QuickLinks -- Click here to rapidly navigate through this document



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549


Form 10-Q


{Mark One}

[X]    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2004
OR

[    ]    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

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, New York, New York 10022
(Address of principal executive offices)
(Zip Code)

(212) 754-2233
(Registrant's telephone number, including area code)

        Indicate by check mark whether the registrant (1) has filed all reports 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 X    No    

        Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    Yes X    No    

APPLICABLE ONLY TO CORPORATE ISSUERS:

        Indicate the number of shares outstanding of each of the issuer's classes of common stock as of August 6, 2004:

                Class A Common Stock: 87,153,183

                Class B Common Stock: None





SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND OTHER INFORMATION
THREE MONTHS ENDED JUNE 30, 2004

 
   
  Page
PART I.    FINANCIAL INFORMATION    

Item 1.

 

Consolidated Financial Statements:

 

 

 

 

Balance Sheets as of December 31, 2003 and June 30, 2004

 

3

 

 

Statements of Income for the Three Months Ended June 30, 2003 and 2004

 

4

 

 

Statements of Income for the Six Months Ended June 30, 2003 and 2004

 

5

 

 

Condensed Statements of Cash Flows for the Six Months Ended June 30, 2003 and 2004

 

6

 

 

Notes to Consolidated Financial Statements

 

7

Item 2.

 

Management's Discussion and Analysis of Financial Condition and Results of Operations

 

24

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

32

Item 4.

 

Controls and Procedures

 

34

PART II.    OTHER INFORMATION

 

 

Item 1.

 

Legal Proceedings

 

35

Item 2.

 

Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Disclosure

 

35

Item 6.

 

Exhibits and Reports on Form 8-K

 

36

2


SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited, in thousands, except per share amounts)

PART I. FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements

 
  December 31,
2003

  June 30,
2004

 
ASSETS            
Current assets:            
  Cash and cash equivalents   $ 79,373   100,806  
  Accounts receivable, net of allowance for doubtful accounts of $4,589 and $4,154 at December 31, 2003 and June 30, 2004, respectively     99,639   87,141  
  Inventories     26,896   30,905  
  Prepaid expenses, deposits and other current assets     31,457   31,059  
   
 
 
    Total current assets     237,365   249,911  
   
 
 
Property and equipment, at cost     473,610   487,162  
  Less accumulated depreciation     244,880   252,710  
   
 
 
    Net property and equipment     228,730   234,452  
   
 
 
Goodwill, net     308,355   303,772  
Operating right, net     14,020   14,020  
Other intangible assets, net     77,428   75,388  
Other assets and investments     97,091   94,860  
   
 
 
    Total assets   $ 962,989   972,403  
   
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY            
Current liabilities:            
  Current installments of long-term debt   $ 6,327   7,602  
  Accounts payable     34,603   32,552  
  Accrued liabilities     117,493   85,153  
   
 
 
    Total current liabilities     158,423   125,307  
   
 
 
Deferred income taxes     4,595   3,465  
Other long-term liabilities     36,983   40,705  
Long-term debt, excluding current installments     525,836   523,290  
   
 
 
    Total liabilities     725,837   692,767  
   
 
 
Commitments and contingencies        
Stockholders' equity:            
  Series A convertible preferred stock, par value $1.00 per share, 1,600 shares authorized, 1,325 shares outstanding at December 31, 2003 and June 30, 2004     1,325   1,325  
  Series B preferred stock, par value $1.00 per share, 2 shares authorized, 1.238 shares outstanding at December 31, 2003 and June 30, 2004     1   1  
  Class A common stock, par value $0.01 per share, 199,300 shares authorized, 61,504 and 63,305 shares outstanding at December 31, 2003 and June 30, 2004, respectively     615   633  
  Class B non-voting common stock, par value $0.01 per share, 700 shares authorized, none outstanding        
  Additional paid-in capital     405,957   412,376  
  Accumulated losses     (169,649 ) (133,684 )
  Treasury stock, at cost     (6,743 ) (9,262 )
  Accumulated other comprehensive income     5,646   8,247  
   
 
 
    Total stockholders' equity     237,152   279,636  
   
 
 
    Total liabilities and stockholders' equity   $ 962,989   972,403  
   
 
 

See accompanying notes to consolidated financial statements.

3


SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended June 30, 2003 and 2004
(Unaudited, in thousands, except per share amounts)

 
  2003
  2004
 
Operating revenues:            
  Services   $ 110,130   147,570  
  Sales     18,719   30,542  
   
 
 
      128,849   178,112  
   
 
 
Operating expenses (exclusive of depreciation and amortization shown below):            
  Services     59,886   77,644  
  Sales     12,531   20,755  
  Amortization of service contract software     1,344   1,597  
   
 
 
      73,761   99,996  
   
 
 
Total gross profit     55,088   78,116  
Selling, general and administrative expenses     19,369   28,427  
Depreciation and amortization     9,847   13,806  
   
 
 
Operating income     25,872   35,883  
   
 
 
Other deductions (income):            
  Interest expense     6,172   7,807  
  Other (income) expense     72   (384 )
   
 
 
      6,244   7,423  
   
 
 
Income before income tax expense     19,628   28,460  
Income tax expense     7,058   8,952  
   
 
 
Net income     12,570   19,508  
Convertible preferred stock dividend     1,895   1,982  
   
 
 
Net income available to common stockholders   $ 10,675   17,526  
   
 
 
Basic and diluted net income per share (See Note 1):            
  Basic net income available to common stockholders   $ 0.18   0.28  
   
 
 
  Diluted net income available to common stockholders   $ 0.14   0.21  
   
 
 
Weighted average number of shares used in per share calculations:            
  Basic shares     59,868   63,153  
   
 
 
  Diluted shares     89,228   90,757  
   
 
 

See accompanying notes to consolidated financial statements.

4



SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Six Months Ended June 30, 2003 and 2004
(Unaudited, in thousands, except per share amounts)

 
  2003
  2004
Operating revenues:          
  Services   $ 215,397   289,203
  Sales     36,670   74,374
   
 
      252,067   363,577
   
 

Operating expenses (exclusive of depreciation and amortization shown below):

 

 

 

 

 
  Services     117,514   153,529
  Sales     24,938   51,411
  Amortization of service contract software     2,611   3,031
   
 
      145,063   207,971
   
 
Total gross profit     107,004   155,606
Selling, general and administrative expenses     37,711   54,347
Depreciation and amortization     19,628   27,566
   
 
Operating income     49,665   73,693
   
 
Other deductions (income):          
  Interest expense     12,404   15,197
  Other (income) expense     (32 ) 224
   
 
      12,372   15,421
   
 
Income before income tax expense     37,293   58,272
Income tax expense     13,402   18,343
   
 
Net income     23,891   39,929
Convertible preferred stock dividend     3,742   3,964
   
 

Net income available to common stockholders

 

$

20,149

 

35,965
   
 

Basic and diluted net income per share (See Note 1):

 

 

 

 

 
  Basic net income available to common stockholders   $ 0.34   0.58
   
 
  Diluted net income available to common stockholders   $ 0.27   0.44
   
 
Weighted average number of shares used in per share calculations:          
  Basic shares     59,660   62,548
   
 
  Diluted shares     88,386   90,384
   
 

See accompanying notes to consolidated financial statements.

5



SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30, 2003 and 2004
(Unaudited, in thousands)

 
  2003
  2004
 
Cash flows from operating activities:            
  Net income   $ 23,891   39,929  
   
 
 
  Adjustments to reconcile net income to cash provided by operating activities:            
    Depreciation and amortization     22,239   30,597  
    Change in deferred income taxes     10,095   5,205  
    Changes in operating assets and liabilities, net of effects of business acquisitions     (8,596 ) (21,337 )
    Other     1,274   1,052  
   
 
 
      Total adjustments     25,012   15,517  
   
 
 
Net cash provided by operating activities     48,903   55,446  
   
 
 

Cash flows from investing activities:

 

 

 

 

 

 
  Capital expenditures     (5,543 ) (10,573 )
  Wagering systems expenditures     (4,756 ) (21,139 )
  Business acquisition, net of cash acquired     (20,760 ) (1,709 )
  Increase in other assets and liabilities, net     (9,481 ) (836 )
   
 
 
Net cash used in investing activities     (40,540 ) (34,257 )
   
 
 
Cash flows from financing activities:            
  Net payments on long-term debt     (3,761 ) (1,231 )
  Proceeds from the issuance of common stock     1,157   3,828  
  Preferred stock cash dividends       (3,964 )
   
 
 
Net cash used in financing activities     (2,604 ) (1,367 )
   
 
 
Effect of exchange rate changes on cash and cash equivalents     434   1,611  
   
 
 
Increase in cash and cash equivalents     6,193   21,433  
Cash and cash equivalents, beginning of period     34,929   79,373  
   
 
 
Cash and cash equivalents, end of period   $ 41,122   100,806  
   
 
 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 
  Cash paid during the period for:            
    Interest   $ 11,796   15,153  
   
 
 
    Income taxes, net of refunds   $ 2,283   17,831  
   
 
 
  Non-cash financing activity during the period:            
    Convertible preferred stock paid-in-kind dividends   $ 3,742    
   
 
 

See accompanying notes to consolidated financial statements.

