 million) and increased sales internationally. The increase was partially offset by the impact of the 2007 re-priced Pennsylvania cooperative services contract ($12.3 million), the impact of the re-priced Florida cooperative services contract, which began impacting revenue during the fourth quarter 2008 ($5.5 million), the strengthening of the U.S. dollar ($1.4 million), decreased revenues from the sale of our licensed games ($7.5 million) and decreased revenue from ILC as a result of the disposal of the business in the fourth quarter of 2007.
Printed Products sales revenue for the year ended December 31, 2008 was $31.9 million compared to $39.0 million for the year ended December 31, 2007, a decrease of $7.1 million or 18%. The decrease was primarily the result of lower phone card sales revenue as a result of a change in our product offering to a lower price and cost structure and decreased sales in Germany.
Cost of services of $331.5 million for the year ended December 31, 2008 was $47.6 million or 17% higher than for the year ended December 31, 2007. The increase was primarily due to an additional four months of costs from OGT which was acquired in May 2007, the production and shipping of instant lottery tickets to China, including costs for air freight and duty on delivery of instant lottery tickets and increased sales of instant lottery tickets internationally. The increase was partially offset by lower costs in our licensed games business and reduced costs from ILC as a result of our disposal of the business in the fourth quarter of 2007.
Cost of sales of $20.2 million for the year ended December 31, 2008 was $12.3 million or 38% lower than for the year ended December 31, 2007 primarily due to lower costs in our phone card business as a result of a change in our product offering and the decline of sales in Germany.
Selling, general and administrative expense of $59.3 million for the year ended December 31, 2008 was $2.7 million or 4% lower than for the year ended December 31, 2007. The decrease was primarily attributable to cost savings initiatives from the shut down of the OGT plant in San Antonio during early 2008 and no costs from ILC as a result of our disposal of the business in the fourth quarter of 2007, partially offset by increased legal, compliance and business development costs from our business in China.
Employee termination costs of $7.2 million for the year ended December 31, 2008 were a result of our cost reduction initiatives. Employee termination costs of $3.6 million for the year ended December 31, 2007 were primarily incurred in Germany during 2007 as a result of the rationalization of our global Printed Products Group operations during the fourth quarter of 2007.
Depreciation and amortization expense of $43.1 million for the year ended December 31, 2008 decreased $23.9 million or 36% compared to the year ended December 31, 2007, primarily due to asset impairment charges of $26.3 million in the year ended December 31, 2007 for the impairment of long-lived assets in Peru and fixed assets in Germany and decreased amortization on our licensed property contracts, partially offset by approximately $6.4 million of impairment charges incurred during the fourth quarter of 2008 primarily related to long-lived assets in the U.S.
Lottery Systems
For the year ended December 31, 2008, total revenue for Lottery Systems was $298.7 million compared to $265.1 million for the year ended December 31, 2007, an increase of $33.6 million or 13%. Lottery Systems service revenue for the year ended December 31, 2008 was $236.0 million compared to $216.3 million for the year ended December 31, 2007, an increase of $19.7 million or 9%. The increase was primarily due to increased revenue from instant ticket validation services in China ($18.9 million), increased revenue from our Lottery Systems contracts in Hungary, Israel and Puerto Rico and the strengthening of the Euro ($4.7 million). The increase was partially offset by a decrease in revenue from the South Carolina contract and a decrease in revenue from the absence of the Korea contract.
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Lottery Systems sales revenue for the year ended December 31, 2008 was $62.7 million compared to $48.7 million for the year ended December 31, 2007, an increase of $14.0 million or 29%. The increase was primarily due to the sale of Wave terminals in Italy ($18.5 million), Lottery Systems sales in Hungary, Germany and Israel, the sale of instant ticket vending machines in Pennsylvania, the sale of VLT hardware in West Virginia and the sale of video software upgrades in Quebec. The increase was partially offset by the absence of one-time sales from 2007 including the sale of ticket checker machines in Canada, sales from the Korea contract, and hardware sales in Australia.
Cost of services of $132.3 million for the year ended December 31, 2008 was $18.1 million or 16% higher than in the year ended December 31, 2007. The increase was primarily due to costs associated with instant ticket validation services in China, increased costs associated with the new online contract in Connecticut and contract loss accruals on Lottery Systems contracts in Mexico ($4.4 million) and Oklahoma ($3.4 million). The increase was partially offset by a decrease in cost from the absence of the Korea contract.
Cost of sales of $54.3 million for the year ended December 31, 2008 was $27.3 million higher than in the year ended December 31, 2007, primarily due to costs associated with the sale of Wave terminals in Italy, Lottery Systems sales in Hungary, Germany and Israel, the sale of instant ticket vending machines in Pennsylvania, the sale of VLT hardware in West Virginia and the sale of video software upgrades in Quebec. The increase was partially offset by a reduction in cost as a result of the absence of one-time sales from 2007 including the sale of instant ticket checker machines in Canada and hardware sales in Australia.
Selling, general and administrative expense of $33.6 million for the year ended December 31, 2008 was $5.2 million or 18% higher than for the year ended December 31, 2007. The increase was primarily attributable to increased legal, compliance and business development costs for our expanded business in China, partially offset by reduced incentive compensation costs.
Employee termination costs of $2.6 million for the year ended December 31, 2008 were a result of our cost reduction initiatives.
Depreciation and amortization expense of $125.8 million for the year ended December 31, 2008 increased $63.6 million compared to the year ended December 31, 2007, primarily due to charges of $64.1 million related to the impairment of certain hardware and software assets in the Lottery Systems business for the year ended December 31, 2008 primarily as a result of certain underperforming Lottery Systems contracts in Mexico ($38.5 million) and Oklahoma ($11.5 million) and the impairment of other obsolete hardware ($6.4 million).
Diversified Gaming
For the year ended December 31, 2008, total revenue for Diversified Gaming was $239.8 million compared to $244.5 million in the year ended December 31, 2007, a decrease of $4.7 million or 2%. Diversified Gaming service revenue for the year ended December 31, 2008 was $215.6 million compared to $207.9 million for the year ended December 31, 2007, an increase of $7.7 million or 4%. The increase in service revenue primarily reflects increased revenue from Global Draw and Games Media, partially offset by the strengthening of the U.S. dollar ($5.5 million), lower revenue on our pari-mutuel contract in Germany as a result of changing to a fixed fee revenue structure, lower revenue due to the loss of our Woodbine pari-mutuel contract in Canada and decreased revenue from our venue management business due to lower handle.
The Diversified Gaming sales revenue for the year ended December 31, 2008 was $24.2 million compared to $36.6 million for the year ended December 31, 2007, a decrease of $12.4 million or 34%. The decrease was primarily due to decreased sales from Games Media reflecting the expected decline in sales of analog AWP terminals as a result of the roll-out of digital AWP terminals, which are being
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deployed under revenue participation agreements. The decrease was partially offset by an up-front license fee for Global Draw game software.
Cost of services of $130.9 million for the year ended December 31, 2008 was $7.6 million or 6% higher than for the year ended December 31, 2007. The increase was primarily due to costs associated with increased revenue from Global Draw and Games Media and increased costs associated with our domestic pari-mutuel business, partially offset by a decline in costs from our pari-mutuel contract in Germany as a result of changing to a fixed fee revenue structure, lower costs as a result of the loss of our Woodbine pari-mutuel contract in Canada and lower costs from our venue management business.
Cost of sales of $11.4 million for the year ended December 31, 2008 was $19.4 million or 63% lower than for the year ended December 31, 2007, primarily due to reduced sales from Games Media.
Selling, general and administrative expense of $25.9 million for the year ended December 31, 2008 was $5.5 million or 27% higher than for the year ended December 31, 2007. The increase was primarily due to the Global Draw earn-out ($4.4 million) and increased costs from Games Media.
Employee termination costs of $1.2 million for the year ended December 31, 2008 were a result of our cost reduction initiatives.
Depreciation and amortization expense of $45.6 million for the year ended December 31, 2008 increased $15.3 million or 50% primarily due to a $2.6 million long-lived asset impairment charge for certain obsolete hardware, plus higher depreciation from Global Draw and Games Media, and from our domestic pari-mutuel racing business as a result of the deployment of new contracts.
Year Ended December 31, 2007 Compared to Year Ended December 31, 2006
The following analysis compares the results of operations for the year ended December 31, 2007 to the results of operations for the year ended December 31, 2006.
Overview
Revenue Analysis
For the year ended December 31, 2007, total revenue was $1,046.7 million compared to $897.2 million for the year ended December 31, 2006, an increase of $149.5 million or 17%. Our service revenue for the year ended December 31, 2007 was $922.4 million compared to $791.8 million for the year ended December 31, 2006, an increase of $130.6 million or 16%. The increase was primarily attributable to a full year of revenue from Global Draw, which was acquired in April 2006 ($19.4 million), and ILC, which was acquired in December 2006 ($6.2 million), as well as revenue from OGT, which was acquired in May 2007 ($66.7 million), and increased sales of instant lottery tickets in Italy. Our sales revenue for the year ended December 31, 2007 was $124.3 million compared to $105.4 million in the year ended December 31, 2006, an increase of $18.9 million or 18%. The increase primarily reflects sales resulting from the acquisition of Games Media in December 2006 ($31.7 million), a $6.5 million sale of hardware in Canada in 2007 and lottery terminal sales in Australia, partially offset by the absence of a $20.3 million one-time sale of terminals in Germany and a decline in phone card sales.
Expense Analysis
Cost of services of $521.4 million for the year ended December 31, 2007 was $89.4 million or 21% higher than for the year ended December 31, 2006. The increase was primarily related to the acquisitions of Global Draw in April 2006, ILC in December 2006 and OGT in May 2007, and higher costs associated with increased instant ticket sales in Italy. Cost of sales of $90.3 million for the year ended December 31, 2007 was $12.4 million or 16% higher than in the year ended December 31, 2006
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primarily due to the acquisition of Games Media in December 2006 and costs associated with a hardware sale in Canada and lottery terminal sales in Australia, partially offset by reduced costs associated with the absence of a one-time sale of terminals in Germany and a decline in phone card sales.
Selling, general and administrative expense of $165.1 million for the year ended December 31, 2007 was $22.0 million or 15% higher than in the year ended December 31, 2006. The increase was primarily related to increased costs associated with the acquisitions of Global Draw in April 2006, Games Media in December 2006 and OGT in May 2007, ILC disposal costs of $2.8 million and increased stock-based compensation costs. The increase was partially offset by the reversal of a $3.9 million warranty reserve for EssNet.
Depreciation and amortization expense of $160.4 million for the year ended December 31, 2007 increased $54.4 million or 51% from the same period in 2006, primarily due to asset impairment charges of $26.3 million in the year ended December 31, 2007 for the impairment of long-lived assets in Peru and fixed assets in Germany as a result of our plan to rationalize our global Printed Products Group operations. The increase was also due to increased amortization of deferred installation costs of the new Lottery Systems contract in Maryland and the lottery contract in Mexico, increased amortization on domestic and international Lottery System contracts and increased amortization on licensed property contracts.
Interest expense of $58.6 million for the year ended December 31, 2007 increased $15.2 million or 35% from the same period in 2006, primarily attributable to increased borrowings to fund acquisitions plus higher interest rates.
Equity in earnings of joint ventures primarily reflects our share of the earnings of CLN, our Italian joint venture, in connection with the operation of the Italian Gratta e Vinci instant lottery, our share of the equity of RCN in connection with the interest we acquired in February 2007 and our interest in Guard Libang. For the year ended December 31, 2007, our share of CLN's earnings totaled $37.7 million compared to $8.3 million in the year ended December 31, 2006. The increase in income for the year ended December 31, 2007 reflects continued growth of instant ticket sales in Italy. For the year ended December 31, 2007, our share of the earnings of RCN was $3.3 million and our share of the earnings of Guard Libang was $0.3 million.
Income tax expense was $25.2 million and $24.1 million for the year ended December 31, 2007 and 2006, respectively. The effective income tax rate for the year ended December 31, 2007 and 2006 was approximately 27.8% and 26.5%, respectively. The increase in the effective income tax rate was primarily due to higher state income taxes in 2007.
Printed Products
For the year ended December 31, 2007, total revenue for Printed Products was $537.1 million compared to $439.6 million in the year ended December 31, 2006, an increase of $97.5 million or 22%. For the year ended December 31, 2007, service revenue for Printed Products was $498.2 million compared to $388.8 million in the prior year, an increase of $109.4 million or 28%. The increase was primarily attributable to the acquisitions of OGT in May 2007 ($66.7 million), and ILC in December 2006 ($6.2 million), increased sales of instant tickets in Italy and increased revenue on our licensed property contracts.
Printed Products sales revenue for the year ended December 31, 2007 was $39.0 million compared to $50.8 million for the year ended December 31, 2006, a decrease of $11.8 million or 23%. The decrease was primarily the result of decreased sales of phone cards associated with a continuing decline in phone card prices and volumes reflecting a market shift to lower-priced products.
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Cost of services of $283.9 million for the year ended December 31, 2007 was $84.9 million or 43% higher than from the same period in 2006. The increase was primarily due to higher operating costs as a result of the acquisitions of OGT in May 2007 and ILC in December 2006, combined with increased costs as a result of higher ticket sales in Italy.
Cost of sales of $32.5 million for the year ended December 31, 2007 was $7.5 million or 19% lower than for the year ended December 31, 2006, primarily due to decreased costs associated with the continuing decline in phone card sales.
Selling, general and administrative expense of $62.0 million for the year ended December 31, 2007 was $13.1 million or 27% higher than in the year ended December 31, 2006. The increase was primarily attributable to the acquisitions of OGT in May 2007 and ILC in December 2006 and a $2.8 million charge related to the sale of our interest in ILC during the fourth quarter 2007.
Depreciation and amortization expense of $67.0 million for the year ended December 31, 2007 increased $41.8 million as compared to the year ended December 31, 2006, primarily due to asset impairment charges of $26.3 million in the year ended December 31, 2007 for the impairment of the long-lived assets in Peru and fixed assets in Germany as a result of our plan to rationalize our global Printed Products Group operations. The increase was also the result of increased amortization on licensed property contracts and depreciation from the acquisition of OGT in May 2007.
Lottery Systems
For the year ended December 31, 2007, total revenue for Lottery Systems was $265.1 million compared to $255.4 million in the year ended December 31, 2006, an increase of $9.7 million or 4%. Lottery Systems service revenue for the year ended December 31, 2007 was $216.3 million compared to $205.7 million for the year ended December 31, 2006, an increase of $10.6 million or 5%. The increase was primarily due to increased revenue from European customers and increased revenue from the new Maryland contract.
Lottery Systems sales revenue for the year ended December 31, 2007 was $48.7 million compared to $49.7 million for the year ended December 31, 2006, a decrease of $1.0 million or 2%. The decrease was primarily due to the absence of a $20.3 million one-time sale of terminals in Germany in the year ended December 31, 2006, partially offset by a $6.5 million sale of hardware in Canada in 2007, terminal sales in Australia and increased sales of hardware in Colorado.
Cost of services of $114.2 million for the year ended December 31, 2007 was $0.5 million lower than in the year ended December 31, 2006. The decrease was primarily due to reduced expenses associated with the 2006 cost reduction initiatives plus costs associated with increased revenues from European customers, partially offset by increased expenses associated with the lottery contract in Mexico.
Cost of sales of $27.0 million for the year ended December 31, 2007 was $6.5 million or 19% lower than during the year ended December 31, 2006, primarily reflecting a reduction in costs associated with the one-time sale of terminals in Germany in 2006, partially offset by higher costs associated with terminal sales in Australia and Canada in 2007.
Selling, general and administrative expense of $28.4 million for the year ended December 31, 2007 was $2.3 million or 7% lower than in the year ended December 31, 2006. The decrease was primarily attributable to the reversal of a $3.9 million warranty reserve for EssNet, partially offset by increased costs from our European Lottery Systems business.
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Depreciation and amortization expense of $62.2 million for the year ended December 31, 2007 increased $13.8 million or 29% as compared to the year ended December 31, 2006, primarily due to the amortization of deferred installation costs of the new Lottery Systems contract in Maryland and the lottery contract in Mexico plus increased amortization on domestic and international contracts.
Diversified Gaming
For the year ended December 31, 2007, total revenue for Diversified Gaming was $244.5 million compared to $202.2 million in the year ended December 31, 2006, an increase of $42.3 million or 21%. Diversified Gaming service revenue for the year ended December 31, 2007 was $207.9 million compared to $197.2 million in the year ended December 31, 2006, an increase of $10.7 million or 5%. The increase in service revenue primarily reflects a full year of revenue for Global Draw, which was acquired in April 2006 ($19.4 million), partially offset by the sale of our racing and data communications businesses in February 2007 plus reduced revenue from our domestic pari-mutuel business.
The Diversified Gaming sales revenue for the year ended December 31, 2007 was $36.6 million compared to $4.9 million in the same period in the prior year, an increase of $31.7 million. The increase was primarily due to the acquisition of Games Media in December 2006.
Cost of services of $123.3 million for the year ended December 31, 2007 was $5.0 million or 4% higher than the year ended December 31, 2006. The increase was primarily due to a full year of costs for Global Draw, which was acquired in April 2006, partially offset by the sale of our racing and data communications businesses in February 2007.
Cost of sales of $30.8 million for the year ended December 31, 2007 was $26.4 million higher than the year ended December 31, 2006, primarily due to the acquisition of Games Media in December 2006.
Selling, general and administrative expense of $20.4 million for the year ended December 31, 2007 was $3.6 million or 21% higher than in the year ended December 31, 2006. The increase was primarily due to a full year of costs for Global Draw, which was acquired in April 2006, and Games Media, which was acquired in December 2006, partially offset by reduced costs related to domestic contracts plus reduced costs associated with reduction in force in our sports betting business.
Depreciation and amortization expense of $30.3 million for the year ended December 31, 2007 decreased $1.1 million or 4% from the year ended December 31, 2006, primarily due to a $9.7 million charge in the year ended December 31, 2006 related to the impairment of certain hardware and software assets in the pari-mutuel business as a result of the roll-out of our new terminal, the two new Quantum Data Centers, and the write-off of hardware and accrual of losses on certain under-performing pari-mutuel contracts, partially offset by increased depreciation resulting from the acquisition of Global Draw in April 2006 and Global Draw's rollout of the Nevada terminals in September 2007.
Liquidity, Capital Resources and Working Capital
In June 2008, we entered into certain debt financing transactions structured to extend the average maturity of the Company's debt, create additional borrowing capacity and revise certain financial covenants to be more favorable to the Company. We and our 100%-owned subsidiary, SGI, entered into a credit agreement dated as of June 9, 2008, among SGI, as borrower, the Company, as guarantor, and the several lenders from time to time parties thereto (the "Credit Agreement"). The Credit Agreement replaced the Company's credit agreement, dated as of December 23, 2004, as amended and restated as of January 24, 2007 (the "2004 Credit Agreement"). All amounts outstanding under the 2004 Credit Agreement were paid on June 9, 2008, and the 2004 Credit Agreement was terminated. In
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addition, on June 11, 2008, SGI issued $200,000 of 7.875% senior subordinated notes due 2016 (the "2008 Notes"). The 2008 Notes were issued pursuant to an indenture dated as of June 11, 2008 among SGI, as issuer, the Company, as a guarantor, the Company's subsidiary guarantors party thereto and the trustee. In connection with the Credit Agreement and the issuance of the 2008 Notes, an aggregate of $13.0 million was paid to certain financial institutions in the form of fees and initial purchasers' discounts. Refer to Note 8 to the Consolidated Financial Statements for additional information regarding long-term and other debt.
As of December 31, 2008, our long-term debt consists of $200.0 million in aggregate principal amount of the 2008 Notes, $200.0 million in aggregate principal amount of 6.25% senior subordinated notes due 2012 (the "2004 Notes"), $273.8 million in aggregate principal amount of 0.75% convertible senior subordinated debentures due 2024 (the "Convertible Debentures") and borrowings under the Credit Agreement. The Credit Agreement consists of a $250.0 million revolving credit facility (the "Revolver"), and a $550.0 million senior secured term loan credit facility (the "Term Loan"). Short-term debt includes approximately $37.5 million of unsecured borrowings, denominated in Chinese Renminbi Yuan ("RMB"), from two banks in China and current installments on long-term debt.
The Credit Agreement and the indentures governing the 2008 Notes and the 2004 Notes contain covenants customary for financings of these types, including negative covenants that, among other things, limit the ability of the Company and its subsidiaries to incur additional indebtedness, pay dividends or make distributions or certain other restricted payments, purchase or redeem capital stock, make investments or extend credit, engage in certain transactions with affiliates, engage in sale-leaseback transactions, consummate certain asset sales, effect a consolidation or merger, sell, transfer, lease or otherwise dispose of all or substantially all assets, or create certain liens and other encumbrances on assets.
As of December 31, 2008, we had approximately $190.2 million available for additional borrowing or letter of credit issuance under our Revolver. There were no borrowings and $59.8 million in outstanding letters of credit under our Revolver as of December 31, 2008. Our ability to borrow under the Credit Agreement will depend on us remaining in compliance with the limitations imposed by our lenders, including the maintenance of certain financial ratios. See Note 8 to the Consolidated Financial Statements (Long-Term and Other Debt) for additional information regarding these financial ratios.
Our pari-mutuel wagering, online lottery, instant ticket validation and wide area gaming systems service contracts require us to, among other things, maintain the central computing system and related hardware in efficient working order, provide added software functionality upon request, provide on-site computer operators, and furnish necessary supplies. Our primary expenditures associated with these services are personnel and related costs, which are expensed as incurred and are included in Operating Expenses Services in the consolidated statements of income. Historically, the revenues we derive from our service contracts have exceeded the direct costs associated with fulfilling our obligations thereunder. We expect that we will continue to realize positive cash flow and operating income as we extend or renew existing service contracts. We also expect that we will enter into new contracts that are accretive to our cash flow. In addition, through advancements in technology, we are continually deploying more efficient and cost effective methods for manufacturing and delivering our products and services to our customers. We expect that technological efficiencies will continue to positively impact our future cash flows and operating results. In the next year, we expect to purchase approximately 20,000 ticket checking machines for our contract with the China Sports Lottery for a total cost of approximately $11.8 million. We are not party to any other material short-term or long-term obligations or commitments pursuant to these service contracts.
Periodically, we bid on new pari-mutuel, instant ticket validation and wide area gaming and online lottery contracts. Once awarded, these contracts generally require significant up-front capital expenditures for terminal assembly, customization of software, software and equipment installation and
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telecommunications configuration. Historically we have funded these up-front costs through cash flows generated from operations, available cash on hand and borrowings under our credit facilities. Our ability to continue to procure new contracts will depend on, among other things, our then present liquidity levels and/or our ability to borrow at commercially acceptable rates to finance the initial up-front costs. Once operational, long-term service contracts have been accretive to our operating cash flow. The actual level of capital expenditures will ultimately largely depend on the extent to which we are successful in winning new contracts. Furthermore, our pari-mutuel wagering network consists of approximately 26,000 wagering terminals. Periodically, we elect to upgrade the technological capabilities of older terminals and replace terminals that have exhausted their useful lives. Servicing our installed terminal base requires that we maintain a supply of parts and accessories on hand. We are also required, contractually in some cases, to provide spare parts over an extended period of time, principally in connection with our systems and terminal sale transactions. To meet our contractual obligations and maintain sufficient levels of on-hand inventory to service our installed base, we purchase inventory on an as-needed basis. We presently have no inventory purchase obligations, other than in the ordinary course of business.
At December 31, 2008, our available cash, short-term investments and borrowing capacity totaled $330.8 million compared to $150.6 million at December 31, 2007. The amount of our available cash and short-term investments fluctuates principally based on the timing of collections from our customers, cash expenditures associated with new and existing pari-mutuel wagering and lottery systems contracts, borrowings or repayments under our credit facilities and changes in our working capital position. The increase in our available cash from the December 31, 2007 level principally reflects the net cash provided by operating activities for the year ended December 31, 2008 of $208.5 million, including a $23.0 million cash dividend from CLN, plus long-term borrowings of $807.3 million, offset by wagering and other capital expenditures and other investing activities totaling $228.7 million, acquisition-related payments of $8.1 million and $626.0 million of payments on long-term debt. The $208.5 million of net cash provided by operating activities is derived from $222.4 million of net cash provided by operations offset by $13.9 million used in changes in working capital. The working capital changes occurred principally from increases in accounts receivable, inventories, prepaid expenses, deposits and other current assets and accounts payable. Capital expenditures totaled $19.7 million in the year ended December 31, 2008, compared to $34.7 million in the prior year. Wagering system expenditures, including software expenditures, totaled $200.0 million in the year ended December 31, 2008, compared to $179.6 million in the prior year. This increase is primarily due to the new lottery contracts in Connecticut and Pennsylvania, coupled with gaming terminals related to Global Draw and Games Media. Cash flow from financing activities principally reflects the borrowings and the repayments of borrowings under the Credit Agreement and the 2008 Notes.
At December 31, 2007, our available cash, short-term investments and borrowing capacity totaled $150.6 million compared to $82.4 million at December 31, 2006. Under the 2004 Credit Agreement, we had approximately $121.2 million available for additional borrowings or letter of credit issuance under our revolver at December 31, 2007. The amount of our available cash and short-term investments fluctuates principally based on the timing of collections from our customers, cash expenditures associated with new and existing pari-mutuel wagering and lottery systems contracts, borrowings or repayments under our credit facilities and changes in our working capital position. The increase in our available cash from the December 31, 2006 level principally reflects the net cash provided by operating activities for the year ended December 31, 2007 of $186.4 million plus long-term borrowings of $358.0 million, offset by wagering and other capital expenditures and other investing activities totaling $252.5 million, acquisition-related payments of $120.1 million and $196.9 million of payments on long-term debt. The $186.4 million of net cash provided by operating activities is derived from $205.2 million of net cash provided by operations offset by $18.9 million used in changes in working capital. The working capital changes occurred principally from increases in accounts receivable, inventories and accrued liabilities and decreases in accounts payable, partially offset by a decrease in
57
other current assets. Capital expenditures totaled $34.7 million in the year ended December 31, 2007, compared to $16.0 million in the corresponding period in 2006. Wagering system expenditures, including software expenditures, totaled $179.6 million in the year ended December 31, 2007, compared to $144.8 million in 2006. This increase is primarily due to the new lottery contracts in Mexico and Connecticut, coupled with gaming terminals related to Global Draw. Cash flow from financing activities principally reflects the repayments of borrowings under the 2004 Credit Agreement.
We believe that our cash flow from operations, available cash and available borrowing capacity under the Credit Agreement will be sufficient to meet our liquidity needs, including anticipated capital expenditures, for the foreseeable future; however, there can be no assurance that this will be the case. While we are not aware of any particular trends, our contracts periodically renew and there can be no assurance that we will be successful in sustaining our cash flow from operations through renewal of our existing contracts or through the addition of new contracts. During 2009, we expect to implement plans to reduce operating costs and capital expenditures and pay down between $50.0 million and $100.0 million of our outstanding indebtedness (although the actual amount of indebtedness that we pay down during 2009 may fall outside of this range).
In addition, lottery customers in the United States generally require service providers to provide performance bonds in connection with each state contract. Our ability to obtain performance bonds on commercially reasonable terms is subject to prevailing market conditions, which may be impacted by economic and political events. Although we have not experienced any difficulty obtaining such bonds, there can be no assurance that we will continue to be able to obtain performance bonds on commercially reasonable terms or at all. While we are not aware of any reason to do so, if we need to refinance all or part of our indebtedness, on or before maturity, or provide letters of credit or cash in lieu of performance bonds, there can be no assurance that we will be able to obtain new financing or to refinance any of our indebtedness, on commercially reasonable terms or at all.
Under the terms of our Convertible Debentures, the holders of the Convertible Debentures may require us to repurchase some or all of their debentures for cash on June 1, 2010 at a repurchase price equal to 100% of the principal amount of the debentures being repurchased, plus accrued and unpaid interest. If current market conditions continue and our common stock continues to trade at current levels, it is likely that the holders of the debentures will exercise this repurchase right. In connection with that repurchase right, the terms of our Credit Agreement provide that the our Term Loan and our Revolver will both mature on March 1, 2010, unless one of the following conditions is met:
In addition, our 2004 Notes mature on December 15, 2012. In connection with the anticipated maturity of these notes, the terms of our Credit Agreement provide our Term Loan and our Revolver will both mature on September 15, 2012, unless one of the following conditions is met:
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We intend to take the steps necessary to satisfy the conditions set forth above in a timely manner, including implementing plans to reduce operating costs and capital expenditures during 2009. However, we cannot assure you that we will have sufficient resources, or will be able to arrange financing, to satisfy such conditions or to repay any accelerated indebtedness under our Credit Agreement or, even if we obtain a waiver from our lenders under our Credit Agreement, to repurchase our Convertible Debentures in 2010 or such later date as such repurchase may be required, or to repay in 2012 our 2004 Notes.
The terms of the indenture governing the Convertible Debentures give holders the right to convert the Convertible Debentures under certain circumstances. The Convertible Debentures contain a net settlement feature. This feature entitles holders of each $1,000 principal amount of Convertible Debentures being converted to receive cash up to $1,000 and shares for any excess conversion value determined in a manner provided in the indenture governing the Convertible Debentures. See Note 8 to our Consolidated Financial Statements for additional information regarding this conversion right.
On February 25, 2009, our Board of Directors approved an increase to the amount authorized under our previously announced program for the repurchase of our Convertible Debentures from $50.0 million to $100.0 million in aggregate principal amount. There was approximately $273.8 million in aggregate principal amount of Convertible Debentures outstanding as of December 31, 2008. Purchases are expected to be funded by cash flows from operations, borrowings, or a combination thereof. The manner, timing and amount of purchases will be determined by our management based on its evaluation of market conditions, price of the Convertible Debentures and other factors. The program may be suspended or discontinued at any time.
Our contractual obligations and commercial commitments principally include obligations associated with our outstanding indebtedness and future minimum operating lease obligations, as set forth in the table below:
|
(in thousands)
Cash Payments Due By Period |
||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Total |
Within
1 Year |
Within
23 Years |
Within
45 Years |
After
5 Years |
||||||||||||
Long-term debt, 6.25% notes (1) |
$ | 200,000 | | | 200,000 | | |||||||||||
Long-term debt, 0.75% debentures (1)(2) |
273,782 | | 273,782 | | | ||||||||||||
Long-term debt, 7.875% notes (1) |
200,000 | | | | 200,000 | ||||||||||||
Long-term debt, Term Loan (1) |
545,875 | 5,500 | 11,000 | 529,375 | | ||||||||||||
Unsecured borrowings denominated in RMB (1) |
37,530 | 37,530 | | | | ||||||||||||
Other long-term debt |
2,461 | 354 | 753 | 1,123 | 231 | ||||||||||||
Interest expense (3) |
302,130 | 54,025 | 102,620 | 86,430 | 59,055 | ||||||||||||
Global Draw earn-out (4) |
80,000 | 80,000 | | | | ||||||||||||
Contractual capital requirements |
11,800 | 11,800 | | | | ||||||||||||
Operating leases |
95,634 | 19,723 | 30,092 | 23,863 | 21,956 | ||||||||||||
SERP Payout (5) |
15,835 | 9,760 | 2,978 | 3,097 | | ||||||||||||
Other long-term liabilities (6) |
24,475 | | 6,997 | 6,133 | 11,345 | ||||||||||||
Total contractual obligations |
$ | 1,789,522 | 218,692 | 428,222 | 850,021 | 292,587 | |||||||||||
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New Accounting Pronouncements
Recently Issued Accounting Standards
In September 2006, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 157, Fair Value Measurements ("SFAS 157"), which defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS 157 was effective for us on January 1, 2008 for all financial assets and liabilities and for nonfinancial assets and liabilities recognized or disclosed at fair value in our Consolidated Financial Statements on a recurring basis (at least annually). For all other nonfinancial assets and liabilities, SFAS 157 is effective for us on January 1, 2009. As it relates to our non-pension related financial assets and liabilities and for nonfinancial assets and liabilities recognized or disclosed at fair value in our Consolidated Financial Statements on a recurring basis (at least annually), the adoption of SFAS 157 did not have a material impact on our Consolidated Financial Statements. We are in the process of evaluating the impact that SFAS 157 will have on our pension related financial liabilities and our nonfinancial assets and liabilities not valued on a recurring basis (at least annually).
In December 2007, the FASB issued SFAS No. 141(revised 2007, Business Combinations ) ("SFAS 141(R)"). SFAS 141(R) supersedes SFAS 141 and requires the acquiring entity in a business combination to recognize all assets acquired and liabilities assumed in the transaction and any non-controlling interest in the acquiree at the acquisition date, measured at the fair value as of that date. This includes the measurement of the acquirer shares issued in consideration for a business combination, the recognition of contingent consideration, the accounting for pre-acquisition gain and loss contingencies, the recognition of capitalized in-process research and development, the accounting for acquisition-related restructuring cost accruals, the treatment of acquisition related transaction costs and the recognition of changes in the acquirer's income tax valuation allowance and deferred taxes. SFAS 141(R) is effective for fiscal years and interim periods within those fiscal years beginning on or after December 15, 2008 and is to be applied prospectively as of the beginning of the fiscal year in which the statement is applied. Accordingly, any business combinations we engage in on or after January 1, 2009 will be recorded and disclosed according to SFAS 141(R). We expect SFAS 141(R) will have an impact on accounting for business combinations once adopted but the effect is dependent upon acquisitions at that time.
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In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statementsan amendment of ARB No. 51 ("SFAS 160"). SFAS 160 establishes accounting and reporting standards that require noncontrolling interests to be reported as a component of equity, changes in a parent's ownership interest while the parent retains its controlling interest be accounted for as equity transactions, and any retained noncontrolling equity investment upon the deconsolidation of a subsidiary be initially measured at fair value. SFAS 160 is effective for fiscal years and interim periods within those fiscal years beginning on or after December 15, 2008 and is to be applied prospectively as of the beginning of the fiscal year in which the statement is applied. We are required to adopt SFAS 160 in the first quarter of 2009. We do not expect the adoption of SFAS 160 to have a material impact on our financial statements.
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activitiesan amendment of FASB Statement No. 133 , as amended and interpreted ("SFAS 161"), which requires enhanced disclosures about an entity's derivative and hedging activities and thereby improves the transparency of financial reporting. Entities are required to provide enhanced disclosures about: (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under Statement 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity's financial position, financial performance, and cash flows. SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. We do not expect that the adoption of SFAS 161 will have a material impact on our financial statements.
In May 2008, the FASB issued FASB Staff Position ("FSP") No. Accounting Principles Board ("APB") 14-1, Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Settlement) ("FSP APB 14-1"). FSP APB 14-1 clarifies that convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement) are not addressed by paragraph 12 of APB Opinion No. 14, Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants . Additionally, this FSP specifies that issuers of such instruments should separately account for the liability and equity components in a manner that will reflect the entity's nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. FSP APB 14-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years, and must be applied retrospectively to all periods presented. We adopted FSP APB 14-1 on January 1, 2009. The impact of adoption was an adjustment to accumulated earnings of approximately $15.7 million representing the cumulative effect of a change in accounting principle as of January 1, 2007 and a remaining debt discount of approximately $18.1 million on our Consolidated Balance Sheet as of January 1, 2009. In addition we will report additional interest expense of approximately $12.8 million in our Consolidated Statement of Operations for 2007, 2008 and 2009.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our products and services are sold to a diverse group of customers throughout the world. As such, we are subject to certain risks and uncertainties as a result of changes in general economic conditions, sources of supply, competition, foreign exchange rates, tax reform, litigation and regulatory developments. (See "Item 1ARisk Factors" for a more complete description of these risks and uncertainties.) The diversity and breadth of our products and geographic operations mitigate the risk that adverse changes from any single event would materially affect our financial position.
Additionally, as a result of the diversity of our customer base, we do not consider ourselves exposed to concentration of credit risks. These risks are further minimized by setting credit limits, ongoing monitoring of customer account balances, and assessment of the customers' financial strengths.
Inflation has not had an abnormal or unanticipated effect on our operations. Inflationary pressures would be significant to our business if raw materials used for instant lottery ticket production, prepaid phone card production or terminal manufacturing are significantly affected. Available supply from the paper and electronics industries tends to fluctuate and prices may be affected by supply.
For fiscal 2008, inflation was not a significant factor in our results of operations, and we were not impacted by significant pricing changes in our costs, except for personnel-related expenditures. We are unable to forecast the prices or supply of substrate, component parts or other raw materials in 2009, but we currently do not anticipate any substantial changes that will materially affect our operating results.
In certain limited cases, our lottery contracts with our customers contain provisions to adjust for inflation on an annual basis, but we cannot be assured that this adjustment would cover raw material price increases or other costs of services. While we have long-term and generally satisfactory relationships with most of our suppliers, we also believe alternative sources to meet our raw material and production needs are available.
In the normal course of business, we are exposed to fluctuations in interest rates and equity market risks as we seek debt and equity capital to sustain our operations. At December 31, 2008, approximately 54% of our debt was in fixed-rate instruments. The following table provides information about our financial instruments that are sensitive to changes in interest rates. The table presents principal cash flows and related weighted-average interest rates by expected maturity dates. See "Item 7Management's Discussion and Analysis of Financial Condition and Results of OperationsLiquidity, Capital Resources and Working Capital" for additional information about our financial instruments.
Effective October 17, 2008, SGI entered into a three-year interest rate swap agreement (the "Hedge") with JPMorgan Chase Bank N.A. ("JPMorgan"). Under the Hedge, SGI will pay interest on a $100 million notional amount of debt at a fixed rate of 3.49% and will receive interest on a $100 million notional amount of debt at the prevailing three-month LIBOR rate. The objective of the Hedge is to eliminate the variability of cash flows attributable to the LIBOR component of interest expense paid on $100 million of our variable-rate debt.
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Principal Amount by Expected MaturityAverage Interest Rate
December 31, 2008
(Dollars in thousands)
|
Twelve Months Ended December 31 | ||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2009 | 2010 | 2011 | 2012 | 2013 | Thereafter | Total | FMV | |||||||||||||||||
Debt at fixed interest rates |
$ | 354 | 101 | 652 | 200,724 | 399 | 474,013 | 676,243 | 560,023 | ||||||||||||||||
Weighted-average interest rates |
5.5 | % | 5.2 | % | 3.0 | % | 6.2 | % | 1.2 | % | 3.8 | % | 4.5 | % | |||||||||||
Debt at variable interest rates |
$ |
43,030 |
5,500 |
5,500 |
5,500 |
523,875 |
|
583,405 |
523,359 |
||||||||||||||||
Weighted-average interest rates |
7.0 | % | 4.2 | % | 4.2 | % | 4.2 | % | 4.2 | % | 0 | % | 4.4 | % |
We are also exposed to fluctuations in foreign currency exchange rates as the financial results of our foreign subsidiaries are translated into U.S. dollars in consolidation. Assets and liabilities outside the United States are primarily located in the United Kingdom, Germany, the Netherlands, Spain, Sweden, Mexico, Austria, Australia, Chile and Ireland. Our investments in foreign subsidiaries with a functional currency other than the U.S. dollar are generally considered long-term investments. Accordingly, we do not hedge these net investments. Our most significant transactional foreign currency exposures are the Euro and the Sterling in relation to the United States dollar. Fluctuations in the value of foreign currencies create exposures, which can adversely affect our results of operations. We manage our foreign currency exchange risks on a global basis by one or more of the following: (i) securing payment from our customers in U.S. dollars, when possible, (ii) entering into foreign currency exchange contracts and (iii) netting asset and liability exposures denominated in similar foreign currencies, to the extent possible. In addition, a significant portion of the cost attributable to our foreign operations is incurred in the local currencies. We may, from time to time, enter into foreign currency exchange or other contracts to hedge the risk associated with certain firm sales commitments, anticipated revenue streams and certain assets and liabilities denominated in foreign currencies. Based upon analysis as of December 31, 2008, we believe a hypothetical 10% change in foreign exchange rates could be material to our future earnings.
Our cash and cash equivalents and investments are in high-quality securities placed with a wide array of institutions with high credit ratings. The investment policy limits our exposure to concentration of credit risks. We believe that the impact of a 10% increase or decrease in interest rates would not be material to our investment income and interest expense from bank loans.
63
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULE
SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
|
Form 10-K
(Page) |
|
---|---|---|
Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting |
65 | |
Report of Independent Registered Public Accounting Firm |
66 |
|
Consolidated Financial Statements: |
||
Balance Sheets as of December 31, 2008 and 2007 |
67 |
|
Statements of Operations for the years ended December 31, 2008, 2007 and 2006 |
68 |
|
Statements of Stockholders' Equity and Comprehensive Income for the years ended December 31, 2008, 2007 and 2006 |
69 |
|
Statements of Cash Flows for the years ended December 31, 2008, 2007 and 2006 |
70 |
|
Notes to Consolidated Financial Statements |
72 |
|
Schedule: |
||
II. Valuation and Qualifying Accounts |
128 |
All other schedules are omitted as the required information is inapplicable or the information is presented in the consolidated financial statements or related notes.
64
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the Board of Directors and Stockholders of
Scientific Games Corporation
New York, New York
We have audited the internal control over financial reporting of Scientific Games Corporation and subsidiaries (the "Company") as of December 31, 2008, based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other personnel 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. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2008, based on the criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of and for the year ended December 31, 2008 of the Company and our report dated March 2, 2009 expressed an unqualified opinion on those financial statements and financial statement schedule and included an explanatory paragraph relating to the Company's adoption of Financial Accounting Standards Board Interpretation No. 48, "Accounting for Uncertainty in Income Taxes" on January 1, 2007.
DELOITTE & TOUCHE LLP
Atlanta,
Georgia
March 2, 2009
65
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the Board of Directors and Stockholders of
Scientific Games Corporation
New York, New York
We have audited the accompanying consolidated balance sheets of Scientific Games Corporation and subsidiaries (the "Company") as of December 31, 2008 and 2007, and the related consolidated statements of operations, stockholders' equity and comprehensive income, and cash flows for each of the three years in the period ended December 31, 2008. Our audits also included the financial statement schedule listed in the Index. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits. We did not audit the financial statements of Consorzio Lotterie Nazionali ("CLN"), the Company's investment which is accounted for by use of the equity method (see note 16 to the consolidated financial statements), as of and for the years ended December 31, 2008 and 2007. The Company's equity in income of CLN was $51,913 and $37,894 for the years ended December 31, 2008 and 2007. Those statements were prepared in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board and were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for CLN, on the basis of International Financial Reporting Standards as issued by the International Accounting Standards Board, as of and for the years ended December 31, 2008 and 2007, is based solely on the report of the other auditors. We have applied auditing procedures to the adjustments to reflect equity in net income of CLN in accordance with accounting principles generally accepted in the United States of America.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the reports of the other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors, such consolidated financial statements present fairly, in all material respects, the financial position of Scientific Games Corporation and subsidiaries as of December 31, 2008 and 2007, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2008, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
As described in Notes 1 and 14 to the consolidated financial statements, the Company adopted Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes ("FIN 48") on January 1, 2007.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of December 31, 2008, based on the criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 2, 2009 expressed an unqualified opinion on the Company's internal control over financial reporting based on our audit.
DELOITTE & TOUCHE LLP
Atlanta,
Georgia
March 2, 2009
66
SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of December 31, 2008 and 2007
(in thousands, except
per share amounts)
|
As of December 31, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
2008 | 2007 | ||||||||
ASSETS |
||||||||||
Current assets: |
||||||||||
Cash and cash equivalents |
$ | 140,639 | $ | 29,403 | ||||||
Accounts receivable, net of allowance for doubtful accounts of $6,465 and $9,184 in 2008 and 2007, respectively |
212,487 | 203,074 | ||||||||
Inventories |
75,371 | 79,295 | ||||||||
Deferred income taxes, current portion |
14,360 | 15,929 | ||||||||
Prepaid expenses, deposits and other current assets |
68,921 | 56,906 | ||||||||
Total current assets |
511,778 | 384,607 | ||||||||
Property and equipment, at cost |
1,016,767 | 979,561 | ||||||||
Less accumulated depreciation |
(441,288 | ) | (404,667 | ) | ||||||
Net property and equipment |
575,479 | 574,894 | ||||||||
Goodwill, net |
657,211 | 716,856 | ||||||||
Intangible assets, net |
120,946 | 133,030 | ||||||||
Other assets and investments |
317,818 | 290,652 | ||||||||
Total assets |
$ | 2,183,232 | $ | 2,100,039 | ||||||
LIABILITIES AND STOCKHOLDERS' EQUITY |
||||||||||
Current liabilities: |
||||||||||
Debt payments due within one year |
$ | 43,384 | $ | 4,942 | ||||||
Accounts payable |
64,635 | 64,108 | ||||||||
Accrued liabilities |
152,665 | 148,464 | ||||||||
Total current liabilities |
260,684 | 217,514 | ||||||||
Deferred income taxes |
33,809 | 51,661 | ||||||||
Other long-term liabilities |
96,048 | 97,024 | ||||||||
Long-term debt, excluding current installments |
1,216,264 | 1,072,625 | ||||||||
Total liabilities |
1,606,805 | 1,438,824 | ||||||||
Commitments and contingencies |
||||||||||
Stockholders' equity: |
||||||||||
Class A common stock, par value $0.01 per share, 199,300 shares authorized, and 92,601 and 93,414 shares outstanding as of December 31, 2008 and 2007, respectively |
926 | 934 | ||||||||
Additional paid-in capital |
561,202 | 521,902 | ||||||||
Accumulated earnings |
105,811 | 97,323 | ||||||||
Treasury stock, at cost, 2,608 and 1,140 shares held as of |
||||||||||
December 31, 2008 and 2007, respectively |
(42,586 | ) | (19,442 | ) | ||||||
Accumulated other comprehensive income |
(48,926 | ) | 60,498 | |||||||
Total stockholders' equity |
576,427 | 661,215 | ||||||||
Total liabilities and stockholders' equity |
$ | 2,183,232 | $ | 2,100,039 | ||||||
See accompanying notes to consolidated financial statements.
67
SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 2008, 2007 and 2006
(in thousands, except per share amounts)
|
Years Ended December 31, | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2008 | 2007 | 2006 | |||||||||
Operating revenues: |
||||||||||||
Services |
$ | 999,972 | $ | 922,415 | $ | 791,804 | ||||||
Sales |
118,857 | 124,289 | 105,426 | |||||||||
|
1,118,829 | 1,046,704 | 897,230 | |||||||||
Operating expenses: |
||||||||||||
Cost of services (exclusive of depreciation and amortization) |
594,785 | 521,433 | 432,013 | |||||||||
Cost of sales (exclusive of depreciation and amortization) |
85,856 | 90,347 | 77,934 | |||||||||
Selling, general and administrative expenses |
184,213 | 165,080 | 143,105 | |||||||||
Employee termination costs |
13,695 | 3,642 | 12,622 | |||||||||
Depreciation and amortization |
218,643 | 160,366 | 106,006 | |||||||||
Operating income |
21,637 | 105,836 | 125,550 | |||||||||
Other (income) expense: |
||||||||||||
Interest expense |
65,026 | 58,550 | 43,393 | |||||||||
Equity in earnings of joint ventures |
(58,570 | ) | (41,252 | ) | (7,900 | ) | ||||||
Early extinguishment of debt |
2,960 | | | |||||||||
Other income, net |
(4,691 | ) | (2,050 | ) | (767 | ) | ||||||
|
4,725 | 15,248 | 34,726 | |||||||||
Income before income tax expense |
16,912 | 90,588 | 90,824 | |||||||||
Income tax expense |
8,424 | 25,221 | 24,063 | |||||||||
Net income |
$ | 8,488 | $ | 65,367 | $ | 66,761 | ||||||
Net income per share: |
||||||||||||
Basic |
$ | 0.09 | $ | 0.71 | $ | 0.73 | ||||||
Diluted |
$ | 0.09 | $ | 0.68 | $ | 0.70 | ||||||
Weighted average number of shares used in per share calculations: |
||||||||||||
Basic shares |
92,875 | 92,566 | 91,066 | |||||||||
Diluted shares |
94,414 | 95,996 | 94,979 | |||||||||
See accompanying notes to consolidated financial statements.
68
SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
Years Ended
December 31, 2008, 2007 and 2006
(in thousands)
|
Years Ended December 31, | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
|
2008 | 2007 | 2006 | ||||||||
Common stock: |
|||||||||||
Beginning balance |
$ | 934 | $ | 916 | $ | 899 | |||||
Issuance of Class A common stock in connection with employee stock purchase plan |
1 | 1 | 1 | ||||||||
Issuance of Class A common stock in stock option and warrant exercises |
6 | 17 | 19 | ||||||||
Purchases of Class A common stock |
(15 | ) | | (3 | ) | ||||||
Ending balance |
926 | 934 | 916 | ||||||||
Additional paid-in capital: |
|||||||||||
Beginning balance |
521,902 | 477,261 | 425,750 | ||||||||
Issuance of Class A common stock in connection with employee stock purchase plan |
962 | 1,034 | 1,062 | ||||||||
Issuance and exercise of stock options, restricted stock units and warrants |
3,363 | 14,105 | 15,165 | ||||||||
Share-based compensation |
34,122 | 25,312 | 21,700 | ||||||||
Tax benefit from employee stock options |
134 | 10,569 | 13,505 | ||||||||
Deferred compensation |
719 | (6,379 | ) | 79 | |||||||
Ending balance |
561,202 | 521,902 | 477,261 | ||||||||
Accumulated (losses) earnings: |
|||||||||||
Beginning balance |
97,323 | 33,452 | (33,309 | ) | |||||||
Net income |
8,488 | 65,367 | 66,761 | ||||||||
Adoption of FIN 48 |
| (1,496 | ) | | |||||||
Ending balance |
105,811 | 97,323 | 33,452 | ||||||||
Treasury stock: |
|||||||||||
Beginning balance |
(19,442 | ) | (19,442 | ) | (9,556 | ) | |||||
Purchase of Class A common stock |
(23,144 | ) | | (9,886 | ) | ||||||
Ending balance |
(42,586 | ) | (19,442 | ) | (19,442 | ) | |||||
Accumulated other comprehensive income (loss): |
|||||||||||
Beginning balance |
60,498 | 35,891 | 3,049 | ||||||||
Other comprehensive income (loss) |
(109,424 | ) | 24,607 | 35,273 | |||||||
Adoption of SFAS 158, net of tax |
| | (2,431 | ) | |||||||
Ending balance |
(48,926 | ) | 60,498 | 35,891 | |||||||
Total stockholders' equity |
$ | 576,427 | $ | 661,215 | $ | 528,078 | |||||
Comprehensive income (loss): |
|||||||||||
Net income |
$ | 8,488 | $ | 65,367 | $ | 66,761 | |||||
Other comprehensive income (loss) |
|||||||||||
Minimum pension liability adjustment, net of tax |
| | (2,478 | ) | |||||||
Pension gains and losses, net of tax |
3,240 | (524 | ) | | |||||||
Foreign currency translation adjustment |
(107,758 | ) | 24,634 | 38,235 | |||||||
Effective portion of derivative financial instruments |
(4,901 | ) | | | |||||||
Unrealized gain (loss) on investments, net of tax |
(5 | ) | 497 | (484 | ) | ||||||
Other comprehensive income (loss) |
(109,424 | ) | 24,607 | 35,273 | |||||||
Comprehensive income (loss) |
$ | (100,936 | ) | $ | 89,974 | $ | 102,034 | ||||
See accompanying notes to consolidated financial statements.
