EX-99.3 6 a06-14436_1ex99d3.htm UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION OF SCIENTIFIC GAMES CORPORATION AND ITS . . .

Exhibit 99.3

UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENT DATA
OF SCIENTIFIC GAMES AND GLOBAL DRAW
(IN THOUSANDS)

The unaudited pro forma condensed combined financial statements have been derived by the application of pro forma adjustments to the combined historical consolidated financial statements of Scientific Games Corporation (“Scientific Games”), the historical consolidated financial statements of Neomi Associates Inc (“Neomi”), including its 100% owed subsidiary, The Global Draw Limited, and the historical financial statements of Research and Development GmbH (“Research and Development”, and together with Neomi and its consolidated subsidiaries, “Global Draw”). The unaudited pro forma condensed combined statement of operations data for the year ended December 31, 2005 gives effect to the following: (i) the consummation of the acquisition of Global Draw by Scientific Games (“the Global Draw acquisition”), (ii) proceeds from the issuance of a $100,000 Term C Loan due December 2009 which bears interest at LIBOR plus 1.25% and (iii) $81,060 of borrowings under our Revolving Credit Facility which bears interest at LIBOR plus 1.75% , as if each occurred at January 1, 2005. The unaudited pro forma condensed combined balance sheet as of December 31, 2005 gives effect to these transactions as if each had occurred on that date.

The unaudited pro forma condensed combined financial data does not purport to represent what our financial position and results of operations would have been if these transactions had actually occurred as of the dates indicated and are not intended to project our financial position or results of operations for any future period.

The unaudited pro forma adjustments related to the purchase price allocation and financing of the Global Draw acquisition are preliminary and are based on information obtained to date that is subject to revision as additional information becomes available. Any such revisions could have a significant impact on total assets, total liabilities and stockholders’ equity, depreciation and amortization, interest expense and income taxes.

The unaudited pro forma condensed combined financial data should be read in conjunction with our historical consolidated financial statements and the related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in our Annual Report on Form 10-K for the year ended December 31, 2005, and Neomi’s and Research and Development’s historical financial statements and the related notes contained therein, elsewhere in this document.

The Global Draw acquisition will be accounted for in accordance with Statement of Financial Accounting Standards, or SFAS, No. 141, “Business Combinations,” and accordingly, we will allocate the purchase price to the assets acquired and liabilities assumed based on their respective fair values as of the closing of the acquisition which will be determined based on valuations and other studies that are currently in process. A preliminary allocation of the purchase price has been made to major categories of assets and liabilities in the accompanying pro forma combined financial information based on estimates and preliminary results of valuations and studies performed to date. The actual allocation of the purchase price and the resulting effect on income from operations may differ materially from the pro forma amounts included herein. Except as explained in the notes to the Unaudited Pro Forma Combined Balance Sheet, we have assumed that the current recorded book value of Global Draw’s assets and liabilities approximate their fair value. When we can further analyze Global Draw’s detailed asset records, we will make an allocation of the purchase price to these assets based on detailed valuations, which may change the amounts of currently recorded book values of Global Draw’s assets and liabilities thereby changing the amount of goodwill reflected in the accompanying unaudited pro forma condensed combined financial data. In addition, we will review the estimated remaining lives of the assets, which may affect the resulting depreciation and amortization relating to these assets, and accordingly, may affect net income and the pro forma results of operations included herein.

1




UNAUDITED PRO FORMA
CONDENSED COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 2005
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

 

 

Scientific
Games
Historical
Twelve Months
Ended
December 31,
2005

 

Neomi
Historical Twelve
Months Ended
March 31, 2006

 

Research
and
Development
Historical
Twelve Months
Ended
December 31,
2005

 

Pro Forma
Adjustments

 

Unaudited
Pro Forma
Twelve Months
Ended
December 31,
2005

 

 

 

 

(1)

 

(2)

 

(3)

 

(4)

 

 

 

 

Operating revenues:

 

 

 

 

 

 

 

 

 