6


SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, in thousands, except per share amounts)

(1)   Consolidated Financial Statements

Basis of Presentation

        The consolidated balance sheet as of June 30, 2004, the consolidated statements of income for the three and six months ended June 30, 2003 and 2004, and the consolidated condensed statements of cash flows for the six months then ended have been prepared by the Company without audit. In the opinion of management, all adjustments necessary to present fairly the consolidated financial position of the Company at June 30, 2004 and the results of its operations for the three and six months ended June 30, 2003 and 2004 and its cash flows for the six months ended June 30, 2003 and 2004 have been made.

        Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's 2003 Annual Report on Form 10-K. The results of operations for the periods ended June 30, 2004 are not necessarily indicative of the operating results for the full year.

        Certain reclassifications have been made to the prior year's consolidated financial statements to conform to the current presentation.

Basic and Diluted Net Income Per Share

        The following represents a reconciliation of the numerator and denominator used in computing basic and diluted net income per share available to common stockholders for the three and six months ended June 30, 2003 and 2004:

 
  Three Months Ended
June 30,

  Six Months Ended
June 30,

 
  2003
  2004
  2003
  2004
Income (numerator)                  
Net income available to common stockholders (basic)   $ 10,675   17,526   20,149   35,965
Add back preferred stock dividend     1,895   1,982   3,742   3,964
   
 
 
 
Income before preferred dividend available to common stockholders (diluted)   $ 12,570   19,508   23,891   39,929
   
 
 
 
Shares (denominator)                  
Basic weighted average common shares outstanding     59,868   63,153   59,660   62,548
Effect of dilutive securities-stock options, warrants, convertible preferred shares and deferred shares     29,360   27,604   28,726   27,836
   
 
 
 
Diluted weighted average common shares outstanding     89,228   90,757   88,386   90,384
   
 
 
 
Basic and diluted per share amounts                  
Basic net income per share available to common stockholders   $ 0.18   0.28   0.34   0.58
   
 
 
 
Diluted net income per share available to common stockholders   $ 0.14   0.21   0.27   0.44
   
 
 
 

7


        At June 30, 2003 and 2004, the Company had outstanding stock options, warrants, Performance Accelerated Restricted Stock Units and Series A Convertible Preferred Stock, which could potentially dilute basic earnings per share in the future. (See Notes 12 and 13 to the Consolidated Financial Statements for the year ended December 31, 2003 in the Company's 2003 Annual Report on Form 10-K.) In August 2004, the holders of all of the outstanding preferred shares of the Company were issued an aggregate of 23,832 shares of Class A common stock in connection with their conversion of the 1,325 shares of Series A Convertible Preferred Stock they then held. The 23,832 newly issued shares of Class A common stock represent approximately 27% of the shares of the Company's common stock outstanding after the conversion and are already reflected in the Company's reported diluted net income per share and similar information.

Stock-Based Compensation

        The Company has chosen to continue to account for stock-based compensation using the intrinsic-value method prescribed by Accounting Principles Board Opinion No. 25. Accordingly, no stock compensation expense has been recognized for a substantial majority of its stock-based compensation plans. Had the Company elected to recognize compensation cost based on the fair value of the stock options at the date of grant under SFAS 123, as amended by SFAS 148, such costs would have been recognized ratably over the vesting period of the underlying instruments and the Company's net income and net income per share would have changed to the pro forma amounts indicated in the table below:

 
  Three Months Ended
June 30,

  Six Months Ended
June 30,

 
 
  2003
  2004
  2003
  2004
 
Net income available to common stockholders as reported   $ 10,675   17,526   20,149   35,965  
Add: Stock-based compensation expense included in reported net income, net of related tax effects       47     94  
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects     (999 ) (1,314 ) (1,882 ) (2,508 )
   
 
 
 
 
Pro forma net income available to common stockholders   $ 9,676   16,259   18,267   33,551  
   
 
 
 
 
Net income available to common stockholders per basic share:                    
  As reported   $ 0.18   0.28   0.34   0.58  
   
 
 
 
 
  Pro forma   $ 0.16   0.26   0.31   0.55  
   
 
 
 
 
Net income available to common stockholders per diluted share:                    
As reported   $ 0.14   0.21   0.27   0.43  
   
 
 
 
 
Pro forma   $ 0.13   0.20   0.26   0.42  
   
 
 
 
 

(2)   Acquisitions

        On November 6, 2003, the Company acquired IGT OnLine Entertainment Systems, Inc. from International Game Technology (NYSE: IGT) for $143,000 in cash plus expenses and a $10,244 working capital adjustment payment. Upon consummation of the acquisition, the Company changed the name of IGT OnLine Entertainment Systems, Inc. to Scientific Games Online Entertainment Systems, Inc ("OES"). The results of OES have been included in the Company's results of operations from the date of acquisition. OES had annual revenues of approximately $148,818 during its most recent fiscal year ended September 27, 2003 which were reported in the Company's Form 8-K filed on February 4, 2004.

        The acquisition of OES strengthens the Company's presence in the lottery industry, expands the Company's geographic presence, broadens its lottery product offerings and accelerates its entrance into

8



the video lottery systems business. As a result of the acquisition, the Company has contracts to operate online lottery systems in 16 states and throughout the Caribbean, in addition to supporting systems that OES delivered to customers in Korea, Norway, Switzerland and Shanghai. The acquisition also included OES's Advanced Gaming System (AGS) video system contracts in six jurisdictions throughout the world, certain intellectual property and an exclusive license to specific IGT slot brands for both instant and online games. The Company is in the process of allocating the purchase price of OES, including performing a thorough analysis to estimate the fair value of the assets acquired and liabilities assumed, and it expects that a majority of the excess will be allocated to goodwill. Goodwill from the acquisition of OES will be deductible for tax purposes.

        The following table presents unaudited pro forma results of operations for the three and six months ended June 30, 2003 as if the acquisition of OES had occurred at the beginning of the periods presented, rather than on the acquisition date of November 6, 2003. These pro forma results have been prepared for comparative purposes and do not purport to be indicative of what would have occurred had the acquisition been consummated on January 1, 2003, or the results that may occur in the future.

 
  Three Months Ended
June 30, 2003

  Six Months Ended
June 30, 2003

 
  (unaudited)

  (unaudited)

Operating revenues   $ 164,598   326,377
Operating income     30,900   61,328
Income before income tax expense     23,197   45,063
Net income     14,770   28,670
Convertible preferred stock dividend     1,895   3,742
   
 
Net income available to common stockholders   $ 12,875   24,928
   
 
Basic net income per share available to common stockholders   $ 0.22   0.42
   
 
Diluted net income per share available to common stockholders   $ 0.17   0.32
   
 

(3)   Business Segments

        The following tables represent revenues, profits, depreciation, amortization, and capital expenditures for the three and six months ended June 30, 2003 and 2004, and assets at June 30, 2003

9



and 2004, by business segment. Corporate expenses, interest expense and other (income) deductions are not allocated to business segments.

 
  Three Months Ended June 30, 2003
 
  Lottery
Group

  Pari-Mutuel
Group

  Venue
Management
Group

  Telecom-
munications
Products
Group

  Totals
Service revenues   $ 72,530   20,775   16,825       110,130
Sales revenues     5,511   776     12,432     18,719
   
 
 
 
 
Total revenues     78,041   21,551   16,825   12,432     128,849
   
 
 
 
 
Cost of service     36,970   11,250   11,666       59,886
Cost of sales     3,833   469     8,229     12,531
Amortization of service contract software     749   595         1,344
   
 
 
 
 
Total operating expenses     41,552   12,314   11,666   8,229     73,761
   
 
 
 
 
Gross profit     36,489   9,237   5,159   4,203     55,088
Selling, general and administrative expenses     9,071   3,140   847   1,177     14,235
Depreciation and amortization     5,733   2,793   514   631     9,671
   
 
 
 
 
Segment operating income   $ 21,685   3,304   3,798   2,395     31,182
   
 
 
 
     
Unallocated corporate expense                       5,310
                     
Consolidated operating income                     $ 25,872
                     
Capital and wagering systems expenditures   $ 4,046   1,879   311   688     6,924
   
 
 
 
 