69
SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2008, 2007 and 2006
(in thousands)
|
Years Ended December 31, | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2008 | 2007 | 2006 | ||||||||||
Cash flows from operating activities: |
|||||||||||||
Net income |
$ | 8,488 | $ | 65,367 | $ | 66,761 | |||||||
Adjustments to reconcile net income to cash provided by operating activities: |
|||||||||||||
Depreciation and amortization |
218,643 | 160,366 | 106,006 | ||||||||||
Change in deferred income taxes |
(16,764 | ) | (7,224 | ) | (8,966 | ) | |||||||
Stock-based compensation |
34,122 | 25,312 | 21,700 | ||||||||||
Non-cash interest expense |
4,634 | 4,364 | 3,922 | ||||||||||
Undistributed equity in earnings of joint ventures |
(58,570 | ) | (41,252 | ) | (7,900 | ) | |||||||
Gain or loss from asset disposal |
694 | | | ||||||||||
Early extinguishment of debt |
2,960 | | | ||||||||||
Changes in current assets and liabilities, net of effects of acquisitions |
|||||||||||||
Accounts receivable |
(20,797 | ) | (9,383 | ) | (22,415 | ) | |||||||
Inventories |
(2,644 | ) | (13,608 | ) | (13,223 | ) | |||||||
Accounts payable |
6,332 | (8,140 | ) | (10,502 | ) | ||||||||
Accrued liabilities |
18,024 | (2,190 | ) | 28,087 | |||||||||
Other current assets |
(14,798 | ) | 17,405 | (31,104 | ) | ||||||||
Other |
28,174 | 1,224 | (1,169 | ) | |||||||||
Net cash provided by operating activities |
208,498 | 192,241 | 131,197 | ||||||||||
Cash flows from investing activities: |
|||||||||||||
Capital expenditures |
(19,686 | ) | (34,686 | ) | (15,988 | ) | |||||||
Wagering systems expenditures |
(163,954 | ) | (148,974 | ) | (125,856 | ) | |||||||
Other intangible assets and software expenditures |
(46,278 | ) | (38,569 | ) | (49,946 | ) | |||||||
Proceeds from asset disposals |
201 | | | ||||||||||
Change in other assets and liabilities, net |
(4,533 | ) | (5,314 | ) | (14,458 | ) | |||||||
Investment in joint venture |
5,605 | (30,827 | ) | | |||||||||
Business acquisitions, net of cash acquired |
(8,109 | ) | (120,054 | ) | (296,928 | ) | |||||||
Net cash used in investing activities |
(236,754 | ) | (378,424 | ) | (503,176 | ) | |||||||
Cash flows from financing activities: |
|||||||||||||
Borrowings (repayments) under revolving credit facility |
(158,000 | ) | (33,000 | ) | 191,000 | ||||||||
Proceeds from issuance of long-term debt |
807,348 | 200,000 | 250,270 | ||||||||||
Payment on long-term debt |
(467,978 | ) | (5,900 | ) | (105,715 | ) | |||||||
Payment of financing fees |
(15,226 | ) | (790 | ) | (1,119 | ) | |||||||
Purchases of treasury stock |
(23,144 | ) | | (9,822 | ) | ||||||||
Excess tax benefit from equity-based compensation plan |
134 | 10,569 | 13,505 | ||||||||||
Net proceeds from issuance of common stock |
3,310 | 15,157 | 17,063 | ||||||||||
Net cash provided by financing activities |
146,444 | 186,036 | 355,182 | ||||||||||
Effect of exchange rate changes on cash and cash equivalents |
(6,952 | ) | 1,759 | 5,646 | |||||||||
Increase (decrease) in cash and cash equivalents |
111,236 | 1,612 | (11,151 | ) | |||||||||
Cash and cash equivalents, beginning of period |
29,403 | 27,791 | 38,942 | ||||||||||
Cash and cash equivalents, end of period |
$ | 140,639 | $ | 29,403 | $ | 27,791 | |||||||
See accompanying notes to consolidated financial statements.
70
SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Years Ended December 31, 2008, 2007 and 2006
(in thousands)
Non-cash investing and financing activities
For the years ended December 31, 2008, 2007 and 2006
See Notes 6 and 8 for a description of deferred financing fee write-offs and capital lease transactions.
Supplemental cash flow information
Cash paid during the period for:
|
Years Ended December 31, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
2008 | 2007 | 2006 | |||||||
Interest |
$ | 55,102 | $ | 52,963 | $ | 37,350 | ||||
Income taxes, net of refunds |
18,113 | (4,243 | ) | 35,671 |
See accompanying notes to consolidated financial statements.
71
SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts)
(1) Description of the Business and Summary of Significant Accounting Policies
When used in these notes, all references to the words "Scientific Games," "we," "us," "our," and "Company" refer to Scientific Games Corporation and all entities included in our consolidated financial statements unless otherwise specified or the context otherwise indicates.
(a) Description of the Business
We are a supplier of technology-based products, systems and services to gaming markets worldwide. We report our operations in three business segments: Printed Products Group, Lottery Systems Group, and Diversified Gaming Group.
Printed Products Group
Our Printed Products Group ("Printed Products") provides instant tickets and related services. Instant tickets and related services include ticket design and manufacturing as well as value-added services, including game design, sales and marketing support, inventory management and warehousing and fulfillment services. Additionally, Printed Products provides lotteries with over 80 licensed brand products, including Deal or No Deal, Major League Baseball®, National Basketball Association, Harley-Davidson®, Wheel-of-Fortune®, Monopoly, Corvette® and World Poker Tour®. The division also includes promotional instant tickets that we sell to both lottery and non-lottery customers.
Printed Products is a worldwide manufacturer of prepaid phone cards, which entitle cellular phone users to a defined value of airtime. Prepaid phone cards offer consumers a cost-effective way to purchase cellular airtime, without requiring phone companies to extend credit or consumers to commit to contracts. Prepaid phone cards utilize the secure process that we employ in the production of instant lottery tickets. This helps to ensure integrity and reliability of the product, thus providing consumers in more than 50 countries with access to prepaid cellular phone service.
In the fourth quarter of 2007, we sold our interest in International Lotto Corp., SRL ("ILC"), which sale agreement was officially registered with a public notary in January 2008. In April 2008, the buyers of ILC informed us that they were voiding the sale agreement for certain specified reasons. We objected to their position and are now in arbitration in Peru with the buyers and are assessing our other legal rights and obligations.
Lottery Systems Group
Our Lottery Systems Group ("Lottery Systems") is a provider of sophisticated, customized computer software, equipment and data communication services to government-sponsored and privately operated lotteries in the U.S. and internationally. The business includes the supply of transaction processing software for the accounting and validation of instant ticket and online lottery games, point-of-sale terminal hardware sales, central site computers and communication hardware sales, and ongoing support and maintenance services for these products. Lottery Systems also includes software and hardware and support services for sports betting and operation of credit card processing systems.
72
SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share amounts)
(1) Description of the Business and Summary of Significant Accounting Policies (Continued)
Diversified Gaming Group
Our Diversified Gaming Group ("Diversified Gaming") provides services and systems to private and public operators in the wide area gaming markets and the pari-mutuel wagering industry. The product offerings include server-based gaming machines (including our Nevada dual screen terminals, which can offer Great Britain regulated Category B2 or B3 content on the same machines), video lottery terminals ("VLTs"), monitor games, wagering systems for the pari-mutuel racing industry, sports betting systems and services and Great Britain regulated Category C Amusement With Prize ("AWP") and Skill With Prize ("SWP") terminals. Business units within the Diversified Gaming Group include The Global Draw Limited and certain related companies ("Global Draw"), a leading supplier of gaming terminals, systems and monitor games to licensed bookmakers, primarily in the U.K., Austria and Mexico; Scientific Games Racing LLC, a leading worldwide supplier of computerized systems for pari-mutuel wagering; Games Media Limited ("Games Media"), our AWP and SWP terminal supplier in the U.K. public house (or pub) market, and our pari-mutuel gaming operations in Connecticut, Maine and the Netherlands.
(b) Principles of Consolidation
The accompanying consolidated financial statements include the Company's accounts and subsidiaries in which our ownership is greater than 50%. Investments in other entities in which our ownership is between 20% and 50% are accounted for in the consolidated financial statements using the equity method of accounting. All inter-company balances and transactions have been eliminated in consolidation.
(c) Cash and Cash Equivalents
Cash and cash equivalents include all cash balances and highly liquid investments with an initial maturity of three months or less. We place our temporary cash investments with high credit quality financial institutions. At times such investments may be in excess of the Federal Deposit Insurance Corporation insurance limit.
(d) Accounts Receivable and Allowance for Doubtful Accounts
Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The allowance for doubtful accounts is our best estimate of the amount of probable credit losses in our existing accounts receivable; however, changes in circumstances relating to accounts receivable may result in a requirement for additional allowances in the future. We determine the allowance based on historical write-off experience, current market trends and, for larger accounts, the ability to pay outstanding balances. We continually review our allowance for doubtful accounts. Past due balances and other higher risk amounts are reviewed individually for collectability. Account balances are charged
73
SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share amounts)
(1) Description of the Business and Summary of Significant Accounting Policies (Continued)
against the allowance after all collection efforts have been exhausted and the potential for recovery is considered remote. Accounts receivable, net, consists of the following:
|
As of December 31, | ||||||
---|---|---|---|---|---|---|---|
|
2008 | 2007 | |||||
Accounts receivable |
$ | 174,842 | $ | 172,569 | |||
Unbilled accounts receivable |
44,110 | 39,689 | |||||
Allowance for doubtful accounts |
(6,465 | ) | (9,184 | ) | |||
|
$ | 212,487 | $ | 203,074 | |||
In certain of our contracts, contractual billings do not coincide with revenue recognized on the contract. Unbilled accounts receivable represent revenue recorded in excess of amounts billable pursuant to contract provisions and generally become billable at contractually specified dates or upon the attainment of milestones. Unbilled amounts are expected to be collected within one year.
(e) Inventories
Inventories are stated at the lower of cost or market, including provisions for obsolescence commensurate with known or estimated exposures. Cost is determined as follows:
Item
|
Cost method | |
---|---|---|
Parts | First-in, first-out or weighted moving average. | |
Work-in-process and finished goods | First-in, first-out or weighted moving average for direct material and labor; other fixed and variable production costs are allocated as a percentage of direct labor cost. |
(f) Property and Equipment
Property and equipment are stated at cost. Depreciation of property and equipment is calculated using the straight-line method over the estimated useful lives of the assets as follows:
Item
|
Estimated Life
in Years |
|||
---|---|---|---|---|
Machinery and equipment |
312 | |||
Transportation equipment |
38 | |||
Furniture and fixtures |
510 | |||
Buildings and leasehold improvements |
540 |
(g) Deferred Installation Costs
Certain lottery, wide area gaming and pari-mutuel systems contracts require us to perform installation activities. Direct installation activities, which include costs for online terminals, facilities wiring, computers, internal labor and travel, are performed at the inception of a specific contract with a specific customer to enable us to perform under the terms of the contract. These activities begin after a
74
SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share amounts)
(1) Description of the Business and Summary of Significant Accounting Policies (Continued)
contract is entered into and end when the setup activities are substantially complete. Such activities do not represent a separate earnings process and are deferred and amortized over the expected life of the contract. Deferred installation costs, net of accumulated depreciation, included in property and equipment were approximately $73,300 and $68,700 at December 31, 2008 and 2007, respectively.
(h) Goodwill and Acquired Intangible Assets
Goodwill represents the excess of the purchase price over the fair value of the net assets of acquired companies. We follow the provisions of SFAS No. 141, Business Combinations ("SFAS 141"), and SFAS No. 142, Goodwill and Other Intangible Assets ("SFAS 142") to account for goodwill and acquired intangible assets. SFAS 141 requires that the purchase method of accounting be used for all business combinations. SFAS 142 requires that all goodwill and intangible assets with indefinite useful lives not be amortized, but instead, be evaluated for impairment on an annual basis or more frequently if events and circumstances indicate that assets might be impaired.
(i) Other Assets and Investments
In accordance with the provisions of Statement of Position 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use , we capitalize costs associated with internally developed and/or purchased software systems for use in our lottery and wagering service contracts. Capitalized costs are amortized on a straight-line basis over the expected useful lives of the asset. We also capitalize costs associated with the procurement of long-term financing, marketing rights, and non-competition and employment agreements arising primarily from business acquisitions. An evaluation is performed to determine if any impairment has occurred with respect to any amortized or non-amortized assets.
(j) Derivative Financial Instruments
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities ("SFAS 133"), SFAS No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activitiesan Amendment of FASB Statement No. 133 ("SFAS 138") and SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities ("SFAS 149"), require that all derivative instruments be recorded on the balance sheet at their respective fair values.
From time to time, the Company utilizes interest rate swap agreements to mitigate any gains or losses associated with the change in expected cash flows due to fluctuation in interest rates on variable rate debt. Such derivatives meet the requirements for cash flow hedge accounting and are recognized on the balance sheet at their fair value. The effective portion of the hedge is recorded in other comprehensive income (loss) and the ineffective portion of the hedge, if any, is recorded in the consolidated statement of operations. Amounts recorded in other comprehensive income (loss) that were deferred on the effective hedged forecasted transactions are reclassified to earnings when the interest expense related to the hedged item affects earnings.
75
SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share amounts)
(1) Description of the Business and Summary of Significant Accounting Policies (Continued)
(k) Impairment of Long-Lived Assets and Acquired Intangible Assets
In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets , we assess the recoverability of long-lived assets and identifiable acquired intangible assets with finite useful lives whenever events or changes in circumstances indicate that the carrying value of such an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the asset to the expected net future undiscounted cash flows to be generated by that asset, or, for identifiable intangibles with finite useful lives, by determining whether the amortization of the intangible asset balance over its remaining life can be recovered through undiscounted future cash flows. The amount of impairment of other long-lived assets is measured by the amount by which the carrying value of the asset exceeds the fair market value of the asset. Assets to be disposed of are reported at the lower of the carrying amount or fair market value, less costs to sell.
(l) Income Taxes
We account for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes ("SFAS 109"). Under SFAS 109, deferred tax assets and liabilities are determined based on the difference between the book and tax bases of assets and liabilities, using enacted tax rates in effect for the year in which the differences are expected to reverse. Deferred tax assets are recognized if it is more likely than not that the assets will be realized in future years. We establish a valuation allowance for deferred tax assets for which realization is unlikely.
When we establish or reduce the valuation allowance against our deferred tax assets, our income tax expense increases or decreases, respectively, in the period such determination is made.
On January 1, 2007, we adopted Financial Accounting Standards Board ("FASB") Interpretation No. 48, Accounting for Uncertainty in Income Taxes ("FIN 48"), and began accounting for income tax contingencies in accordance with the guidance provided in FIN 48. Prior to the adoption of FIN 48, we accounted for income tax contingencies solely in accordance with SFAS No. 5, Accounting for Contingencies .
(m) Foreign Currency Translation
The U.S. dollar is the functional currency for most of our businesses. Significant operations with local currency as functional currency include operations in the European Union. Assets and liabilities of foreign operations are translated at year-end rates of exchange and operations are translated at the average rates of exchange for the year. Gains or losses resulting from translating the foreign currency financial statements are accumulated as a separate component of accumulated other comprehensive income (loss) in stockholders' equity. Gains or losses resulting from foreign currency transactions are included in other income (expense) in the consolidated statements of operations and have not been material to the financial statements.
76
SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share amounts)
(1) Description of the Business and Summary of Significant Accounting Policies (Continued)
(n) Revenue Recognition
We recognize revenue when it is realized or realizable and earned. We consider revenue realized or realizable and earned when we have persuasive evidence of an arrangement, prices are fixed or determinable, services and products are provided to the customer and collectability is probable or reasonably assured depending on the applicable revenue recognition guidance followed. In addition to the general policy discussed above, the following are the specific revenue recognition policies for our operating segments:
Printed Products Group
Revenue from the sale of instant tickets that are sold on a per unit price basis is recognized when the customer accepts the product pursuant to the terms of the contract.
Revenue from the sale of instant tickets that are sold on a variable price basis is recognized when the percentage of the amount of retail sales is determined.
Revenue from cooperative service contracts is recognized based upon a percentage of the amount of the retail value of lottery tickets pursuant to the terms of the contract.
Revenue from licensing branded property coupled with a service component whereby we purchase and distribute merchandise prizes on behalf of lottery authorities to identified winners is recognized on a performance-based measure pursuant to the terms of the contract.
Revenue from licensing of branded property with no service component is recognized when the contract is signed.
Revenue from the sale of prepaid phone cards is recognized when the customer accepts the product pursuant to the terms of the contract.
Lottery Systems Group
Revenue from online lottery services is recognized as a percentage of the amount of retail sales of lottery tickets pursuant to the terms of the contract.
Revenue from the sale of a lottery system, which includes the customization of software, is recognized on the percentage of completion method of accounting, based on the ratio of costs incurred to estimated costs to complete.
Revenue from the perpetual licensing of customized lottery software is recognized on the percentage of completion method of accounting, based on the ratio of costs incurred to estimated costs to complete.
Revenue derived from software maintenance on lottery software is recognized ratably over the maintenance period.
Revenue derived from enhancements to lottery software is recognized at the time we provide such enhancements.
77
SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share amounts)
(1) Description of the Business and Summary of Significant Accounting Policies (Continued)
Revenue from the sale of lottery terminals is recognized when the customer accepts the product pursuant to the terms of the contract.
Diversified Gaming Group
Revenue from the sale of gaming terminals and related software is recognized ratably over the term of the contract.
Revenue from the provision of wide area gaming services is generally recognized as a percentage of revenue generated by the terminals.
Revenue from the provision of pari-mutuel wagering services is generally recognized as a percentage of the amount wagered by the customers' patrons at the time of the wager pursuant to the terms of the contract.
Revenue from the sale of a pari-mutuel wagering system, which includes the customization of software, is recognized on the percentage of completion method of accounting, based on the ratio of costs incurred to estimated costs to complete.
Revenue from the sale of pari-mutuel wagering terminals is recognized when the customer accepts the product pursuant to the terms of the contract.
Revenue from the perpetual licensing of customized pari-mutuel software is recognized on the percentage of completion method of accounting, based on the ratio of costs incurred to estimated costs to complete.
Revenue from wagering at Company owned or operated sites is recognized as a percentage of the amount wagered by our customers at the time of the wager.
Revenue from the provision of facilities management services to non-Company owned wagering sites is recognized as a percentage of the amount wagered by our customers' patrons at the time of the wager pursuant to the terms of the contract.
(o) Service Contract Arrangements
Service contracts for North American pari-mutuel wagering systems, lottery and wide area gaming systems generally provide for substantial related services such as software, maintenance personnel, computer operators and certain operating supplies. The service contracts generally cover four to seven year periods and frequently include renewal options that have generally been exercised by the customers. Under such contracts, we retain ownership of all equipment. The service contracts also provide for certain warranties covering operation of the equipment, machines, display equipment and central computing equipment. The breach of such warranties could result in significant liquidated damages. The service contracts provide for revenue based on a percentage of total amounts wagered. Certain pari-mutuel wagering systems contracts provide for specified minimum levels of revenue. We have historically exceeded such minimums.
78
SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share amounts)
(1) Description of the Business and Summary of Significant Accounting Policies (Continued)
Instant ticket sales contracts provide for revenue based on a fixed fee per thousand instant tickets or a percentage of instant ticket retail sales of the lottery customer. Instant ticket contracts generally run for one to five years and frequently include renewal options.
(p) Shipping and Handling Costs
Shipping and handling costs are included in cost of sales for all periods presented.
(q) Stock-Based Compensation
In accordance with SFAS 123(R), we record compensation cost related to the continued vesting of all stock options that remained unvested as of January 1, 2006, as well as for all stock options granted, modified or cancelled after our adoption date. The compensation cost to be recorded is based on the fair value at the grant date.
(r) Comprehensive Income
We follow SFAS No. 130, Reporting Comprehensive Income ("SFAS 130"), which establishes standards for the reporting and display of comprehensive income and its components in a full set of financial statements. In accordance with SFAS 130, we include and separately classify in comprehensive income unrealized gains and losses from our foreign currency translation adjustments, gains or losses associated with pension or other postretirement benefits, prior service costs or credits associated with pension or other postretirement benefits, transition assets or obligations associated with pension or other postretirement benefits, the effective portion of derivative financial instruments and unrealized gains and losses on investments.
(s) Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Some of the significant estimates involve percentage of completion for contracted lottery development projects and pari-mutuel systems software development projects, equity-based compensation expense, capitalization of software development costs, evaluation of the recoverability of assets and assessment of litigation and contingencies, allocation of purchase price to assets acquired and liabilities assumed in business combinations, and income and other taxes. Actual results could differ from estimates.
(t) Reclassifications
Certain reclassifications have been made to the prior year's consolidated financial statements to conform to the current presentation.
79
SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share amounts)
(2) Basic Income Per Common Share and Diluted Income Per Common Share
Basic income per common share is computed by dividing net income available to common stockholders by the weighted-average number of common shares outstanding during the period. Diluted income per common share gives effect to all dilutive potential common shares that were outstanding during the period. As of December 31, 2008 and 2007, we had outstanding stock options, restricted stock units and convertible debentures which could potentially dilute basic earnings per share in the future. The following represents a reconciliation of the numerator and denominator used in computing basic and diluted income available to common stockholders per common share for the years ended December 31, 2008, 2007 and 2006:
|
Years Ended December 31, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
2008 | 2007 | 2006 | |||||||
Income (numerator) |
||||||||||
Net income |
$ | 8,488 | $ | 65,367 | $ | 66,761 | ||||
Shares (denominator) |
||||||||||
Weighted-average basic common shares outstanding |
92,875 | 92,566 | 91,066 | |||||||
Effect of dilutive securities-stock rights |
1,534 | 2,073 | 2,974 | |||||||
Effect of dilutive shares related to convertible debentures |
5 | 1,357 | 939 | |||||||
Weighted-average diluted common shares outstanding |
94,414 | 95,996 | 94,979 | |||||||
Basic and diluted per share amounts |
||||||||||
Basic net income per share |
$ | 0.09 | $ | 0.71 | $ | 0.73 | ||||
Diluted net income per share |
$ | 0.09 | $ | 0.68 | $ | 0.70 | ||||
The weighted-average diluted common shares outstanding for the years ended December 31, 2008, 2007 and 2006 excludes the effect of approximately 6,512, 167 and 173, respectively, weighted stock rights outstanding, because their effect would be anti-dilutive.
The aggregate number of shares that we could be obligated to issue upon conversion of the remaining $273,782 in aggregate principal amount of our 0.75% convertible senior subordinated notes due 2024 (the "Convertible Debentures"), which were sold in December 2004, is approximately 9,408. The Convertible Debentures provide for net share settlement upon conversion. In December 2004, we purchased a bond hedge to mitigate the potential dilution from conversion of the Convertible Debentures during the term of the bond hedge.
During the second quarter of 2008, the average price of the Company's common stock exceeded the conversion price of the Convertible Debentures; therefore, we have included 5 potentially dilutive shares related to our Convertible Debentures in our weighted-average dilutive shares outstanding. During 2007 and 2006, the average price of our common stock exceeded the conversion price of the Convertible Debentures. Therefore, we have included 1,357 and 939 shares, respectively, related to our Convertible Debentures in our weighted-average dilutive common shares outstanding for the years ended December 31, 2007 and 2006. We have not included the offset from the bond hedge as it would be anti-dilutive; however, to the extent the Convertible Debentures are converted during the term of
80
SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share amounts)
(2) Basic Income Per Common Share and Diluted Income Per Common Share (Continued)
the bond hedge, the diluted share amount will decrease because the bond hedge will offset the dilution from conversion of the Convertible Debentures.
(3) Inventories
Inventories consist of the following:
|
As of December 31, | ||||||
---|---|---|---|---|---|---|---|
|
2008 | 2007 | |||||
Parts and work-in-process |
$ | 36,449 | $ | 34,897 | |||
Finished goods |
38,922 | 44,398 | |||||
|
$ | 75,371 | $ | 79,295 | |||
Point-of-sale terminals manufactured by us may be sold to customers or included as part of a long-term wagering system contract. Parts and work-in-process includes costs for equipment expected to be sold. Costs incurred for equipment associated with specific wagering system contracts not yet placed into service are classified as construction in progress in property and equipment and are not depreciated.
(4) Property and Equipment
Property and equipment, including assets under capital leases, consist of the following:
|
As of December 31, | |||||||
---|---|---|---|---|---|---|---|---|
|
2008 | 2007 | ||||||
Machinery, equipment and deferred installation costs |
$ | 785,340 | $ | 791,258 | ||||
Land and buildings |
78,542 | 73,742 | ||||||
Transportation equipment |
7,576 | 8,636 | ||||||
Furniture and fixtures |
20,958 | 17,899 | ||||||
Leasehold improvements |
22,501 | 24,542 | ||||||
Construction in progress |
101,850 | 63,484 | ||||||
Property and equipment, at cost |
1,016,767 | 979,561 | ||||||
Less: accumulated depreciation |
(441,288 | ) | (404,667 | ) | ||||
Net property and equipment |
$ | 575,479 | $ | 574,894 | ||||
Depreciation expense for the years ended December 31, 2008, 2007 and 2006 amounted to approximately $162,900, $87,200 and $71,500, respectively.
Cost for equipment associated with specific wagering systems contracts not yet placed into service are recorded as construction in progress and not depreciated. When the equipment is placed into service at wagering facilities, the related costs are transferred from construction in progress to machinery and equipment, and we commence depreciation.
Depreciation expense is excluded from cost of sales and other operating expenses and is separately stated with amortization expense on the statement of operations.
81
SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share amounts)
(4) Property and Equipment (Continued)
During the fourth quarter of 2008, we recorded long-lived asset impairment charges of approximately $76,200 primarily related to underperforming Lottery Systems and Printed Products contracts in Mexico (approximately $38,500), Oklahoma (approximately $14,100) and other locations (approximately $7,700) and the impairment of obsolete hardware in the Lottery Systems (approximately $6,400), Printed Products (approximately $3,800) and Diversified Gaming (approximately $2,600) Groups and from our corporate headquarters (approximately $3,100). The fair values of the assets were determined based on the sum of future undiscounted cash flows which were estimated to be nil. The impairment charges are included in depreciation and amortization expense in our Consolidated Statements of Operations for the year ended December 31, 2008.
During the third quarter of 2007, we made a strategic business decision to rationalize our global Printed Products Group operations during the fourth quarter of 2007. As a result, during the year ended December 31, 2007, we recorded impairment charges of approximately $26,300 primarily related to long-lived assets in Peru and fixed assets in Germany. The fair values of the assets were determined based on the sum of future undiscounted cash flows which were estimated to be nil. The impairment charges are reported in our Printed Products segment and are included in depreciation and amortization expense in our Consolidated Statements of Operations for the year ended December 31, 2007.
During the year ended December 31, 2006, we recorded a $9,700 charge to depreciation and amortization expense in our Diversified Gaming segment related to the write-off of certain hardware and software assets used in the pari-mutuel business. The write-off was primarily the result of the roll-out of our new terminal and two Quantum TM Data Centers.
82
SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share amounts)
(5) Goodwill and Intangible Assets and Impairment of Long-Lived Assets
Intangible Assets
The following disclosure presents certain information on our acquired intangible assets as of December 31, 2008 and 2007. Amortizable intangible assets are being amortized on a straight-line basis over their estimated useful lives with no estimated residual values.
Intangible Assets
|
Gross
Carrying Amount |
Accumulated
Amortization |
Net
Balance |
||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
Balance as of December 31, 2008 |
|||||||||||
Amortizable intangible assets: |
|||||||||||
Patents |
$ | 11,563 | 2,871 | 8,692 | |||||||
Customer lists |
28,772 | 14,044 | 14,728 | ||||||||
Customer service contracts |
3,892 | 2,505 | 1,387 | ||||||||
Licenses |
60,237 | 32,615 | 27,622 | ||||||||
Intellectual property |
17,057 | 11,425 | 5,632 | ||||||||
Lottery contracts |
27,926 | 27,498 | 428 | ||||||||
|
149,447 | 90,958 | 58,489 | ||||||||
Non-amortizable intangible assets: |
|||||||||||
Trade name |
37,285 | 2,118 | 35,167 | ||||||||
Connecticut off-track betting system operating right |
35,609 | 8,319 | 27,290 | ||||||||
|
72,894 | 10,437 | 62,457 | ||||||||
Total intangible assets |
$ | 222,341 | 101,395 | 120,946 | |||||||
Balance as of December 31, 2007 |
|||||||||||
Amortizable intangible assets: |
|||||||||||
Patents |
$ | 10,309 | 2,135 | 8,174 | |||||||
Customer lists |
37,454 | 17,164 | 20,290 | ||||||||
Customer service contracts |
4,078 | 2,358 | 1,720 | ||||||||
Licenses |
45,603 | 24,614 | 20,989 | ||||||||
Intellectual property |
22,176 | 9,542 | 12,634 | ||||||||
Lottery contracts |
26,776 | 20,756 | 6,020 | ||||||||
|
146,396 | 76,569 | 69,827 | ||||||||
Non-amortizable intangible assets: |
|||||||||||
Trade name |
38,981 | 2,118 | 36,863 | ||||||||
Connecticut off-track betting system operating right |
34,659 | 8,319 | 26,340 | ||||||||
|
73,640 | 10,437 | 63,203 | ||||||||
Total intangible assets |
$ | 220,036 | 87,006 | 133,030 | |||||||
The aggregate intangible amortization expense for the years ended December 31, 2008, 2007 and 2006 was approximately $27,700, $44,300 and $20,100, respectively. The estimated intangible asset amortization expenses for the years ended December 31, 2009 and for each of the subsequent four
83
SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share amounts)
(5) Goodwill and Intangible Assets and Impairment of Long-Lived Assets (Continued)
years ending December 31, 2013 are approximately $15,400, $11,700, $6,900, $5,100 and $4,800 respectively.
Goodwill
The table below reconciles the change in the carrying amount of goodwill, by reporting segment, for the period from December 31, 2006 to December 31, 2008. In 2008, we recorded (a) a $2,525 increase in goodwill associated with the acquisition of Oberthur Gaming Technologies and related companies ("OGT"), (b) a $135 increase in goodwill associated with the acquisition of Games Media Limited, (c) a $160 increase in goodwill associated with all other acquisitions and (d) a decrease in goodwill of $62,465 as a result of foreign currency translation.
In 2007, we recorded (a) a $73,779 increase in goodwill associated with the acquisition of OGT, (b) a $616 increase in goodwill associated with the purchase price valuation and allocation adjustments associated with the acquisition of Games Media, (c) a $149 decrease in goodwill associated with the final purchase price valuation and allocation adjustments associated with the acquisition of the Global Draw, (d) a $767 increase in goodwill associated with the final purchase price valuation and allocation adjustments associated with the acquisition of substantially all of the online lottery assets of EssNet, (e) a $9,752 decrease in goodwill associated primarily with the impairment of ILC goodwill, (f) a $105 increase in goodwill associated with the purchase price valuation and allocation adjustments associated with certain other acquisitions and (g) an increase in goodwill of $17,760 as a result of foreign currency translation.
Goodwill
|
Printed
Products Group |
Lottery
Systems Group |
Diversified
Gaming Group |
Totals | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Balance at December 31, 2006 |
$ | 259,710 | 184,509 | 189,511 | 633,730 | |||||||||
Adjustments |
69,009 | 10,010 | 4,107 | 83,126 | ||||||||||
Balance at December 31, 2007 |
328,719 | 194,519 | 193,618 | 716,856 | ||||||||||
Adjustments |
(4,474 | ) | (4,178 | ) | (50,993 | ) | (59,645 | ) | ||||||
Balance at December 31, 2008 |
$ | 324,245 | 190,341 | 142,625 | 657,211 | |||||||||
We performed an annual impairment test for fiscal 2008 and 2007 and in accordance with SFAS 142. No adjustment was required to the carrying value of our goodwill or intangible assets with indefinite useful lives as of December 31, 2008 or 2007 as a result of our SFAS 142 annual impairment test.
84
SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share amounts)
(6) Other Assets and Investments
Other assets and investments (net) consist of the following:
|
As of December 31, | ||||||
---|---|---|---|---|---|---|---|
|
2008 | 2007 | |||||
Software systems development costs |
$ | 74,995 | $ | 68,302 | |||
Deferred financing costs |
18,973 | 11,342 | |||||
Deferred tax asset, long-term portion |
104,638 | 85,152 | |||||
SERP trust |
15,942 | 15,801 | |||||
Investments in joint ventures |
76,010 | 81,067 | |||||
Other assets |
27,260 | 28,988 | |||||
|
$ | 317,818 | $ | 290,652 | |||
In the years ended December 31, 2008 and 2007, we capitalized $36,100 and $30,600, respectively, of software systems development costs related primarily to lottery, wide area gaming and pari-mutuel wagering systems. Capitalized costs are amortized on a straight-line basis over a period of five to ten years. The total amount charged to amortization expense for amortization of capitalized systems development costs was approximately $24,800, $15,200 and $14,400 for the years ended December 31, 2008, 2007 and 2006, respectively.
Deferred financing costs arise in connection with our procurement of long-term financing and are amortized over the life of the financing agreements. During fiscal years 2008 and 2006, we entered into new term loan facilities. The proceeds from those transactions were used to acquire certain businesses and repay outstanding borrowings under our senior secured credit facility. We capitalized approximately $15,200, $800 and $1,100 during 2008, 2007 and 2006, respectively, in connection with these borrowings. Amortization of deferred financing costs amounted to approximately $4,600, $4,300 and $3,900 for the years ended December 31, 2008, 2007 and 2006, respectively.
During the second quarter of 2008, we wrote-off of $2,960 of unamortized deferred financing fees related to the Company's old credit agreement, which was terminated and replaced with a new credit agreement.
85
SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share amounts)
(7) Accrued Liabilities
Accrued liabilities consist of the following:
|
As of December 31, | ||||||
---|---|---|---|---|---|---|---|
|
2008 | 2007 | |||||
Compensation and benefits |
$ | 50,806 | $ | 46,088 | |||
Customer advances |
3,112 | 5,037 | |||||
Deferred revenue |
18,801 | 23,272 | |||||
Taxes, other than income |
9,268 | 11,212 | |||||
Accrued licenses |
4,883 | 5,650 | |||||
Liabilites assumed in business combinations |
3,999 | 9,200 | |||||
Accrued contract costs |
6,742 | 10,113 | |||||
Other |
55,054 | 37,892 | |||||
|
$ | 152,665 | $ | 148,464 | |||
(8) Long-Term and Other Debt
In June 2008, we entered into certain debt financing transactions structured to extend the average maturity of the Company's debt, create additional borrowing capacity and revise certain financial covenants to be more favorable to the Company. We and our 100%-owned subsidiary, Scientific Games International, Inc. ("SGI"), entered into a credit agreement dated as of June 9, 2008, among SGI, as borrower, the Company, as guarantor, and the several lenders from time to time parties thereto (the "Credit Agreement"). The Credit Agreement replaced the Company's credit agreement, dated as of December 23, 2004, as amended and restated as of January 24, 2007 (the "2004 Credit Agreement"). All amounts outstanding under the 2004 Credit Agreement were paid on June 9, 2008, and the 2004 Credit Agreement was terminated. In addition, on June 11, 2008, SGI issued $200,000 of 7.875% senior subordinated notes due 2016 (the "2008 Notes"). The 2008 Notes were issued pursuant to an indenture dated as of June 11, 2008 (the "2008 Notes Indenture") among SGI, as issuer, the Company, as a guarantor, the Company's subsidiary guarantors party thereto and the trustee. In connection with the Credit Agreement and the issuance of the 2008 Notes, an aggregate of $13,004 was paid to certain financial institutions in the form of fees and initial purchasers' discounts.
As of December 31, 2008, our long-term debt consisted of $200,000 in aggregate principal amount of the 2008 Notes, $200,000 in aggregate principal amount of 6.25% senior subordinated notes due 2012 (the "2004 Notes"), $273,782 in aggregate principal amount of the Convertible Debentures and borrowings under the Credit Agreement. The Credit Agreement consists of a $250,000 revolving credit facility and a $550,000 senior secured term loan credit facility. Short-term debt includes approximately $37,530 of unsecured borrowings, denominated in Chinese Renminbi Yuan (the "China Loans") from two banks in China and current installments on long-term debt.
86
SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share amounts)
(8) Long-Term and Other Debt (Continued)
The following reflects outstanding balances of long-term debt as of December 31, 2008 and 2007:
|
December 31, | |||||||
---|---|---|---|---|---|---|---|---|
|
2008 | 2007 | ||||||
Revolver, varying interest rate, due 2013 |
$ | | $ | | ||||
Revolver, varying interest rate, due 2009 |
| 158,000 | ||||||
Term Loan, varying interest rate, due 2013 |
545,875 | | ||||||
Term Loan C, varying interest rate, due 2009 |
| 98,250 | ||||||
Term Loan D, varying interest rate, due 2009 |
| 147,750 | ||||||
Term Loan E, varying interest rate, due 2009 |
| 198,000 | ||||||
2008 Notes, 7.875% interest, due 2016 |
200,000 | | ||||||
2004 Notes, 6.25% interest, due 2012 |
200,000 | 200,000 | ||||||
Convertible Debentures, 0.75% interest, due 2024 |
273,782 | 273,782 | ||||||
China Loans, varying interest rate, due 2009 |
37,530 | | ||||||
Capital lease obligations, interest as of December 31, 2007 from 3.9% to 10.0%, payable monthly through September 2009 |
709 | 691 | ||||||
Various loans and bank facilities, interest as of December 31, 2007 from 2.5% to 6.2% |
1,752 | 1,094 | ||||||
Total long-term debt outstanding |
1,259,648 | 1,077,567 | ||||||
Less debt payments due within one year |
(43,384 | ) | (4,942 | ) | ||||
Long-term debt, net of current installments |
$ | 1,216,264 | $ | 1,072,625 | ||||
The following reflects debt and capital lease payments due over the next five years and beyond as of December 31, 2008:
|
Debt and Capital Lease Payments Due by Period
As of December 31, 2008 |
||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Total |
Within
1 Year |
Within
2 Years |
Within
3 Years |
Within
4 Years |
Within
5 Years |
After
5 Years |
||||||||||||||||
Revolver |
$ | | | | | | | | |||||||||||||||
Term Loan |
545,875 | 5,500 | 5,500 | 5,500 | 5,500 | 523,875 | | ||||||||||||||||
2008 Notes |
200,000 | | | | | | 200,000 | ||||||||||||||||
2004 Notes |
200,000 | | | | 200,000 | | | ||||||||||||||||
Convertible Debentures |
273,782 | | 273,782 | | | | | ||||||||||||||||
China Loans |
37,530 | 37,530 | | | | | | ||||||||||||||||
Other |
2,461 | 354 | 101 | 652 | 724 | 399 | 231 | ||||||||||||||||
Total |
$ | 1,259,648 | 43,384 | 279,383 | 6,152 | 206,224 | 524,274 | 200,231 | |||||||||||||||
87
SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share amounts)
(8) Long-Term and Other Debt (Continued)
Credit Agreement
The Credit Agreement provides for a $250,000 senior secured revolving credit facility (the "Revolver") and a $550,000 senior secured term loan credit facility (the "Term Loan"). Under the terms of the Credit Agreement, SGI has the ability, subject to certain terms and conditions, to request additional tranches of term loans or to request an increase in the commitments under the Revolver, or a combination thereof, in a maximum aggregate amount of $200,000 at a later date.
Amounts under the Revolver may be borrowed, repaid and reborrowed by SGI from time to time until maturity. The Credit Agreement will terminate on June 9, 2013, provided that the Revolver and the Term Loan will both mature on March 1, 2010 unless one of the following conditions is met:
The Revolver and the Term Loan will both mature on September 15, 2012, unless one of the following conditions is met:
Voluntary prepayments and commitment reductions under the Credit Agreement are permitted at any time in whole or in part, without premium or penalty (other than breakfunding costs), upon proper notice and subject to a minimum dollar requirement.
Borrowings under the Credit Agreement bear interest at a rate per annum equal to, at SGI's option, either (1) a base rate determined by reference to the higher of (a) the prime rate of JPMorgan Chase Bank, N.A. and (b) the federal funds effective rate plus 0.50%, or (2) a reserve-adjusted LIBOR rate, in each case plus an applicable margin. The applicable margin varies based on the consolidated leverage ratio of the Company from 0.75% to 1.75% above the base rate for base rate loans, and 1.75% to 2.75% above LIBOR for LIBOR-based loans. From the date of the Credit Agreement to the filing date of this Annual Report on Form 10-K, the applicable margins for base rate loans and LIBOR-based loans were 1.50% and 2.50%, respectively. During the term of the Credit Agreement,
88
SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share amounts)
(8) Long-Term and Other Debt (Continued)
SGI will pay its lenders a fee equal to the product of 0.50% per annum and the unused portion of the Revolver.
We and our direct and indirect 100%-owned domestic subsidiaries (other than SGI) have provided a guarantee of the payment of SGI's obligations under the Credit Agreement. In addition, the obligations under the Credit Agreement are secured by a first priority, perfected lien on (1) substantially all the property and assets (real and personal, tangible and intangible) of the Company and its direct and indirect 100%-owned domestic subsidiaries and (2) 100% of our interest in the capital stock (or other equity interests) of all of our direct and indirect 100%-owned domestic subsidiaries and 65% of our interest in the capital stock (or other equity interests) of the first-tier foreign subsidiaries of SGI and the guarantors.
The Credit Agreement contains covenants customary for financings of this type, including negative covenants that, among other things, limit the ability of the Company and its subsidiaries to incur additional indebtedness, pay dividends or make distributions or certain other restricted payments, purchase or redeem capital stock, make investments or extend credit, engage in certain transactions with affiliates, engage in sale-leaseback transactions, consummate certain asset sales, effect a consolidation or merger, sell, transfer, lease or otherwise dispose of all or substantially all assets, or create certain liens and other encumbrances on assets. In addition, the Credit Agreement requires us to maintain the following financial ratios:
"Consolidated Leverage Ratio" means, as of the last day of any period, the ratio of (1) Consolidated Total Debt (defined as the aggregate principal amount of our indebtedness, determined on a consolidated basis and required to be reflected on our balance sheet in accordance with Generally Accepted Accounting Principles ("GAAP")) on such day, to (2) Consolidated EBITDA for the period of four consecutive fiscal quarters then ended.
"Consolidated Senior Debt Ratio" means, as of the last day of any period, the ratio of (1) Consolidated Total Debt (other than the 2004 Notes, the 2008 Notes, the Convertible Debentures and any additional subordinated debt permitted under the Credit Agreement) to (2) Consolidated EBITDA for the period of four consecutive fiscal quarters then ended.
"Consolidated Interest Coverage Ratio" means, for any period, the ratio of (1) Consolidated EBITDA for such period to (2) total cash interest expense with respect to all outstanding indebtedness of the Company and its subsidiaries for such period.
89
SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share amounts)
(8) Long-Term and Other Debt (Continued)
For purposes of the foregoing, "Consolidated EBITDA" means, for any period, consolidated net income (or loss) of the Company and its subsidiaries for such period, determined in accordance with GAAP (excluding (a) the income (or deficit) of any entity accrued prior to the date it becomes a subsidiary of the Company or is merged into or consolidated with us or any of our subsidiaries, (b) the income (or deficit) of any entity (other than subsidiaries) in which we or our subsidiaries have an ownership interest, except to the extent such income is actually received by us or our subsidiaries through dividends or other distributions and (c) the undistributed earnings of any subsidiary (other than SGI) to the extent that the declaration or payment of dividends or similar distributions by such subsidiary is not at the time permitted by the terms of any contractual obligation (other than under the Credit Agreement or any related document) or requirement of law), plus, to the extent reflected as a charge in the statement of such consolidated net income for such period, the sum of (1) income tax expense, (2) interest expense, amortization or write-off of debt discount and debt issuance costs and commissions, discounts and other fees and charges associated with indebtedness, (3) depreciation and amortization expense, (4) amortization of intangibles (including goodwill) and organization costs, (5) certain earn-out payments, (6) extraordinary charges or losses determined in accordance with GAAP, (7) non-cash stock-based compensation expenses, (8) certain expenses, charges or losses resulting from certain investments in Peru not to exceed $3,000 (9) the non-cash portion of any nonrecurring write-offs or write-downs as required in accordance with GAAP and (10) any advisory fees and related expenses in connection with permitted acquisitions, and minus, to the extent included in the statement of such consolidated net income for such period, the sum of (i) interest income, (ii) any extraordinary income or gains determined in accordance with GAAP and (iii) any income or gains with respect to certain earn-out payments.
In addition, the Credit Agreement requires mandatory prepayments of the Term Loan with the net cash proceeds from (1) the incurrence of indebtedness by the Company or any of its subsidiaries (excluding certain permitted indebtedness) and (2) the sale of assets that yields net cash proceeds to the Company or any of its subsidiaries in excess of $5,000 (excluding certain permitted sales of assets) or any settlement of or payment in respect of any property or casualty insurance claim or any condemnation proceeding relating to any asset of the Company of its subsidiaries, subject to a reinvestment exclusion.
We were in compliance with our covenants as of December 31, 2008.
As of December 31, 2008, we had approximately $190,197 available for additional borrowing or letter of credit issuance under our Revolver. There were no borrowings and $59,803 in outstanding letters of credit under our Revolver as of December 31, 2008. Our ability to borrow under the Credit Agreement will depend on us remaining in compliance with the limitations imposed by our lenders, including the maintenance of the foregoing financial ratios.
2008 Notes
The 2008 Notes bear interest at the rate of 7.875% per annum, which accrues from June 11, 2008 and is payable semiannually in arrears on June 15 and December 15 of each year, commencing on December 15, 2008. The 2008 Notes mature on June 15, 2016, unless earlier redeemed or repurchased, and are subject to the terms and conditions set forth in the 2008 Notes Indenture.
90
SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share amounts)
(8) Long-Term and Other Debt (Continued)
SGI may redeem some or all of the 2008 Notes at any time prior to June 15, 2012 at a price equal to 100% of the principal amount of the 2008 Notes, plus accrued and unpaid interest, if any, to the date of redemption and a "make whole" premium calculated as set forth in the 2008 Notes. SGI may redeem some or all of the 2008 Notes for cash at any time on or after June 15, 2012 at redemption prices equal to 103.938%, 101.969% and 100% of the principal amount thereof if redeemed during the 12-month periods commencing on June 15 of 2012, 2013, and 2014 and thereafter, respectively, plus, in each case, accrued and unpaid interest, if any, to the date of redemption. In addition, at any time on or prior to June 15, 2011, SGI may redeem up to 35% of the initially outstanding aggregate principal amount of the 2008 Notes at a redemption price equal to 107.875% of the principal amount thereof, plus accrued and unpaid interest, if any, to the date of redemption, with the net cash proceeds contributed to the capital of SGI from one or more equity offerings of the Company. Additionally, if a holder of 2008 Notes is required to be licensed or found qualified under any applicable gaming laws or regulations and that holder does not become so licensed or found qualified or suitable, then SGI will have the right to, subject to certain notice provisions set forth in the 2008 Notes Indenture, (1) require that holder to dispose of all or a portion of those 2008 Notes or (2) redeem the 2008 Notes of that holder at a redemption price calculated as set forth in the Notes.
Upon the occurrence of a change of control (as defined in the 2008 Notes Indenture), SGI must make an offer to purchase the 2008 Notes at a purchase price equal to 101% of the principal amount thereof, plus accrued and unpaid interest, if any, to the date of repurchase. In addition, following an asset sale (as defined in the 2008 Notes Indenture) and subject to the limitations contained in the 2008 Notes Indenture, SGI must make an offer to purchase certain amounts of the 2008 Notes using the net cash proceeds from such asset sale to the extent such proceeds are not applied as set forth in the 2008 Notes Indenture, at a purchase price equal to 100% of the principal amount of the 2008 Notes to be repurchased, plus accrued interest to the date of repurchase. SGI is not required to make any mandatory redemption or sinking fund payments with respect to the 2008 Notes.
The 2008 Notes are subordinated to all of SGI's existing and future senior debt, rank equally with all of SGI's existing and future senior subordinated debt, and rank senior to all of SGI's future debt that is expressly subordinated to the 2008 Notes. The 2008 Notes are guaranteed on a senior subordinated unsecured basis by the Company and all of our 100%-owned domestic subsidiaries (other than SGI) (see Note 20). The guarantees of the 2008 Notes are subordinated to all of the guarantors' existing and future senior debt, rank equally with all of their existing and future senior subordinated debt, and rank senior to all of their future debt that is expressly subordinated to the guarantees of the 2008 Notes. The 2008 Notes are structurally subordinated to all of the liabilities of the Company's non-guarantor subsidiaries.
The 2008 Notes Indenture contains certain covenants that, among other things, limit our ability, and the ability of certain of our subsidiaries, to incur additional indebtedness, pay dividends or make distributions or certain other restricted payments, purchase or redeem capital stock, make investments or extend credit, engage in certain transactions with affiliates, engage in sale-leaseback transactions, consummate certain asset sales, effect a consolidation or merger, or sell, transfer, lease or otherwise dispose of all or substantially all assets, or create certain liens and other encumbrances on assets.
91
SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share amounts)
(8) Long-Term and Other Debt (Continued)
2004 Notes
The 2004 Notes bear interest at the rate of 6.25% per annum payable semi-annually on each June 15 and December 15, commencing June 15, 2005. The 2004 Notes mature December 15, 2012 unless earlier redeemed or repurchased and are subject to the terms and conditions set forth in the indenture dated as of December 23, 2004 (the "2004 Notes Indenture") among the Company, as issuer, the Company's subsidiary guarantors party thereto and the trustee. The 2004 Notes are senior subordinated, unsecured obligations of the Company, ranking junior to all existing and future senior debt including obligations under the Credit Agreement. The 2004 Notes are guaranteed on a senior subordinated basis by all of our 100%-owned U.S. subsidiaries (see Note 20).
The 2004 Notes are redeemable, at our option, at any time on or after December 15, 2008, in whole or in part, at repurchase prices equal to 103.125%, 101.563%, and 100% of the principal amount thereof if redeemed during the 12-month periods commencing on December 15 of years 2008, 2009, and 2010 and thereafter, respectively plus, in each case, accrued and unpaid interest, if any, to the date of redemption.
Upon the occurrence of a change of control (as defined in the 2004 Notes Indenture), the Company must make an offer to purchase the 2004 Notes at a purchase price equal to 101% of the principal amount thereof, plus accrued and unpaid interest, if any, to the date of repurchase. In addition, following an asset sale (as defined in the 2004 Notes Indenture) and subject to the limitations contained in the 2004 Notes Indenture, the Company must make an offer to purchase certain amounts of the 2004 Notes using the net cash proceeds from such asset sale to the extent such proceeds are not applied as set forth in the 2004 Notes Indenture, at a purchase price equal to 100% of the principal amount of the 2004 Notes to be repurchased, plus accrued interest to the date of repurchase.
The 2004 Notes Indenture contains certain covenants that, among other things, limit our ability, and the ability of certain of our subsidiaries, to incur additional indebtedness, pay dividends or make distributions or certain other restricted payments, purchase or redeem capital stock, make investments or extend credit, engage in certain transactions with affiliates, engage in sale leaseback transactions, consummate certain assets sales, effect a consolidation or merger, or sell, transfer, lease or otherwise dispose of all or substantially all assets, or create certain liens and other encumbrances on assets.
Convertible Debentures
The Convertible Debentures bear interest at the rate of 0.75% per annum until June 1, 2010 and bear interest at the rate of 0.50% per annum thereafter. Interest on the Convertible Debentures is payable semi-annually on each June 1 and December 1, commencing June 1, 2005. The Convertible Debentures are convertible into cash and shares of our Class A common stock at a rate of 34.3643 shares per $1 principal amount of Convertible Debentures, which equates to a conversion price of approximately $29.10 per share of common stock subject to adjustment as provided in the indenture governing the Convertible Debentures. The Convertible Debentures contain a net settlement feature. This feature entitles holders of each $1 principal amount of Convertible Debentures being converted to receive cash up to $1 and shares for any excess conversion value determined in a manner provided in
92
SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share amounts)
(8) Long-Term and Other Debt (Continued)
the indenture governing the Convertible Debentures. Holders of the Convertible Debentures may convert the Convertible Debentures prior to stated maturity under the following circumstances:
The Convertible Debentures are senior subordinated, unsecured obligations of our Company, ranking junior to all existing and future senior debt including obligations under the Credit Agreement. The Convertible Debentures are fully and unconditionally guaranteed on a senior subordinated basis by all of our 100%-owned U.S. subsidiaries (see Note 20). The Convertible Debentures will be redeemable, at our option, at any time on or after June 1, 2010, in whole or in part, at a redemption price equal to 100% of the principal amount. Holders of the Convertible Debentures have the right to require us to repurchase the Convertible Debentures, in whole or in part, at a redemption price equal to 100% of the principal amount on June 1, 2010, December 1, 2014, December 1, 2019, or in the event of a fundamental change as described in the indenture governing the Convertible Debentures. The Convertible Debentures mature on December 1, 2024, unless earlier converted, redeemed or repurchased. The indenture governing the Convertible Debentures limits our ability, and the ability of our subsidiary guarantors, to effect a consolidation or merger, or sell, convey, transfer, or lease substantially all of our or their assets.
We maintain a bond hedge in the form of call options designed to mitigate the potential dilution from the conversion of the Convertible Debentures. During the term of the bond hedge (which expires no later than June 1, 2010), the sellers of the options (the "counterparties") will deliver to us upon our exercise of such options after a conversion of the Convertible Debentures a number of shares of common stock based on the extent to which the then market price of our Class A common stock exceeds $29.10 per share. The options provide for net share settlement upon exercise.
The cost of the bond hedge of approximately $67,200 was partially offset by the sale of warrants to acquire shares of our Class A common stock to the counterparties with whom we entered into the bond hedge for approximately $37,900. The warrants are exercisable ratably over a 60-business day period commencing on June 1, 2010 at a price of $37.248 per share. The warrants provide for net share settlement upon exercise based on the extent to which the market price of our common stock at exercise exceeds the underlying strike price per share. The effect of the bond hedge is to reduce the potential dilution from the conversion of the Convertible Debentures during the term of the bond hedge. There would be dilution from the exercise of the warrants to the extent that the market price per share of our common stock exceeds $37.248 at the time of exercise.
According to Emerging Issues Task Force ("EITF") Issue No. 90-19, Convertible Bonds with Issuer Option to Settle for Cash upon Conversion and EITF Issue No. 00-19, Accounting for Derivative Financial
93
SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share amounts)
(8) Long-Term and Other Debt (Continued)
Instruments Indexed to, and Potentially Settled in, a Company's Own Stock ("EITF 00-19"), the Convertible Debentures are accounted for as convertible debt. The options and warrants underlying the bond hedge are accounted for according to EITF 00-19 as equity securities.
