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Convertible DebenturesConvertibility Notice - Holders of the Convertible Debentures may convert their Convertible Debentures upon the occurrence of certain events, including during any quarter if the market price of the common stock is equal to or greater than $34.92 (which is 120% of the conversion price) for at least 20 trading days during the last 30 consecutive trading days of the immediately preceding calendar quarter; this event is known as a “market price event”. Convertibility resulting from market price events is determined on a quarterly basis.
Upon the occurrence of a market price event for a quarter, holders wishing to convert their Convertible Debentures should deliver their request to the Trustee, Wells Fargo National Association, Attn: Corporate Trust Department, 213 Court Street, Suite 703, Middletown, CT 06457, in accordance with the procedures detailed in the Indenture dated December 23, 2004 governing the Convertible Debentures. Current Quarter - A market price event did not occur for the quarter ended December 31, 2008 and, accordingly, the Convertible Debentures are not convertible during the quarter ending March 31, 2009. Prior Quarter -A market price event did not occur for the quarter ended September 30, 2008 and, accordingly, the Convertible Debentures were not convertible during the quarter ended December 31, 2008. Prior Market Price Occurrences - A market price event occurred during the calendar quarter ending June 30, 2007. In December 2004, Scientific Games Corporation sold $275,000,000 of 0.75% convertible senior subordinated debentures due 2024 (the "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% 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 the Company’s Class A common stock at a rate of 34.3643 shares per $1,000 principal amount of Convertible Debentures, which equates to a conversion price of $29.10 per share of common stock. The Company has elected to deliver, upon conversion, cash equal to the lesser of the aggregate principal amount of Convertible Debentures to be converted and our total conversion obligation, and shares in the event our conversion obligation exceeds the aggregate principal amount of Convertible Debentures to be converted. Holders of the Convertible Debentures may convert the Convertible Debentures when the market price of the Company’s common stock equals or exceeds $34.92, subject to certain conditions, if the Company calls the Convertible Debentures for redemption, or upon certain corporate transactions. The Convertible Debentures are senior subordinated, unsecured obligations of the Company, ranking junior to all existing and future senior debt including obligations under the the Company’s $750,000,000 senior secured credit facility amended and restated as of January 24, 2007. The Convertible Debentures are fully and unconditionally guaranteed on a senior subordinated basis by all of the Company’s 100%-owned U.S. subsidiaries (see Note 20 to the Company’s form 10-K disclosure for the period ending December 31, 2006). The Convertible Debentures will be redeemable, at the option of the Company, at any time on or after June 1, 2010, in whole or in part, at a redemption price equal to 100.000% of the principal amount. Holders of the Convertible Debentures have the right to require the Company to repurchase the Convertible Debentures, in whole or in part, at a redemption price equal to 100.000% 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 indentures governing the Convertible Debentures. The Convertible Debentures mature on December 1, 2024.The Company maintains a bond hedge designed to mitigate the potential dilution from the conversion of the Convertible Debentures. Under the bond hedge, the sellers of the option (the “counterparties”) will deliver to the Company upon the Company’s 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 the Company’s Class A common stock exceeds $29.10 per share. The aggregate number of shares that the Company could be obligated to issue upon conversion of the Convertible Debentures is approximately 9,450,000 shares. The bond hedge provides for net share settlement upon exercise. The bond hedge was purchased in December 2004 and expires in June 2010, subject to Convertible Debenture conversions prior to that time. The cost of the purchased bond hedge of approximately $67,200,000 was partially offset by the sale of warrants (the “warrants”) for approximately $37,900,000 to acquire up to approximately 9,450,000 shares of the Company’s Class A common stock to the counterparties with whom the Company entered into the bond hedge. The warrants are exercisable in year five at a price of $37.248 per share. The warrants provide for net share settlement upon exercise based on the extent to which the then market price of the Company’s Class A common stock at exercise exceeds the underlying strike price per share. The price of the bond hedge and premium from the sale of the warrants resulted in a net charge to stockholders’ equity in the amount of approximately $29,300,000. The net effect of the purchased bond hedge and the warrants is to reduce the potential dilution from the conversion of the Convertible Debentures. There would be dilution from the conversion of the Convertible Debentures to the extent that the then market price per share of the common stock exceeds $37.248 at the time of conversion. According to Emerging Issues Task Force (“EITF”) Issue No. 90-19, Convertible Bonds with Issuer Option to Settle for Cash upon Conversion (“EITF 90-19”) and EITF Issue No. 00-19, Accounting for Derivative Financial 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.
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