10


 
  Three Months Ended June 30, 2004
 
  Lottery
Group

  Pari-Mutuel
Group

  Venue
Management
Group

  Telecom-
munications
Products
Group

  Totals
Service revenues   $ 109,740   21,307   16,523       147,570
Sales revenues     15,797   1,778     12,967     30,542
   
 
 
 
 
Total revenues     125,537   23,085   16,523   12,967     178,112
   
 
 
 
 
Cost of service     54,745   10,871   12,028       77,644
Cost of sales     9,798   1,024     9,933     20,755
Amortization of service contract software     853   744         1,597
   
 
 
 
 
Total operating expenses     65,396   12,639   12,028   9,933     99,996
   
 
 
 
 
Gross profit     60,141   10,446   4,495   3,034     78,116
Selling, general and administrative expenses     16,165   1,969   1,194   1,435     20,763
Depreciation and amortization     9,893   2,489   507   705     13,594
   
 
 
 
 
Segment operating income   $ 34,083   5,988   2,794   894     43,759
   
 
 
 
 
Unallocated corporate expense                       7,876
                     
Consolidated operating income                     $ 35,883
                     
Capital and wagering systems expenditures   $ 9,976   1,974   326   148     12,424
   
 
 
 
 
 
  Six Months Ended June 30, 2003
 
  Lottery
Group

  Pari-Mutuel
Group

  Venue
Management
Group

  Telecom-
munications
Products
Group

  Totals
Service revenues   $ 143,494   39,705   32,198       215,397
Sales revenues     11,558   2,816     22,296     36,670
   
 
 
 
 
Total revenues     155,052   42,521   32,198   22,296     252,067
   
 
 
 
 
Cost of service     73,301   21,998   22,215       117,514
Cost of sales     8,318   1,722     14,898     24,938
Amortization of service contract software     1,410   1,201         2,611
   
 
 
 
 
Total operating expenses     83,029   24,921   22,215   14,898     145,063
   
 
 
 
 
Gross profit     72,023   17,600   9,983   7,398     107,004
Selling, general and administrative expenses     18,304   5,372   1,749   2,391     27,816
Depreciation and amortization     11,406   5,562   1,017   1,278     19,263
   
 
 
 
 
Segment operating income   $ 42,313   6,666   7,217   3,729     59,925
   
 
 
 
 
Unallocated corporate expense                       10,260
                     
Consolidated operating income                     $ 49,665
                     
Assets at June 30, 2003   $ 337,449   282,417   35,663   40,279     695,808
   
 
 
 
 
Capital and wagering systems expenditures   $ 5,768   2,935   610   986     10,299
   
 
 
 
 

11


 
  Six Months Ended June 30, 2004
 
  Lottery
Group

  Pari-Mutuel
Group

  Venue
Management
Group

  Telecom-
munications
Products
Group

  Totals
Service revenues   $ 217,034   40,350   31,819       289,203
Sales revenues     45,362   2,467     26,545     74,374
   
 
 
 
 
Total revenues     262,396   42,817   31,819   26,545     363,577
   
 
 
 
 
Cost of service     109,755   20,865   22,909       153,529
Cost of sales     30,045   1,433     19,933     51,411
Amortization of service contract software     1,646   1,385         3,031
   
 
 
 
 
Total operating expenses     141,446   23,683   22,909   19,933     207,971
   
 
 
 
 
Gross profit     120,950   19,134   8,910   6,612     155,606
Selling, general and administrative
expenses
    32,727   3,808   2,198   2,917     41,650
Depreciation and amortization     19,400   5,309   997   1,438     27,144
   
 
 
 
 
Segment operating income   $ 68,823   10,017   5,715   2,257     86,812
   
 
 
 
 
Unallocated corporate expense                       13,119
                     
Consolidated operating income                     $ 73,693
                     
Assets at June 30, 2004   $ 567,715   324,967   34,403   45,318     972,403
   
 
 
 
 
Capital and wagering systems expenditures   $ 24,437   6,307   662   306     31,712
   
 
 
 
 

        The following table provides a reconciliation of consolidated operating income to the consolidated income before income tax expense for each period:

 
  Three Months Ended
June 30,

  Six Months Ended
June 30,

 
  2003
  2004
  2003
  2004
Reportable consolidated operating income   $ 25,872   35,883   49,665   73,693
Interest expense     6,172   7,807   12,404   15,197
Other (income) expense     72   (384 ) (32 ) 224
   
 
 
 
Income before income tax expense   $ 19,628   28,460   37,293   58,272
   
 
 
 

(4)    Income Tax Expense

        The effective income tax rate for the three and six months ended June 30, 2004 of 31.5% differed from the federal statutory rate of 35% due primarily to benefits from the realization of foreign tax credits and the implementation of the extra-territorial income exclusion regime. The effective income tax rate for the three and six months ended June 30, 2003 was approximately 36%, which differed from the federal statutory rate of 35% due primarily to foreign and state income taxes.

12


(5)    Comprehensive Income

        The following presents a reconciliation of net income to comprehensive income for the three and six month periods ended June 30, 2003 and 2004:

 
  Three Months Ended
June 30,

  Six Months Ended
June 30,

 
  2003
  2004
  2003
  2004
Net income   $ 12,570   19,508   23,891   39,929
Other comprehensive income (loss):                  
  Foreign currency translation     2,381   (617 ) 2,308   767
  Unrealized gain on investments     7   715   876   727
  Unrealized gain (loss) on Canadian dollar hedges     (2,325 )   (3,806 ) 1,107
   
 
 
 
  Other comprehensive income (loss)     63   98   (622 ) 2,601
   
 
 
 
Comprehensive income   $ 12,633   19,606   23,269   42,530
   
 
 
 

(6)    Inventories

        Inventories consist of the following:

 
  December 31,
2003

  June 30,
2004

Parts and work-in-process   $ 17,990   19,614
Finished goods     8,906   11,291
   
 
    $ 26,896   30,905
   
 

        Parts and work-in-process include costs for equipment expected to be sold. Costs incurred for equipment associated with specific wagering system service contracts not yet placed in service are classified as construction in progress in property and equipment.

(7)    Accrued Liabilities

        Accrued liabilities consist of the following:

 
  December 31,
2003

  June 30,
2004

Compensation and benefits   $ 30,364   24,837
Accrued acquisition costs     11,037   8,596
Accrued contract costs     19,985   8,807
Deferred revenue     7,720   6,629
Other     48,387   36,284
   
 
    $ 117,493   85,153
   
 

(8)    Debt

        At June 30, 2004, the Company had approximately $19,532 available for borrowing under the Company's revolving credit facility, which was entered into on November 6, 2003 as part of the Company's senior secured credit facility (as amended and restated, the "2003 Facility"). There were no borrowings outstanding under the revolving credit facility, but approximately $55,468 in letters of credit were issued and outstanding at June 30, 2004. At December 31, 2003, the Company's available

13



borrowing capacity under the revolving credit facility was $27,146. At June 30, 2004, there were $460,511 in outstanding Term C Loans under the 2003 Facility.

        The Company entered into two amendments to the 2003 Facility in the second quarter of 2004. The first amendment gave the Company the ability to incur up to $300,000 of new convertible indebtedness, provided that such indebtedness was subordinated to the 2003 Facility and that the proceeds of such convertible subordinated indebtedness were used to reduce outstanding Term C Loans. The primary purpose of the second amendment (the "Second Amendment") was to support the Company's reorganization of its international operations. The Second Amendment permits the transfer of ownership or disposition of certain assets and subsidiaries of the Company to other subsidiaries of the Company which would otherwise have been limited by the credit agreement governing the 2003 Facility (as amended and restated, the "Amended Credit Agreement"). The Second Amendment made certain other changes to the 2003 Facility, including a reduction to the interest rate charged on Term C Loans by converting the $460,511 outstanding principal balance of Term C Loans into new term loans (the "Term D Loans") effective July 2, 2004. The Term D Loans contain the same terms and conditions as the Term C Loans except for a 0.25% reduction in the Applicable Margins (as defined in the Amended Credit Agreement) and a pricing grid that provides for a further 0.25% rate reduction should the Consolidated Senior Debt Ratio (as defined in the Amended Credit Agreement) be less than 1.75.

        At June 30, 2004, $65,584 of the Company's 121/2% senior subordinated notes (the "Notes") was outstanding.

14



(9)    Goodwill and Intangible Assets, Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of

        The following disclosure presents certain information regarding the Company's acquired intangible assets as of December 31, 2003 and June 30, 2004. Amortizable intangible assets are being amortized over their estimated useful lives, as indicated below, with no estimated residual values.