During the fourth quarter ended December 31, 2007, $1,218 in aggregate principal amount of Convertible Debentures were converted. Pursuant to the terms of the Convertible Debentures, we paid the principal amount of Convertible Debentures that were converted in cash and the excess conversion value (determined to be approximately $378) by delivering approximately 10 shares. In conjunction with the conversion, we acquired approximately 10 shares of our common stock by exercising a portion of the bond hedge and we delivered such shares to the holder of the Convertible Debentures that were converted. The aggregate number of shares that we could be obligated to issue upon conversion of the remaining Convertible Debentures is approximately 9,408. The conversion did not have any material effect on our diluted shares outstanding.
Other Debt
Short-term debt includes approximately $37,530 of unsecured borrowings, denominated in Chinese Renminbi Yuan, from two banks in China. The borrowings have maturity dates of less than one year and interest rates ranging from 6.2% to 7.8%, which is 95% to 105% of the rate set by the People's Bank of China for similar type loans. The lending banks have received standby letters of credit issued under the Revolver to guarantee repayment of these borrowings. Proceeds from the borrowings are being used to procure and install our terminal validation network in China.
(9) Leases
At December 31, 2008, we were obligated under operating leases covering office equipment, office and warehouse space, transponders and transportation equipment expiring at various dates through 2015. Future minimum lease payments required under our leasing arrangements at December 31, 2008 are approximately as follows: $19,700 in 2009; $16,400 in 2010; $13,600 in 2011; $12,900 in 2012; $10,900 in 2013; and $22,000 thereafter. Total rental expense under these operating leases was approximately $20,700, $20,200 and $17,800 in the years ended December 31, 2008, 2007 and 2006, respectively.
We have entered into several operating lease agreements, some of which contain provisions for future rent increases, rent-free periods, or periods in which rent payments are reduced (abated). The total amount of rental payments due over the lease term is being charged to rent expense on the straight-line method over the term of the lease. The difference between rent expense recorded and the amount paid is credited or charged to deferred rent obligation, which is included in other current liabilities and other long-term liabilities in the accompanying consolidated balance sheet.
94
SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share amounts)
(10) Fair Value of Financial Instruments
The fair value of financial instruments is determined by reference to market data and other valuation techniques as appropriate. We believe the fair value of our financial instruments, principally cash and cash equivalents, accounts receivable, other current assets, accounts payable, and accrued liabilities approximates their recorded values.
We believe that the fair value of our fixed interest rate debt approximated $560,023 and $523,197 as of December 31, 2008 and 2007, respectively, based on reference to dealer markets. We believe that the fair value of our variable interest rate debt approximated $523,359 and $596,620 as of December 31, 2008 and 2007, respectively, based on reference to dealer markets.
Effective October 17, 2008, SGI entered into a three-year interest rate swap agreement (the "Hedge") with JPMorgan Chase Bank N.A. ("JPMorgan"). Under the Hedge, which is designated as a cash flow hedge in accordance with FAS 133, SGI will pay interest on a $100,000 notional amount of debt at a fixed rate of 3.49% and will receive interest on a $100,000 notional amount of debt at the prevailing three-month LIBOR rate. The objective of the Hedge is to eliminate the variability of cash flows attributable to the LIBOR component of interest expense paid on $100,000 of our variable-rate debt. As of December 31, 2008, the Hedge was measured at fair value using Level 2 valuation techniques of the fair value hierarchy.
We believe we have matched the critical terms of the hedged variable-rate debt with the Hedge and expect the Hedge to be highly effective in offsetting changes in the expected cash flows due to fluctuation in the three-month LIBOR based rate over the term of the forecasted interest payments related to the $100,000 notional amount of variable-rate debt. Hedge effectiveness is measured quarterly on a retrospective basis using the cumulative dollar-offset approach in which the cumulative changes in the cash flows of the actual swap are compared to the cumulative changes in the cash flows of the hypothetical swap. The effective portion of the Hedge is recorded in other comprehensive income (loss) and the ineffective portion of the Hedge, if any, is recorded in the consolidated statement of operations. During the year ended December 31, 2008, we recorded a loss of approximately $4,901 in other comprehensive income (loss). There was no ineffective portion of the Hedge recorded in the consolidated statement of operations. Amounts recorded in other comprehensive income (loss) that were deferred on the effective hedged forecasted transactions are reclassified to earnings when the interest expense related to the hedged item affects earnings.
(11) Stockholders' Equity
Preferred Stock
As of December 31, 2008, we had a total of 2,000 shares of preferred stock, $1.00 par value, authorized for issuance, including 229 authorized shares of Series A convertible preferred stock and 1 authorized share of Series B preferred stock. No shares of preferred stock are currently outstanding.
Common Stock
We have two classes of common stock, consisting of Class A common stock and Class B non-voting common stock. All shares of Class A common stock and Class B common stock entitle holders to the same rights and privileges except that the Class B common stock is non-voting. Each share of Class B common stock is convertible into one share of Class A common stock. As of December 31, 2008 and 2007, there were 700 shares of Class B common stock authorized and none outstanding. The following
95
SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share amounts)
(11) Stockholders' Equity (Continued)
demonstrates the change in the number of Class A common shares outstanding during the fiscal years ended December 31, 2008 and 2007:
|
December 31, | ||||||
---|---|---|---|---|---|---|---|
|
2008 | 2007 | |||||
Shares issued and outstanding as of beginning of period |
93,414 | 91,628 | |||||
Shares issued as part of equity-based compensation plans and the ESPP, net of RSUs surrendered |
655 | 1,786 | |||||
Other shares issued |
| 10 | |||||
Shares repurchased into treasury stock |
(1,468 | ) | (10 | ) | |||
Shares issued and outstanding as of end of period |
92,601 | 93,414 | |||||
Warrants
During 2004, we sold warrants to acquire up to approximately 9,450 shares of our Class A common stock for approximately $37,900 to the parties with whom we entered into a bond hedge in connection with the Convertible Debentures. The warrants are exercisable ratably over a 60-business day period commencing on June 1, 2010 at a price of $37.248 per share. The warrants provide for net share settlement upon exercise based on the extent to which the market price of our Class A common stock at exercise exceeds the underlying strike price per share. The effect of the bond hedge is to reduce the potential dilution from the conversion of the Convertible Debentures during the term of the bond hedge. There would be dilution from the exercise of the warrants to the extent that the market price per share of our common stock exceeds $37.248 at the time of exercise.
On December 15, 2006, we entered into a licensing agreement with Hasbro, Inc. for the use of certain Hasbro brands in multiple lottery platforms. Under the terms of the agreement, we issued to Hasbro in February 2007 warrants to purchase 40 shares of our Class A common stock at a purchase price of $32.98 per share. The warrants may be exercised at any time before February 28, 2012. The fair value of the warrants on the date of grant was $480. Such amount is reflected in the caption "Other assets and investments" in the Consolidated Balance Sheets. There would be dilution from the exercise of the warrants to the extent that the market price per share of our common stock exceeds $32.98 at the time of exercise.
Treasury Stock
We have a stock repurchase program approved by our Board of Directors under which we are authorized to repurchase, from time to time in the open market through December 31, 2009, shares of our outstanding common stock in an aggregate amount up to $200,000. As of December 31, 2008, we have approximately $167,000 remaining for purchases under the program. Purchases are funded by cash flows from operations, borrowings, or a combination thereof. The timing and amount of purchases is determined by management based on evaluation of market conditions, share price and other factors. The stock repurchase program may be suspended or discontinued at any time. During fiscal 2008, we repurchased 1,468 shares at an aggregate cost of approximately $23,200. During fiscal 2007, no shares were repurchased as part of the repurchase program. During fiscal 2006, we repurchased approximately 324 shares at an aggregate cost of approximately $9,900.
96
SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share amounts)
(12) Stock-Based Compensation
We offer stock-based compensation through the use of stock options, restrictive stock units ("RSUs"), and an Employee Stock Purchase Plan ("ESPP"). We grant stock options to employees and directors under our stock option plans at not less than the fair market value of the stock at the date of grant. The annual limitations and vesting of the stock option plan awards are determined at our discretion. Options granted over the last several years have generally been exercisable in five equal installments beginning on the first anniversary of the date of grant with a maximum term of ten years. RSUs typically vest in five equal installments beginning on the first anniversary of the date of grant. There are approximately 11,500 shares of common stock authorized for awards under our stock option and RSU plans, in addition to reserved shares from preexisting award plans and share options granted as part of inducement stock option awards, which generally are not authorized prior to being granted. As of December 31, 2008, we had approximately 2,383 shares available for grants of equity awards under our equity-based compensation plans, of which 1,320 shares were available for grants of RSUs.
Our ESPP allows for a total of up to 1,000 shares of Class A common stock to be purchased by eligible employees under offerings made each January 1 and July 1. Employees participate through payroll deductions up to a maximum of 15% of eligible compensation. The term of each offering period is six months and shares are purchased on the last day of the offering period at a discount on the stock's market value. Under an amendment to the ESPP adopted in 2006, the purchase price for offering periods beginning in 2007 represents a 15% discount on the closing price of the stock on the last day of the offering period (rather than a 15% discount on the lower of (x) the closing price of the stock on the first day of the offering period and (y) the closing price of the stock on the last day of the offering period). For offering periods held in 2008, 2007 and 2006, we issued a total of 50, 35, and 39 shares, respectively, of common stock at an average price of $19.12, $28.98 and $27.99 per share, respectively. As of December 31, 2008, we had approximately 656 shares of common stock available to be granted under the ESPP.
We record compensation cost for all stock options and RSUs based on the fair value at the grant date.
97
SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share amounts)
(12) Stock-Based Compensation (Continued)
Stock Options
A summary of the changes in stock options outstanding under our equity-based compensation plans during 2008 is presented below:
|
Number of
Options |
Weighted
Average Remaining Contract Term (Years) |
Weighted
Average Exercise Price |
Aggregate
Intrinsic Value |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Options outstanding as of December 31, 2007 |
6,132 | 6.1 | $ | 20.13 | $ | 81,575 | |||||||
Granted |
1,728 | $ | 23.55 | ||||||||||
Exercised |
(296 | ) | $ | 13.93 | $ | 4,352 | |||||||
Canceled |
(186 | ) | $ | 26.39 | |||||||||
Options outstanding as of December 31, 2008 |
7,378 | 6.0 | $ | 21.03 | $ | 21,516 | |||||||
Options excercisable as of December 31, 2008 |
4,054 | 4.2 | $ | 16.37 | $ | 21,469 | |||||||
Options expected to vest after December 31, 2008 |
3,164 | 8.1 | $ | 26.45 | $ | 608 | |||||||
The weighted-average grant date fair value of options granted during 2008, 2007 and 2006 was $10.36, $13.72 and $13.76, respectively. The aggregate intrinsic value of the options exercised during the years ended December 31, 2007 and 2006 was approximately $31,961 and $45,155, respectively.
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model. The weighted-average assumptions used in the model are outlined in the following table:
|
Year Ended December 31, | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
|
2008 | 2007 | 2006 | ||||||||
Assumptions: |
|||||||||||
Expected volatility |
38 | % | 32 | % | 33 | % | |||||
Risk-free interest rate |
3.3 | % | 4.7 | % | 5.1 | % | |||||
Dividend yield |
| | | ||||||||
Expected life (in years) |
6 | 6 | 6 |
The computation of the expected volatility is based on historical daily stock price over a term less than the expected term. A timeframe was used that provided a better representation of the current and future expected volatility. Expected life is based on annual historical employee exercise behavior of option grants with similar vesting periods and option expiration data. The risk-free interest rate is based on the yield of zero-coupon U.S. Treasury securities. We do not anticipate paying dividends in the foreseeable future.
For the years ended December 31, 2008, 2007 and 2006, we recognized stock-based compensation expense of approximately $15,500, $11,300 and $13,600, respectively, and the related tax benefit of approximately $5,282, $4,300 and $4,500, respectively, related to the vesting of stock options. At December 31, 2008, we had approximately $27,200 relating to non-vested stock option awards not yet recognized that will be amortized over a weighted-average period of approximately two years. During the year ended December 31, 2008, we received approximately $4,118 in cash from the exercise of stock options. The actual tax benefit realized for the tax deductions from option exercise of the stock-based payment arrangements totaled approximately $1,595 for the year ended December 31, 2008.
98
SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share amounts)
(12) Stock-Based Compensation (Continued)
Restricted Stock Units
A summary of the changes in RSUs outstanding under our stock-based compensation plans during 2008 is presented below:
|
Number of
Restricted Stock Units |
Weighted
Average Grant Date Fair Value |
|||||
---|---|---|---|---|---|---|---|
Non-vested units as of December 31, 2007 |
1,222 | $ | 32.02 | ||||
Granted |
882 | $ | 24.55 | ||||
Vested |
(386 | ) | $ | 31.91 | |||
Canceled |
(45 | ) | $ | 27.77 | |||
Non-vested units as of December 31, 2008 |
1,673 | $ | 28.30 | ||||
The weighted-average grant date fair value of RSUs granted during 2007 and 2006 was $33.72 and $31.46, respectively. The fair value of each RSU grant is based on the market value of our common stock at the time of grant. During the years ended December 31, 2008, 2007 and 2006, we recognized stock-based compensation expense of approximately $18,400, $13,900 and $8,100, respectively, and the related tax benefits of approximately $7,200, $5,300 and $3,200, respectively, related to the vesting of RSUs. At December 31, 2008, we had approximately $34,600 relating to non-vested RSUs not yet recognized that will be amortized over a weighted-average period of approximately two years. The fair value of RSUs vested during the years ended December 31, 2008, 2007 and 2006 was approximately $1,053, $12,500 and $5,080, respectively.
(13) Pension and Other Post-Retirement Plans
We have defined benefit pension plans for our U.S.-based union employees and U.K.-based union employees (the "U.S. Plan" and the "U.K. Plan") and, with the acquisition of OGT, certain Canadian-based employees (the "Canadian Plan"). Retirement benefits under the U.S. Plan are based upon the number of years of credited service up to a maximum of 30 years for the majority of the employees. Retirement benefits under the U.K. Plan are based on an employee's average compensation over the two years preceding retirement. Retirement benefits under the Canadian Plan are generally based on the number of years of credited service. Our policy is to fund the minimum contribution permissible by the respective tax authorities. We estimate that approximately $3,144 will be contributed to the pension plans in fiscal year 2009.
Previous to fiscal year 2006, we had an unfunded, nonqualified Supplemental Executive Retirement Plan (the "SERP"), which was intended to provide supplemental retirement benefits for certain of our senior executives. In December 2005, we curtailed the SERP and participation and benefit accruals under the plan have ceased. We recorded a charge of $12,363 in the December 31, 2005 statement of operations for the curtailment of the SERP. The benefit distribution amounts were agreed upon for each participant and will continue to grow at a rate of 4% compounded annually from the plan curtailment until benefits are distributed. In 2003, to provide a source for the payment of certain benefits under the SERP, we made an initial $14,700 cash payment to a rabbi trust, which in turn made a $14,700 payment for whole-life insurance policies on the participants. These policies have been placed
99
SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share amounts)
(13) Pension and Other Post-Retirement Plans (Continued)
in a rabbi trust, which will hold the policies and death benefits until they are received. The cash value of these policies was approximately $15,732 and $15,295 as of December 31, 2008 and 2007, respectively.
In conjunction with the acquisition of OGT, we curtailed a nonqualified SERP (the "Canadian SERP"), which was intended to provide supplemental retirement benefits for certain of OGT's senior executives, and a nonqualified executive retirement plan ("Canadian Executive Plan"). Participation in the Canadian SERP and the Canadian Executive Plan has ceased and final benefit payments for these plans were made during 2008. The remaining Canadian plan consists solely of an employee pension plan. During 2007, we recorded an adjustment to goodwill of approximately $4,012 for the acquisition of the Canadian Plan, which includes an adjustment for the curtailment of the Canadian SERP and the Canadian Executive Plan.
In selecting the discount rate for the defined benefit plans we consider fixed-income security yields, specifically AA-rated corporate bonds, as rated by Moody's Investor Service. The table below provides the weighted-average actuarial assumptions used to determine the benefit obligation and net periodic benefit cost.
|
U.S. Plan | U.K. Plan | Canadian Plan | ||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2008 | 2007 | 2006 | 2008 | 2007 | 2006 | 2008 | 2007 | 2006 | ||||||||||||||||||||
Discount rates: |
|||||||||||||||||||||||||||||
Benefit obligation |
6.25 | % | 6.25 | % | 6.00 | % | 6.20 | % | 5.55 | % | 5.10 | % | 7.50 | % | 5.60 | % | N/A | ||||||||||||
Net periodic pension cost |
6.25 | % | 6.00 | % | 5.50 | % | 5.55 | % | 5.10 | % | 4.75 | % | 5.60 | % | 5.30 | % | N/A | ||||||||||||
Rate of compensation increase |
0.00 | % | 0.00 | % | 0.00 | % | 3.60 | % | 3.45 | % | 3.45 | % | 3.25 | % | 3.75 | % | N/A | ||||||||||||
Expected return on assets |
6.00 | % | 6.00 | % | 6.00 | % | 7.75 | % | 8.00 | % | 7.50 | % | 7.00 | % | 7.00 | % | N/A |
The plan assets for the U.S. Plan are invested in Cigna Fixed Fund Account (the "Fund"), which is guaranteed as to principal. In estimating the expected return on the U.S. Plan assets, we consider past performance and future expectations for the Fund. The plan assets for the U.K. Plan are primarily invested in equity securities. In estimating the expected return on the U.K. Plan assets, we consider primarily the current return on the equity market. Plan assets for the Canadian Plan are primarily invested in equity securities. In estimating the expected return on the Canadian Plan assets, we consider primarily the current return on the equity market.
100
SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share amounts)
(13) Pension and Other Post-Retirement Plans (Continued)
The following table sets forth the combined funded status of the pension plans and their reconciliation with the related amounts recognized in our consolidated financial statements at our December 31 measurement dates:
|
December 31, | |||||||
---|---|---|---|---|---|---|---|---|
|
2008 | 2007 | ||||||
Change in benefit obligation: |
||||||||
Benefit obligation at beginning of year |
$ | 116,944 | $ | 79,647 | ||||
Acquired in business combinations |
| 33,058 | ||||||
Service cost |
2,237 | 2,789 | ||||||
Interest cost |
4,244 | 4,445 | ||||||
Participant contributions |
1,247 | 1,466 | ||||||
Curtailments |
525 | 121 | ||||||
Actuarial gain |
(17,435 | ) | (2,852 | ) | ||||
Benefits paid |
(3,151 | ) | (4,149 | ) | ||||
Settlement payments |
(1,842 | ) | (3,973 | ) | ||||
Other, principally foreign exchange |
(21,699 | ) | 6,392 | |||||
Benefit obligation at end of year |
81,070 | 116,944 | ||||||
Change in plan assets: |
||||||||
Fair value of plan assets at beginning of year |
81,514 | 45,989 | ||||||
Acquired in business combinations |
| 29,136 | ||||||
Actual gain (loss) on plan assets |
(11,328 | ) | 1,089 | |||||
Employer contributions |
3,280 | 4,086 | ||||||
Participant contribuitions |
1,247 | 1,466 | ||||||
Benefits paid |
(3,151 | ) | (4,149 | ) | ||||
Settlement payments |
(1,842 | ) | ||||||
Other, principally foreign exchange |
(18,089 | ) | 3,897 | |||||
Fair value of assets at end of year |
51,631 | 81,514 | ||||||
Amounts recognized in the consolidated balance sheets: |
||||||||
Funded status (current) |
(9,761 | ) | | |||||
Funded status (noncurrent) |
(19,678 | ) | (35,430 | ) | ||||
Accumulated other comprehensive income (pre-tax): |
||||||||
Unrecognized actuarial loss |
7,667 | 13,154 | ||||||
Unrecognized prior service cost |
389 | 433 | ||||||
Net amount recognized |
$ | (21,383 | ) | $ | (21,843 | ) | ||
101
SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share amounts)
(13) Pension and Other Post-Retirement Plans (Continued)
The following are the components of our net periodic pension cost:
|
December 31, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
2008 | 2007 | 2006 | |||||||
Components of net periodic pension benefit cost: |
||||||||||
Service cost |
$ | 2,237 | $ | 2,789 | $ | 1,695 | ||||
Interest cost |
4,244 | 4,445 | 2,509 | |||||||
Expected return on plan assets |
(4,633 | ) | (5,037 | ) | (2,502 | ) | ||||
Amortization of actuarial gains/losses |
626 | 959 | 1,165 | |||||||
Curtailments |
525 | |||||||||
Canadian SERP termination loss |
218 | | | |||||||
Net amortization and deferral |
43 | 43 | 44 | |||||||
Net periodic cost |
$ | 3,260 | $ | 3,199 | $ | 2,911 | ||||
The accumulated benefit obligation for all defined benefit pension plans was $59,236 and $91,339 as of December 31, 2008 and 2007, respectively. The underfunded status of our post-retirement benefit plans recorded as a liability in our Consolidated Balance Sheets as of December 31, 2008, 2007 and 2006 was approximately $29,439, $35,430 and $33,658, respectively.
The amounts included in accumulated other comprehensive income as of December 31, 2008 expected to be recognized as components of net periodic pension cost during the fiscal year ended December 31, 2009 are as follows:
Net gain or loss |
$ | 479 | |||
Net prior service cost |
43 | ||||
Net amount expected to be recognized |
$ | 522 | |||
The asset allocation of the U.S. Plan as of December 31, 2008 and 2007, and the target allocation on a weighted-average basis for 2009, was 100% to a fixed fund account. The U.S. Plan investment policy is to maximize long-term financial return commensurate with security and minimizing risk. This is achieved by holding an investment in a fixed fund account, which guarantees a long-term fixed rate of return.
The asset allocation of the U.K. Plan as of December 31, 2008 and 2007, and the target allocation on a weighted-average basis for 2009, by asset category, are as follows:
|
Target
Allocation |
Percentage of
Plan Assets as of December 31, |
||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
2009 | 2008 | 2007 | |||||||
Equity securities |
75 | % | 72 | % | 75 | % | ||||
Bonds |
20 | % | 24 | % | 21 | % | ||||
Real estate |
5 | % | 4 | % | 4 | % | ||||
|
100 | % | 100 | % | 100 | % | ||||
102
SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share amounts)
(13) Pension and Other Post-Retirement Plans (Continued)
The U.K. Plan investment policy is to maximize long-term financial return commensurate with security and minimizing risk. This is achieved by holding a portfolio of marketable investments which avoids over-concentration of investment and spreads assets both over industry and geography.
The asset allocation of the Canadian Plan as of December 31, 2008 and 2007, and the target allocation on a weighted-average basis for 2009, by asset category, are as follows:
|
Target
Allocation |
Percentage of
Plan Assets as of December 31, |
||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
2009 | 2008 | 2007 | |||||||
Equity securities |
65 | % | 62 | % | 68 | % | ||||
Debt securities |
35 | % | 32 | % | 31 | % | ||||
Other short-term |
0 | % | 6 | % | 1 | % | ||||
|
100 | % | 100 | % | 100 | % | ||||
The Canadian Plan investment policy is to maximize long-term financial return commensurate with security and minimizing risk. This is achieved by holding a portfolio of marketable investments which avoids over-concentration of investment and spreads assets both over industry and geography.
The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid:
Year
|
U.S.
Plan |
U.K.
Plan |
Canadian
Plan |
|||||||
---|---|---|---|---|---|---|---|---|---|---|
2009 |
$ | 87 | $ | 555 | $ | 856 | ||||
2010 |
$ | 124 | $ | 569 | $ | 845 | ||||
2011 |
$ | 199 | $ | 584 | $ | 820 | ||||
2012 |
$ | 604 | $ | 598 | $ | 806 | ||||
2013 |
$ | 330 | $ | 613 | $ | 796 | ||||
20142018 |
$ | 2,050 | $ | 3,283 | $ | 4,307 |
We have a 401(k) plan for U.S.-based employees who are not covered by a collective bargaining agreement under which participants were eligible to receive matching contributions of 50 cents on the dollar from us for the first 6% of participant contributions for a match of up to 3% of eligible compensation. Effective February 28, 2009, we reduced the matching contributions to 25 cents on the dollar for the first 6% of participant contributions for a match of up to 1.5% of eligible compensation. We have a 401(k) plan for U.S.-based union employees that does not provide for Company contributions. Contribution expense for the years ended December 31, 2008, 2007 and 2006 amounted to approximately $2,244, $2,085 and $2,100, respectively.
103
SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share amounts)
(14) Income Tax Expense
The components of income before income taxes are as follows:
|
Years Ended December 31, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
2008 | 2007 | 2006 | |||||||
United States ("U.S.") |
$ | (6,272 | ) | $ | 38,353 | $ | 47,714 | |||
Foreign |
23,184 | 52,235 | 43,110 | |||||||
Consolidated income before income tax expense |
$ | 16,912 | $ | 90,588 | $ | 90,824 | ||||
The components of the provision for income taxes are as follows:
Current |
|||||||||||
U.S. Federal |
$ | 5,638 | $ | 12,004 | $ | 16,718 | |||||
U.S. State |
990 | 4,930 | 4,913 | ||||||||
Foreign |
12,409 | 8,883 | 8,008 | ||||||||
Total |
19,037 | 25,817 | 29,639 | ||||||||
Deferred |
|||||||||||
U.S. Federal |
(7,019 | ) | (3,138 | ) | (6,611 | ) | |||||
U.S. State |
(4,106 | ) | (1,027 | ) | (1,655 | ) | |||||
Foreign |
512 | 3,569 | 2,690 | ||||||||
Total |
(10,613 | ) | (596 | ) | (5,576 | ) | |||||
Total income tax expense |
$ | 8,424 | $ | 25,221 | $ | 24,063 | |||||
The reconciliation of the U.S. federal statutory tax rate to the actual tax rate is as follows:
Statutory U.S. federal income tax rate |
35.00 | % | 35.00 | % | 35.00 | % | |||||
U.S. state income taxes, net of federal benefit |
-20.80 | % | 4.01 | % | 2.34 | % | |||||
Federal benefit of R&D credits, net |
-2.34 | % | -0.83 | % | -0.40 | % | |||||
Foreign earnings at lower rates than U.S. federal rate |
23.80 | % | -6.79 | % | -4.04 | % | |||||
Federal expense (benefit) of U.S. permanent differences |
40.11 | % | 0.96 | % | -0.77 | % | |||||
Federal benefit of original issue discount amortization |
-26.62 | % | -4.71 | % | -4.46 | % | |||||
Other |
0.66 | % | 0.20 | % | -1.18 | % | |||||
Effective income tax rate |
49.81 | % | 27.84 | % | 26.49 | % | |||||
The effective tax rate increased in 2008 to 49.81% from 27.8% in 2007. The increase in the 2008 effective tax rate resulted from the impairment charge related to the Mexico contract. The tax benefit of the Mexico loss is fully offset by a valuation allowance as the realizability of the deferred tax asset created by the impairment charge is uncertain.
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting and the amounts used for income tax purposes.
104
SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share amounts)
(14) Income Tax Expense (Continued)
The deferred income tax balances are established using the enacted statutory tax rates and are adjusted for changes in such rates in the period of change.
|
December 31, | ||||||||
---|---|---|---|---|---|---|---|---|---|
|
2008 | 2007 | |||||||
Deferred tax assets: |
|||||||||
Inventory valuation |
$ | 6,305 | $ | 5,729 | |||||
Reserves and other accrued expenses |
15,747 | 10,255 | |||||||
Compensation not currently deductible |
7,193 | 9,370 | |||||||
Employee pension benefit included in other comprehensive income |
3,317 | 5,225 | |||||||
Unrealized losses included in other comprehensive income |
49 | | |||||||
Share based compensation |
19,795 | 11,208 | |||||||
Net operationg loss carry forwards |
57,724 | 33,593 | |||||||
Tax credit carry forwards |
47,303 | 32,367 | |||||||
Differences in financial reporting and tax basis for Property and Equipment |
14,116 | | |||||||
Valuation allowance |
(45,690 | ) | (20,055 | ) | |||||
Realizable deferred tax assets |
125,859 | 87,692 | |||||||
Deferred tax liabilities: |
|||||||||
Deferred costs and prepaid expenses |
(1,230 | ) | (790 | ) | |||||
Unrealized gains included in other comprehensive income |
| (54 | ) | ||||||
Differences in financial reporting and tax basis for: |
|||||||||
Identifiable intangible assets |
(39,440 | ) | (35,913 | ) | |||||
Property and equipment |
| (1,515 | ) | ||||||
Total deferred tax liabilities |
(40,670 | ) | (38,272 | ) | |||||
Net deferred tax assets on balance sheet |
85,189 | 49,420 | |||||||
Reported As: |
|||||||||
Current deferred tax assets |
14,360 | 15,929 | |||||||
Non-current deferred tax assets |
104,638 | 85,152 | |||||||
Non-current deferred tax liabilities |
(33,809 | ) | (51,661 | ) | |||||
Net deferred tax assets on the balance sheet |
$ | 85,189 | $ | 49,420 | |||||
At December 31, 2008, we had net operating loss carry forwards (tax-effected) for federal, state and foreign income tax purposes of $3,704, $2,496 and $51,524, respectively. If not utilized, the federal and state tax loss carry forward will expire through 2023. The use of our federal net operating loss carry forwards in any one year is limited due to prior year changes in ownership. The foreign tax losses can be carried forward for periods that vary from five years to indefinitely.
We have foreign tax credit carry forwards of approximately $40,386 (which if unutilized will expire through 2018), research and development credit carry forwards of $3,904 (which if unutilized will expire
105
SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share amounts)
(14) Income Tax Expense (Continued)
through 2023), minimum tax credit carry forwards of $2,079 (which can be carried forward indefinitely), and state tax credits of $934 (which if unutilized will expire through 2018).
At December 31, 2008 and 2007, we established a valuation allowance of $45,690 and $20,055, respectively, against the deferred tax asset related to the foreign tax loss carry forwards where, based on available evidence, it is more likely than not that such assets will not be realized. The net increase in the valuation allowance for 2008 and 2007 was $25,635 and $11,783, respectively.
Deferred taxes have not been provided on the excess of book basis over tax basis in the shares of certain foreign subsidiaries because these basis differences are not expected to reverse in the foreseeable future and are essentially permanent in duration. Our intention is to continue to reinvest the earnings of our foreign subsidiaries indefinitely. It is not practical to estimate the amount the excess of book over tax basis difference and the tax that might be payable on these undistributed earnings, but we believe that after utilizing foreign tax credits any additional U.S. tax would not have a material impact on our financial condition or results of operations.
The earnings of our U.K. entities are permanently reinvested except to the extent that "deemed dividends" are made to the U.S. under Section 956 of the Internal Revenue Code. Current U.S. tax is provided on the amount of the deemed dividends, net of applicable foreign tax credits.
Our income tax returns for the 2004, 2005 and 2006 tax years are currently under examination by the Internal Revenue Service. We do not expect that the results of this examination will have a material impact on our financial condition or results of operations.
On January 1, 2007, we adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes ("FIN 48"). As a result of the implementation of FIN 48, we recognized an increase in the liability for unrecognized tax benefits of approximately $1,376, which was accounted for as a reduction to our accumulated earnings as of January 1, 2007. Also as a result of the implementation of FIN 48, we recognized accrued interest related to unrecognized tax benefits of $120, which was accounted for as
106
SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share amounts)
(14) Income Tax Expense (Continued)
a reduction to our accumulated earnings as of January 1, 2007. A reconciliation of the beginning and ending amount of unrecognized tax benefits during 2008 and 2007 is as follows:
|
Year Ended December 31, | |||||||
---|---|---|---|---|---|---|---|---|
|
2008 | 2007 | ||||||
Balance at beginning of period |
$ | 13,226 | $ | 4,113 | ||||
Tax Positions related to current year |
||||||||
Additions |
$ | 1,092 | $ | 1,625 | ||||
Reductions |
| | ||||||
Additions for tax positions of prior years |
4,245 | 7,655 | ||||||
Tax Positions related to prior years |
||||||||
Additions |
| | ||||||
Reductions |
| | ||||||
Reductions due to lapse of statute of limitations on tax positions |
(313 | ) | (167 | ) | ||||
Settlements |
| | ||||||
Balance at end of period |
$ | 18,250 | $ | 13,226 | ||||
The total amount of unrecognized tax benefits as of December 31, 2008 was approximately $18,250. Of this amount, approximately $14,778, if recognized, would be included in our statement of operations and have an impact on our effective tax rate.
We recognize interest accrued for unrecognized tax benefits in interest expense and recognize penalties in income tax expense. During the years ended December 31, 2008 and 2007, we recognized approximately $733 and $595, respectively, in interest and penalties. We had approximately $1,588 and $855 for the payment of interest and penalties accrued at December 31, 2008, and 2007, respectively.
We and our subsidiaries file income tax returns in the U.S. federal jurisdiction and various states and foreign jurisdictions. With few exceptions, we are no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years before 2004.
(15) Business and Geographic Segments
We report our operations in three business segments: Printed Products Group, Lottery Systems Group and Diversified Gaming Group. Our Printed Products Group provides instant lottery tickets and related services that include ticket design and manufacturing as well as value-added services, including game design, sales and marketing support, inventory management and warehousing and fulfillment services. Additionally, this division provides lotteries with licensed brand products and includes prepaid phone cards for cellular phone service providers. Our Lottery Systems Group offers online, instant and video lottery products and online and instant ticket validation systems. Its business includes the supply of transaction processing software for the accounting and validation of both instant and online lottery games, point-of-sale terminal hardware sales, central site computers and communication hardware sales and ongoing support and maintenance for these products. Our Diversified Gaming Group provides services and systems to private and public operators in the wide area gaming markets and the pari-mutuel wagering industry. The product offerings include server-based gaming machines (including
107
SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share amounts)
(15) Business and Geographic Segments (Continued)
our Nevada dual screen terminals, which can offer Great Britain regulated Category B2 or B3 content on the same machines), VLTs, monitor games, wagering systems for the pari-mutuel racing industry, sports betting systems and services and Great Britain regulated Category C AWP and SWP terminals.
The following tables represent revenues, profits, depreciation, amortization, capital expenditures and assets for the years ended December 31, 2008, 2007 and 2006, respectively, by current reportable segments. Corporate expenses, including interest expense, other (income) expenses, and corporate depreciation and amortization, are not allocated to the reportable segments.
|
Year Ended December 31, 2008 | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Printed
Products Group |
Lottery
Systems Group |
Diversified
Gaming Group |
Totals | ||||||||||
Service revenues |
$ | 548,308 | 236,022 | 215,642 | 999,972 | |||||||||
Sales revenues |
31,943 | 62,708 | 24,206 | 118,857 | ||||||||||
Total revenues |
580,251 | 298,730 | 239,848 | 1,118,829 | ||||||||||
Cost of services (exclusive of depreciation and amortization) |
331,501 |
132,335 |
130,949 |
594,785 |
||||||||||
Cost of sales (exclusive of depreciation and amortization) |
20,177 | 54,254 | 11,425 | 85,856 | ||||||||||
Selling, general and administrative expenses |
59,336 | 33,634 | 25,923 | 118,893 | ||||||||||
Employee termination costs |
7,213 | 2,576 | 1,152 | 10,941 | ||||||||||
Depreciation and amortization |
43,091 | 125,764 | 45,575 | 214,430 | ||||||||||
Segment operating income |
118,933 | (49,833 | ) | 24,824 | 93,924 | |||||||||
Unallocated corporate costs |
69,533 | |||||||||||||
Corporate employee termination costs |
2,754 | |||||||||||||
Consolidated operating income |
21,637 | |||||||||||||
Assets at December 31, 2008 |
$ |
990,182 |
652,852 |
502,501 |
2,145,535 |
|||||||||
Unallocated assets at December 31, 2008 |
37,697 | |||||||||||||
Consolidated assets at December 31, 2008 |
2,183,232 | |||||||||||||
Capital and wagering systems expenditures |
$ | 25,094 | 107,686 | 50,860 | 183,640 | |||||||||
108
SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share amounts)
(15) Business and Geographic Segments (Continued)
|
Year Ended December 31, 2007 | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Printed
Products Group |
Lottery
Systems Group |
Diversified
Gaming Group |
Total | ||||||||||
Service revenues |
$ | 498,179 | 216,326 | 207,910 | 922,415 | |||||||||
Sales revenues |
38,967 | 48,747 | 36,575 | 124,289 | ||||||||||
Total revenues |
537,146 | 265,073 | 244,485 | 1,046,704 | ||||||||||
Cost of services (exclusive of depreciation and amortization) |
283,924 | 114,200 | 123,309 | 521,433 | ||||||||||
Cost of sales (exclusive of depreciation and amortization) |
32,549 | 27,045 | 30,753 | 90,347 | ||||||||||
Selling, general and administrative expenses |
62,027 | 28,376 | 20,353 | 110,756 | ||||||||||
Employee termination costs |
3,642 | | | 3,642 | ||||||||||
Depreciation and amortization |
66,966 | 62,224 | 30,302 | 159,492 | ||||||||||
Segment operating income |
88,038 | 33,228 | 39,768 | 161,034 | ||||||||||
Unallocated corporate costs |
55,198 | |||||||||||||
Consolidated operating income |
105,836 | |||||||||||||
Assets at December 31, 2007 |
$ | 898,698 | 545,510 | 535,458 | 1,979,666 | |||||||||
Unallocated assets at December 31, 2007 |
120,373 | |||||||||||||
Consolidated assets at December 31, 2007 |
2,100,039 | |||||||||||||
Capital and wagering systems expenditures |
$ | 36,478 | 30,840 | 116,342 | 183,660 | |||||||||
109
SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share amounts)
(15) Business and Geographic Segments (Continued)
|
Year Ended December 31, 2006 | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Printed
Products Group |
Lottery
Systems Group |
Diversified
Gaming Group |
Total | |||||||||
Service revenues |
$ | 388,841 | 205,721 | 197,242 | 791,804 | ||||||||
Sales revenues |
50,769 | 49,723 | 4,934 | 105,426 | |||||||||
Total revenues |
439,610 | 255,444 | 202,176 | 897,230 | |||||||||
Cost of services (exclusive of depreciation and amortization) |
199,006 | 114,701 | 118,306 | 432,013 | |||||||||
Cost of sales (exclusive of depreciation and amortization) |
40,027 | 33,497 | 4,410 | 77,934 | |||||||||
Selling, general and administrative expenses |
48,937 | 30,663 | 16,832 | 96,432 | |||||||||
Employee termination costs |
2,488 | 3,908 | 783 | 7,179 | |||||||||
Depreciation and amortization |
25,203 | 48,423 | 31,410 | 105,036 | |||||||||
Segment operating income |
$ | 123,949 | 24,252 | 30,435 | 178,636 | ||||||||
Unallocated corporate costs |
$ | 47,643 | |||||||||||
Corporate employee severance costs |
5,443 | ||||||||||||
Consolidating operating income |
$ | 125,550 | |||||||||||
Assets at December 31, 2006 |
$ | 669,605 | 535,958 | 420,562 | 1,626,125 | ||||||||
Unallocated assets at December 31, 2006 |
$ | 133,485 | |||||||||||
Consolidated assets at December 31, 2006 |
$ | 1,759,610 | |||||||||||
Capital and wagering systems expenditures |
$ | 14,513 | 91,066 | 36,265 | 141,844 | ||||||||
In evaluating financial performance, we focus on segment operating income as a segment's measure of profit or loss. Segment operating income is before investment income, interest expense, equity in net (income) loss in joint ventures, unallocated corporate costs and income taxes. Certain coporate assets consisting of cash, prepaid expenses, and property, plant and equipment are not allocated to the segments. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies.
Providing information on the revenues from external customers for each product and service is impractical.
110
SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share amounts)
(15) Business and Geographic Segments (Continued)
The following table provides a reconciliation of segment operating income to the consolidated income before income tax expense for each period.
|
Years Ended December 31, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
2008 | 2007 | 2006 | |||||||
Reported segment operating income |
$ | 93,924 | $ | 161,034 | $ | 178,636 | ||||
Unallocated corporate costs |
(69,533 | ) | (55,198 | ) | (47,643 | ) | ||||
Corporate employee termination costs |
(2,754 | ) | | (5,443 | ) | |||||
Consolidating operating income |
21,637 | 105,836 | 125,550 | |||||||
Interest expense |
(65,026 | ) | (58,550 | ) | (43,393 | ) | ||||
Other income |
4,691 | 2,050 | 767 | |||||||
Equity in income of joint venture |
58,570 | 41,252 | 7,900 | |||||||
Early extinguishment of debt |
(2,960 | ) | | | ||||||
Income before income tax expense |
$ | 16,912 | $ | 90,588 | $ | 90,824 | ||||
Sales to foreign customers amounted to approximately $92,000, $48,000 and $42,000 for the years ended December 31, 2008, 2007 and 2006, respectively. The following represents the service and sales revenue and long-lived assets by geographic segment:
|
Years Ended December 31, | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
|
2008 | 2007 | 2006 | ||||||||
Geographic Segments |
|||||||||||
Service and Sales Revenue: |
|||||||||||
United States |
$ | 561,088 | $ | 581,577 | $ | 559,175 | |||||
North America, other than United States |
61,266 | 51,298 | 21,344 | ||||||||
Europe |
364,207 | 330,138 | 261,207 | ||||||||
Other |
132,268 | 83,691 | 55,504 | ||||||||
|
$ | 1,118,829 | $ | 1,046,704 | $ | 897,230 | |||||
|
As of December 31, |
|
|||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
|
2008 | 2007 |
|
||||||||
Long-lived assets (excluding identifiable intangibles): |
|||||||||||
United States |
$ | 319,161 | $ | 307,344 | |||||||
North America, other than United States |
33,418 | 28,865 | |||||||||
Europe |
154,706 | 146,141 | |||||||||
Other |
68,194 | 79,274 | |||||||||
|
$ | 575,479 | $ | 561,624 | |||||||
111
SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share amounts)
(16) Equity Investments in Joint Ventures
Consorzio Lotterie Nazionali
We are a member of Consorzio Lotterie Nazionali ("CLN"), a consortium consisting principally of our Company, Lottomatica S.p.A, and Arianna 2001, a company owned by the Federation of Italian Tobacconists. The consortium has a signed contract with the Italian Monopoli di Stato to be the exclusive operator of the Italian Gratta e Vinci instant lottery (the "Concession"). The Concession commenced in mid-2004 and has an initial term of six years with a six-year extension option at the option of the Monopoli di Stato. Under our contract with CLN, we supply instant lottery tickets, game development services, marketing support, and the instant ticket management system and systems support during the term of the Concession, including any renewal term. We also participate in the profits or losses of CLN as a 20% equity owner, and assist Lottomatica S.p.A in the lottery operations. We account for this investment using the equity method of accounting. For the years ended December 31, 2008, 2007 and 2006, we recorded income of approximately $51,700, $37,655 and $8,266, respectively, representing our share of equity in the earnings of CLN. As of December 31, 2008, all but approximately $23,000 in earnings remained undistributed. We recognized revenue from the sale of instant tickets to CLN of approximately $60,161, $59,362 and $37,167 during the years ended December 31, 2008, 2007 and 2006, respectively. As of December 31, 2008 and 2007, respectively, we had approximately $28,673 and $37,408 in accounts receivable from CLN in our Consolidated Balance Sheets. The following represents summary financial information for the consortium:
|
Years Ended December 31, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
2008 | 2007 | 2006 | |||||||
Revenues |
$ | 491,586 | $ | 405,642 | $ | 184,201 | ||||
Costs of revenues and operating expenses |
$ | 212,714 | $ | 196,392 | $ | 135,824 | ||||
Operating income |
$ | 262,649 | $ | 201,628 | $ | 43,828 | ||||
Net income |
$ | 177,875 | $ | 129,143 | $ | 43,812 |
|
As of December 31, |
|
||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
2008 | 2007 |
|
|||||||
Current assets |
$ | 696,558 | $ | 647,907 | ||||||
Noncurrent assets |
$ | 8,340 | $ | 10,247 | ||||||
Current liabilities |
$ | 512,528 | $ | 489,026 | ||||||
Noncurrent liabilities |
$ | 1,092 | $ | 1,254 |
Guard Libang
On November 15, 2007, we acquired a 50% interest in the ownership of Guard Libang, a leading provider of instant lottery ticket validation systems and certain cooperative services in China for approximately $28,000. Our interest in Guard Libang is accounted for using the equity method of accounting. From the date of acquisition, our share in the earnings of Guard Libang is reflected in the caption "Equity in net income of joint ventures" in the Consolidated Statements of Operations. Our carrying value of Guard Libang is reflected in the caption "Other assets and investments" in the Consolidated Balance Sheets. For the years ended December 31, 2008 and 2007, we recorded income of approximately $3,433 and $290, respectively, representing our share of equity in the earnings of
112
SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share amounts)
(16) Equity Investments in Joint Ventures (Continued)
Guard Libang from the date of acquisition. These amounts remained undistributed as of December 31, 2008.
Roberts Communications Network, LLC
On February 28, 2007, we sold our racing communications business and our 70% interest in NASRIN, our data communications business, to Roberts Communications Network, LLC ("RCN") in exchange for a 29.4% interest in the RCN consolidated business. RCN provides communications services to racing and non-racing customers using both satellite and terrestrial services. Since the date of acquisition, our share of the earnings of RCN is reflected in the caption "Equity in net income of joint ventures" in the Consolidated Statements of Operations. Our carrying value in RCN is reflected in the caption "Other assets and investments" in the Consolidated Balance Sheets. The interest in RCN is not material to our operations. For the years ended December 31, 2008 and 2007, we recorded income of $3,923 and $3,330, respectively, representing our share of equity in the earnings of RCN. As of December 31, 2008, all but approximately $4,736 in earnings remained undistributed.
CSG Lottery Technology (Beijing) Co. Ltd.
On October 12, 2007 we invested $7,350 for a 49% interest in CSG Lottery Technology (Beijing) Co., Ltd. ("CSG"). CSG has established an instant ticket manufacturing facility that is expected to produce instant lottery tickets for sale to the China Sports Lottery for a 15-year period beginning in 2009. Our interest in CSG is accounted for using the equity method of accounting. Our carrying value of CSG is reflected in the caption "Other assets and investments" in the Consolidated Balance Sheets. For the year ended December 31, 2008, we recorded a loss of $428 representing our share of equity in the earnings of CSG. For the year ended December 31, 2007, CSG had no earnings or losses.
Shandong Inspur Scientific Games Technology, Ltd
On April 16, 2007 we invested approximately $750 to establish Shandong Inspur Scientific Games Technology, Ltd. ("SIST"). Through our joint venture with SIST, we began providing cooperative services support in the Shangdong Province of China beginning in the first half of 2008. Our interest in SIST is accounted for using the equity method of accounting. Our carrying value of SIST is reflected in the caption "Other assets and investments" in the Consolidated Balance Sheets. For the year ended December 31, 2008, we recorded a loss of $58 representing our share of equity in the earnings of SIST. For the year ended December 31, 2007, SIST had no earnings or losses.
113
SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share amounts)
(17) Accumulated Other Comprehensive Income
The accumulated balances for each classification of comprehensive income are as follows:
|
Foreign
Currency Items |
Unrealized
Gains (Losses) on Securities (1) |
Derivative
Financial Instruments |
Minimum
Pension Liability (2) |
Unrecognized
actuarial gains/losses and unrecognized prior service cost (2) |
Accumulated
Other Comprehensive Income |
|||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Balance at December 31, 2005 |
$ | 7,077 | 103 | | (4,131 | ) | | 3,049 | |||||||||||
Adoption of SFAS 158 |
| | | | (2,431 | ) | (2,431 | ) | |||||||||||
Change during period |
38,235 | (484 | ) | | (2,478 | ) | | 35,273 | |||||||||||
Balance at December 31, 2006 |
$ | 45,312 | (381 | ) | | (6,609 | ) | (2,431 | ) | 35,891 | |||||||||
Change during period |
24,634 | 497 | | | (1,478 | ) | 23,653 | ||||||||||||
Reclassified into operations |
| | | | 954 | 954 | |||||||||||||
Balance at December 31, 2007 |
$ | 69,946 | 116 | | (6,609 | ) | (2,955 | ) | 60,498 | ||||||||||
Change during period |
(107,758 | ) | (5 | ) | (4,901 | ) | | 4,908 | (107,756 | ) | |||||||||
Reclassified into operations |
| | | | (1,668 | ) | (1,668 | ) | |||||||||||
Balance at December 31, 2008 |
$ | (37,812 | ) | 111 | (4,901 | ) | (6,609 | ) | 285 | (48,926 | ) | ||||||||
(18) Litigation
Although we are a party to various claims and legal actions arising in the ordinary course of business, we believe, on the basis of information presently available to us, that the ultimate disposition of these matters will not likely have a material adverse effect on our consolidated financial position or results of operations.
Our subsidiary, SGI, owned a minority interest in Wintech de Colombia S.A., or Wintech (now liquidated), which formerly operated the Colombian national lottery under contract with Empresa Colombiana de Recursos para la Salud, S.A. (together with its successor agency, "Ecosalud"), an agency of the Colombian government. The contract provided a penalty against Wintech, SGI and the other shareholders of Wintech of up to $5,000 if certain levels of lottery sales were not achieved. In addition, SGI delivered to Ecosalud a $4,000 surety bond as a further guarantee of performance under the contract. Wintech started the instant lottery in Colombia, but, due to difficulties beyond its control, including, among other factors, social and political unrest in Colombia, frequently interrupted telephone service and power outages, and competition from another lottery being operated in a
114
SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share amounts)
(18) Litigation (Continued)
province of Colombia that we believe was in violation of Wintech's exclusive license from Ecosalud, the projected sales level was not met for the year ended June 30, 1993.
On July 1, 1993, Ecosalud declared that the contract was in default and asserted various claims against Wintech, SGI and other shareholders of Wintech for, among other things, realization of the full amount of the penalty, plus interest and costs of the bond. On June 4, 1999, Ecosalud filed a collection proceeding against SGI before the Tribunal Contencioso of Cundinamarca in Colombia. In July 2002, the Tribunal denied SGI's preliminary motion to dismiss the lawsuit and the decision was upheld on appeal. SGI's procedural defense motion was also denied. As a result of these decisions, this lawsuit will be heard in due course on its merits by the Tribunal and an appeal stage will be available.
SGI believes it has various defenses on the merits against Ecosalud's claims. SGI also has certain cross indemnities and undertakings from the two other shareholders of Wintech for their respective shares of any liability to Ecosalud. No assurance can be given that the other shareholders of Wintech will, or have sufficient assets to, honor their indemnity undertakings to SGI when the claims by Ecosalud against SGI and Wintech are finally resolved, in the event such claims result in any final liability. Although we believe that any potential losses arising from these claims will not result in a material adverse effect on our consolidated financial position or results of operations, it is not feasible to predict the final outcome, and there can be no assurance that these claims might not be finally resolved adversely to us or result in material liability.
On June 15, 2007, the Seattle Washington Regional Office of the Federal Trade Commission ("FTC") informed us that it was investigating our May 1, 2007 acquisition of OGT and that it was requesting our voluntary cooperation in that investigation. We were subsequently informed on November 2, 2007 that the FTC had issued formal process in that matter, in which we fully cooperated. On January 27, 2009, the FTC closed its investigation without further action.
On July 3, 2008, Scientific Games Racing ("SGR"), our subsidiary that supplies tote systems to racetracks in California and elsewhere, finalized a settlement of a regulatory inquiry by the California Horse Racing Board (the "CHRB") into a software glitch affecting a type of wager known as "Quick Pick" offered on certain of SGR's pari-mutuel wagering terminals. As part of the settlement, SGR reimbursed the CHRB $50 for the costs of its investigation and agreed to make a voluntary payment of $150 to racing related charities.
Subsequently, purported class action lawsuits relating to the Quick Pick matter were filed against us, SGR and SGI. Angel Romero filed one suit on behalf of himself and a class of similarly situated individuals in Superior Court of Los Angeles on June 2, 2008. On August 5, 2008, Jerry Jamgotchian, individually and on behalf of all others similarly situated in California, Connecticut, Delaware, Indiana, Iowa, Louisiana, Maryland, Michigan, New York, New Jersey, Ohio, Pennsylvania, Texas or Wisconsin, brought suit in the Central District of California . On October 22, 2008, the plaintiff in the Romero lawsuit moved to dismiss the complaint, which motion was granted on October 23, 2008. On October 22, 2008, our motion to dismiss the Jamgotchian lawsuit was granted by the court, without leave to refile. The plaintiff has appealed this ruling.
Since December 13, 2005, we have had a contract with a lottery operator in Mexico to supply an online lottery system, software and related services. In late 2008, we entered into discussions with our lottery operator customer and its parent company to asses our strategic options with a view to
115
SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share amounts)
(18) Litigation (Continued)
potentially restructuring our arrangement. Litigation between the parties commenced in January 2009 and discussions resumed in late February 2009. Effective February 25, 2009, the parties entered into a comprehensive agreement to end all litigation and terminate the contract in an orderly manner on or before October 1, 2009, in light of a change in economic circumstances including changes in the Mexican tax structure relating to lotteries. As part of the agreement, the system, terminals and communications equipment will revert to the Company for potential later use. Accordingly, we have recorded a charge for anticipated losses during the shut-down period and a charge to write off our investment in this contract to expected net realizable value.
