Scientific Games Q4, Yearly Results Up

27 Feb 2004

NEW YORK – (Press Release) -- Scientific Games Corporation (Nasdaq: SGMS) announced financial results for the fourth quarter and year ended December 31, 2003. Revenues in the fourth quarter of 2003 were $176.8 million, up from $118.9 million in the fourth quarter of 2002. Income before non-cash preferred stock dividend was $15.0 million or $0.17 per diluted share in the fourth quarter of 2003 compared to income before non-cash preferred stock dividend of $40.4 million or $0.46 per diluted share in the fourth quarter of 2002. For the fourth quarters of 2003 and 2002, the non-cash preferred stock dividend was $2.0 million and $1.9 million, respectively.

Pro forma income for the fourth quarter of 2002 before non-cash preferred stock dividend, early extinguishment of debt and other debt restructuring charges of $10.2 million and the income tax benefit from the recognition of a net operating loss carryforward of $39.9 million, was $10.8 million or $0.12 per diluted share.

EBITDA (earnings before interest, taxes, depreciation and amortization) for the fourth quarter of 2003 increased 54% to $47.2 million from $30.7 million in the comparable period of 2002.

For the full year 2003, revenues increased 23% to $560.9 million from $455.3 million in 2002. Income before non-cash preferred stock dividend in 2003 was $52.1 million or $0.59 per diluted share compared to income before non-cash preferred stock dividend of $39.7 million or $0.50 per diluted share in 2002. For the full year 2003 and 2002, the non-cash preferred stock dividend was $7.7 million and $7.5 million, respectively.

Pro forma income for the full year 2002 before non-cash preferred stock dividend, early extinguishment of debt and other debt restructuring charges of $25.8 million, and the income tax benefit from the recognition of a net operating loss carryforward of $30.1 million, was $34.0 million or $0.42 per diluted share.

EBITDA for the full year 2003 increased 27% to $157.0 million from $123.7 million in 2002.

The company noted that the move of its Scientific Games Racing operations from Delaware to Georgia contributed a charge to earnings per diluted share of approximately $0.01 in the fourth quarter of 2003 and $0.02 for the full year 2003.

Lorne Weil, Chairman and CEO, commented, "2003 was the most productive and fulfilling year in our history. Our strategies worked well and we continued to grow stronger. As might be expected our earnings and cash flow were far ahead of last year (despite an increase in the effective tax rate from 15% to 36%) and our balance sheet strengthened considerably. Both earnings and balance sheet improvements were aided by the important debt restructuring begun in 2002."

"We enter 2004 with a tremendous platform for growth, buttressed in large part by several developments that occurred during 2003. The most important of these warrant review:

The acquisition of IGT OnLine Entertainment Systems, Inc. (OES) in November 2003 was the company's most significant strategic step since the combination of Scientific Games Holdings Corp. and Autotote Corporation in 2000. The acquisition of seven North American on-line lottery contracts approximately quadruples our recurring on-line lottery contract revenue and establishes us as one of two world leaders in this industry sector.

During the last eighteen months we have been developing what we believe is one of the most advanced video lottery control systems in the world, and the contribution by OES of three domestic and three international video lottery system contracts greatly accelerates the fulfillment of our strategy in this segment. With important lottery representation in China and Korea, OES gives us an excellent base from which to expand all our businesses in the Asia Pacific region. In addition, the intellectual property portfolio acquired with OES will, we believe, have a positive impact on the growth and profitability of our spectrum of systems and printed products.

A total of five contracts for lottery start-ups have been awarded in the US in the last two years and we have been awarded four of them. During 2003, we were chosen to provide the system for the start-up of the North Dakota on-line lottery and we were awarded the instant ticket cooperative services contract for the recent start-up in Tennessee. The Tennessee instant lottery was launched in January 2004 with astounding success - instant ticket sales were $40 million in the first week and $100 million in the first three weeks, an all-time record for the US.

In addition to the Tennessee start-up, our strategy to expand and develop our instant ticket percent of sales or "cooperative services" business was extremely successful in 2003. During the year we added new percent of sales contracts in Arizona, New Mexico and South Dakota, we began a new seven-year contract in Georgia, and we obtained lengthy extensions in Florida and Pennsylvania. And finally, after two years of having our patience and determination sorely tested, we signed a contract in Italy for what has the potential to become the largest instant ticket lottery ever.