Intangible Assets

  Weighted Average
Amortization
Period

  Gross
Carrying
Amount

  Accumulated
Amortization

  Net Balance
Balance at December 31, 2003                  

Amortizable intangible assets:

 

 

 

 

 

 

 

 

 
  Patents   15   $ 3,139   291   2,848
  Customer lists   14     15,375   5,984   9,391
  Customer service contracts   15     3,781   1,280   2,501
  Licenses   1-15     3,928   1,136   2,792
  Lottery contracts   1-7.5     31,000   1,186   29,814
       
 
 
          57,223   9,877   47,346
       
 
 
Non-amortizable intangible assets:                  
  Tradename         32,200   2,118   30,082
  Connecticut off-track betting system operating right         22,339   8,319   14,020
       
 
 
          54,539   10,437   44,102
       
 
 
Total intangible assets       $ 111,762   20,314   91,448
       
 
 
Balance at June 30, 2004                  

Amortizable intangible assets:

 

 

 

 

 

 

 

 

 
  Patents   15   $ 3,794   394   3,400
  Customer lists   14     15,375   6,933   8,442
  Customer service contracts   15     3,719   1,403   2,316
  Licenses   1-15     6,101   2,113   3,988
  Lottery contracts   1-7.5     31,802   4,642   27,160
       
 
 
          60,791   15,485   45,306
       
 
 
Non-amortizable intangible assets:                  
  Tradename         32,200   2,118   30,082
  Connecticut off-track betting system operating right         22,339   8,319   14,020
       
 
 
          54,539   10,437   44,102
       
 
 
Total intangible assets       $ 115,330   25,922   89,408
       
 
 

        The aggregate intangible amortization expense for the six month periods ended June 30, 2003 and 2004 was approximately $1,091 and $5,608, respectively.

15


        The table below reconciles the change in the carrying amount of goodwill, by reporting unit, which is the same as business segment, for the period from January 1, 2004 to June 30, 2004. In 2004, the Company recorded (a) a $1,190 increase in goodwill in connection with an earnout payment pursuant to the SERCHI purchase agreement and (b) a $5,773 decrease in the OES goodwill which is primarily attributable to a contract termination payment received by the Company from a third party.

Goodwill
  Lottery
Group

  Pari-Mutuel
Group

  Venue
Management
Group

  Telecom-
munications
Products
Group

  Totals
 
Balance at December 31, 2003   $ 307,868   487       308,355  
Adjustments:                        
  SERCHI earnout payment     1,190         1,190  
  Adjustments to OES goodwill     (5,773 )       (5,773 )
   
 
 
 
 
 
Balance at June 30, 2004   $ 303,285   487       303,772  
   
 
 
 
 
 

(10)    Pension Plans

        The Company has two funded defined benefit pension plans. It has a defined benefit plan for its U.S. based union employees. Retirement benefits under this plan are based upon the number of years of credited service up to a maximum of 30 years for the majority of the employees. It also has a defined benefit plan for U.K. based employees. Retirement benefits under the U.K. plan are based on an employee's average compensation over the two years preceding retirement. The Company's policy is to fund the minimum contribution permissible by the respective regulatory authorities.

        In connection with its U.S. based collective bargaining agreements, the Company participates with other companies in a defined benefit pension plan covering union employees. The Company expects to make payments to the multi-employer plan of approximately $250 during the year ending December 31, 2004.

        The Company has a 401(k) plan covering all U.S. based employees who are not covered by a collective bargaining agreement. Company contributions to the plan are at the discretion of the Company's Board of Directors. The Company has a 401(k) plan for all union employees which does not provide for Company contributions.

        The Company also has an unfunded, nonqualified Supplemental Executive Retirement Plan (the "SERP"), which is intended to provide supplemental retirement benefits for certain senior executives of the Company. The SERP provides for retirement benefits according to a formula based on each participant's compensation and years of service with the Company.

16



        The following table sets forth the combined amount of net periodic benefit cost recognized for the six month periods ended June 30, 2003 and 2004:

 
  Three Months
Ended June 30,

  Six Months
Ended June 30,

 
 
  2003
  2004
  2003
  2004
 
Components of net periodic pension benefit cost:                    
Service cost   $ 569   1,026   1,138   1,701  
Interest cost     512   641   1,024   1,282  
Expected return on plan assets     (371 ) (448 ) (741 ) (896 )
Actuarial loss     185   295   369   590  
Net amortization and deferral     14   13   27   27  
Amortization of prior service costs     133   192   266   384  
   
 
 
 
 
Net periodic cost   $ 1,042   1,719   2,083   3,088  
   
 
 
 
 

(11)    Financial Information for Guarantor Subsidiaries and Non-Guarantor Subsidiaries

        The Company conducts substantially all of its business through its domestic and foreign subsidiaries. The Notes and the 2003 Facility are fully, unconditionally and jointly and severally guaranteed by substantially all of the Company's wholly owned domestic subsidiaries (the "Guarantor Subsidiaries").

        Presented below is condensed consolidating financial information for (i) Scientific Games Corporation (the "Parent Company"), which includes the activities of Scientific Games Management Corporation, (ii) the Guarantor Subsidiaries and (iii) the wholly owned foreign subsidiaries and the non-wholly owned domestic and foreign subsidiaries (the "Non-Guarantor Subsidiaries") as of December 31, 2003 and June 30, 2004 and for the three and six months ended June 30, 2003 and 2004. 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, Guarantor Subsidiaries and Non-Guarantor Subsidiaries, assuming the guarantee structure of the Notes and the 2003 Facility was in effect at the beginning of the periods presented. Separate financial statements for Guarantor Subsidiaries are not presented based on management's determination that they would not provide additional information that is material to investors.

        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.

17



SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
December 31, 2003
(unaudited, in thousands)

 
  Parent
Company

  Guarantor
Subsidiaries

  Non-Guarantor
Subsidiaries

  Eliminating
Entries

  Consolidated
ASSETS                      
  Cash and cash equivalents   $ 67,618   (4,473 ) 16,228     79,373
  Accounts receivable, net       77,670   22,008   (39 ) 99,639
  Inventories       19,716   7,788   (608 ) 26,896
  Other current assets     4,686   17,005   9,736   30   31,457
  Property and equipment, net     3,135   171,692   54,534   (631 ) 228,730
  Investment in subsidiaries     469,385   184,313     (653,698 )
  Goodwill     183   304,117   4,055     308,355
  Intangible assets       86,982   4,466     91,448
  Other assets     47,159   49,293   8,940   (8,301 ) 97,091
   
 
 
 
 
    Total assets   $ 592,166   906,315   127,755   (663,247 ) 962,989
   
 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY                      
  Current installments of long-term debt   $ 5,015   654   658     6,327
  Current liabilities     15,615   110,158   25,370   953   152,096
  Long-term debt, excluding current installments     525,664     172     525,836
  Other non-current liabilities     (3,844 ) 31,633   13,689   100   41,578
  Intercompany balances     (203,592 ) 189,865   15,524   (1,797 )
  Stockholders' equity     253,308   574,005   72,342   (662,503 ) 237,152
   
 
 
 
 
    Total liabilities and stockholders' equity   $ 592,166   906,315   127,755   (663,247 ) 962,989
   
 
 
 
 

18



SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
June 30, 2004
(unaudited, in thousands)

 
  Parent
Company

  Guarantor
Subsidiaries

  Non-Guarantor
Subsidiaries

  Eliminating
Entries

  Consolidated
ASSETS                      
  Cash and cash equivalents   $ 78,191   441   22,174     100,806
  Accounts receivable, net       63,017   24,163   (39 ) 87,141
  Inventories       21,962   9,551   (608 ) 30,905
  Other current assets     4,246   16,061   10,722   30   31,059
  Property and equipment, net     2,910   176,325   55,848   (631 ) 234,452
  Investment in subsidiaries     549,195   186,022     (735,217 )
  Goodwill     183   298,344   5,245     303,772
  Intangible assets       85,853   3,555     89,408
  Other assets     40,837   54,210   8,074   (8,261 ) 94,860
   
 
 
 
 
    Total assets   $ 675,562   902,235   139,332   (744,726 ) 972,403
   
 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY                      
  Current installments of long-term debt   $ 4,940     2,662     7,602
  Current liabilities     3,140   85,223   28,268   1,074   117,705
  Long-term debt, excluding current installments     523,220     70     523,290
  Other non-current liabilities     (1,562 ) 32,239   13,391   102   44,170
  Intercompany balances     (149,968 ) 133,643   18,243   (1,918 )
  Stockholders' equity     295,792   651,130   76,698   (743,984 ) 279,636
   
 
 
 
 
    Total liabilities and stockholders' equity   $ 675,562   902,235   139,332   (744,726 ) 972,403
   
 
 
 
 

19



SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED STATEMENT OF INCOME
Three Months Ended June 30, 2003
(unaudited, in thousands)

 
  Parent
Company

  Guarantor
Subsidiaries

  Non-Guarantor
Subsidiaries

  Eliminating
Entries

  Consolidated
Operating revenues   $   97,387   33,126   (1,664 ) 128,849
Operating expenses       52,000   22,018   (1,601 ) 72,417
Amortization of service contract software       1,245   99     1,344
   