(19) Financial Information for Guarantor Subsidiaries and Non-Guarantor Subsidiaries
We conduct substantially all of our business through our domestic and foreign subsidiaries. SGI's obligations under the Credit Agreement and the 2008 Notes are fully and unconditionally and jointly and severally guaranteed by Scientific Games Corporation (the "Parent Company") and our 100%-owned domestic subsidiaries other than SGI (the "Guarantor Subsidiaries"). Our 2004 Notes and our Convertible Debentures, which were issued by the Parent Company, are fully and unconditionally and jointly and severally guaranteed by our 100%-owned domestic subsidiaries, including SGI.
Presented below is condensed consolidating financial information for (i) the Parent Company, (ii) SGI, (iii) the 100%-owned Guarantor Subsidiaries other than SGI and (iv) the 100%-owned foreign subsidiaries and the non-100%-owned domestic and foreign subsidiaries (the "Non-Guarantor Subsidiaries") as of December 31, 2008 and December 31, 2007 and for the years ended December 31, 2008, 2007 and 2006. The condensed consolidating financial information has been presented to show the nature of assets held, results of operations and cash flows of the Parent Company, SGI, the Guarantor Subsidiaries and the Non-Guarantor Subsidiaries assuming the guarantee structures of the Credit Agreement, the 2008 Notes, the Convertible Debentures and the 2004 Notes were in effect at the beginning of the periods presented.
The condensed consolidating financial information reflects the investments of the Parent Company in the Guarantor and Non-Guarantor Subsidiaries using the equity method of accounting. Corporate interest and administrative expenses have not been allocated to the subsidiaries.
116
SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share amounts)
(19) Financial Information for Guarantor Subsidiaries and Non-Guarantor Subsidiaries (Continued)
SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
December 31, 2008
(in thousands)
|
Parent
Company |
SGI |
Guarantor
Subsidiaries |
Non-
Guarantor Subsidiaries |
Eliminating
Entries |
Consolidated | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Assets |
|||||||||||||||||||||
Cash and cash equivalents |
$ | 62,948 | 204 | | 79,016 | (1,529 | ) | 140,639 | |||||||||||||
Accounts receivable, net |
| 85,395 | 45,032 | 82,060 | | 212,487 | |||||||||||||||
Inventories |
| 28,877 | 16,909 | 30,010 | (425 | ) | 75,371 | ||||||||||||||
Other current assets |
27,063 | 19,403 | 7,337 | 29,478 | | 83,281 | |||||||||||||||
Property and equipment, net |
2,294 | 185,560 | 133,024 | 255,201 | (600 | ) | 575,479 | ||||||||||||||
Investment in subsidiaries |
421,781 | 278,500 | 2,264 | (931 | ) | (701,614 | ) | | |||||||||||||
Goodwill |
| 273,656 | 74,453 | 309,102 | | 657,211 | |||||||||||||||
Intangible assets |
| 44,774 | 61,036 | 15,136 | | 120,946 | |||||||||||||||
Intercompany balances |
562,105 | | | | (562,105 | ) | | ||||||||||||||
Other assets |
46,045 | 165,601 | 15,042 | 97,230 | (6,100 | ) | 317,818 | ||||||||||||||
Total assets |
$ | 1,122,236 | 1,081,970 | 355,097 | 896,302 | (1,272,373 | ) | 2,183,232 | |||||||||||||
Liabilities and stockholders' equity |
|||||||||||||||||||||
Current installments of long-term debt |
$ | | 5,500 | | 37,884 | | 43,384 | ||||||||||||||
Current liabilities |
24,537 | 49,065 | 48,699 | 96,534 | (1,535 | ) | 217,300 | ||||||||||||||
Long-term debt, excluding current installments |
473,782 | 740,375 | | 2,107 | | 1,216,264 | |||||||||||||||
Other non-current liabilities |
47,490 | 9,971 | 16,821 | 55,569 | 6 | 129,857 | |||||||||||||||
Intercompany balances |
| 239,744 | 96,393 | 225,966 | (562,103 | ) | | ||||||||||||||
Stockholders' equity |
576,427 | 37,315 | 193,184 | 478,242 | (708,741 | ) | 576,427 | ||||||||||||||
Total liabilities and stockholders' equity |
$ | 1,122,236 | 1,081,970 | 355,097 | 896,302 | (1,272,373 | ) | 2,183,232 | |||||||||||||
117
SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share amounts)
(19) Financial Information for Guarantor Subsidiaries and Non-Guarantor Subsidiaries (Continued)
SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
December 31, 2007
(in thousands)
|
Parent Company | SGI | Guarantor Subsidiaries |
Non-
Guarantor Subsidiaries |
Eliminating Entries | Consolidated | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Assets |
|||||||||||||||||||||
Cash and cash equivalents |
$ | 955 | (119 | ) | (268 | ) | 28,835 | | 29,403 | ||||||||||||
Accounts receivable, net |
| 87,154 | 57,000 | 58,920 | | 203,074 | |||||||||||||||
Inventories |
| 45,717 | 6,917 | 27,086 | (425 | ) | 79,295 | ||||||||||||||
Other current assets |
30,940 | 8,193 | 6,345 | 27,357 | | 72,835 | |||||||||||||||
Property and equipment, net |
5,014 | 174,755 | 142,871 | 252,854 | (600 | ) | 574,894 | ||||||||||||||
Investment in subsidiaries |
724,263 | 308,079 | 2,264 | 214,825 | (1,249,431 | ) | | ||||||||||||||
Goodwill |
(162 | ) | 295,875 | 49,557 | 371,586 | | 716,856 | ||||||||||||||
Intangible assets |
| 49,878 | 53,995 | 29,157 | | 133,030 | |||||||||||||||
Other assets |
96,477 | 77,458 | 21,692 | 101,126 | (6,101 | ) | 290,652 | ||||||||||||||
Total assets |
$ | 857,487 | 1,046,990 | 340,373 | 1,111,746 | (1,256,557 | ) | 2,100,039 | |||||||||||||
Liabilities and stockholders' equity |
|||||||||||||||||||||
Current installments of long-term debt |
$ | 4,500 | | | 442 | | 4,942 | ||||||||||||||
Current liabilities |
32,916 | 34,438 | 54,652 | 90,464 | 102 | 212,572 | |||||||||||||||
Long-term debt, excluding current installments |
1,071,282 | | | 1,343 | | 1,072,625 | |||||||||||||||
Other non-current liabilities |
56,087 | 30,111 | 17,423 | 45,058 | 6 | 148,685 | |||||||||||||||
Intercompany balances |
(968,513 | ) | 815,678 | (57,647 | ) | 210,482 | | | |||||||||||||
Stockholders' equity |
661,215 | 166,763 | 325,945 | 763,957 | (1,256,665 | ) | 661,215 | ||||||||||||||
Total liabilities and stockholders' equity |
$ | 857,487 | 1,046,990 | 340,373 | 1,111,746 | (1,256,557 | ) | 2,100,039 | |||||||||||||
118
SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share amounts)
(19) Financial Information for Guarantor Subsidiaries and Non-Guarantor Subsidiaries (Continued)
SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF INCOME
Year Ended December 31, 2008
(in thousands)
|
Parent
Company |
SGI |
Guarantor
Subsidiaries |
Non-
Guarantor Subsidiaries |
Eliminating
Entries |
Consolidated | ||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Operating revenues |
$ | | 505,064 | 150,269 | 467,725 | (4,229 | ) | 1,118,829 | ||||||||||||
Cost of services and cost of sales (exclusive of depreciation and amortization) |
| 53,035 | 351,716 | 280,092 | (4,202 | ) | 680,641 | |||||||||||||
Selling, general and administrative expenses |
61,360 | 60,832 | 16,368 | 45,719 | (66 | ) | 184,213 | |||||||||||||
Employee termination costs |
2,754 | 1,519 | 1,320 | 8,102 | | 13,695 | ||||||||||||||
Depreciation and amortization |
4,213 | 83,437 | 34,093 | 96,900 | | 218,643 | ||||||||||||||
Operating income |
(68,327 | ) | 306,241 | (253,228 | ) | 36,912 | 39 | 21,637 | ||||||||||||
Interest expense |
33,457 | 27,979 | 89 | 3,501 | | 65,026 | ||||||||||||||
Other income |
(120,110 | ) | 299,717 | (263,093 | ) | 23,146 | 39 | (60,301 | ) | |||||||||||
Income (loss) before equity in income of subsidiaries, and income taxes |
18,326 | (21,455 | ) | 9,776 | 10,265 | | 16,912 | |||||||||||||
Equity in income (loss) of subsidiaries |
(20,397 | ) | 106,186 | | | (85,789 | ) | | ||||||||||||
Income tax expense |
(10,559 | ) | 9,304 | 371 | 9,308 | | 8,424 | |||||||||||||
Net income |
$ | 8,488 | 75,427 | 9,405 | 957 | (85,789 | ) | 8,488 | ||||||||||||
119
SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share amounts)
(19) Financial Information for Guarantor Subsidiaries and Non-Guarantor Subsidiaries (Continued)
SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF INCOME
Year Ended December 31, 2007
(in thousands)
|
Parent Company | SGI | Guarantor Subsidiaries |
Non-
Guarantor Subsidiaries |
Eliminating Entries | Consolidated | ||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Operating revenues |
$ | | 458,054 | 197,512 | 396,988 | (5,850 | ) | 1,046,704 | ||||||||||||
Cost of services and cost of sales (exclusive of depreciation and amortization) |
| 273,198 | 92,302 | 251,967 | (5,687 | ) | 611,780 | |||||||||||||
Selling, general and administrative expenses |
53,783 | 54,376 | 19,346 | 37,699 | (124 | ) | 165,080 | |||||||||||||
Employee termination costs |
| | | 3,642 | | 3,642 | ||||||||||||||
Depreciation and amortization |
875 | 56,435 | 27,889 | 75,167 | | 160,366 | ||||||||||||||
Operating income (loss) |
(54,658 | ) | 74,045 | 57,975 | 28,513 | (39 | ) | 105,836 | ||||||||||||
Interest expense |
57,553 | 661 | 78 | 258 | | 58,550 | ||||||||||||||
Other (income) deductions |
(195,553 | ) | 91,935 | 86,937 | (26,582 | ) | (39 | ) | (43,302 | ) | ||||||||||
Income (loss) before equity in income of subsidiaries, and income taxes |
83,342 | (18,551 | ) | (29,040 | ) | 54,837 | | 90,588 | ||||||||||||
Equity in income of subsidiaries |
5,177 | 16,344 | | | (21,521 | ) | | |||||||||||||
Income tax expense |
23,152 | 49 | 167 | 1,853 | | 25,221 | ||||||||||||||
Net income (loss) |
$ | 65,367 | (2,256 | ) | (29,207 | ) | 52,984 | (21,521 | ) | 65,367 | ||||||||||
120
SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share amounts)
(19) Financial Information for Guarantor Subsidiaries and Non-Guarantor Subsidiaries (Continued)
SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF INCOME
Year Ended December 31, 2006
(in thousands)
|
Parent Company | SGI | Guarantor Subsidiaries |
Non-
Guarantor Subsidiaries |
Eliminating Entries | Consolidated | ||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Operating revenues |
$ | | 434,341 | 171,612 | 310,846 | (19,569 | ) | 897,230 | ||||||||||||
Cost of services and cost of sales (exclusive of depreciation and amortization) |
| 218,398 | 107,957 | 203,385 | (19,793 | ) | 509,947 | |||||||||||||
Selling, general and administrative expenses |
3,108 | 60,184 | 51,865 | 27,758 | 190 | 143,105 | ||||||||||||||
Employee termination costs |
| | 12,622 | | | 12,622 | ||||||||||||||
Depreciation and amortization |
| 49,318 | 24,405 | 32,283 | | 106,006 | ||||||||||||||
Operating income (loss) |
(3,108 | ) | 106,441 | (25,237 | ) | 47,420 | 34 | 125,550 | ||||||||||||
Interest expense |
41,266 | 802 | 740 | 585 | | 43,393 | ||||||||||||||
Other (income) deductions |
(71,012 | ) | 51,975 | 3,840 | 5,899 | 631 | (8,667 | ) | ||||||||||||
Income (loss) before equity in income of subsidiaries, and income taxes |
26,638 | 53,664 | (29,817 | ) | 40,936 | (597 | ) | 90,824 | ||||||||||||
Equity in income of subsidiaries |
52,065 | 12,795 | | | (64,860 | ) | | |||||||||||||
Income tax expense |
11,942 | 664 | 760 | 10,697 | | 24,063 | ||||||||||||||
Net income (loss) |
$ | 66,761 | 65,795 | (30,577 | ) | 30,239 | (65,457 | ) | 66,761 | |||||||||||
121
SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share amounts)
(19) Financial Information for Guarantor Subsidiaries and Non-Guarantor Subsidiaries (Continued)
SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Year Ended December 31, 2008
(in thousands)
|
Parent
Company |
SGI |
Guarantor
Subsidiaries |
Non-
Guarantor Subsidiaries |
Eliminating
Entries |
Consolidated | ||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Net income |
$ | 8,488 | 75,426 | 9,405 | 960 | (85,791 | ) | 8,488 | ||||||||||||
Depreciation and amortization |
4,213 | 83,437 | 34,093 | 96,900 | | 218,643 | ||||||||||||||
Change in deferred income taxes |
(12,879 | ) | (17,422 | ) | 17,256 | (3,719 | ) | | (16,764 | ) | ||||||||||
Equity in income of subsidiaries |
20,396 | (106,187 | ) | | | 85,791 | | |||||||||||||
Non-cash interest expense |
3,203 | 1,431 | | | | 4,634 | ||||||||||||||
Gain or loss from asset disposal |
| 141 | | 553 | | 694 | ||||||||||||||
Undistributed earnings from affiliates |
| (51,700 | ) | (3,923 | ) | (2,947 | ) | | (58,570 | ) | ||||||||||
Stock-based compensation |
34,122 | | | | | 34,122 | ||||||||||||||
Early extinguishment of debt |
2,960 | | | | | 2,960 | ||||||||||||||
Changes in working capital and other |
(6,897 | ) | 37,323 | 8,698 | (24,833 | ) | | 14,291 | ||||||||||||
Net cash provided by (used in) operating activities |
53,606 | 22,449 | 65,529 | 66,914 | | 208,498 | ||||||||||||||
Cash flows from investing activities: |
||||||||||||||||||||
Capital and wagering systems expenditures |
(709 | ) | (75,913 | ) | (6,021 | ) | (100,997 | ) | | (183,640 | ) | |||||||||
Investments in subsidiaries |
179,438 | 10,602 | | 931 | (190,971 | ) | | |||||||||||||
Investment in joint venture |
| | | 5,605 | | 5,605 | ||||||||||||||
Business acquisitions, net of cash acquired |
| | (7,098 | ) | (1,011 | ) | | (8,109 | ) | |||||||||||
Other assets and investments |
(11,192 | ) | (2,875 | ) | (14,380 | ) | (22,163 | ) | | (50,610 | ) | |||||||||
Net cash used in investing activities |
167,537 | (68,186 | ) | (27,499 | ) | (117,635 | ) | (190,971 | ) | (236,754 | ) | |||||||||
Cash flows from financing activities: |
||||||||||||||||||||
Net proceeds/payments on long-term debt |
(602,000 | ) | 745,867 | | 37,503 | | 181,370 | |||||||||||||
Excess tax benefit from equity-based compensation plans |
(104 | ) | | | 238 | | 134 | |||||||||||||
Payments of financing fees |
| (15,226 | ) | | | | (15,226 | ) | ||||||||||||
Net proceeds from stock issue |
(5,022 | ) | (32,904 | ) | (169,891 | ) | 25,407 | 185,720 | 3,310 | |||||||||||
Purchase of teasury stock |
(23,144 | ) | | | | | (23,144 | ) | ||||||||||||
Other, principally intercompany balances |
471,121 | (651,677 | ) | 130,601 | 44,704 | 5,251 | | |||||||||||||
Net cash provided by (used in) financing activities |
(159,149 | ) | 46,060 | (39,290 | ) | 107,852 | 190,971 | 146,444 | ||||||||||||
Effect of exchange rate changes on cash |
| | | (6,952 | ) | | (6,952 | ) | ||||||||||||
Increase (decrease) in cash and cash equivalents |
61,994 | 323 | (1,260 | ) | 50,179 | | 111,236 | |||||||||||||
Cash and cash equivalents, beginning of period |
955 | (119 | ) | (268 | ) | 28,835 | | 29,403 | ||||||||||||
Cash and cash equivalents, end of year |
$ | 62,949 | 204 | (1,528 | ) | 79,014 | | 140,639 | ||||||||||||
122
SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share amounts)
(19) Financial Information for Guarantor Subsidiaries and Non-Guarantor Subsidiaries (Continued)
SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Year Ended December 31, 2007
(in thousands)
|
Parent
Company |
SGI |
Guarantor
Subsidiaries |
Non-
Guarantor Subsidiaries |
Eliminating
Entries |
Consolidated | ||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Net income |
$ | 65,367 | (2,256 | ) | (29,207 | ) | 52,984 | (21,521 | ) | 65,367 | ||||||||||
Depreciation and amortization |
874 | 56,436 | 27,889 | 75,167 | | 160,366 | ||||||||||||||
Change in deferred income taxes |
(4,024 | ) | (1,698 | ) | 8,064 | (9,566 | ) | | (7,224 | ) | ||||||||||
Equity in income of subsidiaries |
(5,177 | ) | (16,344 | ) | | | 21,521 | | ||||||||||||
Non-cash interest expense |
4,299 | | 65 | | | 4,364 | ||||||||||||||
Undistributed earnings from affiliates |
| (37,632 | ) | (3,330 | ) | (290 | ) | | (41,252 | ) | ||||||||||
Stock-based compensation |
5,708 | 360 | 19,065 | 179 | | 25,312 | ||||||||||||||
Changes in working capital and other |
18,709 | (31,419 | ) | 1,632 | (3,614 | ) | | (14,692 | ) | |||||||||||
Net cash provided by (used in) operating activities |
85,756 | (32,553 | ) | 24,178 | 114,860 | | 192,241 | |||||||||||||
Cash flows from investing activities: |
||||||||||||||||||||
Capital and wagering systems expenditures |
(6,300 | ) | 12,760 | (75,350 | ) | (114,792 | ) | 22 | (183,660 | ) | ||||||||||
Business acquisitions, net of cash acquired |
| | (62,824 | ) | (57,230 | ) | | (120,054 | ) | |||||||||||
Other assets and investments |
(6,031 | ) | 44,803 | (5,680 | ) | (148,161 | ) | 40,359 | (74,710 | ) | ||||||||||
Net cash used in investing activities |
(12,331 | ) | 57,563 | (143,854 | ) | (320,183 | ) | 40,381 | (378,424 | ) | ||||||||||
Cash flows from financing activities: |
||||||||||||||||||||
Net proceeds/payments on long-term debt |
161,282 | | | (182 | ) | | 161,100 | |||||||||||||
Excess tax benefit from equity-based compensation plans |
10,569 | | | | | 10,569 | ||||||||||||||
Payments of financing fees |
(790 | ) | | | | | (790 | ) | ||||||||||||
Net proceeds from stock issue |
14,699 | (238,010 | ) | 194,866 | 86,727 | (43,125 | ) | 15,157 | ||||||||||||
Other, principally intercompany balances |
(259,903 | ) | 214,546 | (79,541 | ) | 121,716 | 3,182 | | ||||||||||||
Net cash provided by (used in) financing activities |
(74,143 | ) | (23,464 | ) | 115,325 | 208,261 | (39,943 | ) | 186,036 | |||||||||||
Effect of exchange rate changes on cash |
1,673 | 21 | (1,675 | ) | 2,178 | (438 | ) | 1,759 | ||||||||||||
Increase (decrease) in cash and cash equivalents |
955 | 1,567 | (6,026 | ) | 5,116 | | 1,612 | |||||||||||||
Cash and cash equivalents, beginning of period |
| (1,686 | ) | 5,758 | 23,719 | | 27,791 | |||||||||||||
Cash and cash equivalents, end of year |
$ | 955 | (119 | ) | (268 | ) | 28,835 | | 29,403 | |||||||||||
123
SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share amounts)
(19) Financial Information for Guarantor Subsidiaries and Non-Guarantor Subsidiaries (Continued)
SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Year Ended December 31, 2006
(in thousands)
|
Parent
Company |
SGI |
Guarantor
Subsidiaries |
Non-
Guarantor Subsidiaries |
Eliminating
Entries |
Consolidated | ||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Net income |
$ | 66,761 | 65,795 | (30,577 | ) | 30,239 | (65,457 | ) | 66,761 | |||||||||||
Depreciation and amortization |
| 49,318 | 24,405 | 32,283 | | 106,006 | ||||||||||||||
Change in deferred income taxes |
(24,270 | ) | 13,118 | (1,887 | ) | 4,073 | | (8,966 | ) | |||||||||||
Equity in income of subsidiaries |
(52,065 | ) | (12,795 | ) | | | 64,860 | | ||||||||||||
Non-cash interest expense |
3,922 | | | | | 3,922 | ||||||||||||||
Undistributed earnings from affiliates |
| (8,105 | ) | | 205 | | (7,900 | ) | ||||||||||||
Stock-based compensation |
| 2,461 | 18,636 | 603 | | 21,700 | ||||||||||||||
Changes in working capital and other |
(260 | ) | (45,505 | ) | 4,044 | (8,552 | ) | (53 | ) | (50,326 | ) | |||||||||
Net cash provided by (used in) operating activities |
(5,912 | ) | 64,287 | 14,621 | 58,851 | (650 | ) | 131,197 | ||||||||||||
Cash flows from investing activities: |
||||||||||||||||||||
Capital and wagering systems expenditures |
| (53,959 | ) | (26,611 | ) | (61,274 | ) | | (141,844 | ) | ||||||||||
Business acquisitions, net of cash acquired |
| (2,741 | ) | (11,980 | ) | (282,207 | ) | | (296,928 | ) | ||||||||||
Other assets and investments |
(302,769 | ) | (29,657 | ) | (27,945 | ) | (152,653 | ) | 448,620 | (64,404 | ) | |||||||||
Net cash used in investing activities |
(302,769 | ) | (86,357 | ) | (66,536 | ) | (496,134 | ) | 448,620 | (503,176 | ) | |||||||||
Cash flows from financing activities: |
||||||||||||||||||||
Net proceeds/payments on long-term debt |
340,500 | | | (4,945 | ) | | 335,555 | |||||||||||||
Excess tax benefit from equity-based compensation plans |
13,013 | | | 492 | | 13,505 | ||||||||||||||
Payments of financing fees |
(1,119 | ) | | | | | (1,119 | ) | ||||||||||||
Net proceeds from stock issue |
16,111 | 2,742 | 931 | 445,234 | (447,955 | ) | 17,063 | |||||||||||||
Purchases of treasury stock |
(9,822 | ) | | | | | (9,822 | ) | ||||||||||||
Other, principally intercompany balances |
(50,002 | ) | 16,259 | 43,152 | (86,057 | ) | 76,648 | | ||||||||||||
Net cash provided by (used in) financing activities |
308,681 | 19,001 | 44,083 | 354,724 | (371,307 | ) | 355,182 | |||||||||||||
Effect of exchange rate changes on cash |
| | (602 | ) | 82,911 | (76,663 | ) | 5,646 | ||||||||||||
Increase (decrease) in cash and cash equivalents |
| (3,069 | ) | (8,434 | ) | 352 | | (11,151 | ) | |||||||||||
Cash and cash equivalents, beginning of period |
| 1,383 | 14,192 | 23,367 | | 38,942 | ||||||||||||||
Cash and cash equivalents, end of year |
$ | | (1,686 | ) | 5,758 | 23,719 | | 27,791 | ||||||||||||
124
SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share amounts)
(20) Selected Quarterly Financial Data, Unaudited
|
Quarter Ended 2008 | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
March 31 (a) | June 30 (b) | September 30 | December 31 (c) | |||||||||
Total operating revenues |
$ | 257,007 | $ | 305,969 | $ | 291,935 | $ | 263,918 | |||||
Total cost of services and sales |
147,222 | 182,243 | 174,737 | 176,439 | |||||||||
Selling, general and administrative expenses |
47,016 | 49,050 | 41,937 | 46,210 | |||||||||
Employee termination costs |
2,772 | | | 10,923 | |||||||||
Depreciation and amortization |
34,504 | 35,108 | 36,487 | 112,544 | |||||||||
Operating income (loss) |
25,493 | 39,568 | 38,774 | (82,198 | ) | ||||||||
Net income (loss) available to common stockholders |
$ | 19,907 | $ | 28,996 | $ | 25,410 | $ | (65,825 | ) | ||||
Basic and diluted earnings per share: |
|||||||||||||
Basic net income (loss) available to common shareholders |
$ | 0.21 | $ | 0.31 | $ | 0.27 | $ | (0.71 | ) | ||||
Diluted net income (loss) available to common shareholders |
$ | 0.21 | $ | 0.31 | $ | 0.27 | $ | (0.71 | ) | ||||
Weighted average number of shares used in per share calculations: |
|||||||||||||
Basic shares |
93,314 | 92,645 | 92,841 | 92,704 | |||||||||
Diluted shares |
94,718 | 94,420 | 94,626 | 92,704 | |||||||||
125
SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share amounts)
(20) Selected Quarterly Financial Data, Unaudited (Continued)
|
Quarter Ended 2007 | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
March 31 | June 30 | September 30 (c) | December 31 (d) | |||||||||
Total operating revenues |
$ | 242,266 | $ | 269,577 | $ | 266,900 | $ | 267,961 | |||||
Total cost of services and sales |
139,232 | 156,154 | 157,809 | 158,585 | |||||||||
Selling, general and administrative expenses |
39,145 | 40,495 | 43,738 | 41,702 | |||||||||
Employee termination costs |
| | | 3,642 | |||||||||
Depreciation and amortization |
29,078 | 32,256 | 61,266 | 37,766 | |||||||||
Operating income |
34,811 | 40,672 | 4,087 | 26,266 | |||||||||
Net income available to common stockholders |
$ | 24,759 | $ | 27,107 | $ | (2,878 | ) | $ | 16,379 | ||||
Basic and diluted earnings per share: |
|||||||||||||
Basic net income available to common shareholders |
$ | 0.27 | $ | 0.29 | $ | (0.03 | ) | $ | 0.18 | ||||
Diluted net income available to common shareholders |
$ | 0.26 | $ | 0.28 | $ | (0.03 | ) | $ | 0.17 | ||||
Weighted average number of shares used in per share calculations: |
|||||||||||||
Basic shares |
91,993 | 92,581 | 92,737 | 92,939 | |||||||||
Diluted shares |
95,288 | 96,280 | 92,737 | 96,783 | |||||||||
(21) Recently Issued Accounting Standards
In May 2008, the FASB issued FASB Staff Position ("FSP") No. Accounting Principles Board ("APB") 14-1, Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Settlement) ("FSP APB 14-1"). FSP APB 14-1 clarifies that convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement) are not addressed by paragraph 12 of APB Opinion No. 14, Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants . Additionally, this FSP specifies that issuers of such instruments should separately account for the liability and equity components in a manner that will reflect the entity's nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. FSP
126
SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share amounts)
(21) Recently Issued Accounting Standards (Continued)
APB 14-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years, and must be applied retrospectively to all periods presented. We adopted FSP APB 14-1 on January 1, 2009. The impact of adoption was an adjustment to accumulated earnings of approximately $15.7 million representing the cumulative effect of a change in accounting principle as of January 1, 2007 and a remaining debt discount of approximately $18.1 million on our Consolidated Balance Sheet as of January 1, 2009. In addition we will report additional interest expense of approximately $12.8 million in our Consolidated Statement of Operations for 2007, 2008 and 2009.
127
SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
Valuation and Qualifying Accounts
Years Ended December 31, 2008, 2007 and 2006
(in
thousands)
|
Balance at
Beginning of Period |
Charged to
Costs and Expenses |
Other | Deductions (1) |
Balance at End
of Period |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Year ended December 31, 2008 |
||||||||||||||||
Allowance for doubtful accounts |
$ | 9,184 | 1,841 | | 4,560 | 6,465 | ||||||||||
Year ended December 31, 2007 |
||||||||||||||||
Allowance for doubtful accounts |
$ | 6,682 | 4,772 | | 2,270 | 9,184 | ||||||||||
Year ended December 31, 2006 |
||||||||||||||||
Allowance for doubtful accounts |
$ | 6,149 | 3,185 | | 2,652 | 6,682 |
128
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
As of the end of the period covered by this Annual Report on Form 10-K, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)). Based upon that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures are effective.
There were no changes in our internal control over financial reporting during the quarter ended December 31, 2008 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
The report called for by Item 308(a) of Regulation S-K is included herein as "Management's Report on Internal Control Over Financial Reporting."
The attestation report called for by Item 308(b) of Registration S-K is included herein as "Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting," which appears in Item 8 in this Annual Report on Form 10-K.
Management Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. With the participation of the Chief Executive Officer and Chief Financial Officer, our management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework and criteria established in Internal ControlIntegrated Framework , issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, our management has concluded that our internal control over financial reporting was effective as of December 31, 2008.
None.
129
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
We have adopted a Code of Business Conduct that applies to all of our officers, directors and employees (including our Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer) and have posted the Code on our website at www.scientificgames.com . In the event that we have any amendments to or waivers from any provision of the Code applicable to our Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer, we intend to satisfy the disclosure requirement under Item 5.05 of Form 8-K by posting such information on our website.
Information relating to our executive officers is included in Part I of this Annual Report on Form 10-K, as permitted by General Instruction G(3). The other information called for by this item is incorporated by reference to our definitive proxy statement relating to our 2009 Annual Meeting of Stockholders, which will be filed with the SEC. If such proxy statement is not filed on or before April 30, 2009, the information called for by this item will be filed as part of an amendment to this Annual Report on Form 10-K on or before such date, in accordance with General Instruction G(3).
ITEM 11. EXECUTIVE COMPENSATION
The information called for by this item is incorporated herein by reference to our definitive proxy statement relating to our 2009 Annual Meeting of Stockholders, which will be filed with the SEC. If such proxy statement is not filed on or before April 30, 2009, the information called for by this item will be filed as part of an amendment to this Annual Report on Form 10-K on or before such date, in accordance with General Instruction G(3).
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Equity Compensation Plan Information
The following table provides information about the shares of our common stock that may be issued upon the exercise of stock options, warrants and other stock rights under all of our equity compensation plans as of December 31, 2008.
Plan Category
|
Number of securities to be issued upon exercise of outstanding options, warrants and rights | Weighted average exercise price of outstanding options, warrants and rights (3) | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) | |||||||
---|---|---|---|---|---|---|---|---|---|---|
|
(a)
|
(b)
|
(c)
|
|||||||
|
(in thousands, except for per share amounts)
|
|||||||||
Equity compensation plans approved by security holders (1) |
8,659,343 | $ | 20.60 | 2,969,648 | ||||||
Equity compensation plans not approved by security holders (2) |
757,430 | $ | 25.44 | 69,157 | ||||||
Total |
9,416,773 | $ | 21.09 | 3,038,805 | ||||||
130
Inducement Stock Options. At December 31, 2008, approximately 661,000 options granted during 2003 and 2005 under employment inducement award agreements to newly hired employees remained outstanding. The options were granted at exercise prices ranging from $5.88 to $29.18 per share and each such option has a ten-year term and becomes exercisable in four or five equal annual installments, on each of the first four or five anniversaries of the date of grant.
The 1995 Equity Incentive Plan. The 1995 Equity Incentive Plan (the "1995 Plan"), which was originally adopted by our Board of Directors in May 1995, authorizes grants of non-qualified stock options, deferred stock and other stock-related awards to employees who are not executive officers or directors. As of December 31, 2008, approximately 57,000 shares were subject to outstanding awards under the 1995 Plan and approximately 69,000 shares remained available for grant under the 1995 Plan. The 1995 Plan is administered by the Compensation Committee, which is authorized to select the participants, determine the type of awards to be granted and the number of shares of common stock to which awards will relate, specify times at which awards will be exercisable, set other terms and conditions of such awards, interpret and specify rules and regulations relating to the 1995 Plan, and make all other determinations that may be necessary or advisable for the administration of the 1995 Plan. The Board may amend, suspend, discontinue, or terminate the 1995 Plan or the Committee's authority to grant awards thereunder without stockholder approval, except as required by law or regulation or under the Nasdaq rules which would require stockholder approval for material modifications of the 1995 Plan. Unless earlier terminated, the 1995 Plan will terminate at such time that no shares reserved under the 1995 Plan remain available and we have no further obligation with respect to any outstanding award.
Hasbro Warrants. On December 15, 2006, we entered into a licensing agreement with Hasbro, Inc. for the use of certain Hasbro brands in multiple lottery platforms. Under the terms of the agreement we issued warrants to Hasbro to purchase 40,000 shares of our common stock at a purchase price of $32.98 per share. The warrants may be exercised at any time before February 28, 2012.
The other information called for by this item is incorporated herein by reference to our definitive proxy statement relating to our 2009 Annual Meeting of Stockholders, which will be filed with the SEC. If such proxy statement is not filed on or before April 30, 2009, the information called for by this item will be filed as part of an amendment to this Annual Report on Form 10-K on or before such date, in accordance with General Instruction G(3).
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information called for by this item is incorporated herein by reference to our definitive proxy statement relating to our 2009 Annual Meeting of Stockholders, which will be filed with the SEC. If such proxy statement is not filed on or before April 30, 2009, the information called for by this item will be filed as part of an amendment to this Annual Report on Form 10-K on or before such date, in accordance with General Instruction G(3).
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information called for by this item is incorporated herein by reference to our definitive proxy statement relating to our 2009 Annual Meeting of Stockholders, which will be filed with the SEC. If such proxy statement is not filed on or before April 30, 2009, the information called for by this item will be filed as part of an amendment to this Annual Report on Form 10-K on or before such date, in accordance with General Instruction G(3).
131
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) (1) and (2). Financial Statements and Financial Statements Schedule.
See index to Consolidated Financial Statements under Item 8 in Part II hereof where these documents are listed.
(a) (3). Exhibits.
Exhibit
Number |
Description | |
---|---|---|
3.1(a) | Restated Certificate of Incorporation of the Company, filed with the Secretary of State of the State of Delaware on March 20, 2003 (incorporated by reference to Exhibit 3.1 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2002). | |
3.1(b) |
|
Certificate of Amendment of the Restated Certificate of Incorporation of the Company, filed with the Secretary of State of the State of Delaware on June 7, 2007 (incorporated by reference to Exhibit 3.1(b) to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2007). |
3.2 |
|
Amended and Restated Bylaws of the Company (incorporated by reference to Exhibit 3.1 to the Company's Current Report on Form 8-K filed on December 14, 2007). |
4.1 |
|
Indenture, dated as of December 23, 2004, among the Company, as issuer, the subsidiary guarantors party thereto, and Wells Fargo, National Association, as trustee, relating to the 6.25% Senior Subordinated Notes Due 2012 (incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K filed on December 30, 2004). |
4.2 |
|
Registration Rights Agreement, dated December 23, 2004, among the Company, the subsidiary guarantors party thereto, and J.P. Morgan Securities Inc., Bear Stearns & Co. Inc., Jefferies & Company, Inc., Ramius Securities, LLC, ABN AMRO Incorporated, BNY Capital Markets, Inc. and Commerzbank Capital Markets Corp. relating to the 6.25% Senior Subordinated Notes Due 2012 (incorporated by reference to Exhibit 4.2 to the Company's Registration Statement on Form S-4 (No. 333-124106) filed on April 15, 2005 (the "2005 S-4")). |
4.3 |
|
Form of 6.25% Senior Subordinated Note (incorporated by reference to Exhibits 4.3(a) and 4.3(b) to the 2005 S-4). |
4.4 |
|
Indenture, dated as of December 23, 2004, among the Company, as issuer, the subsidiary guarantors party thereto, and Wells Fargo, National Association, as trustee, relating to the 0.75% Convertible Senior Subordinated Notes Due 2024 (incorporated by reference to Exhibit 4.2 to the Company's Current Report on Form 8-K filed on December 30, 2004). |
4.5 |
|
Registration Rights Agreement, dated December 23, 2004 by and among the Company, the Subsidiary Guarantors, and J.P. Morgan Securities Inc. and Bear, Stearns & Co. Inc. as representatives of the Initial Purchasers and Jefferies & Company, Inc., Ramius Securities, LLC, BNY Capital Markets, Inc., Commerzbank Capital Markets Corp. and LaSalle Debt Capital Markets, a division of ABN AMRO Financial Services, Inc. relating to the 0.75% Convertible Senior Subordinated Notes Due 2024 (incorporated by reference to Exhibit 4.2 to the Company's Registration Statement on Form S-3 (No. 333-124107) filed on April 15, 2005 (the "2005 S-3")). |
4.6 |
|
Form of 0.75% Convertible Senior Subordinated Debenture (incorporated by reference to Exhibits 4.3(a) and 4.3(b) to the 2005 S-3). |
132
Exhibit
Number |
Description | |
---|---|---|
4.7 | International Swaps and Derivative Association, Inc. Confirmation, dated December 23, 2004, between JPMorgan Chase Bank, National Association, and the Company with respect to Warrants (the "JPMorgan Confirmation") (incorporated by reference to Exhibit 4.3 to the Company's Current Report on Form 8-K filed on December 30, 2004). | |
4.8 |
|
International Swaps and Derivative Association, Inc. Confirmation, dated December 23, 2004, between Bear Stearns International Limited and the Company with respect to Warrants (the "Bear Confirmation") (incorporated by reference to Exhibit 4.4 to the Company's Current Report on Form 8-K filed on December 30, 2004). |
4.9 |
|
Amendment dated December 23, 2004 to the JPMorgan Confirmation (incorporated by reference to Exhibit 4.5 to the Company's Current Report on Form 8-K filed on December 30, 2004). |
4.10 |
|
Amendment dated December 23, 2004 to the Bear Confirmation (incorporated by reference to Exhibit 4.6 to the Company's Current Report on Form 8-K filed on December 30, 2004). |
4.11 |
|
Indenture, dated as of June 11, 2008, among Scientific Games International, Inc., as issuer, the Company, as a guarantor, the subsidiary guarantors party thereto, and The Bank of Nova Scotia Trust Company of New York, as trustee, relating to the 7.875% Senior Subordinated Notes due 2016 (incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K filed on June 13, 2008). |
4.12 |
|
Registration Rights Agreement, dated June 11, 2008, by and among Scientific Games International, Inc., the Company, the subsidiary guarantors listed therein, and J.P. Morgan Securities Inc., Banc of America Securities LLC and UBS Securities LLC, as representatives for the initial purchasers listed therein, relating to the 7.875% Senior Subordinated Notes due 2016 (incorporated by reference to Exhibit 4.2 to the Company's Current Report on Form 8-K filed on June 13, 2008). |
4.13 |
|
Form of 7.875% Senior Subordinated Notes due 2016 (incorporated by reference to Exhibits 4.3(a) and 4.3(b) to the Company's Registration Statement on Form S-3ASR (No. 333-155346) filed on November 13, 2008). |
10.1 |
|
Credit Agreement, dated as of June 9, 2008, among Scientific Games International, Inc., as borrower, the Company, as a guarantor, the several lenders from time to time parties thereto, and JPMorgan Chase Bank, N.A., as administrative agent, J.P. Morgan Securities Inc. and Banc of America Securities LLC, as joint lead arrangers and joint bookrunners, Bank of America, N.A. and UBS Securities LLC, as co-syndication agents, and ING Capital LLC and Bank of TokyoMitsubishi UFJ Trust Company, as co-documentation agents (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8 K filed on June 13, 2008). |
10.2 |
|
Guarantee and Collateral Agreement, dated as of June 9, 2008, among Scientific Games International, Inc., the Company, as a guarantor, and each other subsidiary of the Company listed on the signature pages thereto, as additional guarantors, in favor of JPMorgan Chase Bank, N.A., as administrative agent (incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K filed on June 13, 2008). |
133
Exhibit
Number |
Description | |
---|---|---|
10.3 | Stockholders' Agreement, dated September 6, 2000, by and among the Company, MacAndrews & Forbes Holdings Inc. (formerly known as Mafco Holdings Inc.) ("MacAndrews") (as successor in interest under the agreement to Cirmatica Gaming S.A.) and Ramius Securities, LLC (incorporated by reference to Exhibit 10.38 to the Company's Quarterly Report on Form 10-Q for the quarter ended July 31, 2000). | |
10.4 |
|
Supplemental Stockholders' Agreement, dated June 26, 2002, by and among the Company and MacAndrews (as successor in interest to Cirmatica Gaming S.A.) (incorporated by reference to Exhibit 4.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2002). |
10.5 |
|
Letter Agreement, dated as of October 10, 2003, by and between the Company and MacAndrews further supplementing the Stockholders' Agreement (incorporated by reference to Exhibit 3 to the Schedule 13D jointly filed by MacAndrews and SGMS Acquisition Corporation on November 26, 2003). |
10.6 |
|
Letter Agreement dated February 15, 2007 between the Company and MacAndrews & Forbes Holdings Inc. (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on February 16, 2007). |
10.7 |
|
Stock Purchase Agreement, dated as of May 1, 2007, by and among François-Charles Oberthur Fiduciaire, S.A., the Company and Scientific Games Holdings (Canada) Inc. (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on May 7, 2007). |
10.8 |
|
Agreement, dated April 20, 2006, among the Company, Scientific Games International Holdings Limited, Scientific Games Beteiligungsgesellschaft mbH, Walter Grubmueller, Stephen George Frater, The Trustees of Warero Privatsitiftung and Jeffery Frederick Nash for the sale and purchase of the entire issued share capital of Neomi Associates, Inc. and Research and Development GmbH (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on April 26, 2006). |
10.9 |
|
Share Purchase and Sale Agreement, dated April 4, 2005, by and among Scientific Games Chile Limitada, Epicentro S.A. and Inversiones Y Aesorias Iculpe Limitada (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on April 8, 2005). |
10.10 |
|
1992 Equity Incentive Plan, as amended and restated (incorporated by reference to Exhibit 10.33 to the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1998).* |
10.11 |
|
1995 Equity Incentive Plan, as amended (incorporated by reference to Exhibit 10.14 to the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1997).* |
10.12 |
|
1997 Incentive Compensation Plan, as amended and restated (incorporated by reference to Exhibit 10.14 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2001).* |
10.13 |
|
2003 Incentive Compensation Plan, as amended and restated (incorporated by reference to Exhibit 10.3 to the Company's Current Report on Form 8-K filed on June 13, 2008).* |
10.14 |
|
Elective Deferred Compensation Plan (Executive Deferred Compensation Plan and Non-Employee Directors Deferred Compensation Plan) (effective January 1, 2005, as amended and restated effective January 1, 2009).*() |
134
Exhibit
Number |
Description | |
---|---|---|
10.15 | Frozen Supplemental Executive Retirement Plan (as amended and restated effective January 1, 2009).*() | |
10.16 |
|
2002 Employee Stock Purchase Plan, as amended and restated (incorporated by reference to Exhibit 10.14 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2005).* |
10.17 |
|
Employment Agreement dated as of January 1, 2006 by and between the Company and A. Lorne Weil (executed on August 8, 2006) (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2006).* |
10.18 |
|
Letter dated August 2, 2007 between A. Lorne Weil and the Company with respect to payment of Mr. Weil's deferred compensation upon a termination of employment under Mr. Weil's Employment Agreement dated as of January 1, 2006 (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2007).* |
10.19 |
|
Amendment to Employment Agreement dated as of May 1, 2008 by and between the Company and A. Lorne Weil (executed on May 12, 2008), which amended Mr. Weil's Employment Agreement dated as of January 1, 2006, as amended by the Letter dated August 2, 2007 (incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K filed on May 14, 2008).* |
10.20 |
|
Amendment to Employment Agreement dated as of December 30, 2008 by and between the Company and A. Lorne Weil, which amended Mr. Weil's Employment Agreement dated as of January 1, 2006, as amended by the Letter dated August 2, 2007 and the Amendment dated as of May 1, 2008.*() |
10.21 |
|
Employment Agreement dated as of May 1, 2008 by and between the Company and Joseph R. Wright (executed on May 14, 2008) (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on May 14, 2008).* |
10.22 |
|
Amendment to Employment Agreement dated as of December 30, 2008 by and between the Company and Joseph R. Wright, which amended Mr. Wright's Employment Agreement dated as of May 1, 2008.*() |
10.23 |
|
Employment Agreement dated as of July 1, 2005 between the Company and Michael Chambrello (executed on June 17, 2005) (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2005).* |
10.24 |
|
Letter Agreement dated as of August 2, 2006 by and between the Company and Michael R. Chambrello, which amended Mr. Chambrello's Employment Agreement dated as of July 1, 2005 (incorporated by reference to Exhibit 10.9 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2006).* |
10.25 |
|
Letter Agreement dated as of May 8, 2008 by and between the Company and Michael R. Chambrello, which amended Mr. Chambrello's Employment Agreement dated as of July 1, 2005, as amended by the Letter Agreement dated as of August 2, 2006 (incorporated by reference to Exhibit 10.3 to the Company's Current Report on Form 8-K filed on May 14, 2008).* |
135
Exhibit
Number |
Description | |
---|---|---|
10.26 | Amendment to Employment Agreement dated as of December 30, 2008 by and between the Company and Michael R. Chambrello, which amended Mr. Chambrello's Employment Agreement dated as of July 1, 2005, as amended by the Letter Agreement dated as of August 2, 2006 and the Letter Agreement dated as of May 8, 2008.*() | |
10.27 |
|
Employment Agreement dated as of November 1, 2002 between the Company and DeWayne E. Laird (executed on May 17, 2004) (incorporated by reference to Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2004).* |
10.28 |
|
Letter Agreement dated as of August 2, 2006 by and between the Company and DeWayne E. Laird (effective as of January 1, 2006), which amended Mr. Laird's Employment Agreement dated as of November 1, 2002 (incorporated by reference to Exhibit 10.10 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2006).* |
10.29 |
|
Letter Agreement dated as of October 7, 2008 by and between the Company and DeWayne E. Laird, which amended Mr. Laird's Employment Agreement dated as of November 1, 2002, as amended by the Letter Agreement dated as of August 2, 2006.*() |
10.30 |
|
Amendment to Employment Agreement dated as of December 30, 2008 by and between the Company and DeWayne E. Laird, which amended Mr. Laird's Employment Agreement dated as of November 1, 2002, as amended by the Letter Agreement dated as of August 2, 2006 and the Letter Agreement dated as of October 7, 2008.*() |
10.31 |
|
Employment Agreement dated as of January 1, 2006 by and between the Company and Robert C. Becker (executed on August 2, 2006) (incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2006).* |
10.32 |
|
Letter Agreement dated as of October 7, 2008 by and between the Company and Robert C. Becker, which amended Mr. Becker's Employment Agreement dated as of January 1, 2006.*() |
10.33 |
|
Amendment to Employment Agreement dated as of December 30, 2008 by and between the Company and Robert C. Becker, which amended Mr. Becker's Employment Agreement dated as of January 1, 2006, as amended by the Letter Agreement dated as of October 7, 2008.*() |
10.34 |
|
Superseding Employment, Separation, Non-Competition and General Release Agreement dated as of March 5, 2009 by and between the Company and Sally L. Conkright (executed on January 14, 2009).*() |
10.35 |
|
Employment Agreement dated as of January 1, 2006 by and between the Company and Larry Potts (executed on August 2, 2006) (incorporated by reference to Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2006).* |
10.36 |
|
Letter Agreement dated as of October 2, 2008 by and between the Company and Larry Potts, which amended Mr. Potts' Employment Agreement dated as of January 1, 2006.*() |
10.37 |
|
Amendment to Employment Agreement dated as of December 30, 2008 by and between the Company and Larry Potts, which amended Mr. Potts' Employment Agreement dated as of January 1, 2006, as amended by the Letter Agreement dated as of October 2, 2008.*() |
136
Exhibit
Number |
Description | |
---|---|---|
10.38 | Superseding Employment, Separation and General Release Agreement dated as of July 1, 2008 by and between Scientific Games International, Inc. and William J. Huntley (executed on June 3, 2008) (incorporated by reference to Exhibit 10.7 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2008).* | |
10.39 |
|
Amendment to Superseding Employment, Separation and General Release Agreement dated as of December 30, 2008 by and between the Company and William J. Huntley, which amended Mr. Huntley's Superseding Employment, Separation and General Release Agreement dated as of July 1, 2008.*() |
10.40 |
|
Employment Agreement dated as of January 1, 2006 by and between Scientific Games International, Inc. and Steven M. Saferin (executed on August 2, 2006) (incorporated by reference to Exhibit 10.6 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2006).* |
10.41 |
|
Letter Agreement dated as of August 5, 2008 by and between the Company and Steven M. Saferin, which amended Mr. Saferin's Employment Agreement dated as of January 1, 2006 (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on August 8, 2008).* |
10.42 |
|
Amendment to Employment Agreement dated as of December 30, 2008 by and between the Company and Steven M. Saferin, which amended Mr. Saferin's Employment Agreement dated as of January 1, 2006, as amended by the Letter Agreement dated as of August 5, 2008.*() |
10.43 |
|
Employment and Severance Benefits Agreement dated December 15, 2005 between the Company and Ira H. Raphaelson (incorporated by reference to Exhibit 10.22 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2005).* |
10.44 |
|
Letter Agreement dated as of August 2, 2006 by and between the Company and Ira H. Raphaelson, which amended Mr. Raphaelson's Employment Agreement dated December 15, 2005 (effective as of February 1, 2006) (incorporated by reference to Exhibit 10.11 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2006).* |
10.45 |
|
Letter Agreement dated as of October 6, 2008 by and between the Company and Ira H. Raphaelson, which amended Mr. Raphaelson's Employment and Severance Benefits Agreement dated December 15, 2005, as amended by the Letter Agreement dated as of August 2, 2006.*() |
10.46 |
|
Amendment to Employment Agreement dated as of December 30, 2008 by and between the Company and Ira H. Raphaelson, which amended Mr. Raphaelson's Employment and Severance Benefits Agreement dated December 15, 2005, as amended by the Letter Agreement dated as of August 2, 2006 and the Letter Agreement dated as of October 6, 2008.*() |
10.47 |
|
Employment Agreement dated as of February 11, 2009 (effective as of January 1, 2009) by and between the Company and Stephen L. Gibbs.*() |
10.48 |
|
Employment Inducement Stock Option Grant Agreement dated July 1, 2005 between the Company and Michael Chambrello (incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2005).* |
137
Exhibit
Number |
Description | |
---|---|---|
10.49 | Employment Inducement Stock Option Grant Agreement dated August 8, 2005 between the Company and Steven Beason (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2005).* | |
12 |
|
Computation of Ratio of Earnings to Fixed Charges.() |
21 |
|
List of Subsidiaries.() |
23.1 |
|
Consent of Deloitte & Touche LLP, Independent Registered Public Accounting Firm.() |
23.2 |
|
Consent of Reconta Ernst & Young S.p.A., Independent Registered Public Accounting Firm.() |
31.1 |
|
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.() |
31.2 |
|
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.() |
32.1 |
|
Certification of Chief Executive Officer 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 Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.() |
99.1 |
|
Report of Reconta Ernst & Young S.p.A., Independent Registered Public Accounting Firm.() |
99.2 |
|
Financial Statements of Consorzio Lotterie Nazionali.() |
138
Pursuant to the requirements of Section 13 or 15(d) 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.
March 2, 2009 | SCIENTIFIC GAMES CORPORATION | |
|
|
/s/ JOSEPH R. WRIGHT |
Joseph R. Wright
Chief Executive Officer and Vice Chairman of the Board |
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on March 2, 2009.