As we have reported previously, worldwide markets for printed products continued to grow significantly in 2003. Organic market growth in the US once again exceeded 10%, the growth of our own US customers was still greater, and there is excellent potential for us in Europe and Latin America. At the same time unit volumes in our phone card operation are growing at nearly 20% which have helped to offset price pressures in the business.

In 2004, we will embark upon a three-pronged capital expansion plan to ensure that we stay ahead of this growth, widen our leadership, and continue to improve our quality and cost position. In the US we will add a fourth instant ticket production line oriented to shorter run, specialty products. This line will allow us to compete more effectively in the non-lottery promotional games business as well. We will begin the construction of a state of the art, high volume production line in our Leeds, England plant, allowing us to far more effectively serve major European customers, and we will begin to move the labor intensive phone card production to our plant in Chile, initiating a significant facility upgrade. All told these investments will support our revenue growth for many years to come as well as enhance profitability.

Early in 2003, we completed the acquisition of MDI Entertainment. This acquisition was intended to allow us to add significant value to our existing customer base as well as provide products and services to sell to our competitors' customers outside of the traditional lottery procurement cycle. The acquisition has been a great success - operating profit in 2003 nearly doubled over the prior year, and we anticipate that it will nearly double again in 2004. Our recent acquisition of exclusive licenses from Hasbro, Inc. for US and Canada instant ticket lottery games based on eight board game properties including Monopoly (r), Battleship (r) and Scrabble (r) should contribute strongly to this growth. We believe that the MDI transaction illustrates clearly the value of acquisitions that synergistically "fit."

The year 2003 was a watershed in the history of our Autotote racing systems business, as we made the difficult decisions to re-brand it as Scientific Games Racing and relocate it from its headquarters in Delaware into our infrastructure in Alpharetta Georgia. In the short run we will enjoy cost savings of upwards of $2 million per year, though this is the least of the long term synergistic benefits. Concurrent with this integration we introduced our new Quantum(TM) pari-mutuel central system, which shares the Linux platform with its lottery sibling. We expect to complete the roll out of the Linux system by June and anticipate that it will have major economic, technological, and marketing advantages.

Near the end of the year, Lottomatica S.p.A.'s subsidiary Cirmatica Gaming, S.A., which had been our largest preferred stockholder for almost three years, sold its ownership position to MacAndrews & Forbes Holdings Inc. While we look forward to continuing to work productively with Lottomatica in such commercial ventures as the Italian instant lottery project, we anticipate that our relationship with MacAndrews & Forbes Holdings will bring important benefits."

Outlook

Mr. Weil continued, "As evidenced by recent financial results, the lottery business has been very strong and we are confident that this will continue. All indications point to continued pressure on state lotteries to maximize revenues to offset deficits and we are seeing a corresponding increase in instant ticket revenues. The acquisition of new licensed properties, particularly those from Hasbro, should give our instant ticket business additional strength.

The increase in the number of our on-line customers to sixteen states affords us a larger base within which to deliver new products and services, intended to drive sales higher for these customers. This is especially important now that we have a full pipeline of new on-line lottery games scheduled to be introduced in the next several months. Revenue growth for existing on-line lottery customers yields extremely high marginal profitability due to the high fixed cost nature of the business.

We are very pleased with the extraordinarily successful launch of the Tennessee instant ticket lottery and the progress we are making toward on-line start-ups in North Dakota and Colorado later in 2004. Early in the second quarter we will be introducing our new electronic game card in Iowa and expect to begin shipping tickets under our new contract for the Gratta e Vinci instant ticket game in Italy. Our new family of lottery ticket vending kiosks has had terrific reception and we anticipate having substantial backlog by mid-year. Our Connecticut-based account wagering continues to grow rapidly, stimulated most recently by the start-up of cable television broadcasts early this month. At the moment the broadcast reaches 250,000 households and we expect to be at 600,000 soon. We believe that all of this should put us on very solid footing for 2004."

Guidance

"For 2004 we expect revenues to be in the range of $690 million to $720 million, EBITDA between $195 million and $205 million, and earnings per diluted share of $0.76 to $0.83," Mr. Weil said.

The company has made a policy change with regard to providing future earnings guidance. The company will continue to provide quarterly guidance updates through the end of 2004. Thereafter the company will discontinue providing revenue and earnings guidance but will provide investors with perspective on its value drivers, its strategic initiatives and those factors critical to understanding its business and operating environment.

"Following the recommendation of our board of directors, our management team will implement this policy to highlight the benefits of our strategy over the long term to employees and shareholders," Mr. Weil said. "The provision of revenue and earnings guidance encourages a short term outlook which, in our view, is not in the best interests of our company or our shareholders."