 
 
 
 
  Gross profit       44,142   11,009   (63 ) 55,088
Selling, general and administrative expenses     5,284   10,637   3,451   (3 ) 19,369
Depreciation and amortization     176   7,500   2,171     9,847
   
 
 
 
 
  Operating income (loss)     (5,460 ) 26,005   5,387   (60 ) 25,872
Interest expense     6,031   181   1,054   (1,094 ) 6,172
Other (income) expense     87   (1,757 ) 650   1,092   72
   
 
 
 
 
Income (loss) before equity in income of subsidiaries, and income taxes     (11,578 ) 27,581   3,683   (58 ) 19,628
Equity in income of subsidiaries     30,287       (30,287 )
Income tax expense     6,139   117   802     7,058
   
 
 
 
 
Net income   $ 12,570   27,464   2,881   (30,345 ) 12,570
   
 
 
 
 


SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED STATEMENT OF INCOME
Three Months Ended June 30, 2004
(unaudited, in thousands)

 
  Parent
Company

  Guarantor
Subsidiaries

  Non-Guarantor
Subsidiaries

  Eliminating
Entries

  Consolidated
 
Operating revenues   $   144,597   41,330   (7,815 ) 178,112  
Operating expenses       79,144   27,087   (7,832 ) 98,399  
Amortization of service contract software       1,497   100     1,597  
   
 
 
 
 
 
  Gross profit       63,956   14,143   17   78,116  
Selling, general and administrative expenses     7,664   16,164   4,602   (3 ) 28,427  
Depreciation and amortization     212   11,080   2,514     13,806  
   
 
 
 
 
 
  Operating income (loss)     (7,876 ) 36,712   7,027   20   35,883  
Interest expense     7,420   296   1,243   (1,152 ) 7,807  
Other (income) expense     (277 ) (1,588 ) 327   1,154   (384 )
   
 
 
 
 
 
Income (loss) before equity in income of subsidiaries, and income taxes     (15,019 ) 38,004   5,457   18   28,460  
Equity in income of subsidiaries     40,324       (40,324 )  
Income tax expense     5,797   1,126   2,029     8,952  
   
 
 
 
 
 
Net income   $ 19,508   36,878   3,428   (40,306 ) 19,508  
   
 
 
 
 
 

20



SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED STATEMENT OF INCOME
Six Months Ended June 30, 2003
(unaudited, in thousands)

 
  Parent
Company

  Guarantor
Subsidiaries

  Non-Guarantor
Subsidiaries

  Eliminating
Entries

  Consolidated
 
Operating revenues   $   194,654   60,226   (2,813 ) 252,067  
Operating expenses       104,889   40,322   (2,759 ) 142,452  
Amortization of service contract software       2,412   199     2,611  
   
 
 
 
 
 
  Gross profit       87,353   19,705   (54 ) 107,004  
Selling, general and administrative expenses     10,045   20,989   6,683   (6 ) 37,711  
Depreciation and amortization     365   14,978   4,285     19,628  
   
 
 
 
 
 
  Operating income (loss)     (10,410 ) 51,386   8,737   (48 ) 49,665  
Interest expense     12,108   332   2,148   (2,184 ) 12,404  
Other (income) expense     (102 ) (3,095 ) 998   2,167   (32 )
   
 
 
 
 
 
Income (loss) before equity in income of subsidiaries, and income taxes     (22,416 ) 54,149   5,591   (31 ) 37,293  
Equity in income of subsidiaries     58,034       (58,034 )  
Income tax expense     11,727   204   1,471     13,402  
   
 
 
 
 
 
Net income   $ 23,891   53,945   4,120   (58,065 ) 23,891  
   
 
 
 
 
 


SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED STATEMENT OF INCOME
Six Months Ended June 30, 2004
(unaudited, in thousands)

 
  Parent
Company

  Guarantor
Subsidiaries

  Non-Guarantor
Subsidiaries

  Eliminating
Entries

  Consolidated
Operating revenues   $   298,499   75,170   (10,092 ) 363,577
Operating expenses       164,410   50,656   (10,126 ) 204,940
Amortization of service contract software       2,832   199     3,031
   
 
 
 
 
  Gross profit       131,257   24,315   34   155,606
Selling, general and administrative expenses     12,697   33,009   8,647   (6 ) 54,347
Depreciation and amortization     422   22,179   4,965     27,566
   
 
 
 
 
  Operating income (loss)     (13,119 ) 76,069   10,703   40   73,693
Interest expense     14,574   515   2,382   (2,274 ) 15,197
Other (income) expense     (552 ) (2,947 ) 1,447   2,276   224
   
 
 
 
 
Income (loss) before equity in income of subsidiaries, and income taxes     (27,141 ) 78,501   6,874   38   58,272
Equity in income of subsidiaries     79,825       (79,825 )
Income tax expense     12,755   3,049   2,539     18,343
   
 
 
 
 
Net income   $ 39,929   75,452   4,335   (79,787 ) 39,929
   
 
 
 
 

21



SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED STATEMENT OF CASH FLOWS
Six Months Ended June 30, 2003
(unaudited, in thousands)

 
  Parent
Company

  Guarantor
Subsidiaries

  Non-Guarantor
Subsidiaries

  Eliminating
Entries

  Consolidated
 
Net income   $ 23,891   53,945   4,120   (58,065 ) 23,891  
  Depreciation and amortization     365   17,390   4,484     22,239  
  Equity in income of subsidiaries     (58,034 )     58,034    
  Changes in operating assets and liabilities     464   (9,318 ) 663   (405 ) (8,596 )
  Deferred Income taxes     10,721   (792 ) 166     10,095  
  Other non-cash adjustments     1,134   160   (20 )   1,274  
   
 
 
 
 
 
Net cash provided by (used in) operating activities     (21,459 ) 61,385   9,413   (436 ) 48,903  
Cash flows from investing activities:                        
  Capital and wagering systems expenditures     (60 ) (1,255 ) (8,984 )   (10,299 )
  Business acquisition, net of cash acquired       (20,744 ) (16 )   (20,760 )
  Other assets and investments     (1,367 ) (9,653 ) 1,530   9   (9,481 )
   
 
 
 
 
 
Net cash used in investing activities     (1,427 ) (31,652 ) (7,470 ) 9   (40,540 )
   
 
 
 
 
 
Cash flows from financing activities:                        
  Payments on long-term debt     (3,331 ) (204 ) (226 )   (3,761 )
  Proceeds from stock issue     1,157     50   (50 ) 1,157  
  Other, principally intercompany balances     30,602   (30,066 ) (1,013 ) 477    
   
 
 
 
 
 
Net cash provided by (used in) financing activities     28,428   (30,270 ) (1,189 ) 427   (2,604 )
   
 
 
 
 
 
Effect of exchange rate changes on cash     (67 ) (131 ) 632     434  
   
 
 
 
 
 
Increase (decrease) in cash and cash equivalents     5,475   (668 ) 1,386     6,193  
Cash and cash equivalents, beginning of period     25,323   180   9,426     34,929  
   
 
 
 
 
 
Cash and cash equivalents, end of period   $ 30,798   (488 ) 10,812     41,122  
   
 
 
 
 
 

22



SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED STATEMENT OF CASH FLOWS
Six Months Ended June 30, 2004
(unaudited, in thousands)

 
  Parent
Company

  Guarantor
Subsidiaries

  Non-Guarantor
Subsidiaries

  Eliminating
Entries

  Consolidated
 
Net income   $ 39,929   75,452   4,335   (79,787 ) 39,929  
  Depreciation and amortization     422   25,011   5,164     30,597  
  Equity in income of subsidiaries     (79,825 )     79,825    
  Changes in operating assets and liabilities     (8,980 ) (10,495 ) (2,070 ) 208   (21,337 )
  Deferred Income taxes     6,221   (791 ) (225 )   5,205  
  Other non-cash adjustments     1,135   (106 ) 23     1,052  
   
 
 
 
 
 
Net cash provided by (used in) operating activities     (41,098 ) 89,071   7,227   246   55,446  
   
 
 
 
 
 
Cash flows from investing activities:                        
  Capital and wagering systems expenditures     (53 ) (26,152 ) (5,507 )   (31,712 )
  Business acquisition, net of cash acquired       (1,709 )     (1,709 )
  Other assets and investments     (29 ) (1,002 ) (1,476 ) 1,671   (836 )
   
 
 
 
 
 
Net cash used in investing activities     (82 ) (28,863 ) (6,983 ) 1,671   (34,257 )
   
 
 
 
 
 
Cash flows from financing activities:                        
  Payments on long-term debt     (2,519 ) (654 ) 1,942     (1,231 )
  Proceeds from stock issue     3,828   1,709     (1,709 ) 3,828  
  Preferred stock cash dividends     (3,964 )       (3,964 )
  Other, principally intercompany balances     53,485   (56,327 ) 3,050   (208 )  
   
 
 
 
 
 
Net cash provided by (used in) financing activities     50,830   (55,272 ) 4,992   (1,917 ) (1,367 )
   
 
 
 
 
 
Effect of exchange rate changes on cash     923   (22 ) 710     1,611  
   
 
 
 
 
 
Increase (decrease) in cash and cash equivalents     10,573   4,914   5,946     21,433  
Cash and cash equivalents, beginning of period     67,618   (4,473 ) 16,228     79,373  
   
 
 
 
 
 
Cash and cash equivalents, end of period   $ 78,191   441   22,174     100,806  
   
 
 
 
 
 

23



SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS FOR
THE THREE AND SIX MONTH PERIODS ENDED JUNE 30, 2004

Item 2.    Management's Discussion and Analysis of Financial Condition and Results of Operations

Background

        The following discussion addresses our financial condition as of June 30, 2004 and the results of our operations for the three months and six months ended June 30, 2004, compared to the corresponding periods in the prior year. This discussion should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations for the fiscal year ended December 31, 2003, included in our 2003 Annual Report on Form 10-K.