Signature
|
Title
|
|
---|---|---|
|
|
|
/s/ JOSEPH R. WRIGHT
Joseph R. Wright |
Chief Executive Officer and Vice Chairman of the Board (principal executive officer) | |
/s/ DEWAYNE E. LAIRD DeWayne E. Laird |
|
Vice President and Chief Financial Officer (principal financial officer) |
/s/ STEPHEN L. GIBBS Stephen L. Gibbs |
|
Vice President, Chief Accounting Officer and Corporate Controller (principal accounting officer) |
/s/ A. LORNE WEIL A. Lorne Weil |
|
Chairman of the Board |
/s/ PETER A. COHEN Peter A. Cohen |
|
Director |
/s/ GERALD J. FORD Gerald J. Ford |
|
Director |
/s/ J. ROBERT KERREY J. Robert Kerrey |
|
Director |
139
Signature
|
Title
|
|
---|---|---|
|
|
|
/s/ ERIC M. TURNER
Eric M. Turner |
Director | |
/s/ RONALD O. PERELMAN Ronald O. Perelman |
|
Director |
/s/ BARRY F. SCHWARTZ Barry F. Schwartz |
|
Director |
/s/ MICHAEL J. REGAN Michael J. Regan |
|
Director |
140
Exhibit
Number |
Description | |
---|---|---|
3.1 | (a) | Restated Certificate of Incorporation of the Company, filed with the Secretary of State of the State of Delaware on March 20, 2003 (incorporated by reference to Exhibit 3.1 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2002). |
3.1 |
(b) |
Certificate of Amendment of the Restated Certificate of Incorporation of the Company, filed with the Secretary of State of the State of Delaware on June 7, 2007 (incorporated by reference to Exhibit 3.1(b) to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2007). |
3.2 |
|
Amended and Restated Bylaws of the Company (incorporated by reference to Exhibit 3.1 to the Company's Current Report on Form 8-K filed on December 14, 2007). |
4.1 |
|
Indenture, dated as of December 23, 2004, among the Company, as issuer, the subsidiary guarantors party thereto, and Wells Fargo, National Association, as trustee, relating to the 6.25% Senior Subordinated Notes Due 2012 (incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K filed on December 30, 2004). |
4.2 |
|
Registration Rights Agreement, dated December 23, 2004, among the Company, the subsidiary guarantors party thereto, and J.P. Morgan Securities Inc., Bear Stearns & Co. Inc., Jefferies & Company, Inc., Ramius Securities, LLC, ABN AMRO Incorporated, BNY Capital Markets, Inc. and Commerzbank Capital Markets Corp. relating to the 6.25% Senior Subordinated Notes Due 2012 (incorporated by reference to Exhibit 4.2 to the Company's Registration Statement on Form S-4 (No. 333-124106) filed on April 15, 2005 (the "2005 S-4")). |
4.3 |
|
Form of 6.25% Senior Subordinated Note (incorporated by reference to Exhibits 4.3(a) and 4.3(b) to the 2005 S-4). |
4.4 |
|
Indenture, dated as of December 23, 2004, among the Company, as issuer, the subsidiary guarantors party thereto, and Wells Fargo, National Association, as trustee, relating to the 0.75% Convertible Senior Subordinated Notes Due 2024 (incorporated by reference to Exhibit 4.2 to the Company's Current Report on Form 8-K filed on December 30, 2004). |
4.5 |
|
Registration Rights Agreement, dated December 23, 2004 by and among the Company, the Subsidiary Guarantors, and J.P. Morgan Securities Inc. and Bear, Stearns & Co. Inc. as representatives of the Initial Purchasers and Jefferies & Company, Inc., Ramius Securities, LLC, BNY Capital Markets, Inc., Commerzbank Capital Markets Corp. and LaSalle Debt Capital Markets, a division of ABN AMRO Financial Services, Inc. relating to the 0.75% Convertible Senior Subordinated Notes Due 2024 (incorporated by reference to Exhibit 4.2 to the Company's Registration Statement on Form S-3 (No. 333-124107) filed on April 15, 2005 (the "2005 S-3")). |
4.6 |
|
Form of 0.75% Convertible Senior Subordinated Debenture (incorporated by reference to Exhibits 4.3(a) and 4.3(b) to the 2005 S-3). |
4.7 |
|
International Swaps and Derivative Association, Inc. Confirmation, dated December 23, 2004, between JPMorgan Chase Bank, National Association, and the Company with respect to Warrants (the "JPMorgan Confirmation") (incorporated by reference to Exhibit 4.3 to the Company's Current Report on Form 8-K filed on December 30, 2004). |
141
Exhibit
Number |
Description | |
---|---|---|
4.8 | International Swaps and Derivative Association, Inc. Confirmation, dated December 23, 2004, between Bear Stearns International Limited and the Company with respect to Warrants (the "Bear Confirmation") (incorporated by reference to Exhibit 4.4 to the Company's Current Report on Form 8-K filed on December 30, 2004). | |
4.9 |
|
Amendment dated December 23, 2004 to the JPMorgan Confirmation (incorporated by reference to Exhibit 4.5 to the Company's Current Report on Form 8-K filed on December 30, 2004). |
4.10 |
|
Amendment dated December 23, 2004 to the Bear Confirmation (incorporated by reference to Exhibit 4.6 to the Company's Current Report on Form 8-K filed on December 30, 2004). |
4.11 |
|
Indenture, dated as of June 11, 2008, among Scientific Games International, Inc., as issuer, the Company, as a guarantor, the subsidiary guarantors party thereto, and The Bank of Nova Scotia Trust Company of New York, as trustee, relating to the 7.875% Senior Subordinated Notes due 2016 (incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K filed on June 13, 2008). |
4.12 |
|
Registration Rights Agreement, dated June 11, 2008, by and among Scientific Games International, Inc., the Company, the subsidiary guarantors listed therein, and J.P. Morgan Securities Inc., Banc of America Securities LLC and UBS Securities LLC, as representatives for the initial purchasers listed therein, relating to the 7.875% Senior Subordinated Notes due 2016 (incorporated by reference to Exhibit 4.2 to the Company's Current Report on Form 8-K filed on June 13, 2008). |
4.13 |
|
Form of 7.875% Senior Subordinated Notes due 2016 (incorporated by reference to Exhibits 4.3(a) and 4.3(b) to the Company's Registration Statement on Form S-3ASR (No. 333-155346) filed on November 13, 2008). |
10.1 |
|
Credit Agreement, dated as of June 9, 2008, among Scientific Games International, Inc., as borrower, the Company, as a guarantor, the several lenders from time to time parties thereto, and JPMorgan Chase Bank, N.A., as administrative agent, J.P. Morgan Securities Inc. and Banc of America Securities LLC, as joint lead arrangers and joint bookrunners, Bank of America, N.A. and UBS Securities LLC, as co-syndication agents, and ING Capital LLC and Bank of TokyoMitsubishi UFJ Trust Company, as co-documentation agents (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8 K filed on June 13, 2008). |
10.2 |
|
Guarantee and Collateral Agreement, dated as of June 9, 2008, among Scientific Games International, Inc., the Company, as a guarantor, and each other subsidiary of the Company listed on the signature pages thereto, as additional guarantors, in favor of JPMorgan Chase Bank, N.A., as administrative agent (incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K filed on June 13, 2008). |
10.3 |
|
Stockholders' Agreement, dated September 6, 2000, by and among the Company, MacAndrews & Forbes Holdings Inc. (formerly known as Mafco Holdings Inc.) ("MacAndrews") (as successor in interest under the agreement to Cirmatica Gaming S.A.) and Ramius Securities, LLC (incorporated by reference to Exhibit 10.38 to the Company's Quarterly Report on Form 10-Q for the quarter ended July 31, 2000). |
142
Exhibit
Number |
Description | |
---|---|---|
10.4 | Supplemental Stockholders' Agreement, dated June 26, 2002, by and among the Company and MacAndrews (as successor in interest to Cirmatica Gaming S.A.) (incorporated by reference to Exhibit 4.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2002). | |
10.5 |
|
Letter Agreement, dated as of October 10, 2003, by and between the Company and MacAndrews further supplementing the Stockholders' Agreement (incorporated by reference to Exhibit 3 to the Schedule 13D jointly filed by MacAndrews and SGMS Acquisition Corporation on November 26, 2003). |
10.6 |
|
Letter Agreement dated February 15, 2007 between the Company and MacAndrews & Forbes Holdings Inc. (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on February 16, 2007). |
10.7 |
|
Stock Purchase Agreement, dated as of May 1, 2007, by and among François-Charles Oberthur Fiduciaire, S.A., the Company and Scientific Games Holdings (Canada) Inc. (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on May 7, 2007). |
10.8 |
|
Agreement, dated April 20, 2006, among the Company, Scientific Games International Holdings Limited, Scientific Games Beteiligungsgesellschaft mbH, Walter Grubmueller, Stephen George Frater, The Trustees of Warero Privatsitiftung and Jeffery Frederick Nash for the sale and purchase of the entire issued share capital of Neomi Associates, Inc. and Research and Development GmbH (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on April 26, 2006). |
10.9 |
|
Share Purchase and Sale Agreement, dated April 4, 2005, by and among Scientific Games Chile Limitada, Epicentro S.A. and Inversiones Y Aesorias Iculpe Limitada (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on April 8, 2005). |
10.10 |
|
1992 Equity Incentive Plan, as amended and restated (incorporated by reference to Exhibit 10.33 to the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1998).* |
10.11 |
|
1995 Equity Incentive Plan, as amended (incorporated by reference to Exhibit 10.14 to the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1997).* |
10.12 |
|
1997 Incentive Compensation Plan, as amended and restated (incorporated by reference to Exhibit 10.14 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2001).* |
10.13 |
|
2003 Incentive Compensation Plan, as amended and restated (incorporated by reference to Exhibit 10.3 to the Company's Current Report on Form 8-K filed on June 13, 2008).* |
10.14 |
|
Elective Deferred Compensation Plan (Executive Deferred Compensation Plan and Non-Employee Directors Deferred Compensation Plan) (effective January 1, 2005, as amended and restated effective January 1, 2009).*() |
10.15 |
|
Frozen Supplemental Executive Retirement Plan (as amended and restated effective January 1, 2009).*() |
143
Exhibit
Number |
Description | |
---|---|---|
10.16 | 2002 Employee Stock Purchase Plan, as amended and restated (incorporated by reference to Exhibit 10.14 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2005).* | |
10.17 |
|
Employment Agreement dated as of January 1, 2006 by and between the Company and A. Lorne Weil (executed on August 8, 2006) (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2006).* |
10.18 |
|
Letter dated August 2, 2007 between A. Lorne Weil and the Company with respect to payment of Mr. Weil's deferred compensation upon a termination of employment under Mr. Weil's Employment Agreement dated as of January 1, 2006 (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2007).* |
10.19 |
|
Amendment to Employment Agreement dated as of May 1, 2008 by and between the Company and A. Lorne Weil (executed on May 12, 2008), which amended Mr. Weil's Employment Agreement dated as of January 1, 2006, as amended by the Letter dated August 2, 2007 (incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K filed on May 14, 2008).* |
10.20 |
|
Amendment to Employment Agreement dated as of December 30, 2008 by and between the Company and A. Lorne Weil, which amended Mr. Weil's Employment Agreement dated as of January 1, 2006, as amended by the Letter dated August 2, 2007 and the Amendment dated as of May 1, 2008.*() |
10.21 |
|
Employment Agreement dated as of May 1, 2008 by and between the Company and Joseph R. Wright (executed on May 14, 2008) (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on May 14, 2008).* |
10.22 |
|
Amendment to Employment Agreement dated as of December 30, 2008 by and between the Company and Joseph R. Wright, which amended Mr. Wright's Employment Agreement dated as of May 1, 2008.*() |
10.23 |
|
Employment Agreement dated as of July 1, 2005 between the Company and Michael Chambrello (executed on June 17, 2005) (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2005).* |
10.24 |
|
Letter Agreement dated as of August 2, 2006 by and between the Company and Michael R. Chambrello, which amended Mr. Chambrello's Employment Agreement dated as of July 1, 2005 (incorporated by reference to Exhibit 10.9 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2006).* |
10.25 |
|
Letter Agreement dated as of May 8, 2008 by and between the Company and Michael R. Chambrello, which amended Mr. Chambrello's Employment Agreement dated as of July 1, 2005, as amended by the Letter Agreement dated as of August 2, 2006 (incorporated by reference to Exhibit 10.3 to the Company's Current Report on Form 8-K filed on May 14, 2008).* |
10.26 |
|
Amendment to Employment Agreement dated as of December 30, 2008 by and between the Company and Michael R. Chambrello, which amended Mr. Chambrello's Employment Agreement dated as of July 1, 2005, as amended by the Letter Agreement dated as of August 2, 2006 and the Letter Agreement dated as of May 8, 2008.*() |
144
Exhibit
Number |
Description | |
---|---|---|
10.27 | Employment Agreement dated as of November 1, 2002 between the Company and DeWayne E. Laird (executed on May 17, 2004) (incorporated by reference to Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2004).* | |
10.28 |
|
Letter Agreement dated as of August 2, 2006 by and between the Company and DeWayne E. Laird (effective as of January 1, 2006), which amended Mr. Laird's Employment Agreement dated as of November 1, 2002 (incorporated by reference to Exhibit 10.10 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2006).* |
10.29 |
|
Letter Agreement dated as of October 7, 2008 by and between the Company and DeWayne E. Laird, which amended Mr. Laird's Employment Agreement dated as of November 1, 2002, as amended by the Letter Agreement dated as of August 2, 2006.*() |
10.30 |
|
Amendment to Employment Agreement dated as of December 30, 2008 by and between the Company and DeWayne E. Laird, which amended Mr. Laird's Employment Agreement dated as of November 1, 2002, as amended by the Letter Agreement dated as of August 2, 2006 and the Letter Agreement dated as of October 7, 2008.*() |
10.31 |
|
Employment Agreement dated as of January 1, 2006 by and between the Company and Robert C. Becker (executed on August 2, 2006) (incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2006).* |
10.32 |
|
Letter Agreement dated as of October 7, 2008 by and between the Company and Robert C. Becker, which amended Mr. Becker's Employment Agreement dated as of January 1, 2006.*() |
10.33 |
|
Amendment to Employment Agreement dated as of December 30, 2008 by and between the Company and Robert C. Becker, which amended Mr. Becker's Employment Agreement dated as of January 1, 2006, as amended by the Letter Agreement dated as of October 7, 2008.*() |
10.34 |
|
Superseding Employment, Separation, Non-Competition and General Release Agreement dated as of March 5, 2009 by and between the Company and Sally L. Conkright (executed on January 14, 2009).*() |
10.35 |
|
Employment Agreement dated as of January 1, 2006 by and between the Company and Larry Potts (executed on August 2, 2006) (incorporated by reference to Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2006).* |
10.36 |
|
Letter Agreement dated as of October 2, 2008 by and between the Company and Larry Potts, which amended Mr. Potts' Employment Agreement dated as of January 1, 2006.*() |
10.37 |
|
Amendment to Employment Agreement dated as of December 30, 2008 by and between the Company and Larry Potts, which amended Mr. Potts' Employment Agreement dated as of January 1, 2006, as amended by the Letter Agreement dated as of October 2, 2008.*() |
145
Exhibit
Number |
Description | |
---|---|---|
10.38 | Superseding Employment, Separation and General Release Agreement dated as of July 1, 2008 by and between Scientific Games International, Inc. and William J. Huntley (executed on June 3, 2008) (incorporated by reference to Exhibit 10.7 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2008).* | |
10.39 |
|
Amendment to Superseding Employment, Separation and General Release Agreement dated as of December 30, 2008 by and between the Company and William J. Huntley, which amended Mr. Huntley's Superseding Employment, Separation and General Release Agreement dated as of July 1, 2008.*() |
10.40 |
|
Employment Agreement dated as of January 1, 2006 by and between Scientific Games International, Inc. and Steven M. Saferin (executed on August 2, 2006) (incorporated by reference to Exhibit 10.6 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2006).* |
10.41 |
|
Letter Agreement dated as of August 5, 2008 by and between the Company and Steven M. Saferin, which amended Mr. Saferin's Employment Agreement dated as of January 1, 2006 (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on August 8, 2008).* |
10.42 |
|
Amendment to Employment Agreement dated as of December 30, 2008 by and between the Company and Steven M. Saferin, which amended Mr. Saferin's Employment Agreement dated as of January 1, 2006, as amended by the Letter Agreement dated as of August 5, 2008.*() |
10.43 |
|
Employment and Severance Benefits Agreement dated December 15, 2005 between the Company and Ira H. Raphaelson (incorporated by reference to Exhibit 10.22 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2005).* |
10.44 |
|
Letter Agreement dated as of August 2, 2006 by and between the Company and Ira H. Raphaelson, which amended Mr. Raphaelson's Employment Agreement dated December 15, 2005 (effective as of February 1, 2006) (incorporated by reference to Exhibit 10.11 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2006).* |
10.45 |
|
Letter Agreement dated as of October 6, 2008 by and between the Company and Ira H. Raphaelson, which amended Mr. Raphaelson's Employment and Severance Benefits Agreement dated December 15, 2005, as amended by the Letter Agreement dated as of August 2, 2006.*() |
10.46 |
|
Amendment to Employment Agreement dated as of December 30, 2008 by and between the Company and Ira H. Raphaelson, which amended Mr. Raphaelson's Employment and Severance Benefits Agreement dated December 15, 2005, as amended by the Letter Agreement dated as of August 2, 2006 and the Letter Agreement dated as of October 6, 2008.*() |
10.47 |
|
Employment Agreement dated as of February 11, 2009 (effective as of January 1, 2009) by and between the Company and Stephen L. Gibbs.*() |
10.48 |
|
Employment Inducement Stock Option Grant Agreement dated July 1, 2005 between the Company and Michael Chambrello (incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2005).* |
146
Exhibit
Number |
Description | |
---|---|---|
10.49 | Employment Inducement Stock Option Grant Agreement dated August 8, 2005 between the Company and Steven Beason (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2005).* | |
12 |
|
Computation of Ratio of Earnings to Fixed Charges.() |
21 |
|
List of Subsidiaries.() |
23.1 |
|
Consent of Deloitte & Touche LLP, Independent Registered Public Accounting Firm.() |
23.2 |
|
Consent of Reconta Ernst & Young S.p.A., Independent Registered Public Accounting Firm.() |
31.1 |
|
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.() |
31.2 |
|
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.() |
32.1 |
|
Certification of Chief Executive Officer 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 Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.() |
99.1 |
|
Report of Reconta Ernst & Young S.p.A., Independent Registered Public Accounting Firm.() |
99.2 |
|
Financial Statements of Consorzio Lotterie Nazionali.() |
147
Exhibit 10.14
SCIENTIFIC GAMES CORPORATION
ELECTIVE DEFERRED COMPENSATION PLAN
Executive Deferred Compensation Plan
and
Non-Employee Directors Deferred Compensation Plan
(effective January 1, 2005, as amended and restated effective January 1, 2009)
Table of Contents
|
|
Page |
|
|
|
ARTICLE I |
INTRODUCTION |
1 |
1.1 |
Purpose; Prior Plan |
1 |
1.2 |
New Plan Effective January 1, 2005 |
1 |
1.3 |
Construction |
1 |
1.4 |
Separate Plans for Executives and Non-Employee Directors |
2 |
|
|
|
ARTICLE II |
DEFINITIONS |
2 |
2.1 |
Account |
2 |
2.2 |
Change in Control Event |
2 |
2.3 |
Code |
3 |
2.4 |
Company |
3 |
2.5 |
Compensation |
3 |
2.6 |
Disability |
3 |
2.7 |
Election Form |
4 |
2.8 |
Elective Deferral |
4 |
2.9 |
Eligible Individual |
4 |
2.10 |
Employer |
4 |
2.11 |
Employment |
4 |
2.12 |
ERISA |
4 |
2.13 |
Investment Vehicle |
4 |
2.14 |
Participant |
4 |
2.15 |
Performance Bonus |
4 |
2.16 |
Plan |
4 |
2.17 |
Plan Administrator |
4 |
2.18 |
Regulations |
4 |
2.19 |
Separation from Service |
5 |
2.20 |
Specified Distribution Date |
5 |
2.21 |
Specified Employee |
6 |
2.22 |
Subsidiary |
6 |
2.23 |
Subsidiary Change in Control Event |
6 |
2.24 |
Trust |
6 |
2.25 |
Trustee |
6 |
2.26 |
Unforeseeable Emergency |
6 |
|
|
|
ARTICLE III |
PARTICIPATION |
6 |
3.1 |
Eligible Individuals |
6 |
3.2 |
Commencement of Participation |
7 |
3.3 |
Continued Participation |
7 |
Table of Contents
|
|
Page |
|
|
|
ARTICLE IV |
DEFERRAL ELECTIONS |
8 |
4.1 |
Deferrals of Salary |
8 |
4.2 |
Deferrals of Cash Bonuses |
8 |
4.3 |
Deferrals of Directors Compensation |
8 |
4.4 |
New Mid-Year Eligibles |
8 |
4.5 |
New Outside Directors |
9 |
4.6 |
Mechanics of Deferral |
9 |
4.7 |
Irrevocability |
9 |
|
|
|
ARTICLE V |
ACCOUNTS |
9 |
5.1 |
Accounts |
9 |
5.2 |
Deemed Investment of Accounts |
10 |
|
|
|
ARTICLE VI |
VESTING |
10 |
6.1 |
General |
10 |
|
|
|
ARTICLE VII |
DISTRIBUTION EVENTS |
10 |
7.1 |
Specified Distribution Date |
10 |
7.2 |
Separation from Service |
11 |
7.3 |
Change in Control Event |
11 |
7.4 |
Disability |
11 |
7.5 |
Death |
11 |
7.6 |
Beneficiaries |
11 |
7.7 |
Unforeseeable Emergency |
12 |
7.8 |
Medium of Distribution |
13 |
7.9 |
Actual Payment Date |
13 |
7.10 |
Taxes |
13 |
7.11 |
Acceleration generally prohibited |
13 |
7.12 |
Delay under Section 162(m) |
13 |
7.13 |
Delays to comply with Securities and other Laws |
14 |
7.14 |
Transition Rule Elections |
14 |
|
|
|
ARTICLE VIII |
PLAN ADMINISTRATOR |
14 |
8.1 |
Plan Administration and Interpretation |
14 |
8.2 |
Powers, Duties, Procedures, Etc. |
15 |
8.3 |
Information |
15 |
8.4 |
Indemnification of Plan Administrator |
15 |
|
|
|
ARTICLE IX |
AMENDMENT AND TERMINATION |
15 |
9.1 |
Amendments |
15 |
9.2 |
Termination of Plan |
15 |
ii
Table of Contents
|
|
Page |
|
|
|
9.3 |
Existing Rights |
16 |
|
|
|
ARTICLE X |
MISCELLANEOUS |
16 |
10.1 |
No Funding |
16 |
10.2 |
Non-Assignability |
16 |
10.3 |
Limitation of Participants Rights |
16 |
10.4 |
Participants Bound |
17 |
10.5 |
Release |
17 |
10.6 |
Administrative Processing Considerations |
17 |
10.7 |
Correction of Error |
17 |
10.8 |
Governing Law |
18 |
10.9 |
Headings and Subheadings |
18 |
iii
SCIENTIFIC GAMES CORPORATION
ELECTIVE DEFERRED COMPENSATION PLAN
Executive Deferred Compensation Plan
and
Non-Employee Directors Deferred Compensation Plan
(effective January 1, 2005, as amended and restated effective January 1, 2009)
The Scientific Games Corporation Elective Deferred Compensation Plan established as of January 1, 2005 (the Plan) is hereby amended and restated in its entirety to read as follows, effective as of January 1, 2009, except as otherwise provided.
Effective October 8, 1998, Scientific Games Corporation (prior to April 27, 2001, Autotote Corporation) adopted the Scientific Games Corporation Key Executive Deferred Compensation Plan (the Prior Plan) to provide a means by which eligible individuals may elect to defer receipt of designated percentages or amounts of their bonuses, and later, pursuant to amendment effective as of December 11, 2001, to make salary deferrals. The Prior Plan as so amended shall continue to be administered in accordance with the terms in effect on October 3, 2004, but shall be limited in its application to benefits attributable to deferrals of salary for 2004 or prior years and bonuses payable for 2004 or prior years (all of which were earned and vested on December 31, 2004) under the terms of the Companys Management Incentive Compensation Program and Compensation Committee action taken thereunder.
Effective January 1, 2005, this Plan, which shall be known as the Scientific Games Corporation Elective Deferred Compensation Plan, was adopted to provide benefits substantially similar to those provided under the Prior Plan on terms modified to comply with Section 409A of the Internal Revenue Code of 1986, as amended (Section 409A) and regulations and other guidance thereunder. Effective January 1, 2009, this amendment and restatement of the Plan was adopted in order to comply with the final regulations under Section 409A (the Regulations).
This Plan shall be administered and interpreted in accordance with Section 409A and the Regulations. Accordingly, no provision hereof shall be construed in any manner that would violate Section 409A or the Regulations. In addition, to the maximum extent permitted by applicable law, no provision of the Plan inconsistent with Section 409A or the Regulations shall be valid or given any effect whatever.
1
For purposes of ERISA and Section 409A, the Plan as set forth in this instrument consists of two separate plans, one for eligible key employees (the Executive Deferred Compensation Plan), and one for non-employee directors (the Non-Employee Directors Deferred Compensation Plan), each governed by those Plan terms which either apply without distinction to both eligible employees and non-employee directors or apply specifically to that particular plan. The Plan with respect to eligible employees is intended to be a plan that is unfunded and is maintained by an employer primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees within the meaning of sections 201(2) and 301(a)(3) of ERISA, and shall be interpreted and administered to the extent possible in a manner consistent with that intent.
Notwithstanding any other provision of the Plan, the entire benefit accrued and vested under the Prior Plan as of December 31, 2004 by the Participant serving as Chief Executive Officer of the Company as of January 1, 2006, pursuant to an employment agreement with the Company effective as of such date, shall be payable solely under this Plan (and no portion thereof shall be payable under the Prior Plan), and the date(s) of payment thereof, other than by reason of Disability or death, shall be the specified dates of payment (within the meaning of Section 409A) set forth in the amendment to such employment agreement executed on May 12, 2008.
Wherever used herein, the following terms have the meanings set forth below, unless a different meaning is clearly required by the context:
(a) 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 and any employee benefit plan sponsored or maintained by the Company or any subsidiary (including any trustee of such plan acting as trustee), 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 Companys then outstanding securities;
(b) the stockholders of the Company approve a merger, consolidation, recapitalization or reorganization of the Company, or the consummation of any such transactions if stockholder
2
approval is not obtained, other than any such transaction which 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 prior to such transaction being beneficially owned by persons who together beneficially owned at least 80% of the combined voting power of the securities of the Company outstanding immediately prior to such transaction; provided that , for purposes of this paragraph (b), 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;
(c) the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the its assets (or any transaction having a similar effect); or
(d) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board of Directors of the Company (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 paragraph (a), (b), or (c) of this Section) whose election by the Board or nomination for election by the Companys 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 of nomination for election was previously so approved (the Continuing Directors), cease for any reason to constitute a majority of the Board;
provided that in any such case, such occurrence constitutes a change in control event as defined in the Regulations.
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4
5
The following categories of individuals are eligible to participate in the Plan for a particular calendar year:
6
Any Eligible Individual who elects to defer part of his or her Compensation in accordance with Article IV shall become a Participant in the Plan as of the date such election becomes irrevocable in accordance with Article IV.
A Participant in the Plan shall continue to be a Participant so long as any amount remains credited to his or her Account.
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An employee who is an Eligible Individual may elect to defer a specified percentage, not to exceed 50%, of his or her base salary payable for a calendar year by completing an Election Form and filing it with the Plan Administrator not later than the last day of preceding calendar year or such earlier deadline as the Plan Administrator may prescribe.
An employee who is an Eligible Individual may elect to defer up to 100% of his cash bonus under the Companys Management Incentive Compensation Program (and/or any other bonus program designated by the Company for inclusion in the Plan) calculated with reference to a particular calendar year (or identifiable portion thereof) by completing an Election Form and filing it with the Plan Administrator (a) not later than the last day of the preceding calendar year or such earlier deadline as the Plan Administrator may prescribe, or (b) if such annual bonus constitutes a Performance Bonus and the Plan Administrator so permits, not later than June 30 of the calendar year in respect of which such bonus is payable.
An employee who first becomes an Eligible Individual as of a date other than the first day of calendar year, and who was not previously eligible to participate in the Plan (or Prior Plan) or any other elective account balance nonqualified deferred compensation plan (a Similar Plan) in his or her capacity as an employee of the Company or any Subsidiary, may elect, by completing an Election Form and filing it with the Plan Administrator within thirty (30) days after such date, to defer up to 50% of his or her salary for pay periods in such calendar year beginning after the date of such election, and up to 100% of his or her cash bonus for such year under the Companys Management Incentive Compensation Program (and/or any other bonus program designated by the Company for inclusion in the Plan) and allocable on a prorata basis to the portion of such year following the date of his or her deferral. The Plan Administrator may, in its discretion, extend the application of this Section 4.4 to one or more employees who were formerly eligible to participate in the Plan or a Similar Plan as an eligible employee but who ceased to be so eligible and who may be treated as newly eligible employees under Treasury Reg. § 1.409A-2(a)(7).
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4.5 New Outside Directors
A newly elected non-employee director who was not previously eligible to participate in the Plan by reason of any prior service as a non-employee director, or in any other elective account balance nonqualified deferred compensation plan of the Company or any Subsidiary in the capacity of either a non-employee director or independent contractor (a Comparable Plan), may elect, by completing an Election Form and filing it with the Plan Administrator within thirty (30) days after becoming such a director, to defer up to 100% of the retainer, fees and other cash compensation payable in respect of services performed as a director during the year of such election and following the date of his or her deferral election. The Plan Administrator may, in its discretion, extend the application of this Section 4.5 to an individual who was formerly eligible to participate in the Plan as a non-employee director or a Comparable Plan but who ceased to be so eligible and who may be treated as newly eligible individual under Treasury Reg. § 1.409A-2(a)(7).
4.6 Mechanics of Deferral
A Participants Compensation shall be reduced in accordance with the Participants election hereunder, and amounts deferred hereunder shall be paid by the Employer to the Trust as soon as administratively feasible after such reduction and credited to the Participants Account as of the date of payment thereof.
4.7 Irrevocability
A Participants deferral election under this Article IV shall be irrevocable after the last date prescribed hereunder for the making of such election; provided, however, that such election may be revoked if necessary in order to permit a hardship withdrawal of section 401(k) contributions under the Scientific Games 401(k) Plan (or any similar plan of the Company or any Subsidiary) prior to age 59-1/2, or in the event of an Unforeseeable Emergency permitting distribution under Section 7.7 hereof. Prior to such date, revocation shall be permitted to the extent (if any) that the Plan Administrator may prescribe.
ARTICLE V
ACCOUNTS
5.1 Accounts
The Plan Administrator shall establish an Account for each Participant reflecting the Participants Elective Deferrals, together with any adjustments for income, gain or loss (determined in accordance with Section 5.2(a)) and any payments from the Account. The Plan Administrator shall establish sub-accounts for each Participant as may be necessary or desirable for the proper administration of the Plan. The Plan Administrator shall provide each Participant with a periodic statement of his or her Account reflecting the income, gains and losses (realized and unrealized), amounts of deferrals, and distributions of such Account since the prior statement.
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5.2 Deemed Investment of Accounts
(a) Adjustment of Accounts . The amount of each Participants Elective Deferral for a calendar year shall be credited to the Participants Account as provided in Section 4.6. The Account shall be adjusted from time to time to reflect (i) subsequent years deferrals, if any, and (ii) gains (or losses) determined as if the Account were invested in one or more Investment Vehicles selected by the Participant. The Plan Administrator may adopt such rules and administrative practices as it shall deem necessary or appropriate in connection with a Participants right to select Investment Vehicles hereunder including restrictions on the timing or frequency of such elections, and all such Investment Vehicle selections shall be made in such form as may be required by the Plan Administrator from time to time.
(b) Investment of Trust Assets . The assets of the Trust shall be invested in such investments (which may, but are not required to be, the Investment Vehicles) as the Trustee shall be directed by the Plan Administrator. Without limiting the generality of the foregoing, the Plan Administrator may, in its discretion, determine to invest Trust assets in such manner as shall minimize the risk that assets of the Trust shall be insufficient to meet the Employers obligations with respect to the Plan and in furtherance thereof may (but shall be under no obligation to) direct the Trustee to invest Trust assets to the maximum extent possible in investments that reflect the Participant selections of the Investment Vehicles to be the basis for the adjustment of their Accounts under Section 5.2(a).
ARTICLE VI
VESTING
6.1 General
Without limitation on Section 10.1, each Participant shall be immediately vested in, i.e. , shall have a nonforfeitable right to, the balance in the Participants Account, to be payable at the time and in the manner provided hereunder.
ARTICLE VII
DISTRIBUTION EVENTS
7.1 Specified Distribution Date
(a) Time of Distribution . Unless sooner distributed by reason of an intervening distribution event under the Plan, a Participant shall receive a distribution of the portion of his or her Account attributable to each Elective Deferral on the Specified Distribution Date for such Elective Deferral.
(b) Extension of Distribution Date . To the extent permitted by the Plan Administrator, each Participant who is employed by the Employer shall be entitled to elect a new, later Specified Distribution Date with respect to the amounts credited to the Participants Account with respect to an Elective Deferral. Any such election shall be made on the Election Form prescribed by the Plan Administrator and shall be delivered to the Plan Administrator no
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later than one year prior to the Participants previous Specified Distribution Date in respect of such Elective Deferral. In addition, the new Specified Distribution Date must be no earlier than five years after the Specified Distribution Date previously in effect and shall be February 28 of the calendar year to which payment is further deferred.
7.2 Separation from Service
In the event of a Participants Separation from Service, the Participant shall receive a distribution of his or her entire Account balance in a single lump sum
(a) If the Participant is a Specified Employee, on the first day following the expiration of six months from the date of such Separation from Service, and
(b) If the Participant is not a Specified Employee, on the thirtieth (30 th ) day following the date of such Separation from Service
7.3 Change in Control Event
Upon a Change in Control Event with respect to the Company, each Participant shall be paid his or her entire Account balance in a single lump sum on the thirtieth (30 th day) following the date of .such Change in Control Event.
7.4 Disability
In the event of a Participants Disability, the Participant shall receive a distribution of his or her entire Account Balance in a single lump sum on the thirtieth (30th) day following the occurrence of such Disability.
7.5 Death
If a Participant dies prior to the complete distribution of his or her Account, the balance of the Account shall be paid in a single lump sum on the fortieth (40 th ) day following the date of death to the Participants designated beneficiary or beneficiaries in effect on the date of the Participants death.
7.6 Beneficiaries
(a) Beneficiary Designation Form . Any designation of a beneficiary shall be made by the Participant on (and only on) a form prescribed by the Plan Administrator (Beneficiary Designation Form) and filed with the Plan Administrator, and may be changed by the Participant at any time by filing another Beneficiary Designation Form containing the revised instructions. Without limiting the generality of the foregoing, the Plan Administrator may, in its discretion, prescribe a single Beneficiary Designation Form for both the Prior Plan and this Plan and require that the same beneficiary designation govern at all times under both Plans.
(b) Failure to Designate . If no beneficiary is designated or no designated beneficiary
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survives the Participant, payment shall be made to the Participants surviving spouse, or, if none, to his or her issue per stirpes , in a single payment. If no spouse or issue survives the Participant, payment shall be made in a single lump sum to the representative of the Participants estate. No payment shall be made to the representative of a Participants estate until the Plan Administrator has been furnished with such evidence as it shall deem necessary or appropriate to establish the validity of the payment.
(c) Proper Beneficiary . If the Plan Administrator has any doubt as to the proper Beneficiary to receive payments hereunder, the Plan Administrator shall have the right to withhold such payments until the matter is finally adjudicated. However, any payment made by the Plan Administrator, in good faith and in accordance with this Plan, shall fully discharge the Company and any other applicable Employer from all further obligations with respect to that payment.
(d) Prior Plan Designations . Notwithstanding anything in Section 7.6(a) or (b) to the contrary, in the event that a Member was a member of the Prior Plan on or before December 31, 2004 (whether or not he is entitled to benefits under the Prior Plan as a result of the amendment and freeze thereof effective December 31, 2004) and had a beneficiary designation in effect under Section 7.4 of such Plan in effect on December 31, 2004, the beneficiary or beneficiaries so designated shall be the Members Beneficiary under this Plan unless and until the Member shall designate another Beneficiary in accordance with Section 7.6(a).
(e) Minor or Incompetent Beneficiary . In making any payments to or for the benefit of any minor or an incompetent Beneficiary, the Plan Administrator, in its sole and absolute discretion, may, but need not, make a payment to a legal or natural guardian or other relative of a minor or court appointed committee of such incompetent. Alternatively, it may make a payment to any adult with whom the minor or incompetent temporarily or permanently resides. The receipt by a guardian, committee, relative or other person shall be a complete discharge to the Company and each other Employer. Neither the Company or any Employer, nor the Plan Administrator, shall have any responsibility to see to the proper application of any payments so made.
7.7 Unforeseeable Emergency
If a Participant suffers an Unforeseeable Emergency, the Plan Administrator, in its sole discretion, may pay to the Participant only that portion, if any, of the Participants Account that the Plan Administrator determines in accordance with the Regulations is necessary to satisfy the emergency need, including any amounts necessary to pay any Federal, State or local income taxes reasonably anticipated to result from the distribution, after taking into account the extent to which such hardship is or may be relieved through reimbursement or compensation by insurance or otherwise or by liquidation of the Participants assets (to the extent the liquidation of such assets would not itself cause severe financial hardship) or by cessation of deferrals under the Plan or any similar plan. A Participant requesting an emergency payment shall apply for the payment in writing in a form approved by the Plan Administrator and shall provide such additional information as the Plan Administrator may require.
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7.8 Medium of Distribution
Each distribution hereunder shall be made in cash and/or in kind as determined by the Plan Administrator.
7.9 Actual Payment Date
The provisions hereof for payment on a particular date shall be construed and may be applied as the Plan Administrator (including the Plan recordkeeper) deems necessary or advisable (taking into account the purpose of the Plan) and in accordance with the Regulations, including without limitation Treasury Reg. § 1.409A-3(d), without liability to any Participant or Beneficiary by reason thereof.
7.10 Taxes
All federal, state or local taxes that the Plan Administrator determines are required to be withheld in respect of any Elective Deferrals hereunder or from any payments made pursuant to this Article VII shall be withheld from amounts payable hereunder or from any other amounts payable to a Participant.
7.11 Acceleration generally prohibited
No acceleration of payments under the Plan shall be permitted except as authorized by the Regulations and approved by the Plan Administrator in its discretion consistent with such Regulations. Without limiting the generality of the foregoing:
(a) Ethics or Conflict of Interest Requirements . Distribution may be accelerated as may be necessary to comply with ethics or conflict of interest requirements in accordance with Treasury Reg. § 1.409A-3(j)(4)(iii).
(b) Payment of employment taxes . Distribution may be accelerated in order to pay (i) the Federal Insurance Contributions Act (FICA) tax imposed under section 3101, section 3121(a) and section 3121(v)(2) of the Code on deferrals under the Plan (the FICA Amount), (ii) Federal, state, local or foreign wage withholding taxes on the FICA Amount, and (iii) additional wage withholding taxes attributable to the pyramiding of wages subject to withholding and taxes. Acceleration shall be permitted under this paragraph (b) only to the extent that the Plan Administrator determines that such tax obligations cannot be readily met from other sources, and the total payment under this paragraph (b) shall not exceed the aggregate of the FICA Amount and related income tax withholding.
7.12 Delay under Section 162(m)
A payment under the Plan may be delayed to the extent that the Company reasonably anticipates that if the payment were made as scheduled, the Employers deduction with respect to such
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payment would not be permitted by reason of section 162(m) of the Code, provided that the payment is made either (a) during the Employers first taxable year in which it is reasonably anticipated that the deduction of such payment will not be barred by section 162(m) or (b) during the period beginning with the date of the Participants Separation from Service and ending on the later of the last day of the taxable year of the Employer in which the Participant separates from service or the 15th day of the third month following such Separation from Service, and all similarly situated Participants are treated on a reasonably consistent basis, and provided further that where any scheduled payment to a specific Participant in a taxable year is delayed in accordance with this Section 7.12, the delay in payment will be treated as a subsequent deferral election unless all scheduled payments to that Participant that could be delayed under this Section 7.12 are also delayed. Where the payment is delayed to a date on or after Separation from Service, the payment will be considered a payment upon a Separation from Service for purposes of the Plan, including for purposes of Section 7.2(b). No election may be provided to the Participant with respect to the timing of the payment under this Section 7.12. The balance credited to each of the Participants Accounts shall continue to be adjusted pursuant to Section 5.2 during the period of any delay in payment under this Section 7.12, including any delay during the period where the Company or the Plan Administrator is determining whether such a delay is necessary or appropriate, up to the last day of the month immediately preceding the date of payment.
7.13 Delays to comply with Securities and other Laws
Payment may be delayed as the Company or the Plan Administrator may determine to be necessary or advisable in order to comply with Federal securities or other applicable laws or as otherwise authorized by applicable with the Regulations, including Treas. Reg.§ 1.409A-2(b)(7). The balance credited to each of the Participants Accounts shall continue to be adjusted pursuant to Section 5.2 during the period of any delay in payment under this Section 7.12, including any delay during the period where the Company or the Plan Administrator is determining whether such a delay is necessary or appropriate.
7.14 Transition Rule Elections
Participants may elect at any time during the period through December 31, 2006 to change the time of payment of any Elective Deferral to any other time of payment permitted at the time of the initial deferral election with respect thereto, provided that no such election made after December 31, 2005 may apply to amounts otherwise payable the year of such election or accelerate into the year of election amounts otherwise payable in a future year.
ARTICLE VIII
PLAN ADMINISTRATOR
8.1 Plan Administration and Interpretation
The Plan Administrator shall oversee the administration of the Plan. The Plan Administrator shall have complete control and authority to determine the rights and benefits and all claims, demands and actions arising out of the provisions of the Plan of any Participant, beneficiary, deceased Participant, or other person having or claiming to have any interest under the Plan. The
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Plan Administrator shall have complete discretion to interpret the Plan and to decide all matters under the Plan. Such interpretation and decision shall be final, conclusive and binding on all Participants and any person claiming under or through any Participant (in the absence of clear and convincing evidence that the Plan Administrator acted arbitrarily and capriciously). Any individual(s) serving as Plan Administrator who is a Participant will not vote or act on any matter relating solely to himself or herself. When making a determination or calculation, the Plan Administrator shall be entitled to rely on information furnished by a Participant, a beneficiary, an Employer or the Trustee. The Plan Administrator shall have the responsibility for complying with any reporting and disclosure requirements of ERISA.
8.2 Powers, Duties, Procedures, Etc.
The Plan Administrator shall have such powers and duties, may adopt such rules and tables, may act in accordance with such procedures, may appoint such officers or agents, may delegate such powers and duties, may receive such reimbursements and compensation, and shall follow such claims and appeal procedures with respect to the Plan as it may establish.
8.3 Information
To enable the Plan Administrator to perform its functions, the Employers shall supply full and timely information to the Plan Administrator on all matters relating to the compensation of Participants, their employment, retirement, death, termination of employment, and such other pertinent facts as the Plan Administrator may require.
8.4 Indemnification of Plan Administrator
The Company agrees to indemnify and to defend to the fullest extent permitted by law any officer(s) or employee(s) who serve as Plan Administrator (including any such individual who formerly served as Plan Administrator) against all liabilities, damages, costs and expenses (including attorneys fees and amounts paid in settlement of any claims approved by the Company) occasioned by any act or omission to act in connection with the Plan, if such act or omission is in good faith.
ARTICLE IX
AMENDMENT AND TERMINATION
9.1 Amendments
The Company shall have the right to amend the Plan from time to time on behalf of all Employers, subject to Section 9.3, by an instrument in writing that has been executed on the Companys behalf by its duly authorized officer.
9.2 Termination of Plan
This Plan is strictly a voluntary undertaking on the part of the Employers and shall not be deemed to constitute a contract between any Employer and any Eligible Individual (or any other person) or a consideration for, or an inducement or condition of employment for, the performance of the
15
services by any Eligible Individual (or other person). The Company reserves the right to terminate the Plan at any time with respect to any or all Participants, subject to Section 9.3, by an instrument in writing that has been executed on the Companys behalf by its duly authorized officer. Upon termination, the Company and other Employers shall continue to maintain the Account of each Participant affected by such termination and pay benefits hereunder as they become due to such Participant as if the Plan had not terminated, but no further deferral shall be available to such Participant for any period after the date of such termination. Alternatively, the Company may determine in its discretion to distribute the remaining balance in the Accounts of all Participants and beneficiaries to the extent authorized by Treasury Reg. § 1.409A-3(j)(ix).
9.3 Existing Rights
No amendment or modification to, or termination of, the Plan shall be effective to the extent that it would reduce the value of a Participants Account immediately prior to the amendment, modification or termination, without the Participants prior written consent, nor (to the extent permitted by law) shall any such amendment or other action be valid or given any effect whatever if and to the extent it is inconsistent with Section 409A or the Regulations.
ARTICLE X
MISCELLANEOUS
10.1 No Funding
The Plan constitutes a mere promise by the Employers to make payments in accordance with the terms of the Plan, and Participants and beneficiaries shall have the status of general unsecured creditors of the Employer. If a Participant has deferred Compensation for service with a Subsidiary, such Subsidiary shall be primarily liable for all obligations under the Plan with respect thereto and the Company shall be secondarily liable thereafter. Nothing in the Plan will be construed to give any employee or any other person rights to any specific assets of the Employer or of any other person. In all events, it is the intent of the Company that the Plan be treated as unfunded for tax purposes and for purposes of Title I of ERISA.
10.2 Non-Assignability
None of the benefits, payments, proceeds or claims of any Participant or beneficiary shall be subject to any claim of any creditor of any Participant or beneficiary and, in particular, the same shall not be subject to attachment or garnishment or other legal process by any creditor of such Participant or beneficiary, nor shall any Participant or beneficiary have any right to alienate, participate, commute, pledge, encumber or assign any of the benefits or payments or proceeds that he or she may expect to receive, contingently or otherwise, under the Plan.
10.3 Limitation of Participants Rights
Nothing contained in the Plan shall confer upon any person a right to be employed or to continue in the employ of the Company or any Subsidiary, or interfere in any way with the right of the Company or any Subsidiary to terminate the employment of a Participant at any time, with or
16
without cause. In addition, nothing shall confer on any individual a right to participate in the Plan in any calendar year. The fact that an individual is an Eligible Individual in one year shall not give the individual a right to participate in the Plan in any other year.
10.4 Participants Bound
Any action with respect to the Plan taken by the Plan Administrator, the Company or any Subsidiary, or the Trustee or any action authorized by or taken at the direction of the Plan Administrator, the Company or any Subsidiary, or the Trustee shall be conclusive upon all Participants and beneficiaries entitled to benefits under the Plan.
10.5 Release
Any payment to any Participant or beneficiary in accordance with the provisions of the Plan shall, to the extent thereof, be in full satisfaction of all claims against the Company or any Subsidiary, the Plan Administrator and the Trustee under the Plan, and the Plan Administrator may, to the extent consistent with the Plan and the Regulations, require such Participant or beneficiary, as a condition precedent to such payment, to execute a receipt and release to such effect. If any Participant or beneficiary is determined by the Plan Administrator to be incompetent by reason of physical or mental disability (including minority) to give a valid receipt and release, the Plan Administrator may cause the payment or payments becoming due to such person to be made to another person for his or her benefit without responsibility on the part of the Plan Administrator, the Company or any Subsidiary, or the Trustee to follow the application or use of such funds.
10.6 Administrative Processing Considerations
Notwithstanding any other provision of the Plan, it shall be recognized that implementation of the accounting, valuation and distribution procedures required under the Plan is dependent upon the Plan recordkeeper receiving complete and accurate information from a variety of different sources on a timely basis. Since events may occur that interrupt or otherwise interfere that in this process, there shall be no guarantee by the Plan that any given information or transaction will be received or processed at the anticipated time and day. In any such events shall occur, any affected transaction will be processed as soon as administratively feasible consistently with the Regulations, without liability to any Participant of Beneficiary by reason thereof.
10.7 Correction of Error
The Plan Administrator may adjust the Accounts of any or all Participants in order to correct errors and rectify omissions in such manner as the Plan Administrator believes will best result in the equitable and nondiscriminatory administration of the Plan and ensure compliance with Section 409A and the Regulations and/or to make use of such correction procedures as may be established to mitigate or avoid penalties for violation thereof, without liability to any Participant or Beneficiary by reason thereof.
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10.8 Governing Law
The Plan shall be construed, administered, and governed in all respects under and by the laws of the State of New York without reference to the principles of conflicts of law, unless preempted by applicable federal law. If any provision of the Plan shall be held by a court of competent jurisdiction to be invalid or unenforceable, the remaining provisions hereof shall continue to be fully effective.
10.9 Headings and Subheadings
Headings and subheadings in this Plan are inserted for convenience only and are not to be considered in the construction of the provisions hereof.
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IN WITNESS WHEREOF, the Board of Directors of the Company has duly adopted this amended and restated Plan on behalf of the Company and other Employers and caused it to be executed by the undersigned officers of the Company this 31 st day of December, 2008.
Attest: |
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Scientific Games Corporation |
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/s/ Jack B. Sarno |
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By: |
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/s/ DeWayne E. Laird |
Jack B. Sarno |
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Name: |
DeWayne E. Laird |
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Title: |
Vice President |
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Exhibit 10.15
SCIENTIFIC GAMES CORPORATION
FROZEN SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
(as amended and restated effective January 1, 2009)
Table of Contents
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Page |
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ARTICLE I |
INTRODUCTION |
1 |
1.1 |
Purpose; Old Plan |
1 |
1.2 |
2005 Plan |
1 |
1.3 |
Complete Discontinuance of Plan |
1 |
1.4 |
Consolidated Plan Document and Roadmap |
2 |
1.5 |
Construction |
2 |
1.6 |
Amendments to Comply with Regulations |
2 |
1.7 |
Coordination with CEO Employment Agreement |
2 |
|
|
|
ARTICLE II |
DEFINITIONS |
3 |
2.1 |
Beneficiary |
3 |
2.2 |
Board of Directors |
3 |
2.3 |
Change of Control |
3 |
2.4 |
Code |
4 |
2.5 |
Committee |
4 |
2.6 |
Company |
4 |
2.7 |
Disability |
4 |
2.8 |
ERISA |
4 |
2.9 |
Final Earnings |
4 |
2.10 |
Grandfathered Benefit |
4 |
2.11 |
Interest |
5 |
2.12 |
Member |
5 |
2.13 |
New Plan Benefit |
5 |
2.14 |
Old Plan |
5 |
i
Table of Contents
(continued)
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Page |
|
|
|
|
2.15 |
Old Plan Benefit |
5 |
2.16 |
Old Plan Discount Rate |
6 |
2.17 |
Plan |
6 |
2.18 |
Regulations |
6 |
2.19 |
Separation from Service |
6 |
2.20 |
Specified Employee |
7 |
2.21 |
Subsidiary |
7 |
2.22 |
Threatened Change of Control |
7 |
2.23 |
Total Frozen Benefit |
7 |
2.24 |
Trust |
7 |
|
|
|
ARTICLE III |
PAYMENT OF BENEFITS |
8 |
3.1 |
Old Plan Benefit Payable on Retirement |
8 |
3.2 |
New Plan Benefit Payable upon Separation from Service |
8 |
3.3 |
Disability |
8 |
3.4 |
Distributions to Specified Employees Based on Separation from Service |
8 |
3.5 |
Death |
8 |
3.6 |
Beneficiaries |
9 |
3.7 |
Withholding for Taxes |
10 |
3.8 |
Acceleration Generally Prohibited |
10 |
3.9 |
Vesting |
10 |
3.10 |
Delay under Section 162(m) |
10 |
|
|
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ARTICLE IV |
PLAN ADMINISTRATION |
11 |
4.1 |
Committee |
11 |
ii
Table of Contents
(continued)
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Page |
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4.2 |
Committee Authority |
11 |
4.3 |
Indemnification |
11 |
4.4 |
Change of Control |
11 |
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ARTICLE V |
CLAIMS PROCEDURE |
11 |
5.1 |
Administrator of Claims Procedure |
11 |
5.2 |
Claims |
12 |
5.3 |
Denial of Claims |
12 |
5.4 |
Appeal of Denial of Claims |
12 |
5.5 |
Appeal |
13 |
5.6 |
Written Decision on Appeal |
13 |
5.7 |
Resolution of Disputes |
13 |
|
|
|
ARTICLE VI |
GENERAL |
14 |
6.1 |
Unsecured Creditor Status |
14 |
6.2 |
Source of Payment |
14 |
6.3 |
Effect of Plan on Compensation |
14 |
6.4 |
Nontransferable |
14 |
6.5 |
Amendment of Plan |
14 |
6.6 |
Prohibition against Acceleration |
15 |
6.7 |
No Employment Rights |
15 |
6.8 |
Binding Effect |
15 |
6.9 |
Governing Law |
15 |
6.10 |
Severability |
15 |
6.11 |
Titles |
16 |
iii
Table of Contents
(continued)
|
Page |
|
|
|
|
ARTICLE VII |
GRANTOR TRUST |
16 |
7.1 |
Grantor Trust |
16 |
7.2 |
Situs of Assets |
17 |
7.3 |
Trust Agreement Governs |
17 |
iv
SCIENTIFIC GAMES CORPORATION
FROZEN SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
(b) a plan providing the New Plan Benefit (as defined in Section 2.13), consisting of the Total Frozen Benefit (as defined in Section 2.23), as increased by 4% interest under Section 2.11, or, for a Member entitled to payment of an Old Plan Benefit, the portion of such Total Frozen Benefit in excess of such Old Plan Benefit, to be payable in either case on Separation from Service (as defined in Section 2.19), Disability, death, or a specified payment date pursuant to Section 1.7, on terms compliant with Section 409A and the Regulations.
2
As used herein, the following words and phrases shall have the meanings specified below unless a different meaning is clearly required by the context:
3
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 a majority of the Board.
2.6 The term Company shall mean Scientific Games Corporation, its successors and assigns, any Subsidiary authorized by the Board to participate in this Plan with respect to its employees (to the extent required or appropriate for such purpose), and any organization into which the Company may be merged or consolidated or to which all or substantially all of its assets may be transferred.