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	Scientific Games Q4, Yearly Results Up 27 Feb 2004 NEW YORK – (Press Release) -- Scientific Games Corporation (Nasdaq: SGMS) announced financial results for the fourth quarter and year ended December 31, 2003. Revenues in the fourth quarter of 2003 were $176.8 million, up from $118.9 million in the fourth quarter of 2002. Income before non-cash preferred stock dividend was $15.0 million or $0.17 per diluted share in the fourth quarter of 2003 compared to income before non-cash preferred stock dividend of $40.4 million or $0.46 per diluted share in the fourth quarter of 2002. For the fourth quarters of 2003 and 2002, the non-cash preferred stock dividend was $2.0 million and $1.9 million, respectively. Pro forma income for the fourth quarter of 2002 before non-cash preferred stock dividend, early extinguishment of debt and other debt restructuring charges of $10.2 million and the income tax benefit from the recognition of a net operating loss carryforward of $39.9 million, was $10.8 million or $0.12 per diluted share. EBITDA (earnings before interest, taxes, depreciation and amortization) for the fourth quarter of 2003 increased 54% to $47.2 million from $30.7 million in the comparable period of 2002. For the full year 2003, revenues increased 23% to $560.9 million from $455.3 million in 2002. Income before non-cash preferred stock dividend in 2003 was $52.1 million or $0.59 per diluted share compared to income before non-cash preferred stock dividend of $39.7 million or $0.50 per diluted share in 2002. For the full year 2003 and 2002, the non-cash preferred stock dividend was $7.7 million and $7.5 million, respectively. Pro forma income for the full year 2002 before non-cash preferred stock dividend, early extinguishment of debt and other debt restructuring charges of $25.8 million, and the income tax benefit from the recognition of a net operating loss carryforward of $30.1 million, was $34.0 million or $0.42 per diluted share. EBITDA for the full year 2003 increased 27% to $157.0 million from $123.7 million in 2002. The company noted that the move of its Scientific Games Racing operations from Delaware to Georgia contributed a charge to earnings per diluted share of approximately $0.01 in the fourth quarter of 2003 and $0.02 for the full year 2003. Lorne Weil, Chairman and CEO, commented, "2003 was the most productive and fulfilling year in our history. Our strategies worked well and we continued to grow stronger. As might be expected our earnings and cash flow were far ahead of last year (despite an increase in the effective tax rate from 15% to 36%) and our balance sheet strengthened considerably. Both earnings and balance sheet improvements were aided by the important debt restructuring begun in 2002." "We enter 2004 with a tremendous platform for growth, buttressed in large part by several developments that occurred during 2003. The most important of these warrant review: The acquisition of IGT OnLine Entertainment Systems, Inc. (OES) in November 2003 was the company's most significant strategic step since the combination of Scientific Games Holdings Corp. and Autotote Corporation in 2000. The acquisition of seven North American on-line lottery contracts approximately quadruples our recurring on-line lottery contract revenue and establishes us as one of two world leaders in this industry sector. During the last eighteen months we have been developing what we believe is one of the most advanced video lottery control systems in the world, and the contribution by OES of three domestic and three international video lottery system contracts greatly accelerates the fulfillment of our strategy in this segment. With important lottery representation in China and Korea, OES gives us an excellent base from which to expand all our businesses in the Asia Pacific region. In addition, the intellectual property portfolio acquired with OES will, we believe, have a positive impact on the growth and profitability of our spectrum of systems and printed products. A total of five contracts for lottery start-ups have been awarded in the US in the last two years and we have been awarded four of them. During 2003, we were chosen to provide the system for the start-up of the North Dakota on-line lottery and we were awarded the instant ticket cooperative services contract for the recent start-up in Tennessee. The Tennessee instant lottery was launched in January 2004 with astounding success - instant ticket sales were $40 million in the first week and $100 million in the first three weeks, an all-time record for the US. In addition to the Tennessee start-up, our strategy to expand and develop our instant ticket percent of sales or "cooperative services" business was extremely successful in 2003. During the year we added new percent of sales contracts in Arizona, New Mexico and South Dakota, we began a new seven-year contract in Georgia, and we obtained lengthy extensions in Florida and Pennsylvania. And finally, after two years of having our patience and determination sorely tested, we signed a contract in Italy for what has the potential to become the largest instant ticket lottery ever. As we have reported previously, worldwide markets for printed products continued to grow significantly in 2003. Organic market growth in the US once again exceeded 10%, the growth of our own US customers was still greater, and there is excellent potential for us in Europe and Latin America. At the same time unit volumes in our phone card operation are growing at nearly 20% which have helped to offset price pressures in the business. In 