        We operate in four business segments: Lottery Group, Pari-mutuel Group, Venue Management Group and Telecommunications Products Group. Our Lottery Group provides instant tickets and related services and lottery systems. Instant ticket and related services includes ticket design and manufacturing as well as value-added services, including game design, sales and marketing support, inventory management and warehousing and fulfillment services. In addition, this division includes promotional instant tickets and pull-tab tickets that we sell to both lottery and non-lottery customers. Our lottery systems business includes the supply of transaction processing software for the accounting and validation of both 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.

        On November 6, 2003, we acquired IGT OnLine Entertainment Systems, Inc. from International Game Technology and changed its name to Scientific Games Online Entertainment Systems, Inc. ("OES"). OES operates online lottery systems in seven states and the Caribbean, and supports systems sold to customers in Korea, Norway, Switzerland and Shanghai. The acquisition also included the Advanced Games System (AGS) video system contracts in six jurisdictions throughout the world, certain intellectual property and an exclusive license to specific IGT slot brands for both instant and online games.

        Our Pari-mutuel Group is comprised of our North American and international on-track, off-track and inter-track pari-mutuel services, simulcasting and communications services, and video gaming, as well as sales of pari-mutuel systems and equipment.

        Our Venue Management Group is comprised of our Connecticut off-track betting operations, and the Netherlands on-track and off-track betting operations.

        Our Telecommunications Products Group is comprised of our prepaid cellular phone cards business.

        The first and fourth quarters of the calendar year traditionally comprise the weakest season for our pari-mutuel wagering business. 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. 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 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, instant ticket and prepaid phone card 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.

24



        Operating results may also vary significantly from period to period depending on the addition or disposition of business units in each period. The acquisition of OES in November 2003, which was accounted for as a purchase, affects the comparability of operations from period to period (see Note 2 to the Consolidated Financial Statements).

Results of Operations: See Note 3—Business Segments

Three Months Ended June 30, 2004 compared to Three Months Ended June 30, 2003

Revenue Analysis

        For the quarter ended June 30, 2004, revenues of $178.1 million improved $49.3 million or 38% as compared to the prior year quarter, reflecting a $37.4 million or 34% increase in service revenue and a $11.8 million or 63% increase in sales revenue.

        The increase in service revenue in the quarter ended June 30, 2004 is primarily attributable to a $37.2 million or 51% increase in service revenues in the Lottery Group, of which $35.1 million is attributable to the addition of OES and the balance of the increase is attributable to improvements in lottery retail sales, reflecting governments' continuing emphasis on lotteries to support government sponsored programs. Pari-mutuel Group service revenues increased $0.5 million reflecting expanded business in Ireland and favorable foreign exchange rates. Venue Management Group service revenues decreased $0.3 million due to less wagering as a result of a smoking ban instituted in Connecticut in the quarter and lower Handle (dollars wagered) in the Netherlands, which was partially offset by favorable foreign exchange rates.

        The $11.8 million increase in sales revenue in the quarter ended June 30, 2004 is primarily attributable to a $10.3 million increase in systems and equipment sales in the Lottery Group, coupled with a $1.0 million increase in systems and equipment sales in the Pari-mutuel Group and a $0.5 million improvement in revenues in the Telecommunications Products Group, due primarily to the impact of favorable exchange rates, partially offset by lower prices.

Gross Profit Analysis

        Gross profit of $78.1 million for the quarter ended June 30, 2004 increased $23.0 million or 42% as compared to the corresponding period in 2003, reflecting a $19.4 million or 40% improvement in service revenue margins, and a $3.6 million or 58% improvement in sales revenue margins. Gross margins increased to 44% in 2004 from 43% in 2003. Margin improvements related to service revenues as compared to the prior year period were primarily attributable to the Lottery Group as a result of the addition of OES. Increased lottery systems and equipment sales revenue contributed $4.3 million to the increase in gross margin on sales in the Lottery Group for the quarter as compared to 2003. The $0.9 million or 10% improvement in services gross margin in the Pari-mutuel Group reflects the benefits of continued cost reduction efforts. Venue Management Group gross margins decreased $0.7 million or 13% as a result of lower service revenues as described above, coupled with slightly higher operating costs in the quarter. Telecommunications Products Group gross margins decreased $1.2 million or 28% from the prior year, as more favorable exchange rates and increased volume were offset by lower prices.

Expense Analysis

        Selling, general and administrative expenses of $28.4 million for the quarter ended June 30, 2004 were $9.1 million or 47% higher than in 2003. This increase is primarily due to the addition of OES.

        Depreciation and amortization expense, including amortization of service contract software, of $15.4 million for the quarter ended June 30, 2004 increased $4.2 million or 38% from the corresponding period in 2003, primarily due to the acquisition of OES.

25



        Interest expense of $7.8 million for the quarter ended June 30, 2004 increased $1.6 million or 26% from 2003, primarily as a result of additional borrowings in connection with the acquisition of OES.

Income Tax Expense

        Income tax expense of $9.0 million for the quarter ended June 30, 2004 increased $1.9 million or 27% from 2003 as a result of higher earnings. The financial statement income tax provision was 31.5% in 2004 and 36.0% in 2003. The lower effective rate in 2004 primarily reflects the benefits from the realization of foreign tax credits and the implementation of the extra-territorial income exclusion regime.

Six Months Ended June 30, 2004 compared to Six Months Ended June 30, 2003

Revenue Analysis

        For the six months ended June 30, 2004, revenues of $363.6 million improved $111.5 million or 44% overall as compared to the prior year period, reflecting a $73.8 million or 34% increase in service revenue and a $37.7 million or 103% increase in sales revenue.

        The increase in service revenue in the six months ended June 30, 2004 is primarily attributable to a $73.5 million or 51% increase in service revenues in the Lottery Group, of which $69.5 million is attributable to the addition of OES and the balance of the increase is attributable to improvements in lottery retail sales, reflecting governments' continuing emphasis on lotteries to support government sponsored programs. Pari-mutuel Group service revenues increased $0.6 million reflecting expanded business in Ireland and favorable foreign exchange rates; partially offset by the negative impact of severe winter weather conditions in the northeastern U.S. in the first quarter of 2004. Venue Management Group service revenues decreased $0.4 million as a result of the severe northeast weather in the first quarter of 2004, coupled with a smoking ban instituted in Connecticut in the second quarter of 2004 and lower Handle in the Netherlands, which decline was partially offset by favorable foreign exchange rates.

        The $37.7 million increase in sales revenue in the six months ended June 30, 2004 is primarily attributable to a $33.8 million improvement in systems and equipment sales in the Lottery Group, coupled with a $4.2 million improvement in revenues in the Telecommunications Products Group, due primarily to the impact of favorable exchange rates and increased volumes, partially offset by lower prices.

Gross Profit Analysis

        Gross profit of $155.6 million for the six months ended June 30, 2004 increased $48.6 million or 45%, reflecting a $37.4 million or 39% improvement in service revenue margins, and a $11.2 million or 96% improvement in sales revenue margins. Gross margins increased from 42% in 2003 to 43% in 2004. Margin improvements related to service revenues as compared to the prior year period were primarily attributable to the Lottery Group as a result of the addition of OES. Increased lottery systems and equipment sales revenue contributed $12.1 million to the increase in gross margin on sales in the Lottery Group for 2004 as compared to 2003. The $1.8 million or 48% improvement in services gross margin in the Pari-mutuel Group reflects the benefits of continued cost reduction efforts. Venue Management Group gross margins decreased $1.1 million or 11% as a result of lower service revenues, as described above, coupled with slightly higher operating costs in the six months. Telecommunications Products Group gross margins decreased $0.8 million or 11% from the prior year, as more favorable exchange rates and increased volume were offset by lower prices.