 

 

 

Services

 

$

639,327

 

76,379

 

2,808

 

(2,808

)(e)

715,706

 

 

Sales

 

142,356

 

 

 

 

142,356

 

 

 

 

781,683

 

76,379

 

2,808

 

(2,808

)

858,062

 

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

Cost of services (exclusive of depreciation and amortization)

 

351,430

 

28,785

 

1,720

 

(2,808

)(e)

379,127

 

 

Cost of sales (exclusive of depreciation and amortization)

 

100,621

 

 

 

 

100,621

 

 

Selling, general and administrative expenses

 

131,844

 

14,472

 

567

 

(6,153

)(a)

140,730

 

 

Depreciation and amortization

 

66,794

 

18,902

 

255

 

(8,619

)(b)(c)

77,332

 

 

Operating income

 

130,994

 

14,220

 

266

 

14,772

 

160,252

 

 

Other deductions:

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

26,548

 

73

 

9

 

12,180

(d)

38,810

 

 

Equity in loss in joint ventures

 

2,064

 

 

 

 

2,064

 

 

Early extinguishment of debt

 

478

 

 

 

 

478

 

 

Other (income) expense, net

 

(1,700

)

(298

)

9

 

 

(1,989

)

 

 

 

27,390

 

(225

)

18

 

12,180

 

39,363

 

 

Income before income tax expense 

 

103,604

 

14,445

 

248

 

2,592

 

120,889

 

 

Income tax (benefit) expense

 

28,285

 

(1,340

)

62

 

6,616

(f)

33,623

 

 

Net income

 

$

75,319

 

15,785

 

186

 

(4,024

)

87,266

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted net income per share:

 

 

 

 

 

 

 

 

 

 

 

 

Basic net income available to common stockholders

 

$

0.84

 

 

 

 

 

 

 

0.98

 

 

Diluted net income available to common stockholders

 

$

0.81

 

 

 

 

 

 

 

0.94

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of shares used in per share calculations:

 

 

 

 

 

 

 

 

 

 

 

 

Basic shares

 

89,327

 

 

 

 

 

 

 

89,327

 

 

Diluted shares

 

92,484

 

 

 

 

 

 

 

92,484

 

 

 

The accompanying notes are an integral part of this unaudited pro forma condensed combined statement of operations.

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NOTES TO UNAUDITED PRO FORMA CONDENSED
COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS)

1.               The historical balances in this column represent the consolidated results of operations of Scientific Games for the twelve months ended December 31, 2005 as reported in the audited historical consolidated financial statements of Scientific Games.

2.               The historical balances in this column represent the consolidated results of operations of Neomi for the twelve months ended March 31, 2006 as reported in the audited historical consolidated financial statements of Neomi.

3.               The historical balances in this column represent the results of operations of Research and Development for the twelve months ended December 31, 2005 as reported in the audited historical consolidated financial statements of Research and Development.

4.               The pro forma adjustments reflected in the unaudited pro forma condensed combined statements of operations give effect to the following:

(a)             A decrease to selling, general and administrative expenses related to the following:

To eliminate transaction bonuses awarded to certain key employees

 

$

3,664

 

To eliminate social tax charges resulting from the selling shareholder’s transfer of shares in Neomi to certain key employees

 

2,489

 

 

 

$

6,153

 

 

(b)            A decrease in depreciation expense relating to acquired property and equipment based on estimated useful lives (in years) and estimated fair market values. The following table indicates the components of the adjustments by asset class and the amount by which current estimates of average useful lives differ from the average remaining lives in the depreciation accounts of Global Draw:

3




DEPRECIATION EXPENSE

 

Preliminary
Estimated Fair
Value

 

Historic
Average
Estimated
Life

 

Approximate
Average
Remaining Life

 

Year Ended
March 31,
2006

 

Terminals and computer equipment

 

$

5,661

 

4

 

2

 

2,950

 

Transportation equipment

 

1,068

 

4

 

3

 

365

 

 

 

$

6,729

 

 

 

 

 

3,315

 

Global Draw historical depreciation expense

 

 

 

 

 

 

 

11,168

 

 

 

 

 

 

 

 

 

 

 

Decrease in depreciation expense

 

 

 

 

 

 

 

$

7,853

 

 

The decrease in depreciation expense results from the estimated fair market value of the terminals and computer equipment being less than the net book value of such items.