2.7 The term Disability shall mean (a) with respect to the New Plan Benefit, any medically determinable physical or mental impairment which can be expected to result in death or to last for a continuous period of not less than twelve (12) months and which renders the Member unable to engage in any substantial gainful activity or by reason of which the Member receives income replacement benefits for a period of not less than three months under an accident and health plan of the Company; provided that notwithstanding the foregoing, a determination of total disability by the Social Security Administration shall be conclusive proof of Disability, and (b) with respect to the Old Plan Benefit, Total and Permanent Disability as defined in the Old Plan (i.e., disability that entitles a Member to disability benefits under the Companys long term disability plan in effect at the time the Member becomes disabled or if the Company does not maintain a long-term disability plan, inability of the Member to perform the usual and customary duties of his occupation which is likely to be permanent or of long duration).
2.9 The term Final Earnings shall mean the total of a Members annual rate of base salary and maximum target bonus amount as of December 31, 2005, determined without regard to any deduction of pre-tax contributions under Code Section 401(k) plans, flexible benefit (cafeteria) plans described in Code Section 125, and qualified transportation fringes described in Code Section 132(f)(4), and before deferrals of compensation under any elective deferred compensation plans.
2.10 The term Grandfathered Benefit shall (subject to Section 1.7) mean the present value as of December 31, 2004 of the benefit earned and vested in respect of a Member on such date under the Old Plan, calculated as the amount that the Member could have received as a lump sum distribution if he voluntarily terminated his employment with the Company without cause on December 31, 2004 and received such distribution as soon as possible
4
2.11 The term Interest shall mean interest at an annual rate of four percent (4%), credited and compounded annually up to the day prior to the date of payment (or other applicable date of reference).
2.12 The term Member shall mean any individual who was a Member of the Old Plan on December 31, 2004.
2.13 The term New Plan Benefit shall mean a Members Total Frozen Benefit increased by Interest from January 1, 2006 as provided in Section 2.10; provided, however, that
(a) If the Member received a distribution of his Old Plan Benefit prior to payment of his New Plan Benefit, (i) Interest shall be credited on the Members Total Frozen Benefit from January 1, 2006 to the date as of which the Old Plan Benefit was paid, (ii) the amount of Old Plan Benefit paid, as increased by Interest similarly computed, shall be deducted from the Members Total Frozen Benefit as of such date, and (iii) the remaining balance of the Members Total Frozen Benefit (including such Interest) shall then be increased by Interest under Section 2.11 to the applicable date provided therein, and
(b) If distribution of a Members New Plan Benefit is to be made prior to distribution of the Members Old Plan Benefit, the Members New Plan Benefit shall be the amount of the Members Total Frozen Benefit as of December 31, 2005, increased by Interest from January 1, 2006 under Section 2.11 to the applicable date provided therein, reduced (but not below zero) by the amount of the Members Grandfathered Benefit increased by interest to such date at the Old Plan Discount Rate.
(c) Notwithstanding anything herein go the contrary, a Members New Plan Benefit, including associated calculations of Interest, shall be appropriately adjusted in the event of any intervening distribution in respect of such New Plan Benefit made on a specified payment date under Section 1.7, or under Section 3.8.
2.14 The term Old Plan shall mean the Scientific Games Corporation Supplemental Executive Retirement Plan originally established effective September 7, 2000, as amended and restated effective November 1, 2003 and in effect thereafter in respect of benefits earned and vested on December 31, 2004.
2.15 The term Old Plan Benefit shall (subject to Section 1.7) mean a Members Grandfathered Benefit (if any), increased by interest at the Old Plan Discount Rate from December 31, 2004 to the last day of the month immediately preceding the date scheduled for payment thereof under Section 3.1 (or other applicable provision hereof). The amount of each Members Old Plan Benefit as of December 31, 2004 is set forth in Schedule 1.
5
6
7
The words and phrases defined in this Article when used in this Plan with an initial capital letter shall have the meanings specified in this Article, unless a different meaning is clearly required by the context. Any words herein used in the masculine shall be read and construed in the feminine where they would so apply. Words in the singular shall be read and construed as though used in the plural in all cases where they would so apply.
8
9
10
11
Compensation Committee
Scientific Games Corporation
750 Lexington Avenue
New York, New York 10022
(212) 754-2233
12
13
14
15
16
The provisions of the Trust Agreement under the Trust shall govern following a Change of Control in the event of any inconsistency between such provisions and the foregoing provisions of the Plan.
17
IN WITNESS WHEREOF, pursuant to action taken by the Compensation Committee of the Board on December 15, 2005, and thereafter on December 29, 2008, the undersigned has executed this amended and restated Plan document on behalf of the Company (and each Subsidiary) this 31 st day of December, 2008.
Attest: |
|
Scientific Games Corporation |
||
|
|
|
|
|
|
|
|
|
|
/s/ Jack B. Sarno |
|
By: |
/s/ DeWayne E. Laird |
|
Jack B. Sarno |
|
Name: |
DeWayne E. Laird |
|
|
|
Title: |
Vice President |
|
18
Schedule 1
SCIENTIFIC GAMES CORPORATION
FROZEN SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
Total Frozen Benefit as of December 31, 2005
|
|
Assumed
|
|
Final
|
|
Annual Benefit
|
|
Present Value
|
|
|||
|
|
|
|
|
|
|
|
|
|
|||
Weil |
|
N/A |
|
N/A |
|
$ |
877,947 |
|
$ |
9,853,046 |
|
|
Huntley |
|
15 |
|
$ |
750,150 |
|
$ |
337,567 |
|
$ |
3,788,461 |
|
Schloss(1) |
|
15 |
|
$ |
750,150 |
|
$ |
337,567 |
|
$ |
3,788,461 |
|
Laird |
|
15 |
|
$ |
529,380 |
|
$ |
238,221 |
|
$ |
2,675,513 |
|
Old Plan Benefit (Grandfathered Benefit) as of December 31, 2004
|
|
Years of
|
|
Final Average
|
|
Annual Benefit
|
|
Present Value
|
|
||
|
|
|
|
|
|
|
|
|
|
||
Weil(2) |
|
N/A |
|
N/A |
|
N/A |
|
N/A |
|
||
Huntley |
|
15 |
|
$ |
486,586 |
|
218,964 |
|
$ |
2,401,731 |
|
Schloss |
|
12 |
|
$ |
520,600 |
|
197,500 |
|
$ |
2,056,618 |
|
Laird(3) |
|
8 |
|
N/A |
|
N/A |
|
N/A |
|
(1) Entire benefit paid in 2007 pursuant to termination of employment/separation from service.
Amendment to Employment Agreement (this Amendment), dated as of December 30, 2008, by and between Scientific Games Corporation, a Delaware corporation (the Company), and A. Lorne Weil (Executive).
WHEREAS, Executive has been employed pursuant to an Employment Agreement dated as of January 1, 2006 (executed on August 8, 2006) by and between the Company and Executive (the 2006 Agreement), as amended by a letter dated August 2, 2007 regarding amounts payable under the Companys Key Executive Deferred Compensation Plan (the EDCP Payment Letter) and as further amended by an Amendment to Employment Agreement effective as of May 1, 2008 (executed on May 12, 2008) (the May 2008 Amendment and, collectively with the 2006 Agreement and the EDCP Payment Letter, the Employment Agreement);
WHEREAS, the Company and Executive desire to amend the Employment Agreement as set forth herein to bring the Employment Agreement into compliance with Section 409A of the Internal Revenue Code of 1986 and the regulations and Treasury guidance thereunder; and
WHEREAS, the amendments contemplated hereby are intended to bring the timing of, and certain procedural aspects with respect to, certain payments under the Employment Agreement into compliance with Section 409A but not to otherwise affect Executives right to such payments.
NOW THEREFORE, in consideration of the premises and the mutual benefits to be derived herefrom and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:
Without limiting the generality of the foregoing, the Company and Executive agree to the following:
2
IN WITNESS WHEREOF, each of the parties hereto has caused this Amendment to be executed on its behalf as of the date first above written.
|
SCIENTIFIC GAMES CORPORATION |
||
|
|
|
|
|
|
|
|
|
By: |
|
/s/ Ira H. Raphaelson |
|
Name: |
Ira H. Raphaelson |
|
|
Title: |
Vice President, General Counsel and Secretary |
|
|
|
|
|
|
|
|
|
|
|
/s/ A. Lorne Weil |
|
|
|
A. Lorne Weil |
|
3
Amendment to Employment Agreement (this Amendment), dated as of December 30, 2008, by and between Scientific Games Corporation, a Delaware corporation (the Company), and Joseph R. Wright, Jr. (Executive).
WHEREAS, the Company and Executive entered into an Employment Agreement effective as of May 1, 2008 (executed on May 14, 2008) (the Employment Agreement);
WHEREAS, the Company and Executive desire to amend the Employment Agreement as set forth herein to bring the Employment Agreement into compliance with Section 409A of the Internal Revenue Code of 1986 and the regulations and Treasury guidance thereunder; and
WHEREAS, the amendments contemplated hereby are intended to bring the timing of, and certain procedural aspects with respect to, certain payments under the Employment Agreement into compliance with Section 409A but not to otherwise affect Executives right to such payments.
NOW THEREFORE, in consideration of the premises and the mutual benefits to be derived herefrom and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:
IN WITNESS WHEREOF, each of the parties hereto has caused this Amendment to be executed on its behalf as of the date first above written.
|
SCIENTIFIC GAMES CORPORATION |
||
|
|
|
|
|
|
|
|
|
By: |
|
/s/ Ira H. Raphaelson |
|
Name: |
Ira H. Raphaelson |
|
|
Title: |
Vice President, General Counsel and Secretary |
|
|
|
|
|
|
|
|
|
|
/s/ Joseph R. Wright, Jr. |
||
|
Joseph R. Wright, Jr. |
||
3
Amendment to Employment Agreement (this Amendment), dated as of December 30, 2008, by and between Scientific Games Corporation, a Delaware corporation (the Company), and Michael R. Chambrello (Executive).
WHEREAS, Executive has been employed pursuant to an Employment Agreement dated as of July 1, 2005 by and between the Company and Executive (the 2005 Agreement) as amended by a letter agreement dated August 2, 2006 (the August 2006 Amendment) and a letter agreement dated May 8, 2008 (the May 2008 Amendment and, collectively with the 2005 Agreement and the August 2006 Amendment, the Employment Agreement); and
WHEREAS, the Company and Executive desire to amend the Employment Agreement as set forth herein to bring the Employment Agreement into compliance with Section 409A of the Internal Revenue Code of 1986 and the regulations and Treasury guidance thereunder; and
WHEREAS, the amendments contemplated hereby are intended to bring the timing of, and certain procedural aspects with respect to, certain payments under the Employment Agreement into compliance with Section 409A but not to otherwise affect Executives right to such payments.
NOW THEREFORE, in consideration of the premises and the mutual benefits to be derived herefrom and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:
|
SCIENTIFIC GAMES CORPORATION |
||
|
|
||
|
|
||
|
By: |
/s/ Ira H. Raphaelson |
|
|
Name: |
Ira H. Raphaelson |
|
|
Title: |
Vice President, General Counsel and Secretary |
|
|
|
|
|
|
|
||
|
/s/ Michael R. Chambrello |
||
|
Michael R. Chambrello |
||
4
Exhibit 10.29
October 7, 2008
DeWayne Laird
Vice President and Chief Financial Officer
Scientific Games Corporation
750 Lexington Avenue
New York, New York
Dear DeWayne:
This will confirm our understanding regarding certain amendments to the Employment Agreement, dated as of November 1, 2002, between you and Scientific Games Corporation (the Company), as amended by the Letter Agreement, dated as of August 2, 2006, by and between you and the Company (as amended hereby, the Agreement). Except as expressly set forth herein, the terms of the Agreement shall remain in full force and effect and are hereby ratified and confirmed in all respects.
Clarification of Section 7(a)(iv) and Section 7(c)(iv) of Agreement . The term stock options and options as used in Section 7(a)(iv) and Section 7(c)(iv) of the Agreement shall include all forms of equity awarded to you by the Company, including both stock options and restricted stock units (notwithstanding Section 7(a)(v) and Section 7(c)(v) of the Agreement).
[ remainder of page intentionally left blank ]
1
Please indicate your agreement to the foregoing by countersigning and returning an original signed copy of this letter to me.
|
Very truly yours, |
|
||
|
|
|
||
|
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|
||
|
Scientific Games Corporation |
|||
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|
||
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|
|
||
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By: |
|
/s/ A. Lorne Weil |
|
|
Name: |
A. Lorne Weil |
||
|
Title: |
Chairman and Chief Executive Officer |
||
Accepted and Agreed to:
By: |
/s/ DeWayne Laird |
|
|
DeWayne Laird |
2
Amendment to Employment Agreement (this Amendment), dated as of December 30, 2008, by and between Scientific Games Corporation, a Delaware corporation (the Company), and DeWayne E. Laird (Executive).
WHEREAS, Executive has been employed pursuant to an Employment Agreement dated as of November 1, 2002 by and between the Company and Executive (the 2002 Agreement), as amended by a letter agreement dated August 2, 2006 (the August 2006 Amendment) and as further amended by a letter agreement dated October 7, 2008 (the October 2008 Amendment and, collectively with the 2002 Agreement and the August 2006 Amendment, the Employment Agreement); and
WHEREAS, the Company and Executive desire to amend the Employment Agreement as set forth herein to bring the Employment Agreement into compliance with Section 409A of the Internal Revenue Code of 1986 and the regulations and Treasury guidance thereunder; and
WHEREAS, the amendments contemplated hereby are intended to bring the timing of, and certain procedural aspects with respect to, certain payments under the Employment Agreement into compliance with Section 409A but not to otherwise affect Executives right to such payments.
NOW THEREFORE, in consideration of the premises and the mutual benefits to be derived herefrom and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:
IN WITNESS WHEREOF, each of the parties hereto has caused this Amendment to be executed on its behalf as of the date first above written.
|
SCIENTIFIC GAMES CORPORATION |
||
|
|
|
|
|
|
|
|
|
By: |
|
/s/ Ira H. Raphaelson |
|
Name: |
Ira H. Raphaelson |
|
|
Title: |
Vice President, General Counsel and Secretary |
|
|
|
|
|
|
|
|
|
|
/s/ DeWayne E. Laird |
||
|
DeWayne E. Laird |
||
3
Exhibit 10.32
October 7, 2008
Robert Becker
Vice President and Treasurer
Scientific Games Corporation
750 Lexington Avenue
New York, New York
Dear Bob:
This will confirm our understanding regarding certain amendments to the Employment Agreement, dated as of August 2, 2006 (and effective as of January 1, 2006), between you and Scientific Games Corporation (the Company) (as amended hereby, the Agreement). Except as expressly set forth herein, the terms of the Agreement shall remain in full force and effect and are hereby ratified and confirmed in all respects.
Term . The Term set forth in Section 2 of the Agreement shall be extended to December 31, 2012 (as may be extended in accordance with Section 2 of the Agreement and subject to earlier termination in accordance with the Agreement).
Base Salary . Effective January 1, 2009, your Base Salary shall be three hundred fifty-five thousand US dollars (US$355,000.00) per year, subject to increases thereof as may be determined from time to time in the sole discretion of the Compensation Committee of Scientific Games Corporation.
Termination Upon Expiration of Agreement . In the event that the Agreement expires on or after December 31, 2012, you will receive the Standard Termination Payments (as defined in Section 5(a) of the Agreement) and, if not already paid to you and without duplication, the non-equity portion of your incentive compensation for the completed calendar year after which such expiration occurs, payable if, as and when such bonuses are awarded in the ordinary course in such subsequent year, subject to payroll deductions; provided , however , that if and to the extent necessary to comply with Section 409A(a)(2)(B)(i) of the Code, and applicable administrative guidance and regulations, such payment shall be made in a lump sum on the date that is six months plus one day following the applicable expiration date.
Equity Award Grant . The Company shall grant you seven thousand five hundred (7,500) restricted stock units under the Scientific Games Corporation 2003 Incentive Compensation Plan, as amended and restated (the Plan), and an individual equity agreement (in the form to be provided to you) to be entered into by and between Scientific Games Corporation and you (the Equity Agreement). The Equity Agreement shall provide that the equity award shall vest with respect to twenty percent (20%) of the shares of common stock subject to such award on each of the first five anniversaries of the date of grant, subject to any applicable provisions relating to accelerated vesting and forfeiture as described in the Agreement, the Equity Agreement or the Plan.
[ remainder of page intentionally left blank ]
1
Please indicate your agreement to the foregoing by countersigning and returning an original signed copy of this letter to me.
|
Very truly yours, |
||
|
|
||
|
|
||
|
Scientific Games Corporation |
||
|
|
||
|
|
||
|
By: |
/s/ DeWayne Laird |
|
|
Name: |
DeWayne Laird |
|
|
Title: |
Vice President and Chief Financial Officer |
Accepted and Agreed to:
By: |
/s/ Robert Becker |
|
|
Robert Becker |
2
WHEREAS, Executive has been employed pursuant to an Employment Agreement made on August 2, 2006 but as of January 1, 2006 by and between the Company and Executive, as amended by the letter agreement dated October 7, 2008 (as so amended, the Employment Agreement); and
WHEREAS, the Company and Executive desire to amend the Employment Agreement as set forth herein to bring the Employment Agreement into compliance with Section 409A of the Internal Revenue Code of 1986 and the regulations and Treasury guidance thereunder; and
WHEREAS, the amendments contemplated hereby are intended to bring the timing of, and certain procedural aspects with respect to, certain payments under the Employment Agreement into compliance with Section 409A but not to otherwise affect Executives right to such payments.
NOW THEREFORE, in consideration of the premises and the mutual benefits to be derived herefrom and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:
To the extent any payments of money or other benefits due to Executive hereunder could cause the application of an acceleration or additional tax under Section 409A of the Code, such payments or other benefits shall be deferred if deferral will make such payment or other benefits compliant under Section 409A of the Code, or otherwise such payments or other benefits shall be restructured, to the extent possible, in a manner determined by the Company that does not cause such acceleration or additional tax. To the extent any reimbursements or in-kind benefits due to Executive under this Agreement constitute deferred compensation under Section 409A of the Code, 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). Any cash payment made on an after-tax basis that involves a reimbursement of taxes may be made as soon as the Company receives the information necessary for such purpose but in no event later than the end of the calendar year following the year other taxes are remitted to the taxing authority. Each payment made under this Agreement shall be designated as a separate payment within the meaning of Section 409A of the Code.
IN WITNESS WHEREOF, each of the parties hereto has caused this Amendment to be executed on its behalf as of the date first above written.
|
SCIENTIFIC GAMES CORPORATION |
||
|
|
|
|
|
|
|
|
|
By: |
|
/s/ Ira H. Raphaelson |
|
Name: |
Ira H. Raphaelson |
|
|
Title: |
Vice President, General Counsel and Secretary |
|
|
|
|
|
|
|
|
|
|
/s/ Robert C. Becker |
||
|
Robert C. Becker |
||
3
Exhibit 10.34
SUPERSEDING EMPLOYMENT, SEPARATION,
NON-COMPETITION AND
GENERAL RELEASE AGREEMENT
This Superseding Employment, Separation, Non-Competition and General Release Agreement (this Agreement ) is made and entered into as of the 5 th day of March 2009 ( Separation Date ), by and between Sally Conkright ( Executive ) and Scientific Games Corporation, a company formed under the laws of Delaware (the Company and, together with Executive, the Parties ).
WHEREAS, Executive has been employed as Vice President Administration and previously also as Chief Human Resources Officer, pursuant to a letter agreement of September 30, 2002 which was replaced by an employment agreement of August 2, 2006 as amended by a letter agreement dated October 7, 2008 and as further amended by an amendment dated as of December 30, 2008 (as so amended, the Employment Agreement );
WHEREAS , the Executive wishes to resign her various positions in the Company and its affiliates to pursue other opportunities and Executive and the Company desire to enter into this Agreement regarding Executives separation from employment with the Company; and
WHEREAS , Executive a nd the Company wish to settle and resolve all potential disputes, actions, lawsuits, charges and claims that the Executive has or may have against the Company and that the Company may have against her to the fullest extent permitted by law and without any admission of liability or wrongdoing by either Party.
NOW THEREFORE, in consideration of the recitals and the mutual promises, covenants and agreements set forth herein, the Parties covenant and agree as follows:
1. Termination of Existing Employment Agreements . As of the Separation Date, Executives employment with the Company shall terminate and all existing and prior employment agreements between the Parties, whether oral or written, including the Employment Agreement are hereby terminated and of no further force or effect, except the following provisions of the Employment Agreement shall survive such termination and continue in full force and effect in accordance with their respective terms:
(a) Section 6 related to non-competition, non-solicitation, non-disclosure, etc.; and
(b) Section 8 relating to Executives right to indemnification (which right to indemnification shall in no event be less favorable to Executive than exists as of the Effective Date).
2. Consideration to Executive . Except for any payments or benefits Executive has accrued or vested pursuant to Executives participation in the Companys 401(k) Plan or the Employee Stock Purchase Plan, which shall be subject to the terms and conditions set forth in such plans (it being understood and agreed that, as of the Separation Date, any option Executive may have with respect to the current option period under the Employee Stock Purchase Plan will be deemed cancelled and any of Executives accumulated payroll deductions for such option period will be paid to Executive in accordance with the terms of such plan),
Executive acknowledges and agrees that the payments described in this Section 2 fulfill any and all of the Companys obligations due to Executive under any agreement or bonus, incentive compensation, severance or separation plan or allowance or any other compensation or benefit plan or arrangement maintained by the Company or any of its subsidiaries, and Executive specifically acknowledges and agrees that Executive is entitled to no other compensation or benefits from the Company or any of its subsidiaries of any kind or nature whatsoever, except to the extent expressly provided in this Agreement.
In consideration of the covenants undertaken herein by Executive, and for other good and valuable consideration, receipt of which is hereby acknowledged, and in full and complete consideration for Executives promises, covenants and agreements set forth in this Agreement, the Company shall provide the following to Executive:
(a) Any accrued but unpaid base salary (which is US$447,000 per annum) of Executive for services rendered to the Separation Date, payable in accordance with the Companys regular payroll policies (and subject to applicable withholdings);
(b) An amount in respect of accrued and unpaid vacation (totaling 14 weeks) as of the Separation Date, payable within 30 days of the Separation Date (and subject to applicable withholdings);
(c) Reimbursement in accordance with the Companys policies of any unpaid reasonable business expenses and disbursements incurred by Executive prior to the Separation Date; provided , however , that Executive must submit vouchers for any such expenses in accordance with the Companys standard procedures by March 31, 2009;
(d) US$745,149 (subject to applicable withholdings) representing an amount equal to the sum of (i) Executives annual base salary and (ii) Executives Severance Bonus Amount (as defined in the Employment Agreement), 50% of which shall be payable on September 7, 2009 (or on the next regular payroll date following September 7, 2009) and the remaining 50% of which shall be payable over a period of six (6) months beginning September 7, 2009 in accordance with the Companys regular payroll practices;
(e) All unvested stock options, restricted stock units, restricted stock and other equity-based awards held by Executive immediately prior to the Separation Date will become fully vested and non-forfeitable, and, in all other respects, all such options and other awards shall be governed by the plans and programs and the agreements and other documents pursuant to which the awards were granted;
(f) US$ 298,149 as a 2008 bonus, payable on or before March 15, 2009 (and subject to applicable withholdings);
(g) US$150 ,000 as a 2009 bonus in recognition of Executives hard work on the budget task force (notwithstanding the pro-ration formula of Section 5(e)(iv) of the Employment Agreement), payable on or before March 31, 2009 (and subject to applicable withholdings);
2
(h) an amount not to exceed US$40,000 in the aggregate on an after-tax basis shall be reimbursed to Executive for outplacement counseling provided to Executive by an outplacement firm during the period ending no later than August 31, 2009; provided that Executive submits receipts or other documents reasonably acceptable to the Company documenting such outplacement expenses, which payment(s) shall be made by the Company to the Executive within thirty (30) days after the Executive submits such receipts or documents to the Company;
(i) US$10,000 to reimburse Executive for moving expenses from New York back to Boston; provided that Executive submits receipts or other documents reasonably acceptable to the Company documenting such moving expenses, which evaluation and payment shall be made within thirty (30) days after the Executive submits such receipts or documents to the Company; and
(j) If Executive elects to continue COBRA coverage for health and dental coverage under the Companys group health plan in accordance with COBRA, the monthly premiums for such coverage for a period of eighteen (18) months will be paid by the Company in full.
For the avoidance of doubt, in the event of Executives death prior to the time when all payments under this Section 2 have been made, Executives estate shall receive such payments not already paid to Executive in accordance with this Section 2.
The Company makes no representations or warranties 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 of the Code 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. To the extent any payments of money or other benefits due to Executive under this Agreement could cause the application of an acceleration or additional tax under Section 409A of the Code, such payments or other benefits shall be deferred if deferral will make such payment or other benefits compliant under Section 409A of the Code, or otherwise such payments or other benefits shall be restructured, to the extent possible, in a manner determined by the Company that does not cause such acceleration or additional tax. To the extent any reimbursements or in-kind benefits due to Executive under this Agreement constitute deferred compensation under Section 409A of the Code, 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). Any cash payment made on an after-tax basis that involves a reimbursement of taxes may be made as soon as the Company receives the information necessary for such purpose but in no event later than the end of the calendar year following the year the related taxes are remitted to the taxing authority. Each payment made under this Agreement shall be designated as a separate payment within the meaning of Section 409A of the Code.
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3. General Release of Claims .
(a) In consideration for the benefits specified in Section 2 hereof, which Executive hereby acknowledges are not otherwise owed to Executive, Executive hereby understands and agrees that Executive is knowingly and voluntarily releasing, waiving and forever discharging, to the fullest extent permitted by law, on Executives own behalf and on behalf of Executives agents, assignees, attorneys, heirs, executors, administrators and anyone else claiming by or through Executive (collectively referred to as the Releasors ):
(i) the Company, its affiliates, subsidiaries, predecessors, successors or assigns, and any of its or their past or present stockholders, members or other equity holders, and any of its or their respective past or present directors, executives, officers, insurers, attorneys, employees, consultants, agents, employee benefits plans and trustees, fiduciaries, and administrators of those plans (collectively referred to as the Released Parties ),
(ii) of and from any and all claims under local, state or federal law or equity, whether known or unknown, asserted and unasserted, that Executive and/or the other Releasors have or may have against Released Parties as of the Effective Date, including but not limited to all matters relating to or in any way arising out of any aspect of Executives employment with the Company, separation from employment with the Company, or Executives treatment by the Company while in the Companys employ, and all other claims, charges, complaints, liens, demands, causes of action, obligations, damages (including consequential, punitive or exemplary damages), liabilities or the like of whatever nature (including, without limitation, attorneys fees and costs) (collectively Claims ), including but not limited to all Claims for:
(A) salary and other compensation or benefits, including, but not limited to, overtime if applicable, incentive compensation and other bonuses, severance pay, vacation pay or any benefits under the Employee Retirement Income Security Act of 1974, as amended or any other applicable local, state or federal law;
(B) discrimination, harassment or retaliation based upon race, color, national origin, ancestry, religion, marital status, sex, sexual orientation, citizenship status, pregnancy or any pregnancy related disability, family status, leave of absence (including but not limited to the Family Medical Leave Act or any other federal, state or local leave laws), handicap (including but not limited to The Rehabilitation Act of 1973), medical condition or disability, or any other characteristic covered by law under Title VII of the Civil Rights Act of 1964, as amended, the Civil Rights Act of 1991, the Americans with Disabilities Act, as amended, Sections 1981 through 1988 of the Civil Rights Act of 1866, and any other federal, state, or local law prohibiting discrimination in employment, the Worker Adjustment and Retraining Notification Act, or any other federal, state or local law concerning plant shutdowns, mass layoffs, reductions in
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force or other business restructuring;
(C) discrimination, harassment or retaliation based upon age under the Age Discrimination in Employment Act as amended by the Older Workers Benefit Protection Act of 1990 (the ADEA), or under any other federal, state, or local law prohibiting age discrimination;
(D) matters arising under the Sarbanes-Oxley Act of 2002 and any other federal, state or local whistleblower laws;
(E) breach of implied or express contract (whether written or oral), breach of promise, misrepresentation, fraud, estoppel, waiver or breach of any covenant of good faith and fair dealing, including without limitation breach of any express or implied covenants of any employment agreement that may be applicable to Executive;
(F) defamation, negligence, infliction of emotional distress, violation of public policy, wrongful or constructive discharge, or any employment-related tort recognized under any applicable local, state, or federal law;
(G) any violation of any Fair Employment Practices Act, Equal Rights Act; Civil Rights Act; Minimum Fair Wages Act; or Payment of Wages Act; or any comparable federal, state or local law;
(H) any violation of the New York State Human Rights Law, New York Labor Act, New York Equal Pay Act, New York City Human Rights Law, New York Civil Rights Law, New York Rights of Persons with Disabilities Law, New York Sexual Orientation Non-Discrimination Act, New York Equal Rights Law, the New York State Workers Compensation and Disability Benefit Laws (including the retaliation provisions thereof), and New York City Administrative Code and Charter, or any comparable federal, state or local law;
(I) costs, fees, or other expenses, including attorneys fees; and
(J) any other claim, charge, complaint, lien, demand, cause of action, obligation, damages, liabilities or the like of any kind whatsoever, including, without limitation, any claim that this Agreement was induced or resulted from any fraud or misrepresentation by Company.
Excluded from the release set forth in this Section 3(a) are: (i) any Claims or rights to enforce this Agreement against the Company; (ii) any Claims that may arise after the Effective Date; and (iii) any Claims that Executive cannot lawfully release. Notwithstanding anything to the contrary contained herein, also excluded from the release set forth in this Section 3(a) is Executives right to file a charge with an administrative agency (including the Equal Employment Opportunity Commission
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and the National Labor Relations Board) or participate in any agency investigation. Executive is, however, hereby waiving Executives right to recover money or other damages in connection with any such charge or investigation. Executive is also hereby waiving Executives right to recover money in connection with a charge filed by any other individual or by the Equal Employment Opportunity Commission, National Labor Relations Board or any other federal, state or local agency.
(b) The Released Parties, for good consideration which they hereby acknowledge receiving, hereby release Executive from any and all claims, demands, causes of action, liability or the like which they had, now have or may claim to have against Executive, as of the Effective Date, whether known or unknown (it being understood and agreed that excluded from the release set forth in this Section 3(b) are (i) any claims or rights to enforce this Agreement against Executive, (ii) any claims that may arise after the Effective Date and (iii) any claims that the Company cannot lawfully release).
4. Additional Agreements by Employee .
(a) BY AGREEING TO THE RELEASE CONTAINED IN THIS AGREEMENT EXECUTIVE HEREBY KNOWINGLY AND VOLUNTARILY WAIVES ANY RIGHTS (KNOWN OR UNKNOWN) TO BRING OR PROSECUTE A LAWSUIT OR MAKE ANY LEGAL CLAIM AGAINST THE RELEASED PARTIES WITH RESPECT TO ANY OF THE CLAIMS DESCRIBED IN SECTION 3 HEREOF. Executive agrees that the release set forth herein will bar all claims or demands of every kind, known or unknown, referred in Section 3 hereof and further agrees that no non-governmental person, organization or other entity acting on Executives behalf has in the past or will in the future file any lawsuit, arbitration or proceeding asserting any claim that is waived or released under this Agreement. If Executives initiates, files or pursues a lawsuit, arbitration or other proceeding asserting any Claim waived or released in this Agreement, (i) Executive will pay for all costs, including reasonable attorneys fees, incurred by the Released Parties in defending against such Claim (unless such Claim is a charge with the Equal Employment Opportunity Commission or the National Labor Relations Board); (ii) Executive gives up any right to individual damages in connection with any administrative, arbitration or court proceeding with respect to Executives employment with and/or separation from the Company; and (iii) if Executive is awarded money damages, Executive will assign to the Released Parties Executives right and interest to all such money damages. Notwithstanding the foregoing, this paragraph does not limit Executives right to challenge the validity of this Agreement in a legal proceeding under the Older Workers Benefit Protection Act, 29 U.S.C. § 626(f), with respect to claims under the ADEA. This paragraph also is not intended to and shall not limit the right of a court to determine, in its discretion, that the Company is entitled to restitution, recoupment or setoff of any payments made to Executive by the Company should this Agreement be found to be invalid as to the release of claims under the ADEA.
(b) Executive agrees that Executive shall not knowingly solicit, encourage, assist or participate (directly or indirectly) in bringing any Claims or actions against any of the Released Parties by other current or former employees, officers or third parties, except as compelled by subpoena or other court order or legal process, and, unless prohibited by applicable law, only after providing the Company with prior notice of any such subpoena,
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order or legal process and an opportunity to timely contest such process.
(c) Executive represents, warrants and agrees that Executive has not filed any administrative, judicial or other form of complaint or initiated any claim, charge, complaint, suit or legal or other proceeding against any of the Released Parties, and that Executive will not make such a filing at any time hereafter based on any events, actions or omissions occurring prior to the Effective Date. Executive understands and agrees that this Agreement will be pleaded as a full and complete defense to any such claim, charge, complaint, suit or proceeding which is or may be instituted, prosecuted or maintained by Executive, Executives agents, assignees, attorneys, heirs, executors, administrators and anyone else claiming by or through Executive .
5. Affirmations . In signing this Agreement, Executive hereby affirms that:
(a) Executive has been paid and/or has received all leave (paid or unpaid), compensation, wages, overtime, if applicable, bonuses, commissions, severance pay, and/or benefits to which Executive may be entitled, other than as provided herein, and that no other amounts and/or benefits are due to Executive except as specifically provided in this Agreement;
(b) Executive is not eligible to receive payments or benefits under any other Company and/or other Released Partys severance pay policy, plan, practice or arrangement;
(c) Executive has no known workplace injuries or occupational diseases that Executive has not reported to the Company in writing and Executive either has been provided or Executive has not been denied any leave requested under the Family and Medical Leave Act or under any applicable Company policy or any local, state, or federal law;
(d) Executive has not complained of and Executive is not aware of any fraudulent activity or any act(s) which would form the basis of a claim of fraudulent or illegal activity by the Company or any other Released Party that Executive has not reported to the Company in writing;
(e) On or about the Separation Date, or within a reasonable time thereafter, the Company provided Executive with timely and adequate notice of Executives right to continue group insurance benefits under COBRA (unless such notice was not required to be given because, on the day before the Separation Date, Executive did not receive group health insurance benefits through the Company and thus are not a qualified beneficiary within the meaning of COBRA); and
(f) Executive acknowledges and agrees that if Executive breaches the provisions of this Agreement, then the Company will have the right to seek an appropriate remedy against Executive, which may include, but not be limited to, injunctive relief and monetary damages (as to a violations of Section 6 of the Employment Agreement), as well as the return of any payments, reimbursements or benefits Executive has received under any provision of this Agreement, through arbitration as set out below.
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6. Transition and Executives Cooperation .
(a) Executive will not be required to maintain regular office hours as of January 9, 2009 but be reasonably available as needed to achieve an orderly transition of Executives responsibilities until the Separation Date .
(b) Executive agrees that Executive will provide reasonable assistance to ensure a smooth transition of Executives responsibilities and will cooperate with the Company, its subsidiaries and its affiliates with respect to matters or issues which took place or arose during Executives tenure with the Company, specifically including without limitation any attorney retained by any of them or any other representative acting on their behalf, in connection with any pending or future internal investigation or judicial, administrative or regulatory matter, proceeding or investigation. The Parties acknowledge and agree that such cooperation may include, but shall not be limited to, Executive making herself available for meetings, interviews, statements, testimony or the signing of affidavits, and providing to the Company any documents or information in Executives possession or under Executives control relating to any such litigation, regulatory matter or investigation, provided that any such meeting, interviews, statements or testimony do not unduly interfere with Executives work schedule or other post-Company duties. The Company shall reimburse Executive promptly after Executive submits receipts or other documents reasonably acceptable to the Company for actual out-of-pocket expenses reasonably incurred and approved by the Company in connection with Executives performance under this Section 6 and otherwise in accordance with the Companys reimbursement policy, which approval and processing shall not be unreasonably withheld or delayed; provided , however , that Executive shall not be entitled to any expense reimbursement for reasonable time spent testifying or otherwise cooperating in any matter in which Executive is a defendant in the proceeding or a named subject or target of the litigation, regulatory matter or investigation.
(c) Executive represents and warrants that Executive has and will accurately, completely and truthfully disclose to the Company any and all materials and information requested, including without limitation in connection with any pending or future internal investigation or judicial, administrative or regulatory matter, proceeding or investigation involving conduct in which Executive was involved or had knowledge in connection with Executives employment with the Company. In the event of a material breach of this Section 6, Executive agrees that the Company may, in its sole discretion, elect to terminate this Agreement and render it null and void as of the Separation Date or any time thereafter, and that in such event, Executive shall be required to reimburse the Company in full any payments, reimbursements or benefits Executive has received under any provision of this Agreement.
7. Confidentiality of Agreement . The Parties agree that it is a material condition of this Agreement that Executive shall keep the terms of this Agreement strictly and completely confidential and that Executive will not directly or indirectly make or issue any private statement, press release or public statement, or communicate or otherwise disclose to any executive or employee of the Company (past, present or future) or to a member of the general public, the negotiations leading to, or the terms, amounts or facts of or underlying this Agreement, except as may be required by law or compulsory process; provided , however , that
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Executive may disclose the terms of this Agreement to Executives immediate family, attorneys, and accountants or other financial advisors so long as they agree to abide by the foregoing confidentiality restriction. This provision does not preclude compliance by Executive with Section 6 of the Employment Agreement or either party from complying with their obligations under securities laws (e.g., making appropriate disclosures in a Form 4 or other SEC filing) nor does it preclude Executive from sharing relevant portions with a potential or future employer. This provision also does not preclude disclosure which is compelled by court order, regulatory process or subpoena; provided , however, that, in the event of such order, process or subpoena, Executive will, unless prohibited by applicable law, promptly notify the Company so that the Company may object or seek a protective order should it choose to do so.
8. Return of Company Property . Executive agrees that Executive has or will surrender to the Company all Company credit cards, parking cards, security badges, cell phones, pagers, Blackberries, computer equipment and expense accounts, and that Executive will submit all outstanding travel vouchers, business expenses and the like no later than March 31, 2009. Executive further agrees that Executive has returned or will return to the Company, on or before March 5, 2009, and will not keep, maintain or permit any copy of, any Company property, including without limitation any documents, papers, files or records in any media (whether stored on Company or personal property) which may be in Executives possession, custody or control, except to the extent that Executive retains property with the written confirmation of the CEO, COO or General Counsel to enable the Executive to perform Executives obligations under Section 6 of this Agreement.
9. Non-Admissions . The Parties hereto recognize that, by entering into this Agreement, the Company does not admit, and does specifically deny, any violation of any local, state, federal, or other law, whether regulatory, common or statutory. The Parties further recognize that (a) this Agreement has been entered into in release and compromise of any claims which might be asserted by Executive in connection with Executives employment by the Company or Executives resignation from employment, and to avoid the expense and burden of any litigation related thereto, and (b) some of the amounts payable to Executive hereunder are in addition to anything of value to which she is already entitled.
10. Rights After Breach . The Company shall be entitled to file counterclaims against Executive in the event of Executives breach of the covenant not to sue and shall be entitled to any remedies at law or in equity, including repayment of benefits under this Agreement and the cessation of payment by the Company of any unpaid benefits under this Agreement, as well as any and all other resulting actual or consequential damages, including reasonable attorneys fees and costs in the discretion of the arbitrator. The other Released Parties may file counterclaims against Executive in the event of a knowing breach of the covenant not to sue them by Executive.
11. Waiver of Breach; Cure . One or more waivers of a breach of any covenant, term or provision of this Agreement by any Party shall not be construed as a waiver of a subsequent breach of the same covenant, term or provision, nor shall it be considered a waiver of any other then existing or subsequent breach of a different covenant, term or provision. Neither Party shall initiate any claim against the other Party for a breach under this Agreement (other than a claim seeking injunctive relief as provided herein by the Company if the Company reasonably believes irreparable harm could occur prior to the end of the cure period set forth herein) unless such
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Party shall have given such other Party written notice of such breach following which such other Party fails within 15 days after such notice to affirm that such breach will be cured within 30 days after such notice or fails within 30 days after such notice to cure such breach.
12. Enforcement and Arbitration .
(a) 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 Executive and the Company agree that, except for any 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, Executives employment with, and/or separation from, 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 6 of the Employment Agreement (which provision survives the termination of the Employment Agreement, pursuant to Section 1 of this Agreement). 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 6 of the Employment Agreement, the Company and Executive hereby consent to the jurisdiction of any or all of the following courts: (i) the United States District Court for the Southern District of New York; (ii) the Supreme Court of the State of New York, New York County; or (iii) any other court having jurisdiction; provided , that damages for any alleged violation of Section 6 of the Employment Agreement, as well as any claim, counterclaim or cross-claim brought by the 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, but not limited to, 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.
(b) Any arbitration under this Agreement shall be filed exclusively with the American Arbitration Association in New York, New York 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. Subject to the last sentence of this Section 12(b), each party shall pay that partys own costs and attorney fees, if any, unless the arbitrators rule otherwise. The Executive understands that he is giving up no substantive rights, and this Agreement simply governs forum. The prevailing party in any dispute, controversy or claim arising out of or related to this Agreement ( and/or the surviving provisions of the
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Employment Agreement) shall be entitled to recover its reasonable costs and attorney fees in the discretion of the arbitrator.
(c) 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 THE ARBITRATION PROVISIONS SET FORTH IN THIS SECTION 12.
13. Severability . If any provision or term of this Agreement, other than the Executives release set forth herein, is held to be illegal, invalid or unenforceable, such provision or term shall be fully severable; this Agreement shall be construed and enforced as if such illegal, invalid or unenforceable provision had never comprised part of this Agreement; and the remaining provisions of this Agreement shall remain in full force and effect and shall not be affected by the illegal, invalid or unenforceable provision or by its severance from this Agreement. Furthermore, in lieu of each such illegal, invalid or unenforceable provision or term, there shall be added automatically as a part of this Agreement another provision or term as similar to the illegal, invalid or unenforceable provision, as may be possible and that is legal, valid and enforceable.
14. Entire Agreement . This Agreement constitutes the entire Agreement of the Parties, and supersedes all prior and contemporaneous negotiations, prior drafts of this Agreement and other agreements, oral or written, including whatever rights, if any, Executive may have had under the Employment Agreement (except to the extent otherwise specifically provided hereby). All prior and contemporaneous negotiations, prior drafts of this Agreement and other agreements are deemed incorporated and merged into this Agreement and are deemed to have been abandoned if not so incorporated. No representations, oral or written, are being relied upon by either Party in executing this Agreement other than the express representations of this Agreement. This Agreement cannot be changed or terminated unless by express written agreement of the Parties. This Agreement may be executed by each Party in separate counterparts, each of which shall be deemed an original and constitute one document.
15. Revocation and Effective Date . Executive may accept this Agreement by delivering to the Vice President & General Counsel, Ira H. Raphaelson, 750 Lexington Avenue, 25 th Floor, NY, NY 10022, USA, a faxed copy of this Agreement and the letter in the form attached to this Agreement as Exhibit A, both signed by Executive no later than 5:00 p.m. Eastern Time on the date that is twenty-one (21) days after this Agreement is initially delivered to Executive, unless a later date and time is mutually agreed (the date, if any, on which Executive executes and delivers a copy of this Agreement being the Execution Date ), as long as Executive or her counsel delivers to the Companys Counsel within a reasonable time thereafter an original of this Agreement executed by Executive on or before the Effective Date. Executive acknowledges that if Executive does not accept this Agreement in the manner described above, it will be withdrawn and of no effect. If Executive accepts this Agreement before the end of the twenty-one (21) days permitted, Executive represents that Executive has done so voluntarily and with the advice of Executives attorney. Executive may revoke Executives acceptance of this Agreement within seven (7) days of the Execution Date by delivery of written notice to the Companys General Counsel, Ira H. Raphaelson, by 5:00 p.m. on
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the seventh day following the Execution Date of this Agreement. Executive acknowledges and agrees that, if Executive revokes Executives acceptance of this Agreement, Executive shall receive none of the benefits provided hereunder and this Agreement shall be null and void, having have no further force or effect, and that this Agreement will not be admissible as evidence in any judicial, administrative or arbitral proceeding or trial. Executive further acknowledges that if the Companys General Counsel does not receive from Executive written notice of Executives revocation prior to the expiration of seven (7) days of the Execution Date, Executive shall have forever waived Executives right to revoke this Agreement, and it shall thereafter have full force and effect as of the eighth (8th) day after the Execution Date (the Effective Date ).
16. Joint Drafting . In recognition of the fact that the Parties hereto had an 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.
17. Headings . The headings used herein are for reference only and shall not affect the construction of this Agreement.
18. Acknowledgment .
By executing this Agreement, Executive acknowledges that (i) Executive has had at least twenty-one (21) days to consider the terms of this Agreement, and has either considered this Agreement and its terms for that period or has knowingly and voluntarily waived Executives right to do so; (ii) Executive has been advised by the Company pursuant to this Agreement to consult with an attorney regarding the terms of this Agreement; (iii) Executive has consulted with an attorney or, in the alternative, waives Executives right to do so, regarding the terms of this Agreement; (iv) any and all questions regarding the terms of this Agreement have been asked and answered to Executives complete satisfaction; (v) Executive has read this Agreement, Executive has no contractual right or claim to the benefits described herein and acknowledges that the consideration provided for hereunder is in addition to anything of value to which Executive may already be entitled; (vi) the consideration provided for herein is good and valuable; and (vii) Executive is entering into this Agreement voluntarily, of Executives own free will, and without any coercion, undue influence, threat or intimidation of any kind or type whatsoever. Executive further acknowledges and agrees that any revisions to this Agreement made prior to the Effective Date are not material and shall not be deemed to affect the amount of time Executive has to consider this Agreement, and Executive hereby voluntarily waives additional time for review, if any, with respect to any such revisions.
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Executive hereby acknowledges and confirms that Executive has read all thirteen (13) pages of this Superseding Employment, Separation, Non-Competition and General Release Agreement and hereby freely and voluntarily assents to all the terms and conditions in this Agreement, and signs the same as Executives own free act with the full intent of accepting the benefits contemplated hereby in return for releasing the Released Parties (as defined above) from all Claims.
/s/ Sally Conkright |
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Date: January 14, 2009 |
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Sally Conkright |
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SCIENTIFIC GAMES CORPORATION |
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/s/ Michael Chambrello |
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Date: As of January 9, 2009 |
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Michael Chambrello |
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Chief Operating Officer |
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Exhibit 10.36
October 2, 2008
Larry Potts
Vice President, Chief Compliance Officer and Director of Security
Scientific Games Corporation
750 Lexington Avenue
New York, New York
Dear Larry:
This will confirm our understanding regarding certain amendments to the Employment Agreement, dated as of August 2, 2006 (and effective as of January 1, 2006), between you and Scientific Games Corporation (the Company) (as amended hereby, the Agreement). Except as expressly set forth herein, the terms of the Agreement shall remain in full force and effect and are hereby ratified and confirmed in all respects.
Term . The Term set forth in Section 2 of the Agreement shall be extended to December 31, 2011 (as may be extended in accordance with Section 2 of the Agreement and subject to earlier termination in accordance with the Agreement).
Base Salary . Effective January 1, 2009, your Base Salary shall be four hundred sixty-nine thousand five hundred US dollars (US$469,500.00) per year, subject to increases thereof as may be determined from time to time in the sole discretion of the Compensation Committee of Scientific Games Corporation.
Termination Upon Expiration of Agreement . In the event that the Agreement expires on or after December 31, 2011, you will receive the Standard Termination Payments (as defined in Section 5(a) of the Agreement) and:
A. if not already paid to you and without duplication, the non-equity portion of your incentive compensation for the completed calendar year after which such expiration occurs, payable if, as and when such bonuses are awarded in the ordinary course in such subsequent year, subject to payroll deductions; provided , however , that if and to the extent necessary to comply with Section 409A(a)(2)(B)(i) of the Code, and applicable administrative guidance and regulations, such payment shall be made in a lump sum on the date that is six months plus one day following the applicable expiration date; and
B. except to the extent otherwise provided at the time of grant under the terms of any equity award made to you, all stock options, deferred stock, restricted stock and other equity-based awards held by you, if such termination occurs on or after December 31, 2011 not for Cause, will become fully vested and non-forfeitable (provided that any such options will cease being exercisable
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upon the earlier of (x) three months after the expiration date of the Agreement and (y) the scheduled expiration date of such options), and, in all other respects, all such options and other awards shall be governed by the plans and programs and the agreements and other documents pursuant to which the awards were granted; provided , however , that any performance-based equity award in respect of which the performance criteria has not been finally determined as having been met (or not met), will either vest and be delivered upon such determination of such criteria being satisfied or lapse in the event such criteria is not met.
Equity Award Grant . The Company shall grant you ten thousand (10,000) restricted stock units under the Scientific Games Corporation 2003 Incentive Compensation Plan, as amended and restated (the Plan), and an individual equity agreement (in the form to be provided to you) to be entered into by and between the Company and you (the Equity Agreement). The Equity Agreement shall provide that the equity award shall vest with respect to twenty percent (20%) of the shares of common stock subject to such award on each of the first five anniversaries of the date of grant, subject to any applicable provisions relating to accelerated vesting and forfeiture as described in the Agreement, the Equity Agreement or the Plan.
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Please indicate your agreement to the foregoing by countersigning and returning an original signed copy of this letter to me.
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Very truly yours, |
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Scientific Games Corporation |
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/s/ A. Lorne Weil |
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A. Lorne Weil |
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Chairman and Chief Executive Officer |
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Accepted and Agreed to: |
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/s/ Larry Potts |
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Larry Potts |
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WHEREAS, the Company and Executive entered into an Employment Agreement dated as of January 1, 2006 (executed on August 2, 2006) by and between the Company and Executive, as amended by the letter agreement dated October 2, 2008 (as so amended, the Employment Agreement); and
WHEREAS, the Company and Executive desire to amend the Employment Agreement as set forth herein to bring the Employment Agreement into compliance with Section 409A of the Internal Revenue Code of 1986 and the regulations and Treasury guidance thereunder; and
WHEREAS, the amendments contemplated hereby are intended to bring the timing of, and certain procedural aspects with respect to, certain payments under the Employment Agreement into compliance with Section 409A but not to otherwise affect Executives right to such payments.
NOW THEREFORE, in consideration of the premises and the mutual benefits to be derived herefrom and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:
To the extent any payments of money or other benefits due to Executive hereunder could cause the application of an acceleration or additional tax under Section 409A of the Code, such payments or other benefits shall be deferred if deferral will make such payment or other benefits compliant under Section 409A of the Code, or otherwise such payments or other benefits shall be restructured, to the extent possible, in a manner determined by the Company that does not cause such acceleration or additional tax. To the extent any reimbursements or in-kind benefits due to Executive under this Agreement constitute deferred compensation under Section 409A of the Code, 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 of the Code.
IN WITNESS WHEREOF, each of the parties hereto has caused this Amendment to be executed on its behalf as of the date first above written.
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SCIENTIFIC GAMES CORPORATION |
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By: |
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/s/ Ira H. Raphaelson |
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Name: |
Ira H. Raphaelson |
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Title: |
Vice President, General Counsel and Secretary |
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/s/ Larry Potts |
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Larry Potts |
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WHEREAS, Executive has been employed pursuant to an Employment Agreement dated as of August 1, 2006 by and between the Company and Executive (the Original Agreement), as amended by the Superseding Employment, Separation and General Release Agreement dated as of July 1, 2008 (the Superseding Agreement and, together with the Original Agreement, the Employment Agreement); and
WHEREAS, the Company and Executive desire to amend the Employment Agreement as set forth herein to bring the Employment Agreement into compliance with Section 409A of the Internal Revenue Code of 1986 and the regulations and Treasury guidance thereunder; and
WHEREAS, the amendments contemplated hereby are intended to bring the timing of, and certain procedural aspects with respect to, certain payments under the Employment Agreement into compliance with Section 409A but not to otherwise affect Executives right to such payments.
NOW THEREFORE, in consideration of the premises and the mutual benefits to be derived herefrom and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:
To the extent any payments of money or other benefits due to Executive hereunder could cause the application of an acceleration or additional tax under Section 409A of the Code, such payments or other benefits shall be deferred if deferral will make such payment or other benefits compliant under Section 409A of the Code, or otherwise such payments or other benefits shall be restructured, to the extent possible, in a manner determined by the Company that does not cause such acceleration or additional tax. To the extent any reimbursements or in-kind benefits due to Executive under this Agreement constitute deferred compensation under Section 409A of the Code, 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 of the Code.
For the avoidance of doubt, Section 4(g) of the Original Agreement (as amended hereby) shall apply to the Original Agreement as well as the Superseding Agreement, as may be applicable (notwithstanding anything in the Superseding Agreement to the contrary).
IN WITNESS WHEREOF, each of the parties hereto has caused this Amendment to be executed on its behalf as of the date first above written.