26



Expense Analysis

        Selling, general and administrative expenses of $54.3 million for the six months ended June 30, 2004 were $16.6 million or 44% higher than in 2003. This increase is primarily due to the addition of OES.

        Depreciation and amortization expense, including amortization of service contract software, of $30.6 million for the six months ended June 30, 2004 increased $8.4 million or 38% from 2003, primarily due to the acquisition of OES.

        Interest expense of $15.2 million for the six months ended June 30, 2004 increased $2.8 million or 23% from 2003, primarily as a result of additional borrowings in connection with the acquisition of OES.

Income Tax Expense

        Income tax expense of $18.3 million for the six months ended June 30, 2004 increased $4.9 million or 37% from 2003 as a result of higher earnings. The financial statement income tax provision was 31.5% in 2004 and 36.0% in 2003. The lower effective rate in 2004 primarily reflects the benefits from the realization of foreign tax credits and the implementation of the extra-territorial income exclusion regime.

Critical Accounting Policies

        Our consolidated financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America. Preparing consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses. These estimates and assumptions are affected by the application of our accounting policies. Our significant accounting policies are described in Note 1 to our 2003 Annual Report on Form 10-K. Critical accounting policies are those that require application of management's most difficult, subjective, or complex judgments, often as a result of matters that are inherently uncertain and may change in subsequent periods. Critical accounting policies for us include revenue recognition on percentage of completion contracts related to lottery development projects and pari-mutuel systems software development projects, capitalization of software development costs, evaluation of the recoverability of assets, the assessment of litigation and contingencies, accounting for stock-based compensation, accounting for derivative instruments and hedging activities, and accounting for income and other taxes. Actual results could differ from estimates.

Liquidity, Capital Resources and Working Capital

        Our senior credit facility, the 2003 Facility, consists of a $75.0 million revolving credit facility due 2006 and a $460.5 million Term D Loan due 2009. The 2003 Facility contains certain financial covenants which are described below. At June 30, 2004, approximately 88% of our debt, representing approximately $465.3 million of indebtedness, was in variable rate instruments. Consequently, we are exposed to fluctuations in interest rates. The effect of a 0.125% change in interest rates associated with our variable rate debt will result in a change of approximately $0.6 million per year in our interest expense assuming no change in our outstanding borrowings.

        Our financing arrangements as of June 30, 2004 impose certain limitations on our and our subsidiaries' operations.

        The Amended Credit Agreement governing the 2003 Facility 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,

27



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, and create certain liens and other encumbrances on assets. Also, the Amended Credit Agreement governing the 2003 Facility contains the following financial covenants, which are computed quarterly on a rolling four-quarter basis as applicable:

        For purposes of the foregoing limitations, Consolidated EBITDA means the sum of (i) consolidated net income, (ii) consolidated interest expense with respect to all outstanding indebtedness, (iii) provisions for taxes based on income, (iv) total depreciation expense, (v) total amortization expense and (vi) certain adjustments, in each case for the period being measured, all of the foregoing as determined on a consolidated basis for us and our subsidiaries in accordance with GAAP. Although we were in compliance with our loan covenants at June 30, 2004 and expect to continue to remain in compliance over the next 12 months, we cannot assure you that we will be able to do so or that we will be able to continue to meet the covenant requirements beyond 12 months.

        At June 30, 2004, we had outstanding letters of credit of $55.5 million, but no outstanding borrowings under the revolving credit facility, leaving us with a total availability of $19.5 million as compared to $27.1 million at December 31, 2003. Our ability to borrow under the 2003 Facility will depend on our remaining in compliance with the limitations imposed by our lenders, including the maintenance of the specified financial covenants. Presently we have not sought and, therefore, do not have any other financing commitments.

28



        Our contractual obligations and commercial commitments principally include obligations associated with our outstanding indebtedness and future minimum operating lease obligations.

        In August 2004, the holders of all of our outstanding Series A Convertible Preferred Stock were issued an aggregate of 23,832,390 shares of our Class A common stock in connection with their conversion of the 1,325,081 shares of Series A Convertible Preferred Stock they then held. The 23,832,390 newly issued shares of Class A common stock represent approximately 27% of the shares of our common stock outstanding after the conversion and are already reflected in our reported diluted net income per share and similar information. Prior to conversion, our Series A Convertible Preferred Stock paid dividends at the rate of 6% per annum. In 2004, we satisfied the dividend requirements with cash. Prior to 2004, we satisfied the dividend requirements by issuing additional shares of Series A Convertible Preferred Stock.

        Our pari-mutuel wagering and online lottery 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 derived from our pari-mutuel wagering and lottery systems 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. 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 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 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. For fiscal 2004, we anticipate that capital expenditures and software expenditures will be approximately $65.0 million. However, the actual level of expenditures will ultimately depend on the extent to which we are successful in winning new contracts. The amount of capital expenditures in fiscal 2005 and beyond will 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. We presently have no commitments to replace our existing terminal base, and our obligation to upgrade the terminals is discretionary. 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.

        At June 30, 2004, our available cash and borrowing capacity totaled $120.3 million compared to $106.5 million at December 31, 2003. Our available cash and borrowing capacity fluctuates principally based on the timing of collections from our customers, cash expenditures associated with new and

29



existing pari-mutuel wagering and lottery systems contracts, repayment of our outstanding debt and changes in our working capital position. The increase in our available cash and borrowing capacity from the December 31, 2003 level principally reflects the net cash provided by operating activities for the six months ended June 30, 2004 of $55.4 million, partially offset by wagering and other capital expenditures of $31.7 million and acquisition related payouts of $1.7 million.

        Of the $55.4 million provided by operations, $21.3 million was used for changes in working capital. The working capital changes occurred principally from income tax payments and decreases in accounts payable and other liabilities and from an increase in inventory, partially offset principally by collections of receivables.

        We believe that our cash flow from operations, available cash and available borrowing capacity under the 2003 Facility will be sufficient to meet our liquidity needs, including anticipated capital expenditures, for the foreseeable future; however, we cannot assure you that this will be the case. While we are not aware of any particular trends, our contracts periodically renew and we cannot assure you 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. 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, we cannot assure you 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, we cannot assure you that we will be able to obtain new financing or to refinance any of our indebtedness, on commercially reasonable terms or at all.

Impact of Recently Issued Accounting Standards

        In December 2003, the Financial Accounting Standards Board (the "FASB") issued Statement No. 132 (revised 2003) Employers' Disclosures about Pensions and Other Postretirement Benefits—an amendment of FASB Statements No. 87, 88, and 106 ("SFAS 132 Amended"). SFAS 132 Amended revises employers' disclosures about pension plans and other postretirement benefit plans. It does not change the measurement or recognition of those plans required by FASB Statements No. 87, Employers' Accounting for Pensions, No. 88, Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits ("SFAS 87"), and No. 106, Employers' Accounting for Postretirement Benefits Other Than Pensions ("SFAS 106"). SFAS 132 Amended retains the disclosure requirements contained in FASB Statement No. 132, Employers' Disclosures about Pensions and Other Postretirement Benefits ("SFAS 132"), which it replaces. It requires additional disclosures to those in the original SFAS 132 about the assets, obligations, cash flows, and net periodic benefit cost of defined benefit pension plans and other defined benefit postretirement plans. The required information is to be provided separately for pension plans and for other postretirement benefit plans. The provisions of SFAS 132 remain in effect until the provisions of SFAS 132 Amended are adopted. Except as noted below, SFAS 132 Amended is effective for us in our year 2003 financial statements. Disclosure of information about foreign plans required by paragraphs 5(d), 5(e), 5(g), and 5(k) of SFAS 132 Amended and disclosure of estimated future benefit payments required by paragraph 5(f) of SFAS 132 Amended are effective for fiscal year 2004.

        On March 12, 2003, the FASB added to its agenda a project that will seek to improve the accounting disclosures relating to stock-based compensation. Among other issues, the project on stock-based compensation will address whether to require that the cost of employee stock options be treated as an expense. The FASB plans to start deliberating the key issues on this subject at future public

30



meetings and issued an Exposure Draft in March 2004 that could become effective in the first quarter of 2005.

Recent Developments

        In August 2004, the holders of all of our outstanding Series A Convertible Preferred Stock were issued an aggregate of 23,832,390 shares of our Class A common stock in connection with their conversion of the 1,325,081 shares of Series A Convertible Preferred Stock they then held. The 23,832,390 newly issued shares of Class A common stock represent approximately 27% of the shares of our common stock outstanding after the conversion and are already reflected in our reported diluted net income per share and similar information.