(c)             A decrease in amortization expense relating to acquired intangible assets and goodwill based on estimated lives as follows:

AMORTIZATION EXPENSE

 

Preliminary
Estimated Fair
Value

 

Average
Estimated
Life

 

Year Ended
March 31,
2006

 

Customer relationships

 

$         8,422

 

3

 

2,812

 

Game Technology

 

         16,602

 

4

 

4,156

 

Trade name

 

           4,915

 

N/A

 

 

 

 

$       29,939

 

 

 

6,968

 

 

 

 

 

 

 

 

 

Global Draw historical intangible amortization expense

 

 

 

 

 

7,734

 

 

 

 

 

 

 

 

 

Decrease in amortization expense

 

 

 

 

 

$

766

 

 

4




(d)            A net increase in interest expense reflecting borrowings under the term loan, the revolving loan facility, and amortization of deferred financing costs, is calculated as follows:

INTEREST EXPENSE

 

Amount
Borrowed

 

Interest
Rate

 

Year Ended
March 31,
2006

 

New senior credit facilities:

 

 

 

 

 

 

 

Term C Loan

 

$

100,000

 

6.47

%

6,470

 

Revolving credit facility

 

81,060

 

6.97

%

5,650

 

Amortization of deferred financing costs

 

 

 

 

 

142

 

 

 

$

181,060

 

 

 

12,262

 

Existing interest expense on debt being repaid

 

 

 

 

 

82

 

Increase in interest expense

 

 

 

 

 

$

12,180

 

 

The effect of a 0.125% change in the assumed interest rate on borrowings under our new senior credit facilities would result in a $226 change in the pro forma interest expense on an annual basis.

(e)             The elimination of intercompany revenue and costs related to services provided by Research and Development to The Global Draw Limited.

(f)               A net increase in income tax expense resulting from the following:

The elimination of the corporate tax deduction taken in connection with the payment of social tax charges resulting from the sole selling shareholder’s transfer of shares in Neomi to certain key employees

 

$

5,838

 

Income tax expense resulting from the pro forma decrease in taxable income

 

778

 

 

 

$

6,616

 

 

5




UNAUDITED PRO FORMA
CONDENSED COMBINED BALANCE SHEET
YEAR ENDED DECEMBER 31, 2005
(IN THOUSANDS)

 

 

Scientific Games
Corporation
Historical
December 31,
2005

 

Neomi
Historical
March 31,
2006

 

Research and
Development
Historical
December 31,
2005

 

Pro Forma
Adjustments

 

Unaudited
Pro Forma
Twelve Months
Ended
December 31,
2005

 

 

 

(1)

 

(2)

 

(3)

 

(4)

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

38,942

 

5,797

 

 

(569

)(d)

44,170

 

Accounts receivable

 

129,250

 

3,409

 

693

 

 

133,352

 

Inventories

 

40,148

 

1,228

 

 

 

41,376

 

Deferred income taxes

 

14,242

 

2,285

 

 

 

16,527

 

Prepaid expenses, deposits and other current assets

 

31,971

 

15,016

 

6

 

 

46,993

 

Total current assets

 

254,553

 

27,735

 

699

 

(569

)

282,418

 

Property and equipment, at cost

 

666,469

 

48,884

 

674

 

(42,829

)

673,198

 

Less accumulated depreciation

 

300,250

 

34,235

 

174

 

(34,409

)

300,250

 

Net property and equipment

 

366,219

 

14,649

 

500

 

(8,420

)(a)

372,948

 

Goodwill

 

339,169

 

 

 

132,516

(b)

471,685

 

Operating right, net

 