2004, we will embark upon a three-pronged capital expansion plan to ensure that we stay ahead of this growth, widen our leadership, and continue to improve our quality and cost position. In the US we will add a fourth instant ticket production line oriented to shorter run, specialty products. This line will allow us to compete more effectively in the non-lottery promotional games business as well. We will begin the construction of a state of the art, high volume production line in our Leeds, England plant, allowing us to far more effectively serve major European customers, and we will begin to move the labor intensive phone card production to our plant in Chile, initiating a significant facility upgrade. All told these investments will support our revenue growth for many years to come as well as enhance profitability. Early in 2003, we completed the acquisition of MDI Entertainment. This acquisition was intended to allow us to add significant value to our existing customer base as well as provide products and services to sell to our competitors' customers outside of the traditional lottery procurement cycle. The acquisition has been a great success - operating profit in 2003 nearly doubled over the prior year, and we anticipate that it will nearly double again in 2004. Our recent acquisition of exclusive licenses from Hasbro, Inc. for US and Canada instant ticket lottery games based on eight board game properties including Monopoly (r), Battleship (r) and Scrabble (r) should contribute strongly to this growth. We believe that the MDI transaction illustrates clearly the value of acquisitions that synergistically "fit." The year 2003 was a watershed in the history of our Autotote racing systems business, as we made the difficult decisions to re-brand it as Scientific Games Racing and relocate it from its headquarters in Delaware into our infrastructure in Alpharetta Georgia. In the short run we will enjoy cost savings of upwards of $2 million per year, though this is the least of the long term synergistic benefits. Concurrent with this integration we introduced our new Quantum(TM) pari-mutuel central system, which shares the Linux platform with its lottery sibling. We expect to complete the roll out of the Linux system by June and anticipate that it will have major economic, technological, and marketing advantages. Near the end of the year, Lottomatica S.p.A.'s subsidiary Cirmatica Gaming, S.A., which had been our largest preferred stockholder for almost three years, sold its ownership position to MacAndrews & Forbes Holdings Inc. While we look forward to continuing to work productively with Lottomatica in such commercial ventures as the Italian instant lottery project, we anticipate that our relationship with MacAndrews & Forbes Holdings will bring important benefits." Outlook Mr. Weil continued, "As evidenced by recent financial results, the lottery business has been very strong and we are confident that this will continue. All indications point to continued pressure on state lotteries to maximize revenues to offset deficits and we are seeing a corresponding increase in instant ticket revenues. The acquisition of new licensed properties, particularly those from Hasbro, should give our instant ticket business additional strength. The increase in the number of our on-line customers to sixteen states affords us a larger base within which to deliver new products and services, intended to drive sales higher for these customers. This is especially important now that we have a full pipeline of new on-line lottery games scheduled to be introduced in the next several months. Revenue growth for existing on-line lottery customers yields extremely high marginal profitability due to the high fixed cost nature of the business. We are very pleased with the extraordinarily successful launch of the Tennessee instant ticket lottery and the progress we are making toward on-line start-ups in North Dakota and Colorado later in 2004. Early in the second quarter we will be introducing our new electronic game card in Iowa and expect to begin shipping tickets under our new contract for the Gratta e Vinci instant ticket game in Italy. Our new family of lottery ticket vending kiosks has had terrific reception and we anticipate having substantial backlog by mid-year. Our Connecticut-based account wagering continues to grow rapidly, stimulated most recently by the start-up of cable television broadcasts early this month. At the moment the broadcast reaches 250,000 households and we expect to be at 600,000 soon. We believe that all of this should put us on very solid footing for 2004." Guidance "For 2004 we expect revenues to be in the range of $690 million to $720 million, EBITDA between $195 million and $205 million, and earnings per diluted share of $0.76 to $0.83," Mr. Weil said. The company has made a policy change with regard to providing future earnings guidance. The company will continue to provide quarterly guidance updates through the end of 2004. Thereafter the company will discontinue providing revenue and earnings guidance but will provide investors with perspective on its value drivers, its strategic initiatives and those factors critical to understanding its business and operating environment. "Following the recommendation of our board of directors, our management team will implement this policy to highlight the benefits of our strategy over the long term to employees and shareholders," Mr. Weil said. "The provision of revenue and earnings guidance encourages a short term outlook which, in our view, is not in the best interests of our company or our shareholders."