        On July 6, 2004, the Massachusetts Lottery awarded us the contract to be its primary supplier of instant tickets and related marketing services. Our current contract with the Massachusetts Lottery is due to expire in August, 2004. The new contract is for an initial term of two years with three one-year options to renew. We anticipate that the contract will generate approximately $20-25 million of revenue over its initial two-year term.

31


Item 3. 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. 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 were significantly affected. Available supply from the paper and electronics industries tends to fluctuate and prices may be affected by supply.

        For 2003 and the first six months of 2004, 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 for the balance of 2004, 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 June 30, 2004, approximately 12% of our debt was in fixed-rate instruments. We consider the fair value of all financial instruments not to be materially different from their carrying value at year-end. 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 "Liquidity, Capital Resources and Working Capital.")

Principal Amount by Expected Maturity—Average Interest Rate
June 30, 2004
(dollars in thousands)

 
  2004
  2005
  2006
  2007
  2008
  Thereafter
  Total
  Fair
value

Long-term debt:                                  
  Fixed interest rate   $           65,584   65,584   74,792
  Interest rate               12.5 % 12.5 %  
  Variable interest rate   $ 5,070   5,187   5,092   4,960   4,748   440,251   465,308   469,014
  Average interest rate     6.09 % 4.26 % 4.20 % 4.14 % 4.09 % 4.09 % 4.12 %  

        We entered into derivative contracts to hedge part of our foreign currency exposure with respect to future cash receipts under our contract with the Ontario Lottery Commission. These instruments, which had been designated as cash flow hedges, were all settled during the three months ended March 31, 2004 and we recorded a credit to other comprehensive income of $1.1 million for the change in the fair value of these foreign exchange instruments prior to settlement.

32



        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, France, Austria and Chile. Our investment 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. Translation gains and losses historically have not been material. 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) utilizing borrowings denominated in foreign currency, and (iii) entering into foreign currency exchange contracts. In addition, a significant portion of the cost attributable to our foreign operations is incurred in the local currencies. We believe that a 10% adverse change in currency exchange rates would not have a significant adverse effect on our net earnings or cash flows. 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.

        Our cash and cash equivalents and investments are in high-quality securities placed with a wide array of financial institutions with high credit ratings. This investment policy limits our exposure to concentration of credit risks.

Forward-Looking Statements

        Throughout this Quarterly Report on Form 10-Q we make "forward-looking statements" within the meaning of the United States Private Securities Litigation Reform Act of 1995. In some cases, forward-looking statements can be identified by the use of forward-looking terminology such as "may," "will," "estimate," "intend," "continue," "believe," "expect" or "anticipate," or the negatives thereof, variations thereon or similar terminology. The forward-looking statements contained in this Quarterly Report on Form 10-Q are generally located in the material set forth under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations" but may be found in other locations as well. These forward-looking statements generally relate to plans and objectives for future operations and are based upon management's reasonable estimates of future results or trends. Although we believe that the plans and objectives reflected in or suggested by such forward-looking statements are reasonable, such plans or objectives may not be achieved.

        Actual results may differ from projected results due, but not limited, to unforeseen developments, including developments relating to the following:

33


        Actual future results may be materially different from what we expect. We will not update forward-looking statements even though our situation may change in the future.

Item 4. Controls and Procedures

        As required by SEC rules, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this quarterly report. This evaluation was carried out under the supervision and with the participation of our management, including our principal executive officer and principal financial officer. Based on this evaluation, these officers have concluded that the design and operation of our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms.

        Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. There were no significant changes to our internal controls over financial reporting during the second quarter of 2004 that have materially affected, or are reasonably likely to affect, our internal control over financial reporting. As with any system of internal controls, there are inherent limitations in the controls we have put in place. Specifically, collusion by two or more employees can override the controls put in place within any organization, and individuals may execute transactions without the proper authority or disclosure.

34



SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
Six Months Ended June 30, 2003

PART II. OTHER INFORMATION

Item 1.    Legal Proceedings

        No significant changes have occurred with respect to legal proceedings as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2003.

Item 2.    Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Disclosure

 
  (a) Total Number of
Shares Purchased(1)

  (b) Average Price
Paid per Share

  (c) Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or
Program

  (d) Maximum Number of Shares
(or Approximate
Dollar Value) of
Shares that May
Yet Be Purchased
Under the Plans or
Program

April, 2004   90,000   $ 21.34     N/A
May, 2004           N/A
June, 2004           N/A

(1)
The Company permits employees to satisfy the exercise price and/or withholding taxes associated with employee stock options by surrendering shares that have been held for at least six months. During the second quarter of 2004, a total of 90,000 shares with a market value of $21.34 per share were surrendered to the Company in connection with an employee stock option exercise.

Item 3.    Defaults Upon Senior Securities

        None.

Item 4.    Submission of Matters to a Vote of Stockholders

        None.

Item 5.    Other Information

        None.

35


Item 6.    Exhibits and Reports on Form 8-K

(a)    Exhibits


10.1

 

First Amendment, dated as of April 30, 2004, to the Amended and Restated Credit Agreement dated as of November 6, 2003, among the Company, the several banks and other financial institutions or entities from time to time parties thereto.

10.2

 

Second Amendment and Consent, dated as of June 30, 2004, to the Amended and Restated Credit Agreement dated as of November 6, 2003, supplemented and as amended by that certain First Amendment, dated as of April 30, 2004, among the Company, the several banks and other financial institutions or entities from time to time parties thereto.

10.3

 

Employment Agreement, dated as of November 1, 2002, between the Company and DeWayne E. Laird (executed on May 17, 2004).

31.1

 

Certification of the Chief Executive Officer of the Company pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.

31.2

 

Certification of the Chief Financial Officer of the Company pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.

32.1

 

Certification of the Chief Executive Officer of the Company pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2

 

Certification of the Chief Financial Officer of the Company pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(b)    Reports on Form 8-K

        None.

36



SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
Three and Six Months Ended June 30, 2004

SIGNATURES

        Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

    SCIENTIFIC GAMES CORPORATION
                   (REGISTRANT)

 

 

By:

/s/  
DEWAYNE E. LAIRD      
    Name: DeWayne E. Laird
    Title: Vice President and Chief Financial Officer
(principal financial and accounting officer)

Dated: August 9, 2004

37


SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
Three and Six Months Ended June 30, 2004

INDEX TO EXHIBITS

(a) Exhibit
      Number

  Description

10.1

 

First Amendment, dated as of April 30, 2004, to the Amended and Restated Credit Agreement dated as of November 6, 2003, among the Company, the several banks and other financial institutions or entities from time to time parties thereto.

10.2

 

Second Amendment and Consent, dated as of June 30, 2004, to the Amended and Restated Credit Agreement dated as of November 6, 2003, supplemented and as amended by that certain First Amendment, dated as of April 30, 2004, among the Company, the several banks and other financial institutions or entities from time to time parties thereto.

10.3

 

Employment Agreement dated as of November 1, 2002, between the Company and DeWayne E. Laird (executed on May 17, 2004).

31.1

 

Certification of the Chief Executive Officer of the Company pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.

31.2

 

Certification of the Chief Financial Officer of the Company pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.

32.1

 

Certification of the Chief Executive Officer of the Company pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2

 

Certification of the Chief Financial Officer of the Company pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

38




QuickLinks

SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND OTHER INFORMATION THREE MONTHS ENDED JUNE 30, 2004
SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME Six Months Ended June 30, 2003 and 2004 (Unaudited, in thousands, except per share amounts)
SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS Six Months Ended June 30, 2003 and 2004 (Unaudited, in thousands)
SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET December 31, 2003 (unaudited, in thousands)
SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET June 30, 2004 (unaudited, in thousands)
SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES SUPPLEMENTAL CONDENSED STATEMENT OF INCOME Three Months Ended June 30, 2003 (unaudited, in thousands)
SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES SUPPLEMENTAL CONDENSED STATEMENT OF INCOME Three Months Ended June 30, 2004 (unaudited, in thousands)
SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES SUPPLEMENTAL CONDENSED STATEMENT OF INCOME Six Months Ended June 30, 2003 (unaudited, in thousands)
SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES SUPPLEMENTAL CONDENSED STATEMENT OF INCOME Six Months Ended June 30, 2004 (unaudited, in thousands)
SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES SUPPLEMENTAL CONDENSED STATEMENT OF CASH FLOWS Six Months Ended June 30, 2003 (unaudited, in thousands)
SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES SUPPLEMENTAL CONDENSED STATEMENT OF CASH FLOWS Six Months Ended June 30, 2004 (unaudited, in thousands)
SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTH PERIODS ENDED JUNE 30, 2004
SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES Six Months Ended June 30, 2003
SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES Three and Six Months Ended June 30, 2004 SIGNATURES