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SCIENTIFIC GAMES INTERNATIONAL, INC. |
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/s/ Ira H. Raphaelson |
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Name: |
Ira H. Raphaelson |
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Title: |
Vice President, General Counsel and Secretary |
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/s/ William J. Huntley |
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William J. Huntley |
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WHEREAS, the Company and Executive entered into an Employment Agreement dated as of January 1, 2006 (executed on August 2, 2006) by and between the Company and Executive, as amended by the letter agreement dated August 5, 2008 (as so amended, the Employment Agreement); and
WHEREAS, the Company and Executive desire to amend the Employment Agreement as set forth herein to bring the Employment Agreement into compliance with Section 409A of the Internal Revenue Code of 1986 and the regulations and Treasury guidance thereunder; and
WHEREAS, the amendments contemplated hereby are intended to bring the timing of, and certain procedural aspects with respect to, certain payments under the Employment Agreement into compliance with Section 409A but not to otherwise affect Executives right to such payments.
NOW THEREFORE, in consideration of the premises and the mutual benefits to be derived herefrom and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:
To the extent any payments of money or other benefits due to Executive hereunder could cause the application of an acceleration or additional tax under Section 409A of the Code, such payments or other benefits shall be deferred if deferral will make such payment or other benefits compliant under Section 409A of the Code, or otherwise such payments or other benefits shall be restructured, to the extent possible, in a manner determined by the Company that does not cause such acceleration or additional tax. To the extent any reimbursements or in-kind benefits due to Executive under this Agreement constitute deferred compensation under Section 409A of the Code, 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 of the Code.
IN WITNESS WHEREOF, each of the parties hereto has caused this Amendment to be executed on its behalf as of the date first above written.
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SCIENTIFIC GAMES INTERNATIONAL, INC. |
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By: |
/s/ Ira H. Raphaelson |
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Name: |
Ira H. Raphaelson |
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Vice President, General Counsel and Secretary |
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/s/ Steven M. Saferin |
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Steven M. Saferin |
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Exhibit 10.45
October 6, 2008
Ira H. Raphaelson
Vice President, General Counsel & Secretary
Scientific Games Corporation
750 Lexington Avenue
New York, New York
Dear Ira:
This will confirm our understanding regarding certain amendments to the Employment and Severance Benefits Agreement, dated December 15, 2005 (effective as of February 1, 2006), between you and Scientific Games Corporation (the Company), as amended by the Letter Agreement, dated as of August 2, 2006, by and between you and the Company (as amended hereby, the Agreement). Except as expressly set forth herein, the terms of the Agreement shall remain in full force and effect and are hereby ratified and confirmed in all respects. Capitalized terms used herein but not defined herein shall have the meanings ascribed to them in the Agreement (except as otherwise modified hereby).
Term . The Term set forth in Section 1 of the Agreement shall be extended to February 1, 2012 (as may be extended in accordance with Section 1 of the Agreement and subject to earlier termination in accordance with the Agreement).
Base Salary . Effective February 1, 2009, your Base Salary shall be six hundred nineteen thousand five hundred US dollars (US$619,500) per year, subject to increases thereof as may be determined from time to time in the sole discretion of the Compensation Committee of the Company.
Termination in connection with Change in Control. In the event your employment is terminated by the Company without Cause or by you for Good Reason herein and such termination occurs upon or within one year immediately following a Change in Control (as defined below), you shall be entitled to (without duplication):
(1) the Accrued Obligations (as defined in Section 5(b) of the Agreement);
(2) an amount equal to two times the sum of (a) your annual Base Salary and (b) an amount equal to the highest Annual Bonus paid to you in respect of the two most recent fiscal years of the Company but not more than your Target Bonus for the then-current fiscal year, payable in a lump sum in accordance with the provisions set forth under the caption Timing of Certain Payments below;
(3) except to the extent otherwise provided at the time of grant under the terms of any equity award made to you, all stock options, deferred stock, restricted stock and other equity-based awards held by you at termination will become fully
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vested and non-forfeitable, and, in all other respects, all such options and other awards shall be governed by the plans and programs and the agreements and other documents pursuant to which the awards were granted;
(4) no later than March 15 following the end of the fiscal year in which such termination occurs, in lieu of the Annual Bonus for the year in which such termination occurs, the pro rata portion of any Annual Bonus which would have been payable to you had you remained in employment with the Company during the entire year in which such termination occurred (such pro rata calculation to be determined by multiplying a fraction, the numerator of which is the number of whole months in such year prior to such termination and the denominator of which is 12, times the Annual Bonus which would have been payable to you had you remained employed with the Company);
(5) if you elect to continue medical coverage under the Companys group health plan in accordance with COBRA, the Company shall pay the monthly premiums for such coverage for a period of twelve (12) months.
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 shareholder of 20% or more of the outstanding common stock, 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 Companys then-outstanding securities; (ii) the stockholders of the Company approve a merger, consolidation, recapitalization, or reorganization of SGC, 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 which 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 hereof, 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 the Company sells all or substantially all of the stock of the Company to any person or entity other than an affiliate of the Company; or (iv) during any period of two 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 Companys stockholders was approved by a vote of at
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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.
Termination Upon Expiration of Agreement . In the event that the Agreement expires on or after February 1, 2012, you will receive the Accrued Obligations and:
A. if not already paid to you and without duplication, the non-equity portion of your incentive compensation for the completed calendar year after which such expiration occurs, payable if, as and when such bonuses are awarded in the ordinary course in such subsequent year, subject to payroll deductions; provided , however , that if and to the extent necessary to comply with Section 409A(a)(2)(B)(i) of the Code, and applicable administrative guidance and regulations, such payment shall be made in a lump sum on the date that is six months plus one day following the applicable expiration date; and
B. except to the extent otherwise provided at the time of grant under the terms of any equity award made to you, all stock options, deferred stock, restricted stock and other equity-based awards held by you, if such termination on or after February 1, 2012 not for Cause, will become fully vested and non-forfeitable (provided that any such options will cease being exercisable upon the earlier of (x) three (3) months after the expiration date of the Agreement and (y) the scheduled expiration date of such options), and, in all other respects, all such options and other awards shall be governed by the plans and programs and the agreements and other documents pursuant to which the awards were granted; provided , however , that any performance based equity award in respect of which the performance criteria has not been finally determined as having been met (or not met), will either vest and be delivered upon such determination of such criteria being satisfied or lapse in the event such criteria is not met.
Timing of Certain Payments . Unless otherwise contemplated in the Agreement, all payments payable in connection with termination of your employment under the Agreement shall be made as soon as practicable after the Termination Date but in no event later than 30 days after the Termination Date; provided, however, that if and to the extent necessary to comply with Section 409A(a)(2)(B)(i) of the Code, and applicable administrative guidance and regulations, any such payment shall be made in a lump sum on the date that is six months plus one day following the Termination Date.
Non-Competition . The period of non-competition set forth in Section 15 of the Agreement shall be eighteen (18) months rather than twelve (12) months.
Equity Award Grant . The Company shall grant you twenty-five thousand (25,000) restricted stock units under the Scientific Games Corporation 2003 Incentive Compensation Plan, as amended and restated (the Plan), and an individual equity agreement (in the form to be provided to you) to be entered into by and between the Company and you (the Equity Agreement). The Equity Agreement shall provide that the equity award shall vest with respect to twenty percent (20%) of the shares of common stock subject to such award on each of the first five anniversaries of the date of grant, subject to any applicable provisions relating to accelerated vesting and forfeiture as described in the Agreement, the Equity Agreement or the Plan.
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Please indicate your agreement to the foregoing by countersigning and returning an original signed copy of this letter to me.
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Very truly yours, |
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Scientific Games Corporation |
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By: |
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/s/ A. Lorne Weil |
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A. Lorne Weil |
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Chairman and Chief Executive Officer |
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/s/ Ira H. Raphaelson |
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Ira H. Raphaelson |
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Amendment to Employment Agreement (this Amendment), dated as of December 30, 2008, by and between Scientific Games Corporation, a Delaware corporation (the Company), and Ira H. Raphaelson (Executive).
WHEREAS, Executive has been employed pursuant to an Employment and Severance Benefits Agreement dated as of December 15, 2005 by and between the Company and Executive (the 2005 Agreement), as amended by a letter agreement dated August 2, 2006 (the August 2006 Amendment) and as amended further by a letter agreement dated October 6, 2008 (the October 2008 Amendment and, collectively with the 2005 Agreement and the August 2006 Amendment, the Employment Agreement); and
WHEREAS, the Company and Executive desire to amend the Employment Agreement as set forth herein to bring the Employment Agreement into compliance with Section 409A of the Internal Revenue Code of 1986 and the regulations and Treasury guidance thereunder; and
WHEREAS, the amendments contemplated hereby are intended to bring the timing of, and certain procedural aspects with respect to, certain payments under the Employment Agreement into compliance with Section 409A but not to otherwise affect Executives right to such payments.
NOW THEREFORE, in consideration of the premises and the mutual benefits to be derived herefrom and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:
IN WITNESS WHEREOF, each of the parties hereto has caused this Amendment to be executed on its behalf as of the date first above written.
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SCIENTIFIC GAMES CORPORATION |
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By: |
/s/ DeWayne Laird |
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DeWayne Laird |
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Vice President and Chief Financial Officer |
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/s/ Ira H. Raphaelson |
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Ira H. Raphaelson |
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Exhibit 10.47
Employment Agreement
This Employment Agreement (the Agreement ) is made as of February 11, 2009 but effective as of January 1, 2009 (the Effective Date ), by and between Scientific Games Corporation, a Delaware corporation (the Company ), and Stephen L. Gibbs ( Employee ).
WHEREAS, Employee has been employed pursuant to an Employment Agreement dated as of March 1, 2007 as amended by an amendment dated as of December 30, 2008 (as amended, the Prior Agreement ); and
WHEREAS, the Company and Employee desire that this Agreement replace and supersede the Prior 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 Employee, the parties hereto agree as follows.
1. Termination of Existing Employment Agreements . As of the Effective Date, all existing employment agreements between the parties hereto, whether oral or written, including the Prior Agreement, are hereby terminated and superseded by this Agreement.
2. Employment; Term . The Company hereby agrees to employ Employee, and Employee 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 Employee under this Agreement (the Term ) shall be the period commencing on the Effective Date and ending on February 28, 2011, as may be extended in accordance with this Section 2 and subject to earlier termination in accordance with Section 5 hereof. The Term shall be automatically extended without further action by either party hereto by one additional year (added to the end of the Term), and then on each succeeding annual anniversary thereafter, unless either party hereto shall have given written notice to the other party hereto prior to the date which is ninety (90) days prior to the date upon which such extension would otherwise have become effective electing not to further extend the Term, in which case Employees employment shall terminate on the date upon which such extension would otherwise have become effective, unless terminated in accordance with Section 5 hereof. It is also intended that Employees previous term of employment with the Company shall be included when calculating Employees tenure at the Company for all purposes.
3. Position and Duties . During the Term, Employee will serve as Vice President, Chief Accounting Officer and Corporate Controller of the Company, and as an officer or director of any subsidiary or affiliate of the Company if elected to any such position by the stockholders or by the board of directors of any such subsidiary or affiliate, as the case may be. In such capacities, Employee shall perform such duties and shall have such responsibilities as are normally associated with such positions and as otherwise may be assigned to the Employee from time to time by the Chief Executive Officer, Chief Operating Officer or Chief Financial Officer of the Company or upon the authority of the Board of Directors of the Company. Subject to Section 5(e) hereof, Employees functions, duties and responsibilities are subject to reasonable changes as the Company may in good faith determine from time to time. Employee hereby agrees to accept such employment and to serve the Company and its subsidiaries and affiliates to the best of Employees ability in such capacities, devoting substantially all of Employees business time to such employment.
4. Compensation .
(a) Base Salary . During the Term, Employee will receive a base salary of two
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hundred seventy six thousand two hundred fifty U.S. Dollars (US$276,250) per annum, paid in accordance with the Companys 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 Employee. In the event that the Company, in its sole discretion, from time to time determines to increase Employees base salary, such increased amount shall, from and after the effective date of such increase, constitute the base salary of Employee for purposes of this Agreement.
(b) Incentive Compensation . Employee shall have the opportunity annually to earn incentive compensation in amounts determined by the Compensation Committee of the Board of Directors of the Company (the Compensation Committee ) in accordance with the applicable incentive compensation plan of the Company as in effect from time to time ( Incentive Compensation ). Under such plan, Employee shall have the opportunity annually (beginning with respect to the 2009 performance period) to earn up to 43% of Employees base salary as Incentive Compensation on the terms and subject to the conditions of such plan.
(c) Eligibility for Annual Equity Awards . Employee 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 for similarly situated employees of the Company and subject to the Companys 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 Employee under any such plan or program.
(d) Expense Reimbursement . Subject to Section 4(g) hereof, the Company shall reimburse Employee for all reasonable and necessary travel, business entertainment and other business expenses incurred by Employee in connection with the performance of Employees duties under this Agreement, on a timely basis upon timely submission by Employee of vouchers therefor in accordance with the Companys standard procedures.
(e) Health and Welfare Benefits . Employee 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 employees in accordance with the terms of such plans and programs and subject to the Companys right to at any time amend or terminate any such plan or program. Employee shall be entitled to paid vacation, holidays, and any other time off in accordance with the Companys policies in effect from time to time.
(f) Special Equity Award . The Company shall grant to Employee seven thousand five hundred (7,500) restricted stock units under the Scientific Games Corporation 2003 Incentive Compensation Plan, as amended and restated (the Plan ), pursuant to an equity award agreement (in the form to be provided to Employee) to be entered into by and between the Company and Employee (the Equity Award Agreement ). The Equity Award Agreement shall provide that the equity award shall vest with respect to twenty percent (20%) of the shares of common stock subject to such award on each of the first five anniversaries of the date of grant, subject to any applicable provisions relating to accelerated vesting and forfeiture as described in this Agreement, the Equity Award Agreement or the Plan.
(g) Taxes and Internal Revenue Code 409A . Payment of all compensation and benefits to Employee specified in this Section 4 and in Section 5 of 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 Employee under this Agreement, including, without limitation, under Section 409A of the Internal Revenue Code of 1986, as amended (the Code ),
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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 hereunder are deemed to be subject to Section 409A, including payments under Section 5 of this Agreement, Employee 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 months following termination of employment). Notwithstanding anything herein to the contrary, if (i) at the time of Employees separation from service (as defined in Treas. Reg. Section 1.409A-1(h)) with the Company other than as a result of Employees death, (ii) Employee 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 Employee 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 Employee) until the date that is six months following Employees 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 Employee 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 possible, 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 Employee under this Agreement constitute deferred compensation under Section 409A, any such reimbursements or in-kind benefits shall be paid to Employee 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.
5. Termination of Employment . Employees employment may be terminated at any time prior to the end of the Term under the terms described in this Section 5.
(a) Termination by Employee for Other than Good Reason . Employee may terminate Employees employment hereunder for any reason or no reason upon 60 days prior written notice to the Company referring to this Section 5(a); provided , however , that a termination by Employee for Good Reason (as defined below) shall not constitute a termination by Employee for other than Good Reason pursuant to this Section 5(a). In the event Employee terminates Employees employment for other than Good Reason, Employee shall be entitled only to the following compensation and benefits (collectively, the Standard Termination Payments ):
(i) any accrued but unpaid base salary for services rendered by Employee to the date of such termination, payable in accordance with the Companys 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 Employee;
(ii) all 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 4
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hereof in which Employee theretofore participated will be paid under the terms and conditions of such plans, programs, and arrangements (and agreements and documents thereunder);
(iii) except as provided in Section 6.6 hereof, all stock options, restricted stock units and other equity awards will be governed by the terms of the plans and programs under which such options, restricted stock units or other awards were granted; and
(iv) reasonable business expenses and disbursements incurred by Employee prior to such termination will be reimbursed in accordance with Section 4(d) hereof.
(b) Termination By Reason of Death . If Employee dies during the Term, the last beneficiary designated by Employee by written notice to the Company (or, in the absence of such designation, Employees estate) shall be entitled to the following compensation and benefits:
(i) the Standard Termination Payments; and
(ii) a lump sum payment equal to Employees annual base salary, payable within 30 days of death.
(c) Termination By Reason of Total Disability . The Company may terminate Employees employment in the event of Employees Total Disability. For purposes of this Agreement, Total Disability shall mean Employees (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 Employees employment is terminated by the Company by reason of Total Disability, the Company shall pay the following amounts, and make the following other benefits available, to Employee:
(i) the Standard Termination Payments;
(ii) an amount equal to the sum of (A) Employees annual base salary and (B) Employees Severance Bonus Amount (as defined below), payable over a period of twelve (12) months after such termination in accordance with Section 5(f) of this Agreement; provided such amount shall be reduced by any disability payments provided to Employee as a result of any disability plan sponsored by the Company or its affiliates providing benefits to Employee. For purposes of this Agreement, Severance Bonus Amount shall mean an amount equal to the highest annual Incentive Compensation paid to Employee in respect of the two most recent fiscal years of the Company but not more than the Employees target bonus for the-then current fiscal year;
(iii) in lieu of any Incentive Compensation for the year in which such termination occurs, payment of an amount equal to (A) the highest annual Incentive Compensation paid to Employee in respect of the two most recent fiscal years of the Company but not more than Employees target bonus for the year of termination, multiplied by (B) a fraction the numerator of which is the number of days Employee was employed in the year of such termination and the denominator of which is the total number of days in the year of such termination, payable as and when such Incentive Compensation would otherwise have been payable under Section 4(b); and
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(iv) if Employee elects to continue medical coverage under the Companys group health plan in accordance with COBRA, the Company shall pay the monthly premiums for such coverage for a period of twelve (12) months.
(d) Termination by the Company for Cause . The Company may terminate the employment of Employee at any time for Cause. For purposes of this Agreement, Cause shall mean: (i) gross neglect by Employee of Employees duties hereunder; (ii) Employees conviction (including conviction on a nolo contendere plea) 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 Employee in connection with the performance of Employees duties hereunder; (iv) intentional breach by Employee of any material provision of this Agreement; (v) material violation by Employee of a material provision of the Companys Code of Conduct; or (vi) any other willful or grossly negligent conduct of Employee which would make the continued employment of Employee by the Company materially prejudicial to the best interests of the Company. In the event Employees employment is terminated for Cause, Employee 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 Employee for Good Reason . The Company may terminate Employees employment at any time without Cause, for any reason or no reason, and Employee may terminate Employees employment for Good Reason. For purposes of this Agreement Good Reason shall mean that without Employees prior written consent, any of the following shall have occurred: (i) a material change, adverse to Employee, in Employees positions, titles, offices, or duties as provided in Section 3 hereof, except, in such case, in connection with the termination of Employees employment for Cause, Total Disability or death; (ii) an assignment of any significant duties to Employee which are materially inconsistent with Employees positions or offices held under Section 3 hereof; (iii) a material decrease in base salary or material decrease in Employees incentive compensation opportunities provided under this Agreement; and (iv) 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 Employee for Good Reason under any of clauses (i) (iv) of this Section 5(e) shall not be considered effective unless Employee shall have provided the Company with written notice of the specific reasons for such termination within thirty (30) days after he 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. In the event that Employees employment is terminated by the Company without Cause or by Employee for Good Reason (and not, for the avoidance of doubt, in the event of a termination pursuant to Section 5(a), (b), (c) or (d) hereof), the Company shall pay the following amounts, and make the following other benefits available, to Employee.
(i) the Standard Termination Payments;
(ii) an amount equal to the sum of (A) Employees annual base salary and (B) Employees Severance Bonus Amount, payable over a period of twelve (12) months after such termination in accordance with Section 5(f) of this Agreement;
(iii) in lieu of any Incentive Compensation for the year in which such termination occurs, payment of an amount equal to (A) the highest annual Incentive Compensation paid to Employee in respect of the two most recent fiscal years of the Company but not more than the Employees target bonus for the year of such termination, multiplied by (B) a fraction the numerator of which is the number of days Employee was employed in the year of such termination and the denominator of which is the total number of days in the year of such
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termination, payable as and when such Incentive Compensation would otherwise have been payable under Section 4(b); and
(iv) if Employee elects to continue medical coverage under the Companys group health plan in accordance with COBRA, the Company shall pay the monthly premiums for such coverage for a period of twelve (12) months.
(f) Timing of Certain Payments under Section 5 . Payments pursuant to Sections 5(c)(ii) or 5(e)(ii) of this Agreement, if any, shall be payable in equal installments in accordance with the Companys standard payroll practices over a period of twelve (12) months following the date of termination (subject to such deductions or amounts to be withheld as required by applicable law and regulations); provided , however , that if and to the extent necessary to prevent any acceleration or additional tax under Section 409A, such payments shall be made as follows: (i) no payments shall be made for a six-month period following the date of Employees separation of service (as defined in Section 409A(a)(2)(B)(i) of the Code) with the Company, (ii) an amount equal to the aggregate sum that would have been otherwise payable during the initial six-month period shall be paid in a lump sum six (6) months following the date of Employees 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 Employees separation of service with the Company through the remainder of the twelve-month period, payment of the remaining amount due shall be payable in equal installments in accordance with the Companys standard payroll practices (subject to such deductions or amounts to be withheld as required by applicable law and regulations). In addition, notwithstanding any other provision with respect to the timing of payments under this Agreement, if and to the extent necessary to comply with Section 409A, amounts payable following termination of employment in a lump sum, including pursuant to Sections 5(c)(iii) and 5(e)(iii) of this Agreement, shall instead be paid six (6) months following the date of Employees separation of service (subject to such deductions or amounts to be withheld as required by applicable law and regulations).
(g) No Obligation to Mitigate . Employee shall have no obligation to mitigate damages pursuant to this Section 5, but shall be obligated to promptly advise the Company regarding any compensation earned or any payments that will become due with respect to services provided to another employer during any period of continued payments pursuant to this Section 5. The Companys obligation to make continued payments to Employee shall be reduced by any compensation earned by the Employee during the severance period (without regard to when such compensation is paid).
(h) 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 the Employee hereunder (including, without limitation, any payments pursuant to this Section 5) shall be subject to set-off with respect to any amounts the Employee otherwise owes the Company or any subsidiary or affiliate thereof.
(i) No Other Benefits or Compensation . Except as may be provided under this Agreement, under any other written agreement between Employee and the Company, or under the terms of any plan or policy applicable to Employee, Employee shall have no right to receive any other compensation from the Company, or to participate in any other plan, arrangement or benefit provided by the Company, with respect to any future period after such termination or resignation.
(j) Release of Employment Claims; Compliance with Section 6 . Employee agrees, as a condition to receipt of any termination payments and benefits provided for in this Section 5 (other than the Standard Termination Payments), that Employee will execute a general release agreement, in a form reasonably satisfactory to the Company, releasing any and all claims arising out of Employees
6
employment (other than enforcement of this Agreement). The Company shall provide Employee with the proposed form of release referred to in the immediately preceding sentence no later than two (2) days following the date of termination. Employee shall have 21 days to consider the release and if he executes the release, shall have seven (7) days after execution of the release to revoke the release, and, absent such revocation, the release shall become binding. Provided Employee does not revoke the release, payments contingent on the release (if any) shall be paid no earlier than eight (8) days after execution thereof in accordance with the applicable provisions herein. The Companys obligation to make any termination payments and benefits provided for in this Section 5 (other than the Standard Termination Payments) shall immediately cease if Employee willfully and materially breaches Section 6.1, 6.2 , 6.3, 6.4, or 6.8 hereof.
6. Noncompetition; Non-solicitation; Nondisclosure; etc .
6.1 Noncompetition; Non-solicitation .
(a) Employee acknowledges the highly competitive nature of the Companys business and that access to the Companys confidential records and proprietary information renders Employee special and unique within the Companys industry. In consideration of the amounts that may hereafter be paid to Employee pursuant to this Agreement (including, without limitation, Sections 4 and 5 hereof), Employee agrees that during the Term (including any extensions thereof) and during the Covered Time (as defined in Section 6.1(e) hereof), Employee, 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 6, Competing Business shall mean any business: (i) involving design and production of instant lottery tickets and the management of related marketing and distribution programs; manufacture, sale, operation or management of on-line lottery systems (Lotto-type games), video gaming, including fixed odds or server-based betting terminals and video lottery terminals; development and commercialization of licensed and other proprietary game entertainment for all lottery product channels; provision of wagering (whether pari-mutuel (pooled) or otherwise) or venue management services for racetracks and off-track betting facilities; production of prepaid cellular phone cards; or any other business in which the Company or its affiliates is then or was within the previous twelve (12) months engaged or in which the Company, to Employees knowledge, intends to engage during the Term or the Covered Time (as defined below); (ii) in which the Employee was engaged or involved (whether in an executive or supervisory capacity or otherwise) on behalf of the Company or with respect to which the Employee has obtained proprietary or confidential information; and (iii) which was conducted anywhere in the United States or in any other geographic area in which such business was conducted or planned to be conducted by the Company.
(b) In further consideration of the amounts that may hereafter be paid to Employee pursuant to this Agreement (including, without limitation, Sections 4 and 5 hereof), Employee agrees that, during the Term (including any extensions thereof) and during the Covered Time, Employee 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 Employees 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, Employee agrees that upon the earlier of Employees (i) negotiating with any Competitor (as defined below) concerning the possible employment of Employee by the Competitor, (ii) responding to (other
7
than for the purpose of declining) an offer of employment from a Competitor, or (iii) becoming employed by a Competitor, (A) Employee will provide copies of Section 6 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, Employee will promptly provide notice to the Company of such circumstances. Employee further agrees that the Company may provide notice to a Competitor of Employees 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) Employee understands that the restrictions in this Section 6.1 may limit Employees 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, without limitation, Sections 4 and 5 hereof) is sufficient to justify such restrictions. In consideration thereof and in light of Employees education, skills and abilities, Employee agrees that Employee will not assert in any forum that such restrictions prevent Employee from earning a living or otherwise should be held void or unenforceable.
(e) For purposes of this Section 6.1, Covered Time shall mean the period beginning on the date of termination of Employees employment (the Date of Termination ) and ending twelve (12) months after the Date of Termination.
6.2 Proprietary Information; Inventions.
(a) Employee acknowledges that, during the course of Employees employment with the Company, Employee necessarily will have (and during any employment by the Company prior to the Term has had) access to and make use of proprietary information and confidential records of the Company. Employee covenants that Employee shall not during the Term or at any time thereafter, directly or indirectly, use for Employees 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 Companys 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 Employees 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 Companys 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 Employees actual knowledge, has agreed to hold in confidence; and (x) all written, graphic, electronic data and other material containing any of the foregoing. Employee 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 or generally known or available to the industry or information that becomes available to Employee on an unrestricted, non-confidential basis from a source other than the Company or its directors, officers, employees, or agents (without breach of any obligation of
8
confidentiality of which Employee has actual knowledge at the time of the relevant disclosure by Employee).
(b) Employee 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 Employee during the Term (and during any employment by the Company prior to the Term) shall belong to the Company, provided that such Inventions grew out of the Employees 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 Companys time or with the use of the Companys facilities or materials. Employee 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 the Employees inventorship. If any Invention is described in a patent application or is disclosed to third parties, directly or indirectly, by the Employee within two (2) years after the termination of the Employees employment with the Company, it is to be presumed that the Invention was conceived or made during the Term. Employee agrees that Employee will not assert any rights to any Invention as having been made or acquired by Employee prior to the date of this Agreement, except for Inventions, if any, disclosed in Exhibit A to this Agreement.
6.3 Confidentiality and Surrender of Records . Employee shall not, during the Term or at any time thereafter (irrespective of the circumstances under which Employees 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 persons or entitys employment or retention by the Company, nor shall Employee retain, and will deliver promptly to the Company, any of the same following termination of Employees 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 Employees possession or under Employees control or accessible to Employee which contain any proprietary information. All confidential records shall be and remain the sole property of the Company during the Term and thereafter.
6.4 Non-disparagement . Employee 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 Employee from making truthful statements that are required by applicable law, regulation or legal process.
6.5 No Other Obligations . Employee represents that Employee is not precluded or limited in Employees ability to undertake or perform the duties described herein by any contract, agreement or restrictive covenant. Employee covenants that Employee shall not employ the trade secrets or proprietary information of any other person in connection with Employees employment by the Company without such persons authorization.
6.6 Forfeiture of Outstanding Options . The provisions of Section 5 hereof notwithstanding, if Employee willfully and materially fails to comply with Section 6.1, 6.2, 6.3, 6.4, or 6.8 hereof, all options to purchase common stock, restricted stock units and other equity-based awards granted by the Company (whether prior to, contemporaneous with, or subsequent to the Effective Date) and held by Employee or a transferee of Employee shall be immediately forfeited and cancelled.
9
6.7 Enforcement . Employee acknowledges and agrees that, by virtue of Employees position, services and access to and use of confidential records and proprietary information, any violation by Employee of any of the undertakings contained in this Section 6 would cause the Company immediate, substantial and irreparable injury for which it has no adequate remedy at law. Accordingly, Employee 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 6. Employee waives posting of any bond otherwise necessary to secure such injunction or other equitable relief. Rights and remedies provided for in this Section 6 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.
6.8 Cooperation with Regard to Litigation . Employee agrees to cooperate reasonably with the Company, during the Term and thereafter (including following Employees 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 Employee has or intends to assert in good faith an interest or position adverse to or inconsistent with the interest or position of the Company, Employee agrees to cooperate reasonably with the Company, during the Term and thereafter (including following Employees 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 of Directors of the Company 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 Employee) all reasonable expenses actually incurred in connection with Employees cooperation and assistance including, without limitation, reasonable fees and disbursements of counsel, if any, chosen by Employee if Employee reasonably determines in good faith, on the advice of counsel, that the Companys counsel may not ethically represent Employee in connection with such action, suit or proceeding due to actual or potential conflicts of interests.
6.9 Survival . The provisions of this Section 6 shall survive the termination of the Term and any termination or expiration of this Agreement.
6.10 Company . For purposes of this Section 6, references to the Company shall include the Company and each subsidiary and/or affiliate of the Company.
7. Code of Conduct . Employee acknowledges that he has read the Companys Code of Conduct and agrees to abide by such Code, as amended or supplemented from time to time, and other policies applicable to employees and executives of the Company.
8. Indemnification . The Company shall indemnify Employee to the full extent permitted under the Companys 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 the Employee may be made a party by reason of the Employee being an officer, director or employee of the Company or of any subsidiary or affiliate of the Company.
9. Assignability; Binding Effect . Neither this Agreement nor the rights or obligations hereunder of the parties hereto shall be transferable or assignable by Employee, except in accordance with the laws of descent and distribution and as specified below. The Company may assign this Agreement and the Companys rights and obligations hereunder, and shall assign this Agreement and such rights and obligations, to any Successor (as hereinafter defined) which, by operation of law or otherwise, continues to carry on substantially the business of the Company (or a business unit of the Company for which Employee provided services) prior to the event of succession, and the Company shall, as a condition of the succession, require such Successor to agree in writing to assume the Companys obligations and be
10
bound by this Agreement. For purposes of this Agreement, Successor shall mean any person that succeeds to, or has the practical ability to control, the Companys business directly or indirectly, by merger or consolidation, by purchase or ownership of voting securities of the Company or all or substantially all of its assets or those relating to a particular business unit of the Company to which Employee provides services, or otherwise. The Company may also assign this Agreement and the Companys 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 Employee hereunder. This Agreement shall be binding upon and inure to the benefit of Employee, Employees heirs, executors, administrators, and beneficiaries, and shall be binding upon and inure to the benefit of the Company and its successors and assigns.
10. Complete Understanding; Amendment; Waiver . This Agreement constitutes the complete understanding between the parties hereto with respect to the employment of Employee and supersedes all other prior agreements and understandings, both written and oral, between the parties hereto with respect to the subject matter hereof, and no statement, representation, warranty or covenant has been made by either party hereto with respect thereto except as expressly set forth herein. Except as contemplated by Section 4(g) hereof, this Agreement shall not be modified, amended or terminated except by a written instrument signed by each of the parties hereto. 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 hereto charged with giving such waiver. Waiver by either party hereto of any breach hereunder by the other party hereto shall not operate as a waiver of any other breach, whether similar to or different from the breach waived. No delay by either party hereto in the exercise of any rights or remedies shall operate as a waiver thereof, and no single or partial exercise by either party hereto of any such right or remedy shall preclude other or further exercise thereof.
11. 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 hereto 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 hereto 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 hereto 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.
12. Survivability . The provisions of this Agreement which by their terms call for performance subsequent to termination of Employees employment hereunder, or of this Agreement, shall so survive such termination, whether or not such provisions expressly state that they shall so survive.
11
13. Governing Law; Arbitration .
(a) Governing Law . 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.
(b) Arbitration .
(i) The Employee 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, Employees 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 6 hereof. 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 6 hereof, the Company and Employee hereby consent to the jurisdiction of any or all of the following courts: (i) the United States District Court for the Southern District of New York; (ii) the Supreme Court of the State of New York, New York County; or (iii) any other court having jurisdiction; provided that damages for any alleged violation of Section 6 hereof, as well as any claim, counterclaim or cross-claim brought by the Employee 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 Employee 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, but not limited to, 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 the American Arbitration Association in New York, New York 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 Employee 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 partys own costs and attorney fees, if any, unless the arbitrators rule otherwise. The Employee understands that he 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. The Employee shall not be required to pay any fee or cost that he would not otherwise be required to pay in a court action, unless so ordered by the arbitrators.
(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.
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14. 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.
15. Joint Drafting . In recognition of the fact that the parties hereto 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 hereto shall have the same opportunity to present evidence as to the actual intent of the parties hereto with respect to any such ambiguous language without any inference or presumption being drawn against any party hereto.
16. 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 General Counsel, at 750 Lexington Avenue, 25th Floor, New York, NY 10022, (b) to the Employee, at the last address shown in the Companys records, or (c) to such other replacement address as may be designated in writing by the addressee to the addressor.
[ Remainder of Page Intentionally Left Blank ]
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IN WITNESS WHEREOF, each of the parties hereto has duly executed this Agreement on February 11, 2009, to be deemed effective as of Effective Date above written.
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SCIENTIFIC GAMES CORPORATION |
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By: |
/s/ DeWayne E. Laird |
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Name: |
DeWayne E. Laird |
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Title: |
Vice President and Chief Financial Officer |
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EMPLOYEE |
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/s/ Stephen L. Gibbs |
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Name: Stephen L. Gibbs |
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14
Exhibit 12
Earnings to Fixed Charges
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December 31, |
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2004 |
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2005 |
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2006 |
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2007 |
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2008 |
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Income before income tax expense |
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99,761 |
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106,024 |
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85,405 |
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50,923 |
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(41,018 |
) |
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Equity in losses of equity-method investees |
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615 |
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42 |
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(1,721 |
) |
(1,042 |
) |
(448 |
) |
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Net income before equity in losses of equity- method investees |
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100,376 |
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106,066 |
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83,684 |
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49,881 |
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(41,466 |
) |
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Add fixed charges: |
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Interest expense including amortization of debt issuance costs |
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30,952 |
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26,548 |
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43,393 |
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58,550 |
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65,026 |
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Estimate of interest within rental expense |
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5,116 |
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4,208 |
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4,755 |
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4,699 |
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6,885 |
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36,068 |
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30,756 |
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48,148 |
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63,249 |
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71,911 |
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Adjusted earnings |
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136,444 |
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136,822 |
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131,832 |
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113,130 |
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30,445 |
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Ratio of earnings to fixed charges (1) |
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3.8 |
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4.4 |
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2.7 |
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1.8 |
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0.4 |
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(1) The ratio of earnings to fixed charges is computed by dividing adjusted earnings by fixed charges.
SCIENTIFIC GAMES CORPORATION SUBSIDIARIES
All
subsidiaries are 100% owned unless otherwise stated.
Scientific Games International, Inc. (Delaware)
MDI Entertainment, LLC (Delaware)
Scientific Games Canada Inc. (Ottawa)
Scientific Connections India Private Limited (India)
Scientific Games del Peru, S.R.L. (Peru) (99.9%)
Scientific Games Racing LLC (Delaware)
Scientific Games International Inc.Indra Sistemas S.A. Union Temporal De Empresas (Spain) (75%)
TRACKPLAY LLC (Delaware)
Scientific Games Racing Electronics & Computer Services Industry and Trading Limited Company (Turkey)
SG Racing, Inc. (Delaware)
Autotote Canada Inc. (Ontario)
Autotote Enterprises, Inc. (Connecticut)
Autotote Panama, Inc. (Panama)
Autotote Gaming, Inc. (Nevada)
Scientific Games Chile Limitada (Chile) (99.99%)
Scientific Games Latino America SA (Chile)
SGLA Servicios Limitada (Chile)
SGLA Comercializadora de Materiales Limitada (Chile)
Scientific Games Latino America Limitada (Chile)
Scientific Games Holdings Limited (Ireland)
Scientific Games Worldwide Limited (Ireland)
Scientific Games Services Limited (Ireland)
Scientific Games Malta Limited (Malta)
Scientific Games Racing B.V. (Netherlands)
Scientific Games Banen B.V. (Netherlands)
Scientific Games Deutschland GmbH (Germany)
Scientific Games Lottery Services KFT (Hungary)
Scientific Games Australia Pty. Ltd. (Australia)
Scientific Games Worldwide Sports Ltd. (B.V.I.)
Scientific Games Luxembourg Holdings SARL (Luxembourg)
Scientific Games Racing SAS (France)
Scientific Games Luxembourg Finance SARL (Luxembourg)
Scientific Games Reel Time Pty Ltd (Australia)
Scientific Games Puerto Rico, Inc. (Puerto Rico)
Scientific Games Spain Services SRL (Spain)
Scientific Games Sweden AB (Sweden)
Scientific Games Global Mexico S. de R.L. de C.V. (Mexico)
Scientific Games Mexico, SRL de CV (Mexico)
Scientific Games International Holdings LTD (UK)
Scientific Games Global Plus Limited (UK)
Global Draw Limited (UK)
Neomi Associates , Inc. (B.V.I.)
Pagoda Leisure Limited (UK)
Games Media Limited (UK)
Voodoo Games Limited (UK)
Channel 1 Games Limited (UK)
Global Games Limited (UK)
Scientific Games International Limited (UK)
Scientific Games Beteiligungsgesellschaft mBH (Austria)
Scientific
Games International GmbH (Austria)
Global Draw Austria GmbH (Austria)
Scientific Connections SDN BHD (Malaysia)
Knightway Promotions Limited (UK)
Scientific Connections Limited (UK)
Scientific Games Germany GmbH (Germany)
Autotote Europe GmbH (Germany)
Scientific Games Racing GmbH (Austria)
Scientific Games Racing GmbH (Germany)
Scientific Games Honsel GmbH (Germany)
Scientific Games Holdings (Canada) ULC (Nova Scotia)
Scientific Games Products (Canada) ULC (Nova Scotia)
Scientific Games Products (Australia) Pty Ltd (Australia)
Scientific Games Products, Inc. (Delaware)
Scientific Games SA Inc. (Delaware)
Happy Sun Technologies Ltd. (British Virgin Islands) (50%)
Success Trader Technologies Limited (Hong Kong) (50%)
Success Trader SZ (China) (50%)
Shenzhen Leli (China) (50%)
Guard Libang Technology Co. Limited (China) (50%)
Shandong Inspur Scientific Technology, Ltd. (Beijing) (50%)
Scientific Games Technology (Beijing) Co., Ltd. (China)
Scientific Games (China) Company Limited
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statement Nos. 333-82612, 333-05811, 333-44983, 333-44979, 333-101725, 333-101729, 333-110141, and 333-134043 on Form S-8 and Registration Nos. 333-74590, 333-110477, 333-112452, 333-124107, 333-141720, and 333-155346 on Form S-3 of our reports dated March 2, 2009, relating to the consolidated financial statements and consolidated financial statement schedule of Scientific Games Corporation (which report expresses an unqualified opinion and includes an explanatory paragraph relating to Scientific Games Corporation's adoption of Financial Accounting Standards Board Interpretation No. 48, "Accounting for Uncertainty in Income Taxes" on January 1, 2007) , and the effectiveness of Scientific Games Corporation's internal control over financial reporting, appearing in this Annual Report on Form 10-K of Scientific Games Corporation for the year ended December 31, 2008.
DELOITTE & TOUCHE LLP
Atlanta,
Georgia
March 2, 2009
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statement Nos. 33-82612, 333-05811, 333-44983, 333-44979, 333-101725, 333-101729, 333-110141, and 333-134043 of Scientific Games Corporation on Form S-8, Registration Nos. 333-74590, 333-110477, 333-112452, 333-124107 and 333-141720 of Scientific Games Corporation on Form S-3, and Registration Statement No. 333-155346 of Scientific Games International, Inc. on Form S-3 of our report dated February 27, 2009, with respect to the balance sheets of Consorzio Lotterie Nazionali as of December 31, 2008 and 2007, and the related statements of income, changes in equity and cash flows for the years then ended, prepared on the basis of International Financial Reporting Standards as issued by the International Accounting Standards Board, included in this Annual Report (Form 10-K) of Scientific Games Corporation for the year ended December 31, 2008.
/s/ Reconta Ernst & Young S.p.A.
Rome,
Italy
February 27, 2009
Certification by Chief Executive Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
I, Joseph R. Wright, Jr., certify that:
1. I have reviewed this annual report on Form 10-K 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: March 2, 2009
/s/ JOSEPH R. WRIGHT
Joseph R. Wright Chief Executive Officer |
Certification by Chief Financial Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
I, DeWayne E. Laird, certify that:
1. I have reviewed this annual report on Form 10-K 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: March 2, 2009
/s/ DEWAYNE LAIRD
DeWayne Laird Chief Financial Officer |
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 Annual Report of Scientific Games Corporation (the "Company") on Form 10-K for the period ended December 31, 2008 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Joseph R. Wright, Jr., 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/ JOSEPH R. WRIGHT
Joseph R. Wright Chief Executive Officer March 2, 2009 |
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 Annual Report of Scientific Games Corporation (the "Company") on Form 10-K for the period ended December 31, 2008 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, DeWayne E. Laird, 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/ DEWAYNE E. LAIRD
DeWayne E. Laird Chief Financial Officer March 2, 2009 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the Board of Directors and Equityholders of
Consorzio Lotterie Nazionali
We have audited the accompanying balance sheets of Consorzio Lotterie Nazionali as of December 31, 2008 and 2007, and the related statements of income, changes in equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company's internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Consorzio Lotterie Nazionali at December 31, 2008 and 2007, and the results of its operations and its cash flows for the years then ended, in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board.
/s/ Reconta Ernst & Young S.p.A.
Rome,
Italy
February 27, 2009
Exhibit 99.2
CONSORZIO LOTTERIE NAZIONALI
INDEX TO FINANCIAL STATEMENTS
|
|
Page |
|
|
|
Balance Sheets as of December 31, 2008 and 2007 |
|
F- 2 |
|
|
|
Income Statements for the Years Ended December 31, 2008, 2007 and 2006 |
|
F- 3 |
|
|
|
Statements of Changes in Equity for the Years Ended December 31, 2008, 2007 and 2006 |
|
F- 4 |
|
|
|
Cash Flow Statements for the Years Ended December 31, 2008, 2007, and 2006 |
|
F- 5 |
|
|
|
Notes to Financial Statements |
|
F- 6 |
F-1
CONSORZIO LOTTERIE NAZIONALI
BALANCE SHEETS
December 31, 2008 and 2007
(In thousands of Euro)
|
|
|
|
December 31, |
|
||
|
|
Notes |
|
2008 |
|
2007 |
|
|
|
|
|
|
|
|
|
ASSETS |
|
|
|
|
|
|
|
Non-current assets |
|
|
|
|
|
|
|
Equipment, net |
|
3 |
|
3,853 |
|
4,820 |
|
Intangible assets, net |
|
4 |
|
46 |
|
36 |
|
Deferred income taxes |
|
16 |
|
2,072 |
|
2,163 |
|
Total non-current assets |
|
|
|
5,971 |
|
7,019 |
|
|
|
|
|
|
|
|
|
Current assets |
|
|
|
|
|
|
|
Inventories |
|
5 |
|
9,124 |
|
10,648 |
|
Trade and other receivables |
|
6 |
|
35,892 |
|
29,099 |
|
Current financial assets from parent company |
|
18/20 |
|
129,345 |
|
15,101 |
|
Other current assets |
|
7 |
|
324,110 |
|
376,981 |
|
Cash and cash equivalents |
|
8 |
|
175 |
|
4 |
|
Total current assets |
|
|
|
498,646 |
|
431,833 |
|
|
|
|
|
|
|
|
|
TOTAL ASSETS |
|
|
|
504,617 |
|
438,852 |
|
|
|
|
|
|
|
|
|
EQUITY AND LIABILIILES |
|
|
|
|
|
|
|
Equity |
|
|
|
|
|
|
|
Issued capital |
|
9 |
|
16,000 |
|
16,000 |
|
Legal reserve |
|
|
|
3,200 |
|
1,077 |
|
Retained earnings, including net income for the period |
|
|
|
117,731 |
|
85,920 |
|
Total equity |
|
|
|
136,931 |
|
102,997 |
|
|
|
|
|
|
|
|
|
Non-current liabilities |
|
|
|
|
|
|
|
Deferred income taxes |
|
16 |
|
166 |
|
715 |
|
Long-term provisions |
|
10 |
|
616 |
|
144 |
|
Total non-current liabilities |
|
|
|
782 |
|
859 |
|
|
|
|
|
|
|
|
|
Current liabilities |
|
|
|
|
|
|
|
Accounts payable |
|
11 |
|
104,841 |
|
93,849 |
|
Derivative instruments |
|
20 |
|
1,492 |
|
3,166 |
|
Current financial payables to parent company |
|
18/20 |
|
5,254 |
|
2,521 |
|
Other current liabilities |
|
12 |
|
250,035 |
|
194,996 |
|
Income taxes payable |
|
|
|
5,282 |
|
40,464 |
|
Total current liabilities |
|
|
|
366,904 |
|
334,996 |
|
|
|
|
|
|
|
|
|
TOTAL EQUITY AND LIABILITIES |
|
|
|
504,617 |
|
438,852 |
|
F-2
CONSORZIO LOTTERIE NAZIONALI
INCOME STATEMENTS
Years ended December 31, 2008, 2007 and 2006
(In thousands of Euro)
|
|
|
|
For the year ended
|
|
||||
|
|
Notes |
|
2008 |
|
2007 |
|
2006 |
|
|
|
|
|
|
|
|
|
unaudited |
|
Service revenues |
|
13 |
|
322,411 |
|
277,004 |
|
138,642 |
|
Other revenue |
|
|
|
990 |
|
567 |
|
664 |
|
Total Revenue |
|
|
|
323,401 |
|
277,571 |
|
139,306 |
|
|
|
|
|
|
|
|
|
|
|
Cost of tickets |
|
|
|
43,090 |
|
41,197 |
|
29,929 |
|
Service costs |
|
14 |
|
93,228 |
|
90,535 |
|
74,315 |
|
Depreciation, amortization and write-downs |
|
|
|
4,130 |
|
2,608 |
|
1,929 |
|
Other operating costs |
|
|
|
1 ,368 |
|
736 |
|
1,108 |
|
Total Costs |
|
|
|
141,816 |
|
135,076 |
|
104 , 281 |
|
|
|
|
|
|
|
|
|
|
|
Operating Income |
|
|
|
181,585 |
|
142,495 |
|
35,025 |
|
|
|
|
|
|
|
|
|
|
|
Financial income |
|
15 |
|
3,665 |
|
3,429 |
|
2,298 |
|
Financial expenses |
|
15 |
|
(11,749 |
) |
(7,238 |
) |
(4,851 |
) |
|
|
|
|
|
|
|
|
|
|
Net income before income tax |
|
16 |
|
173,502 |
|
138,686 |
|
32,472 |
|
|
|
|
|
|
|
|
|
|
|
Income tax expense |
|
16 |
|
55,771 |
|
52,766 |
|
12,400 |
|
Net income for the year |
|
|
|
117,731 |
|
85,920 |
|
20,072 |
|
F-3
CONSORZIO LOTTERIE NAZIONALI
STATEMENTS OF CHANGES IN EQUITY
Years ended December 31, 2008 and 2007
(In thousands of Euro)
|
|
Issued |
|
Legal |
|
Retained |
|
|
|
For the year ended December 31, 2008 |
|
Capital |
|
Reserve |
|
Earnings |
|
Total |
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1, 2008 |
|
16,000 |
|
1,077 |
|
85,920 |
|
102,99 7 |
|
Allocation of prior year income |
|
|
|
2,123 |
|
(2,123 |
) |
|
|
Dividend distribution |
|
|
|
|
|
(83,797 |
) |
(83,797 |
) |
Net income for the year |
|
|
|
|
|
117,731 |
|
117,731 |
|
Balance at December 31, 2008 |
|
16,000 |
|
3,200 |
|
117,731 |
|
136,931 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued |
|
Legal |
|
Retained |
|
|
|
For the Year ended December 31, 2007 |
|
Capital |
|
Reserve |
|
Earnings |
|
Total |
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1, 2007 |
|
11,820 |
|
|
|
17,077 |
|
28,897 |
|
Allocation of prior year income |
|
|
|
1,077 |
|
(1,077 |
) |
|
|
Dividend distribution |
|
|
|
|
|
(16,000 |
) |
(16,000 |
) |
Increase in issued capital |
|
4,180 |
|
|
|
|
|
4,180 |
|
Net income for the year |
|
|
|
|
|
85,920 |
|
85,920 |
|
Balance at December 31, 2007 |
|
16,000 |
|
1,077 |
|
85,920 |
|
102,997 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued |
|
Legal |
|
Retained |
|
|
|
For the year ended December 31, 2006 |
|
Capital |
|
Reserve |
|
Earnings |
|
Total |
|
(unaudited) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1, 2006 |
|
11,820 |
|
|
|
(2,995 |
) |
8,825 |
|
Net income for the year |
|
|
|
|
|
20,072 |
|
20,072 |
|
Balance at December 31, 2006 |
|
11,820 |
|
|
|
17,077 |
|
28,897 |
|
F-4
CONSORZIO LOTTERIE NAZIONALI
CASH FLOW STATEMENTS
Years ended December 31, 2008, 2007 and
2006
(In thousands of Euro)
|
|
|
|
Year ended December 31, |
|
||||
|
|
Notes |
|
2008 |
|
2007 |
|
2006 |
|
|
|
|
|
|
|
|
|
unaudited |
|
Operating activities: |
|
|
|
|
|
|
|
|
|
Profit before income tax |
|
16 |
|
173,502 |
|
138,686 |
|
32,472 |
|
Adjustments to reconcile profit before income tax to net cash flow |
|
|
|
|
|
|
|
|
|
Depreciation |
|
3 |
|
1,830 |
|
887 |
|
516 |
|
Intangible asset amortization |
|
4 |
|
47 |
|
39 |
|
1,413 |
|
Interest income |
|
20 |
|
(46 |
) |
(214 |
) |
(504 |
) |
Interest on intercompany loan |
|
20 |
|
(708 |
) |
(173 |
) |
|
|
Total accrued interest income |
|
|
|
(754 |
) |
(387 |
) |
(504 |
) |
Bank interest charges and commissions |
|
20 |
|
35 |
|
34 |
|
37 |
|
Other intercompany interest |
|
20 |
|
5,255 |
|
3,375 |
|
2,384 |
|
Interest expense to AAMS |
|
20 |
|
2,041 |
|
1,791 |
|
366 |
|
Total accrued interest expense |
|
|
|
7,331 |
|
5,200 |
|
2,787 |
|
Other non-monetary items: |
|
|
|
|
|
|
|
|
|
Unrealized foreign exchange (gains)/losses, net |
|
|
|
(217 |
) |
(1,451 |
) |
(798 |
) |
Exchange (gains)/losses on derivatives, net |
|
15/20 |
|
(1,674 |
) |
844 |
|
2,059 |
|
Net change in long-term provisions |
|
|
|
472 |
|
(50 |
) |
154 |
|
Realized foreign exchange (gains)/losses, net |
|
|
|
2,040 |
|
(397 |
) |
(991 |
) |
Income taxes paid |
|
|
|
(91,361 |
) |
(23,161 |
) |
|
|
Cash flows before changes in working capital |
|
|
|
91,2 16 |
|
120,210 |
|
37,108 |
|
Change in net working capital: |
|
|
|
|
|
|
|
|
|
Inventories |
|
|
|
1,524 |
|
(2,987 |
) |
(3,577 |
) |
Trade and other receivables: |
|
|
|
|
|
|
|
|
|
- Trade and other receivables |
|
|
|
(4,434 |
) |
(5,802 |
) |
(2,865 |
) |
- Receivables from PoS (retailers) |
|
|
|
52,539 |
|
(57,339 |
) |
(152,131 |
) |
- Related party receivables |
|
|
|
(2,030 |
) |
(1,432 |
) |
(1,190 |
) |
Accounts payable: |
|
|
|
|
|
|
|
|
|
- Payables to AAMS |
|
|
|
53,475 |
|
(23,958 |
) |
93,074 |
|
- Payables to others |
|
|
|
98 |
|
163 |
|
394 |
|
- Payables to suppliers including related parties |
|
|
|
9,169 |
|
(10,928 |
) |
50,067 |
|
Current income taxes |
|
16 |
|
(56,171 |
) |
(52,511 |
) |
(12,082 |
) |
Deferred income taxes |
|
16 |
|
400 |
|
(255 |
) |
(318 |
) |
Income taxes payable |
|
|
|
4,768 |
|
40,757 |
|
11,446 |
|
Other tax receivables |
|
|
|
50,932 |
|
12,581 |
|
1,633 |
|
VAT payables and taxes other than income taxes |
|
|
|
389 |
|
1,061 |
|
6 |
|
Cash flows from operating activities |
|
|
|
201,873 |
|
19,560 |
|
21,565 |
|
Investing activities: |
|
|
|
|
|
|
|
|
|
Purchase of equipment |
|
3 |
|
(864 |
) |
(2,545 |
) |
(1,994 |
) |
Purchase of intangible assets |
|
4 |
|
(57 |
) |
(27 |
) |
(53 |
) |
Disposal of financial assets |
|
|
|
|
|
2 |
|
|
|
Interest received |
|
|
|
46 |
|
214 |
|
504 |
|
Cash flows from investing activities |
|
|
|
(875 |
) |
(2,356 |
) |
(1,543 |
) |
Financing activities |
|
|
|
|
|
|
|
|
|
Interest paid |
|
|
|
(971 |
) |
(1,825 |
) |
(37 |
) |
Dividends paid |
|
|
|
(83,797 |
) |
(1 6,000 |
) |
|
|
Payables to AAMS and other |
|
|
|
|
|
|
|
(6,513 |
) |
Increase in issued capital |
|
|
|
|
|
4,180 |
|
|
|
Net change in financial receivables from payables to parent company |
|
|
|
(116,059 |
) |
(12,732 |
) |
(102,491 |
) |
Cash flows from financing activities |
|
|
|
(200,827 |
) |
(26,377 |
) |
(109,041 |
) |
Net increase (decrease) in cash and cash equivalents |
|
|
|
171 |
|
(9,173 |
) |
(89,019 |
) |
Cash and cash equivalents at the beginning of the period |
|
|
|
4 |
|
9 ,177 |
|
98,196 |
|
Cash and cash equivalents at the end of the period |
|
8 |
|
175 |
|
4 |
|
9,177 |
|
F-5
CONSORZIO LOTTERIE NAZIONALI
NOTES TO FINANCIAL STATEMENTS
(thousands of Euro)
1. Corporate information
Consorzio Lotterie Nazionali (hereinafter CLN or the Company) is a consortium organized under the laws of the Republic of Italy. The head office of the Company is located in Rome, Italy.