14,020

 

 

 

 

14,020

 

Other intangible assets, net

 

73,269

 

17,474

 

71

 

12,394

(c)

103,208

 

Other assets and investments

 

125,283

 

 

 

569

(d)

125,852

 

Total assets

 

1,172,513

 

59,858

 

1,270

 

136,490

 

1,370,131

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

Current installments of long-term debt

 

6,055

 

 

43

 

1,000

(f)

7,098

 

Accounts payable

 

54,223

 

2,235

 

32

 

 

56,490

 

Accrued liabilities

 

80,305

 

12,142

 

914

 

 

93,361

 

Interest payable

 

779

 

 

 

 

779

 

Total current liabilities

 

141,362

 

14,377

 

989

 

1,000

 

157,728

 

Deferred income taxes

 

9,759

 

 

 

1,192

(g)

10,951

 

Other long-term liabilities

 

59,879

 

 

 

 

59,879

 

Long-term debt, excluding current installments

 

574,680

 

38,832

 

 

141,228

(e)(f)

754,740

 

Total liabilities

 

785,680

 

53,209

 

989

 

143,420

 

983,298

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

 

 

 

Class A common stock, par value $0.01 per share, 199,300 shares authorized, 88,414 and 89,869 shares outstanding at December 31, 2004 and 2005, respectively

 

899

 

 

21

 

(21

)(h)

899

 

Additional paid-in capital

 

425,750

 

 

 

 

425,750

 

Accumulated profits (losses) 

 

(33,309

)

6,649

 

260

 

(6,909

)(h)

(33,309

)

Treasury stock, at cost

 

(9,556

)

 

 

 

(9,556

)

Accumulated other comprehensive income

 

3,049

 

 

 

 

3,049

 

Total stockholders’ equity 

 

386,833

 

6,649

 

281

 

(6,930

)

386,833

 

Total liabilities and stockholders’ equity

 

1,172,513

 

59,858

 

1,270

 

136,490

 

1,370,131

 

 

6




 

NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET

(IN THOUSANDS)

1.               The historical balances in this column represent the consolidated balance sheet of Scientific Games as of December 31, 2005 as reported in the audited historical consolidated financial statements of Scientific Games.

2.               The historical balances in this column represent the consolidated balance sheet of Neomi as of March 31, 2006 as reported in the audited historical consolidated financial statements of Neomi.

3.               The historical balances in this column represent the balance sheet of Research and Development as of December 31, 2005 as reported in the audited historical financial statements of Research and Development.

4.               The pro forma adjustments reflected in the unaudited pro forma condensed combined balance sheet give effect to the following:

a.               Based on preliminary information, the fair market values of the acquired property and equipment is below the historical net book values of these assets by $8,420. As a result, this amount has been reflected as a decrease to property and equipment.

b.              The increase in goodwill results from the Global Draw acquisition.

c.               Based on preliminary information, the fair market value of acquired intangible assets is above the historical book value of these assets by $12,394. As a result, this amount has been reflected as an increase to intangible assets.

d.              The increase in other assets results from the capitalization of deferred financing fees.

e.               Proceeds from the new Term C Loan and borrowings under the Revolving Credit Facility less repayment of existing debt of Neomi and existing debt of Scientific Games calculated as follows:

Proceeds from Term C Loan

 

$100,000

 

Proceeds from borrowings under the Revolving

 

 

 

Credit Facility

 

81,060

 

Repayment of existing debt of Neomi

 

(38,832

)

 

 

$142,228

 

 

f.                 The net increase in long-term debt of $142,228 has been classified as follows:

Current installments of long-term debt

 

$

1,000

 

Long-term debt, excluding current installments

 

141,228

 

 

 

$

142,228

 

 

g.              The increase in current deferred tax liabilities of $1,192 is the result of the increase in the fair value of identifiable intangible assets acquired, partially offset by the decrease in property plant and equipment, in connection with the acquisition of Global Draw.

h.              Reflects adjustments to historical stockholders’ equity.

7