The financial statements of the Company for the year ended December 31, 2008 were approved for issue by the Board of Directors in accordance with a resolution dated February 26, 2009.
The Companys operations are entirely in the Republic of Italy. In the month of October 2003, the Italian Ministry of Economy and Finances granted to CLN the exclusive concession to operate various traditional and instant lotteries, including scratch and win instant games. The concessions, granted to CLN by the Ministry entity Amministrazione Autonoma dei Monopoli di Stato (hereinafter AAMS) expires in the months of March and May of 2010, for traditional lotteries and instant lotteries, respectively, unless such concession terms are extended at the discretion of AAMS.
The Companys instant and traditional lotteries are available through various vendors located throughout Italy, mainly at tobacco shops, cafes, bars, motorway restaurants and newspaper stands (collectively, Points of Sale or PoS).
The Companys deed of association assigns to all of the Companys equityholders specific roles in the Companys business activities as follows:
· Lottomatica S.p.A. (the parent of the Company): its role includes design and coordination of the overall Company operations, i.e. management of marketing and accounting functions, collection of wagers from Points of Sales, administration of periodic drawings, and procurement of software and hardware for Points of Sale;
· Scientific Games Corporation: its role includes design and production of instant lottery tickets;
· Arianna 2001 S.p.A: its role includes serving as the secure depository and manager of the instant lottery tickets inventory;
· Olivetti S.p.A.: its role includes responsibilities for the supply and maintenance of software and hardware of the Company;
· Servizi Base 2001 S.p.A.: its role includes management of the instant lottery ticket distribution to the Points of Sale.
2.1 Basis of preparation
The financial statements have been prepared on a historical cost basis, except as disclosed in the accounting policies below for derivative financial statements which are measured at fair value. The financial statements are presented in thousands of Euro unless otherwise indicated.
Statement of Compliance
The financial statements of CLN have been prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board.
2.2 Changes in accounting policy
The accounting policies adopted are consistent with those of the previous financial year except as follows.
The Company has adopted the following new International Financial Reporting Interpretations Committee (IFRIC) interpretations during the year. Adoption of these new interpretations did not have any effect on the financial performance or position of the Company.
F-6
CONSORZIO LOTTERIE NAZIONALI
NOTES TO FINANCIAL STATEMENTS
(thousands of Euro)
Amendments to IAS 39 and IFRS 7 Reclassification of Financial Assets: Effective Date and Transition
IFRIC 11 IFRS 2 Group and Treasury Shares Transactions
IFRIC 12 Service Concession Arrangements
IFRIC 13 Customer Loyalty Programmes
IFRIC 14 IAS 19 - The limit on a Defined
Benefit Asset, Minimum funding requirements and their interaction
IFRIC 16 - Hedges of a Net Investment in a Foreign Operation
The principal effects of these changes are as follows:
Amendments to IAS 39
and IFRS
7
Reclassification of Financial Assets: Effective Date and
Transition
Amendment to the standard issued in October 2008 permits an entity to reclassify non-derivative financial assets (other than those designated at fair value through profit or loss by the entity upon initial recognition) out of the fair value through profit or loss category in particular circumstances. The amendment also permits an entity to transfer from the available-for-sale category to the loans and receivables category a financial asset that would have met the definition of loans and receivables (if the financial asset had not been designated as available for sale), if the entity has the intention and ability to hold that financial asset for the foreseeable future. A further amendment, issued on 27 November 2008, clarified the effective date and transition requirements of that earlier amendment. An entity is required to apply those amendments on or after from 1 July 2008. The adoption of this amendments had no effect on the financial position or performance of the Company.
IFRIC 11 IFRS 2 Group and Treasury Shares Transactions
This interpretation requires arrangements whereby an employee is granted rights to an entitys equity instruments to be accounted for as an equity-settled scheme, even if the entity buys the instruments from another party, or the shareholders provide the equity instruments needed. The adoption of this interpretation had no effect on the financial position or performance of the Company.
IFRIC 12 - Service Concession Arrangements
This interpretation applies to service concession operators and explains how to account for the obligations undertaken and rights received in service concession arrangements. Service concession arrangements are arrangements whereby a government or other body grants contract for the supply of public services, such as roads, prisons or hospitals, to private operators. The adoption of this interpretation is not applicable to the Company.
IFRIC 13 Customer Loyalty Programmes
This interpretation requires customer loyalty credits to be accounted for as a separate component of the sales transaction in which they are granted. A portion of the fair value of the consideration received is allocated to the award credits and deferred. This is then recognised as revenue over the period that the award credits are redeemed. The effective date is for annual periods beginning on or after July 1, 2008. The adoption of this interpretation had no effect on the financial position or performance of the Company or it requires additional disclosures since the Company currently has no customer loyalty programmes.
IFRIC 14 IAS 19 - The limit on a Defined Benefit Asset, Minimum funding requirements and their interaction
IFRIC Interpretation 14 provides guidance on how to assess the limit on the amount of surplus in a defined benefit scheme that can be recognised as an asset under IAS 1 Employee Benefits. The adoption of this interpretation had no effect on the financial position or performance of the Company.
IFRIC 16 Hedges of a Net Investment in a Foreign Operation
IFRIC 16 was issued in July 2008 and becomes effective for financial years beginning on or after 1 October 2008. The interpretation is to be applied prospectively. IFRIC 16 provides guidance on the accounting for a hedge of a net investment. As such it provides guidance on identifying the foreign currency risks that qualify for hedge accounting in the hedge of a net investment, where within the group the hedging instruments can be held in the hedge of a net investment and how an entity should determine the amount of foreign currency
F-7
CONSORZIO LOTTERIE NAZIONALI
NOTES TO FINANCIAL STATEMENTS
(thousands of Euro)
gain or loss, relating to both the net investment and the hedging instrument, to be recycled on disposal of the net investment. The adoption of this interpretation had no effect on the financial position or performance of the Company or it requires additional disclosures since the Company currently has no these kind of hedges.
2.3 International Financial Reporting Standards to be adopted in 2009 and later
The International Accounting Standards Board and IFRIC issued additional standards and interpretations which are effective for periods starting after the date of these financial statements and therefore have yet to be adopted by CLN as described below.
IFRS 1 First Time Adoption of IFRS (Revised)
The amendment to IFRS 1 allows an entity to determine the cost of investments in subsidiaries, jointly controlled entities or associates in its opening IFRS financial statements in accordance with IAS 27 or using a deemed cost. The revised standard was issued on 27 November 2008 and becomes effective for financial years beginning on or after 1 January 2009. The adoption of this amendment will have no impact on the financial position or performance of the Company.
IFRS 2 Share-based Payment (Revised)
The IASB issued an amendment to IFRS 2 in January 2008 that clarifies the definition of a vesting condition and prescribes the treatment for an award that is effectively cancelled. The adoption of this standard will not have any effect on the financial position or performance of the Company and it will not require additional disclosures when adopted on January 1 2009 since the Company currently has no share based payment plans.
IFRS 3R Business Combinations
IFRS 3R introduces a number of changes in the accounting for business combinations occurring after its effective date that will impact the amount of goodwill recognised, the reported results in the period that an acquisition occurs, and future reported results. The revised standard was issued in January 2008 and becomes effective for financial years beginning on or after 1 July 2009. The changes by IFRS 3R will affect future acquisitions, if any.
IFRS 8 Operating Segments
IFRS 8 replaces IAS 14 Segment Reporting IFRS 8 and specifies how an entity should report information about its operating and reportable segments in annual and interim financial statements. It also defines requirements for related disclosures about products and services, geographical areas and major customers. CLN plans to adopt IFRS 8 on January 1, 2009, its effective date. The adoption of this standard will not have any effect on the financial position or performance of the Company and it will not require additional disclosures since the Company currently has only one business segment.
IAS 1R Presentation of financial statements
The revised standard separates owner and non-owner changes in equity whereby there is comprehensive revision including requiring a statement of comprehensive income and amendments relating to disclosure of puttable instruments and obligations arising on liquidation. The effective date is for annual periods beginning on or after January 1, 2009. The adoption of this revised standard is not expected to have a material impact on the financial position or performance of the Company.
IAS23 Amendment - Borrowing Costs
The revised IAS 23 Borrowing Costs is effective for financial years beginning on or after January 1, 2009 and requires capitalisation of borrowing costs that relate to a qualifying asset. The transitional requirements of the standard require it to be adopted as a prospective change from the effective date. The adoption of this standard is not expected to have a material impact on the financial position or performance of the Company.
IAS 27R Consolidated and Separate Financial Statements
IAS 27R requires that a change in the ownership interest of a subsidiary (without loss of control) is accounted for as an equity transaction. Therefore, such transactions will no longer give rise to goodwill or
F-8
CONSORZIO LOTTERIE NAZIONALI
NOTES TO FINANCIAL STATEMENTS
(thousands of Euro)
give rise to a gain or loss. Furthermore, the amended standard changes the accounting for losses incurred by the subsidiary as well as the loss of control of a subsidiary. The revised standard was issued in January 2008 and becomes effective for financial years beginning on or after 1 July 2009. The adoption of this revised standard is not expected to have a material impact on the financial position or performance of the Company.
IAS 32 Financial Instruments: Presentation and IAS 1 Presentation of Financial Statements Puttable Financial Instruments and Obligations Arising on Liquidation
The revisions provide a limited scope exception for puttable instruments to be classified as equity if they fulfil a number of specified features. These amendments to IAS 32 and IAS 1 were issued in February 2008 and become effective for financial years beginning on or after 1 January 2009. CLN has concluded that these amendments will have no impact on the financial position or performance of the Company, as CLN currently has no such financial instruments.
IAS 39 Financial Instruments: Recognition and Measurement Eligible Hedged Items
The amendment addresses the designation of a one-sided risk in a hedged item, and the designation of inflation as a hedged risk or portion in particular situations. It clarifies that an entity is permitted to designate a portion of the fair value changes or cash flow variability of a financial instrument as the hedged item. This amendment to IAS 39 was issued in August 2008 and becomes effective for financial years beginning on or after 1 July 2009. CLN has concluded that the amendment will have no impact on the financial position or performance of the Company, as the Company has not entered into any such instruments as accounting hedges.
Improvements to IFRSs
In May 2008 the IASB issued its first omnibus of amendments to its standards, primarily with a view of removing inconsistencies and clarifying wording. This has been done as part of the annual improvements project as a method to make necessary, but not urgent, amendments to IFRSs arising from matters raised by the International Financial Reporting Interpretations Committee. There are separate transitional provisions for each standard. The amendments made can result in accounting changes for presentation, recognition and measurement. Such amendments are effective for annual period beginning on or after 1 January 2009 but CLN has concluded that these changes will not have a material impact on the financial position or performance of the Company.
IFRIC 15 Agreement for the Construction of Real Estate
IFRIC 15 was issued in July 2008 and becomes effective for financial years beginning on or after 1 January 2009. The interpretation is to be applied retrospectively. It clarifies when and how revenue and related expenses from the sale of a real estate unit should be recognised if an agreement between a developer and a buyer is reached before the construction of the real estate is completed. Furthermore, the interpretation provides guidance on how to determine whether an agreement is within the scope of IAS 11 or IAS 18. This interpretation will have no impact on the financial position or performance of the Company, as CLN does not conduct such activity.
IFRIC 17 Distributions of Non-Cash Assets to Owners
On 27 November 2008 the IFRIC issued its guidance IFRIC 17 which clarifies that a dividend payable should be recognised when the dividend is appropriately authorised and is no longer at the discretion of the entity. It also clarifies that an entity should measure the dividend payable at the fair value of the net assets to be distributed and should recognise the difference between the dividend paid and the carrying amount of the net assets distributed in profit or loss.
The Interpretation also requires an entity to provide additional disclosures if the net assets being held for distribution to owners meet the definition of a discontinued operation. The Interpretation is effective for annual periods beginning on or after 1 July 2009. The adoption of this interpretation is not expected to have an impact on the financial position or performance of the Company.
F-9
CONSORZIO LOTTERIE NAZIONALI
NOTES TO FINANCIAL STATEMENTS
(thousands of Euro)
IFRIC 18 Transfers of Assets from Customers
On 29 January 2009 the IFRIC issued an Interpretation that provides additional guidance on the accounting for transfers of assets from customers. It clarifies the requirements of IFRSs for agreements in which an entity receives from a customer an item of property, plant and equipment that the entity must then use either to connect the customer to a network or to provide the customer with ongoing access to a supply of goods or services (such as a supply of electricity, gas or water) or to do both. IFRIC 18 requires entities to apply the Interpretation prospectively to transfers of assets from customers received on or after 1 July 2009. IFRIC 18 is likely to be particularly relevant for the utility sector. The adoption of this interpretation is not expected to have a material impact on the financial position or performance of the Company.
2.4 Significant accounting judgments, estimates and assumptions
The preparation of the Companys financial statements requires management to make judgments, estimates and assumptions that affect the reported amounts of revenues, expenses, assets and liabilities, and the disclosure of contingent liabilities, at the reporting date. However, uncertainty about these assumptions and estimates could result in outcomes that could require a material adjustment to the carrying amount of the asset or liability affected in the future.
Estimates and assumptions
The key assumptions concerning the future and other key sources of estimation uncertainty at the balance sheet date that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below.
Deferred Tax Assets
Deferred tax assets are recognized to the extent that it is probable that taxable profit will be available in the future. Significant management judgment is required to determine the amount of deferred tax assets that can be realized, based upon the likely timing and level of future taxable profits together with future tax planning strategies.
2.5 Summary of significant accounting policies
Foreign currency translation
Transactions in foreign currencies are initially recorded at the functional currency rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated at the functional currency rate of exchange ruling at the balance sheet date. All differences are taken to profit or loss.
Non monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates as at the dates of the initial transactions.
Equipment, net
Equipment are stated at cost less accumulated depreciation. Cost includes ancillary costs directly attributable to bringing the asset into operating condition. Depreciation is calculated on straight-line basis over the estimated useful life of the assets as follows:
Terminals and communication equipment |
|
5 to 7 years |
|
|
|
Machinery and equipment |
|
4 years |
|
|
|
Furniture and fittings |
|
8 to 9 years |
The carrying values of systems and equipment are reviewed for impairment when events or changes in circumstances indicate that the carrying value may not be recoverable.
F-10
CONSORZIO LOTTERIE NAZIONALI
NOTES TO FINANCIAL STATEMENTS
(thousands of Euro)
All repairs and maintenance costs are recognised in profit or loss as incurred.
A unit of equipment is derecognised upon disposal or when no future economic benefits are expected from its use or disposal. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is included in profit or loss in the year the asset is derecognised.
Borrowing costs
Borrowing costs are recognized as an expense when incurred.
Intangible assets, net
Intangible assets acquired separately are measured on initial recognition at cost. Following initial recognition, intangible assets are carried at cost less any accumulated amortization and any accumulated impairment losses. The useful lives of intangible assets are assessed to be either finite or indefinite. Intangible assets with finite lives are amortized over the useful economic life and assessed for impairment whenever there is an indication that the intangible asset may be impaired. The estimated useful lives are as follows:
Software |
|
3 years |
|
|
|
Licenses |
|
3 years |
|
|
|
Others |
|
2 to 5 years |
The amortization period and the amortization method for an intangible asset with a finite useful life is reviewed at least annually at year-end. Changes in the expected useful life or the expected pattern of consumption of future economic benefits embodied in the asset is accounted for by changing the amortization period or method, as appropriate, and treated as changes in accounting estimates. The amortization expense on intangible assets with finite lives is recognized in the income statement within the caption Depreciation, amortization and write-downs.
Gains or losses arising from derecognition of an intangible asset are measured as the difference between the net disposal proceeds and the carrying amount of the asset and are recognised in profit or loss when the asset is derecognised.
Impairment of non-financial assets
The Company assesses at each reporting date whether there is an indication that an asset may be impaired. If any such indication exists, or when annual impairment testing for an asset is required, the Company makes an estimate of the assets recoverable amount. An assets recoverable amount is the higher of an assets or cash-generating units fair value less costs to sell and its value in use, and is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets. Where the carrying amount of an asset exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount. In assessing value in use, the estimated future cash flows take into account the risks specific to the asset and are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset.
An assessment is made at each reporting date as to whether there is any indication that previously recognized impairment losses may no longer exist or may have decreased. If such indication exists, the recoverable amount is estimated. A previously recognized impairment loss is reversed only if there has been a change in the estimates used to determine the assets recoverable amount since the last impairment loss was recognized. If that is the case, the carrying amount of the asset is increased to its recoverable amount. That increased amount cannot exceed the carrying amount that would have been determined, net of depreciation, had no impairment loss been recognized for the asset in prior years. Such reversal is recognized in profit or loss unless the asset is carried at revalued amount, in which case the reversal is treated as a revaluation
F-11
CONSORZIO LOTTERIE NAZIONALI
NOTES TO FINANCIAL STATEMENTS
(thousands of Euro)
increase. After such a reversal, the depreciation charge is adjusted in future periods to allocate the assets revised carrying amount, less any residual value, on a systematic basis over its remaining useful life.
Inventories
Inventories are stated at the lower of cost or net realizable value. Cost is determined on a specific identification basis.
Net realizable value is the estimated selling price in the ordinary course of business, less estimated costs necessary to make the sale.
Financial assets
Financial assets within the scope of IAS 39 are classified as financial assets at fair value through profit or loss, loans and receivables, held-to-maturity investments, or available-for-sale financial assets, as appropriate. The Company only has financial assets classified as loans and receivable and fair value through profit and loss. When financial assets are recognised initially on the trade date, they are measured at fair value, plus, in the case of investments not at fair value through profit or loss, directly attributable transaction costs.
The Company determines the classification of its financial assets on initial recognition.
Trade receivables and other receivables
Trade accounts receivable are subsequently measured at amortized cost less impairment. Allowances for doubtful accounts are generally recorded when there is objective evidence that the Company will not be able to collect the related receivables. Bad debts are written off when identified.
Short-term receivables are not discounted because the effect of discounting cash flows is immaterial.
Cash and cash equivalents
Cash and cash equivalents in the balance sheet are comprised of cash at banks and on hand and short-term, highly liquid investments with an original maturity of three months or less at the date of purchase.
Financial liabilities
Financial liabilities at amortized cost
All loans and borrowings and trade accounts payable are initially recognised at fair value less directly attributable transaction costs. After initial recognition, interest bearing loans and borrowings are subsequently measured at amortised cost using the effective interest method. Short-term payables are not discounted because the effect of discounting cash flows is immaterial.
Financial liabilities at fair value through profit or loss
Financial liabilities at fair value through profit or loss includes financial liabilities held for trading and financial liabilities designated upon initial recognition as at fair value through profit or loss.
Financial liabilities are classified as held for trading if they are acquired for the purpose of selling in the near term. Derivatives are classified as held for trading unless they are designated as effective hedging instruments.
Gains or losses on liabilities held for trading are recognised in profit or loss
Derivative financial instruments and hedging
The Company uses derivative financial instruments such as forward currency contracts to mitigate the risks associated with foreign currency related to the purchase of lottery tickets.
The Companys forward currency contracts do not qualify for hedge accounting; therefore any gains or losses arising from changes in their fair value are taken directly to net profit or loss for the year. The fair
F-12
CONSORZIO LOTTERIE NAZIONALI
NOTES TO FINANCIAL STATEMENTS
(thousands of Euro)
value of forward currency contracts is calculated by reference to current forward exchange rates for contracts with similar maturity profiles.
Derecognition of financial assets and liabilities
Financial assets
A financial asset (or, where applicable a part of a financial asset or part of a group of similar financial assets) is derecognised when:
· the rights to receive cash flows from the asset have expired;
· the Company retains the right to receive cash flows from the asset, but has assumed an obligation to pay them in full without material delay to a third party under a pass through arrangement; or
· the Company has transferred its rights to receive cash flows from the asset and either (a) has transferred substantially all the risks and rewards of the asset, or (b) has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset.
Financial liabilities
A financial liability is derecognised when the obligation under the liability is discharged or cancelled or expires.
Provisions
Provisions are recognized when the Company has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. Whenever the Company expects some or all of a provision to be reimbursed, for example under an insurance contract, the reimbursement is recognized as a separate asset, but only when the reimbursement is virtually certain. The expense relating to any provision is presented in the income statement net of any reimbursement. If the effect of the time value of money is material, provisions are discounted using a current pre-tax rate that reflects, where appropriate, the risks specific to the liability. Where discounting is used, the increase in the provision due to the passage of time is recognized as a borrowing cost.
Revenue recognition
Revenues are recognized to the extent that it is probable the economic benefits associated with the transaction will flow to the Company and the amount of revenue can be reliably measured. Revenues are measured at the fair value of the consideration received, excluding discounts and taxes. The contracts generally provide for a variable amount of monthly service fees received through AAMS based on a percentage of instant and traditional lotterys total wagers. Specific recognition criteria must also be met before revenue is recognized as discussed below.
The Companys revenues derive from operating contracts. Under operating contracts, the Company manages all of the activities along the lottery value chain including collecting wagers, paying out prizes, managing all accounting and other back-office functions, running advertising and promotions, operating data transmission networks and processing centers, training staff, providing retailers with assistance and supplying materials for the game. Fees earned under operating contracts are recognized as revenue in the period earned and are classified as Service Revenue in the Income Statement when all of the following criteria are met:
· Persuasive evidence of an arrangement exists, which is typically when a customer contract has been signed;
· Services have been rendered;
· The fee is deemed to be fixed or determinable and free of contingencies or significant uncertainties;
· Collectibility is reasonably assured.
Interest income and interest expense
Interest income and interest expense are recognised as interest accrues (using the effective interest rate, that is the rate that exactly discounts estimated future cash receipts through the expected life of the financial instrument to the net carrying amount of the financial assets or liabilities).
F-13
CONSORZIO LOTTERIE NAZIONALI
NOTES TO FINANCIAL STATEMENTS
(thousands of Euro)
Income taxes
Current income tax
Current tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered from or paid to the taxation authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted by the balance sheet date.
Deferred income tax
Deferred income tax is provided using the liability method on temporary differences at the balance sheet date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes.
Deferred income tax liabilities are recognized for all taxable temporary differences.
Deferred income tax assets are recognized for all deductible temporary differences, carry-forward of unused tax credits and unused tax losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, and the carry-forward of unused tax credits and unused tax losses, can be utilized.
The carrying amount of deferred income tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred income tax asset to be utilized. Unrecognized deferred income tax assets are reassessed at each balance sheet date and are recognized to the extent that it has become probable that future taxable profit will allow the deferred tax asset to be recovered.
Deferred income tax assets and liabilities are measured at the tax rates that are expected to apply to the year when the asset is realized or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the balance sheet date.
Income tax relating to items recognized directly in equity is recognized in equity and not in the income statement.
3. Equipment, net
Equipment, net amounts to euro 3,853 and includes euro 519 for those tangible assets to be transferred free of charge at the expiration of the concession (separately disclosed). These assets are defined as Freely distributed assets (FDA) and refer to Companys equipment in use by third parties (points of sale) to carry out activities related to Instant and Traditional lotteries wich are to be returned to the Ministry of Finance upon the expiration of the concession agreement.
F-14
CONSORZIO LOTTERIE NAZIONALI
NOTES TO FINANCIAL STATEMENTS
(thousands of Euro)
|
|
Leasehold |
|
Furniture
|
|
Other |
|
Contract
|
|
Freely
|
|
|
|
Balance at December 31, 2008 |
|
Improvements |
|
Equipment |
|
Assets |
|
Progress |
|
Assets |
|
Total |
|
Gross |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1, 2008 |
|
230 |
|
3,124 |
|
152 |
|
|
|
3,140 |
|
6,646 |
|
Additions |
|
|
|
572 |
|
1 |
|
290 |
|
|
|
863 |
|
Transfers |
|
|
|
1,613 |
|
|
|
|
|
(1,613 |
) |
|
|
Balance at December 31, 2008 |
|
230 |
|
5,309 |
|
153 |
|
290 |
|
1,527 |
|
7,509 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated depreciation |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1, 2008 |
|
136 |
|
476 |
|
65 |
|
|
|
1,149 |
|
1,826 |
|
Depreciation charge for the year |
|
51 |
|
1,532 |
|
18 |
|
|
|
229 |
|
1,830 |
|
Transfers |
|
|
|
370 |
|
|
|
|
|
(370 |
) |
|
|
Balance at December 31, 2008 |
|
187 |
|
2,378 |
|
83 |
|
|
|
1,008 |
|
3,656 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net book value |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008 |
|
43 |
|
2,931 |
|
70 |
|
290 |
|
519 |
|
3,853 |
|
|
|
Leasehold |
|
Furniture
|
|
Other |
|
Freely
|
|
|
|
Balance at December 31, 2007 |
|
Improvements |
|
Equipment |
|
Assets |
|
Assets |
|
Total |
|
Gross |
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1, 2007 |
|
230 |
|
579 |
|
152 |
|
3,140 |
|
4,101 |
|
Additions |
|
|
|
2,545 |
|
|
|
|
|
2,545 |
|
Balance at December 31, 2007 |
|
230 |
|
3,124 |
|
152 |
|
3,140 |
|
6,646 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated depreciation |
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1, 2007 |
|
85 |
|
129 |
|
47 |
|
678 |
|
939 |
|
Depreciation charge for the year |
|
51 |
|
347 |
|
18 |
|
471 |
|
887 |
|
Balance at December 31, 2007 |
|
136 |
|
476 |
|
65 |
|
1,149 |
|
1,826 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net book value |
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007 |
|
94 |
|
2,648 |
|
87 |
|
1,991 |
|
4,820 |
|
4. Intangible assets, net
Intangible assets are comprised of certain computer software and license costs to operate such software. Intangible assets are being amortized ratably over their estimated useful lives which do not exceed the expiration dates of the lottery operation agreement.
F-15
CONSORZIO LOTTERIE NAZIONALI
NOTES TO FINANCIAL STATEMENTS
(thousands of Euro)
Balance at December 31, 2008 |
|
Software |
|
Licences |
|
Total |
|
Gross |
|
|
|
|
|
|
|
Balance at January 1, 2008 |
|
3,567 |
|
697 |
|
4,264 |
|
Additions |
|
57 |
|
|
|
57 |
|
Balance at December 31, 2008 |
|
3,624 |
|
697 |
|
4,321 |
|
|
|
|
|
|
|
|
|
Amortisation and impairment |
|
|
|
|
|
|
|
Balance at January 1, 2008 |
|
3,548 |
|
680 |
|
4,228 |
|
Amortization for the year |
|
30 |
|
17 |
|
47 |
|
Balance at December 31, 2008 |
|
3,578 |
|
697 |
|
4,275 |
|
|
|
|
|
|
|
|
|
Net book value |
|
|
|
|
|
|
|
Balance at December 31, 2008 |
|
46 |
|
|
|
46 |
|
Balance at December 31, 2007 |
|
Software |
|
Licences |
|
Total |
|
Gross |
|
|
|
|
|
|
|
Balance at January 1, 2007 |
|
3,540 |
|
697 |
|
4,237 |
|
Additions |
|
27 |
|
|
|
27 |
|
Balance at December 31, 2007 |
|
3,567 |
|
697 |
|
4,264 |
|
|
|
|
|
|
|
|
|
Amortisation and impairment |
|
|
|
|
|
|
|
Balance at January 1, 2007 |
|
3,526 |
|
663 |
|
4,189 |
|
Amortization for the year |
|
22 |
|
17 |
|
39 |
|
Balance at December 31, 2007 |
|
3,548 |
|
680 |
|
4,228 |
|
|
|
|
|
|
|
|
|
Net book value |
|
|
|
|
|
|
|
Balance at December 31, 2007 |
|
19 |
|
17 |
|
36 |
|
5. Inventories
|
|
December 31, |
|
||
|
|
2008 |
|
2007 |
|
|
|
|
|
|
|
Instant Lottery Tickets |
|
9,124 |
|
10,648 |
|
Inventories are entirely comprised of instant lottery tickets held by the depositary and equityholder Arianna 2001 S.p.A..
F-16
CONSORZIO LOTTERIE NAZIONALI
NOTES TO FINANCIAL STATEMENTS
(thousands of Euro)
6. Trade and other receivables
|
|
December 31, |
|
||
|
|
2008 |
|
2007 |
|
|
|
|
|
|
|
Trade receivables |
|
27,689 |
|
22,925 |
|
Related party receivables (Lottomatica Group) |
|
8,203 |
|
6,174 |
|
|
|
35,892 |
|
29,099 |
|
Trade receivables refer to the commission fees from AAMS as set forth in the concession agreement.
The related party receivables relate to services rendered for the collection of lottery tickets. Trade receivables are non-interest bearing and are generally due from 30 to 90 days.
7. Other current assets
|
|
December 31, |
|
||
|
|
2008 |
|
2007 |
|
|
|
|
|
|
|
Receivables from retailers |
|
323,643 |
|
376,183 |
|
Other receivables |
|
466 |
|
795 |
|
VAT receivables |
|
1 |
|
3 |
|
|
|
324,110 |
|
376,981 |
|
Receivables from retailers refer to the amounts due to CLN from the retailers where tickets are sold. The collection of these monthly remittances occurs between ten and twenty days after each month-end.
8. Cash and cash equivalents
|
|
December 31, |
|
||
|
|
2008 |
|
2007 |
|
|
|
|
|
|
|
Cash and cash equivalents |
|
175 |
|
4 |
|
Cash and cash equivalents are stated at cost, which approximates fair value, and earn interest at market rates. The Company participates in a cash pooling agreement with an equityholder, Lottomatica S.p.A., pursuant to which its funds are swept daily into various cash pools managed by Lottomatica S.p.A.. Amounts swept into the cash pools of Lottomatica S.p.A. are classified as current financial assets from parent Company.
9. Equity
On February 26, 2008, at the annual meeting, general equityholders declared, and the Company subsequently paid, euro 83,797 in dividends and resolved to appropriate euro 2,123 to increase the Companys legal reserve up to euro 3,200 through the Companys retained earnings. A legal reserve is required by Italian law and must be increased by a minimum of 5% of net profit for the year until the balance represents 20% of issued capital.
F-17
CONSORZIO
LOTTERIE NAZIONALI
NOTES TO FINANCIAL STATEMENTS
(thousands
of Euro)
The equityholders and issued capital attributed to them are as follows at December 31, 2008:
Equityholder |
|
Percent
|
|
Issued
|
|
Lottomatica S.p.A. |
|
63 |
% |
10,080 |
|
Scientific Games Corp. |
|
20 |
% |
3,200 |
|
Arianna 2001 S.p.A. |
|
15 |
% |
2,400 |
|
Olivetti S.p.A. |
|
1 |
% |
160 |
|
Servizi Base 2001 S.p.A. |
|
1 |
% |
160 |
|
Total |
|
100 |
% |
16,000 |
|
10. Long term provisions
Balance at December 31, 2008 |
|
Legal
|
|
Other |
|
Total |
|
|
|
|
|
|
|
|
|
Balance at January 1, 2008 |
|
|
|
144 |
|
144 |
|
Arising during the year |
|
600 |
|
16 |
|
616 |
|
Utilized |
|
|
|
(144 |
) |
(144 |
) |
Balance at December 31, 2008 |
|
600 |
|
16 |
|
616 |
|
|
|
Legal |
|
|
|
|
|
Balance at December 31, 2007 |
|
Matters |
|
Other |
|
Total |
|
|
|
|
|
|
|
|
|
Balance at January 1, 2007 |
|
150 |
|
45 |
|
195 |
|
Arising during the year |
|
|
|
144 |
|
144 |
|
Utilized |
|
(150 |
) |
(45 |
) |
(195 |
) |
Balance at December 31, 2007 |
|
|
|
144 |
|
144 |
|
Legal matters
Provisions relate primarily to the legal fees in connection with legal matters discussed in Note 19.
Other
Other provisions relate primarily to prizes on certain lottery games. Provisions are calculated based on historical cost information and expected prize payouts. Settlement on prizes varies according to the terms of each individual game.
11. Accounts payable
|
|
December 31, |
|
||
|
|
2008 |
|
2007 |
|
|
|
|
|
|
|
Accounts payable |
|
2,179 |
|
1,994 |
|
Related parties payables |
|
102 ,662 |
|
91,855 |
|
|
|
104,841 |
|
93,849 |
|
Accounts payable are non-interest bearing and are normally settled on 60 to 90 day terms.
F-18
CONSORZIO LOTTERIE NAZIONALI
NOTES TO FINANCIAL STATEMENTS
(thousands
of Euro)
For comments on related parties payables, see related parties relationships and transactions disclosure in Note 18.
12. Other current liabilities
|
|
December 31, |
|
||
|
|
2008 |
|
2007 |
|
|
|
|
|
|
|
Other liabilities to AAMS |
|
247,948 |
|
193,370 |
|
Taxes other than income taxes |
|
21 |
|
3 |
|
Other liabilities |
|
703 |
|
557 |
|
VAT payables |
|
1 ,363 |
|
1 ,066 |
|
|
|
250,035 |
|
194,996 |
|
Other liabilities to AAMS refer to the remittance due to AAMS based on the total monthly wagers.
13. Revenue
|
|
December 31, |
|
||
|
|
2008 |
|
2007 |
|
|
|
|
|
|
|
Instant lotteries |
|
320,665 |
|
275,042 |
|
Traditional lotteries |
|
1 ,746 |
|
1 ,962 |
|
|
|
322,411 |
|
277,004 |
|
14. Service costs
|
|
December 31, |
|
||
|
|
2008 |
|
2007 |
|
|
|
|
|
|
|
Service costs from Lottomatica S.p.A. |
|
65,471 |
|
66,204 |
|
Points of Sale assistance |
|
21,707 |
|
19,942 |
|
Consulting fees |
|
2,248 |
|
2,052 |
|
Maintenance fees |
|
899 |
|
773 |
|
Advertising costs |
|
1,685 |
|
722 |
|
Other costs |
|
1,218 |
|
842 |
|
|
|
93,228 |
|
90,535 |
|
For comments related to costs from the equityholder Lottomatica S.p.A., see related parties relationships and transactions disclosure in Note 18.
F-19
CONSORZIO LOTTERIE
NAZIONALI
NOTES TO FINANCIAL STATEMENTS
(thousands
of Euro)
15. Financial income and expenses
|
|
December 31, |
|
||
|
|
2008 |
|
2007 |
|
|
|
|
|
|
|
Interest income |
|
754 |
|
387 |
|
Forward currency contracts |
|
1,674 |
|
|
|
Exchange gains |
|
1,237 |
|
3,042 |
|
|
|
3,665 |
|
3,429 |
|
|
|
|
|
|
|
Interest expense |
|
7,332 |
|
5,200 |
|
Forward currency contracts |
|
|
|
844 |
|
Factoring of account receivables contract |
|
1,357 |
|
|
|
Exchange losses |
|
3,060 |
|
1,194 |
|
|
|
11,749 |
|
7,238 |
|
16. Income tax
Significant components of income tax expense are as follows:
|
|
December 31, |
|
||
|
|
2008 |
|
2007 |
|
|
|
|
|
|
|
Current |
|
|
|
|
|
National (IRES) |
|
48,185 |
|
45,744 |
|
Regional (TRAP) |
|
7,986 |
|
6,767 |
|
Total Current |
|
56,171 |
|
52,511 |
|
|
|
|
|
|
|
Deferred |
|
|
|
|
|
Deferred income tax recovered |
|
91 |
|
(94 |
) |
Deferred income tax (benefit)/expense |
|
(549 |
) |
349 |
|
Other adjustments |
|
58 |
|
|
|
Total Deferred |
|
(400 |
) |
255 |
|
Total income tax expense |
|
55,771 |
|
52,766 |
|
The tax effects of temporary differences and carryforwards that give rise to deferred income tax assets and liabilities consist of the following:
F-20
CONSORZIO LOTTERIE NAZIONALI
NOTES TO FINANCIAL STATEMENTS
(thousands of Euro)
|
|
December 31, |
|
||
|
|
2008 |
|
2007 |
|
Deferred tax assets |
|
|
|
|
|
Bad debt reserve provision |
|
1,243 |
|
623 |
|
Other provisions |
|
626 |
|
983 |
|
Intangible assets |
|
15 |
|
508 |
|
Equipment depreciation |
|
126 |
|
34 |
|
Other |
|
62 |
|
15 |
|
|
|
2,072 |
|
2,163 |
|
Deferred tax liabilities |
|
|
|
|
|
Unrealized exchange gains |
|
49 |
|
405 |
|
Equipment depreciation |
|
18 |
|
212 |
|
Other |
|
99 |
|
98 |
|
|
|
166 |
|
715 |
|
Net deferred income tax assets |
|
1,906 |
|
1,448 |
|
|
|
|
|
|
|
Net deferred income tax assets at December 31, 2008 |
|
1,906 |
|
|
|
Net deferred income tax assets at December 31, 2007 |
|
1,448 |
|
|
|
Deferred income tax benefit credited to profit or loss |
|
458 |
|
|
|
The effective income tax rate on profit before income tax differed from the Italian statutory tax rate for the following reasons:
|
|
December 31, |
|
||
|
|
2008 |
|
2007 |
|
Net income before income tax |
|
173,502 |
|
138,686 |
|
|
|
|
|
|
|
Italian statutory tax rate (IRES) |
|
27.5 |
% |
33.0 |
% |
|
|
|
|
|
|
Theoretical provision for income taxes based on Italian statutory tax rate |
|
47,713 |
|
45,766 |
|
|
|
|
|
|
|
Reconciliation of the theoretical and effective provision for income taxes: |
|
|
|
|
|
|
|
|
|
|
|
Permanent differences |
|
|
|
|
|
Italian local tax (IRAP) |
|
7,565 |
|
7,281 |
|
|
|
|
|
|
|
Non deductible expense |
|
73 |
|
63 |
|
Other |
|
420 |
|
(344 |
) |
Total tax provision |
|
55,771 |
|
52,766 |
|
|
|
|
|
|
|
Effective tax rate |
|
32.1 |
% |
38.0 |
% |
The recognition of deferred tax assets is based on managements expectations that sufficient taxable income will be generated in future years to realize them.
17. Segment information
The Companys primary segment reporting format is based on business segment reporting as defined by IAS 14, Segment Reporting. The Company is organized as one business segment. The Companys geographical information includes only Italy.
F-21
CONSORZIO LOTTERIE NAZIONALI
NOTES TO FINANCIAL STATEMENTS
(thousands of Euro)
18. Related parties disclosures
Related parties relationships and transactions are reported in the table below:
Trade and other receivables from Lis Finanziaria S.p.A. relate to services rendered for the collection of lottery tickets.
F-22
CONSORZIO LOTTERIE NAZIONALI
NOTES TO FINANCIAL STATEMENTS
(thousands of Euro)
Current financial assets from parent company refer primarily to the trade receivables from PoS collected at year end via the euro 150,000 factoring of trade receivables contract the Company entered into during the year, the proceeds of which were swept into the cash pool managed by Lottomatica S.p.A..
Accounts payable and service costs to the parent company refer to the services rendered to CLN in accordance with intercompany agreements. In particular, they refer primarily to marketing and advertising, data processing, back office and cash pooling activities performed by the parent company and charged to the Company.
Accounts payables and service costs to the equity holder, Arianna 2001, refer to secure depository and distribution expenses.
Accounts payable and costs to Scientific Games Corp. refer primarily to the tickets purchased during the year. In addition euro 1,937 of costs refer to tickets license fees and software maintenance costs.
Accounts payable to GTech Corp, a subsidiary of Lottomatica S.p.A., refer primarily to certain machinery acquired for dispensing instant lotteries.
Financial expenses to the parent company refer to interest expense charged by the equityholder Lottomatica relating to the Companys short-term borrowing transactions with the parent company.
All the transactions with related parties, including the intragroup transactions, were executed at terms and conditions that are consistent with market rates and they refer to mutual administrative, financial and organizational services rendered. No atypical and/or unusual transactions have been recorded by the Company.
At December 31, 2008, there were no guarantees made to or received from related parties.
19. Litigation
LAS VEGAS Instantaneous Lottery Petitions
Beginning in April 2006, the Company began receiving payment requests relating to the Las Vegas instant lottery tickets (scratch and win) for non-winning tickets.
To-date, 415 petitions and 102 requests for injunctive payments have been received by the Company. There have also been numerous requests for out-of court settlements. These claims amounted to about 5.8 million euro in prize money and requested payment for non-winning tickets. The players claimed that according to their interpretation of the Game Regulations established with the Finance Ministry Decree of February 16, 2005, the amounts corresponding to the winnings indicated in the various areas of the tickets should have been paid every time cards with points from 10 to K appear, even though the regulations state that all the cards must have the same points. As a matter of fact, the players sustained that in all French card games those cards with 10 to K have the same points.
The Company considers these requests unfounded as they do not follow the Game Regulations which explicitly describe the qualifications of a winning ticket.
To-date, 102 rulings have been issued fully accepting the reasons represented by legal counsel assisting the Company. In addition, other rulings (15) have been issued either sentencing penalties for deceptive advertising for the notices printed on the back of the tickets or costs of tickets to be reimbursed and penalties to be paid (29 rulings), since it was not proven during the trial that the game regulations had been displayed in the retailers sites. 75 rulings requested the Company to pay the prize amount in addition to claim compensation.
F-23
CONSORZIO LOTTERIE NAZIONALI
NOTES TO FINANCIAL STATEMENTS
(thousands of Euro)
With regard to the unfavourable rulings, the Company instructed its counsel to file an appeal with the Supreme Court (to-date, 47 appeals have been filed). The Supreme Court however dismissed 21 of the appeals presented by the Company. To-date, the rulings have not yet been released and therefore, it cannot be ascertained whether the Supreme Court admitted the opinion of the Public Prosecutor.
In the opinion of legal counsel, other rulings may have a negative outcome based on the same information used in unfavorable rulings against the Company as discussed above.
20. Financial instruments and financial risk management objective and policies
Fair values
Set out below is a comparison, by category, of the carrying amounts and fair values of our fmancial instruments.
|
|
December 31, 2008 |
|
December 31, 2007 |
|
||||
|
|
Carrying
|
|
Fair
|
|
Carrying
|
|
Fair
|
|
Financial assets |
|
|
|
|
|
|
|
|
|
Trade and other receivables |
|
35,892 |
|
35,892 |
|
29,099 |
|
29,099 |
|
Current financial assets from parent |
|
129,345 |
|
129,345 |
|
15,101 |
|
15,101 |
|
Other current assets |
|
324,110 |
|
324,110 |
|
376,981 |
|
376,981 |
|
Cash and cash equivalents |
|
175 |
|
175 |
|
4 |
|
4 |
|
|
|
489,522 |
|
489,522 |
|
421,185 |
|
421,185 |
|
Financial liabilities at amortised costs |
|
|
|
|
|
|
|
|
|
Accounts payable |
|
104,841 |
|
104,841 |
|
93,849 |
|
93,849 |
|
Current financial payables to parent company |
|
5,254 |
|
5,254 |
|
2,521 |
|
2,521 |
|
Other current liabilities |
|
250,035 |
|
250,035 |
|
194 ,996 |
|
194 ,995 |
|
|
|
360,130 |
|
360,130 |
|
291,366 |
|
291,365 |
|
Financial liabilities |
|
|
|
|
|
|
|
|
|
Derivative instruments |
|
1 ,492 |
|
1 ,492 |
|
3,166 |
|
3,166 |
|
|
|
1,492 |
|
1,492 |
|
3,166 |
|
3,166 |
|
The fair value of the derivative instruments (forward currency contracts) is calculated primarily by reference to current forward exchange rates for contracts with similar maturity profiles.
Interest income and expense
The following is a breakdown of the Companys interest income and interest expense by category for the year ended December 31:
F-24
CONSORZIO LOTTERIE NAZIONALI
NOTES TO FINANCIAL STATEMENTS
(thousands of Euro)
|
|
Interest Income |
|
Interest Expense |
|
||||
|
|
2008 |
|
2007 |
|
2008 |
|
2007 |
|
Financial assets |
|
|
|
|
|
|
|
|
|
Current financial assets from parent company |
|
708 |
|
173 |
|
|
|
|
|
Other current financial assets |
|
44 |
|
71 |
|
|
|
|
|
Forward currency contracts |
|
1,674 |
|
|
|
|
|
|
|
Cash and cash equivalents |
|
2 |
|
143 |
|
|
|
|
|
|
|
2,428 |
|
387 |
|
|
|
|
|
Financial liabilities at amortised costs |
|
|
|
|
|
|
|
|
|
Current financial payables to parent company |
|
|
|
|
|
5,254 |
|
3,375 |
|
Other current liabilities |
|
|
|
|
|
2,043 |
|
1,791 |
|
|
|
|
|
|
|
7,297 |
|
5,166 |
|
Financial liabilities |
|
|
|
|
|
|
|
|
|
Bank overdrafts |
|
|
|
|
|
35 |
|
34 |
|
Factoring of accounts receivable contract |
|
|
|
|
|
1,357 |
|
|
|
Forward currency contracts |
|
|
|
|
|
|
|
844 |
|
|
|
|
|
|
|
1,392 |
|
878 |
|
Credit risk
The Companys credit risk is derived from cash and cash equivalents, trade accounts receivable, and other current assets balances. We maintain cash deposits and trade with only recognized, creditworthy third parties. We evaluate the collectibility of trade accounts and sales receivables on a customer by customer basis and we believe our reserves are adequate. Trade and sales receivables are reported net of allowances for doubtful accounts. Allowance for doubtful accounts are generally recorded when objective evidence exists that we will not be able to collect the receivable. Bad debts are written off when identified.
With respect to credit risk arising from financial assets of the Company, the Companys exposure arises only from default of the counterparty, with a maximum exposure equal to the carrying amount of these balances. We manage our exposure to counterparty credit risk by dealing with major, financially sound counterparties with high-grade credit ratings and by limiting exposure to any one counterparty.
The following is an analysis of the Companys past due trade receivables:
Year Ended December 31, 2008
|
|
|
|
|
|
1 - 30 |
|
31 - 60 |
|
61 - 90 |
|
over 90 |
|
|
|
Total |
|
Current |
|
days |
|
days |
|
days |
|
days |
|
Trade receivables |
|
27,689 |
|
27,689 |
|
|
|
|
|
|
|
|
|
|
|
100.0 |
% |
100.0 |
% |
0.0 |
% |
0.0 |
% |
0.0 |
% |
0.0 |
% |
Year Ended December 31, 2007
|
|
|
|
|
|
1 - 30 |
|
31 - 60 |
|
61 - 90 |
|
over 90 |
|
|
|
Total |
|
Current |
|
days |
|
days |
|
days |
|
days |
|
Trade receivables |
|
22,925 |
|
22,925 |
|
|
|
|
|
|
|
|
|
|
|
100.0 |
% |
100.0 |
% |
0.0 |
% |
0.0 |
% |
0.0 |
% |
0.0 |
% |
The following is an analysis of the Companys past due receivables from retailers and the related bad debt reserve:
F-25
CONSORZIO LOTTERIE NAZIONALI
NOTES TO FINANCIAL STATEMENTS
(thousands of Euro)
Year Ended December 31, 2008
|
|
|
|
|
|
1 - 30 |
|
31 - 60 |
|
61 - 90 |
|
over 90 |
|
|
|
Total |
|
Current |
|
days |
|
days |
|
days |
|
days |
|
Receivables from PoS |
|
324,110 |
|
240,048 |
|
79,722 |
|
1,316 |
|
781 |
|
2,243 |
|
|
|
100 |
% |
74.1 |
% |
24.6 |
% |
0.4 |
% |
0.2 |
% |
0.7 |
% |
Year Ended December 31, 2007
|
|
|
|
|
|
1 - 30 |
|
31 - 60 |
|
61 - 90 |
|
over 90 |
|
|
|
Total |
|
Current |
|
days |
|
days |
|
days |
|
days |
|
Receivables from PoS |
|
376,981 |
|
374,286 |
|
378 |
|
222 |
|
283 |
|
1,812 |
|
|
|
100 |
% |
99.3 |
% |
0.1 |
% |
0.0 |
% |
0.1 |
% |
0.5 |
% |
Bad debt reserve
|
|
December 31, |
|
||
|
|
2008 |
|
2007 |
|
|
|
|
|
|
|
Balance at beginning of period |
|
2,264 |
|
604 |
|
Provisions |
|
2,254 |
|
1,682 |
|
Utilization |
|
(379 |
) |
(22 |
) |
Balance at end of period |
|
4,139 |
|
2,264 |
|
Liquidity risk
The Companys objective in managing liquidity risk is to maintain a balance between continuity of funding and flexibility through the use of cash generated by operating activities. The Company participates in a cash pooling agreement with the parent company, Lottomatica S.p.A., pursuant to which the Companys funds are swept daily into various cash pools managed by Lottomatica S.p.A.. We believe our ability to generate excess cash from operations to reinvest in our business is one of our fundamental financial strengths, and combined with our business cash generating capacity, we expect to meet our financial obligations and operating needs in the foreseeable future. We expect to use cash generated primarily from operating activities to meet contractual obligations and to pay dividends.
The Company does not have any financial liabilities that exceed 12 months other than the forward currency contracts previously disclosed. In this regard, the Company is committed to purchase currency of USD 4,500 in 2010. As such, the contractual maturity dates of the Companys financial liabilities are all substantially within one year.
The Company, since entering into the cash pooling agreement discussed above, did not enter into any lines of credit or other borrowing arrangements with banks.
Market risk
Foreign currency exchange rate risk
As a result of transactions for tickets purchased from the US equityholder Scientific Games Corp, our financial statements can be affected by movements in USD/EUR exchange rate. The primary risk inherent in our financial instruments is the market risk arising from adverse changes in foreign currency exchange rates. We seek to manage our foreign exchange risk by entering into forward currency contracts. Since 2004, we entered into forward currency contracts to reduce the exposure associated with certain liabilities denominated in USD, economically hedging approximately 50% of the estimated future supply of tickets.
The sensitivity analysis to a reasonably possible change in the USD exchange rate, in a range between +10% and -10% compared to the exchange rate as of December 31, 2008 and 2007, and the related potential effect on the net income and net equity of the Companys is as follows:
F-26
CONSORZIO LOTTERIE NAZIONALI
NOTES TO FINANCIAL STATEMENTS
(thousands of Euro)
|
|
Increase/ |
|
Effect on net |
|
|
|
|
|
decrease in US |
|
income before |
|
|
|
|
|
dollar rate |
|
tax |
|
Effect on equity |
|
|
|
|
|
|
|
|
|
2008 |
|
10 |
% |
242 |
|
165 |
|
|
|
-10 |
% |
(296 |
) |
(202 |
) |
|
|
|
|
|
|
|
|
2007 |
|
10 |
% |
233 |
|
144 |
|
|
|
-10 |
% |
(285 |
) |
(177 |
) |
Interest rate risk
The Company does not have financing arrangements with banks since the Companys short-term borrowing requirements are provided by Lottomatica S.p.A. through the cash pooling agreement previously discussed. The interest rate for the cash pooling agreement is set on a quarterly basis. The interest rate on the cash account for the remittances to AAMS is set at market rates. Consequently, changes in market interest rates would not have significant effect on the Companys net income and net equity.
Capital management
The primary objective of the Companys capital management is to ensure that it maintains a strong credit rating and healthy capital ratios in order to support its business and to maximise equityholders value.
F-27