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

FORM 10-K


ý

 

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

For the fiscal year ended: December 31, 2011

Or

o

 

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

For the transition period from                        to

Commission file number: 0-13063

SCIENTIFIC GAMES CORPORATION
(Exact name of registrant as specified in its charter)

Delaware
(State or other jurisdiction of
incorporation or organization)
  81-0422894
(I.R.S. Employer
Identification No.)

750 Lexington Avenue, 25th Floor
New York, New York 10022

(Address of principal executive offices) (Zip Code)

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

         Securities registered pursuant to Section 12(b) of the Act:

Title of each class   Name of each exchange on which registered
Class A Common Stock, $.01 par value   Nasdaq Global Select Market

         Securities registered pursuant to Section 12(g) of the Act: None

         Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ý    No o

         Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o    No ý

         Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý    No o

         Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý    No o

         Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý

         Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer ý   Accelerated filer o   Non-accelerated filer o
(Do not check if
smaller reporting company)
  Smaller reporting company o

         Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o    No ý

         As of June 30, 2011 the market value of voting and non-voting common equity held by non-affiliates of the registrant was approximately $591,270,442(1).

         Common shares outstanding as of February 24, 2012 were 92,539,907.

         DOCUMENTS INCORPORATED BY REFERENCE

         The following document is incorporated herein by reference:

Document   Parts Into Which Incorporated
Proxy Statement for the Company's 2012 Annual Meeting of Stockholders   Part III

(1)
For this purpose only, "non-affiliates" excludes directors and executive officers.

         EXHIBIT INDEX APPEARS ON PAGE 150



PART I
FORWARD-LOOKING STATEMENTS

        Throughout this Annual Report on Form 10-K we make "forward-looking statements" within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements describe future expectations, plans, results or strategies and can often be identified by the use of terminology such as "may," "will," "estimate," "intend," "continue," "believe," "expect," "anticipate," "could," "potential," "opportunity," or similar terminology. The forward-looking statements contained in this Annual Report on Form 10-K are generally located in the material set forth under the headings "Business," "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" but may be found in other locations as well. These statements are based upon management's current expectations, assumptions and estimates and are not guarantees of future results or performance. Actual results may differ materially from those contemplated in these statements due to a variety of risks and uncertainties and other factors, including, among other things: competition; material adverse changes in economic and industry conditions; technological change; retention and renewal of existing contracts and entry into new or revised contracts; availability and adequacy of cash flows to satisfy obligations and indebtedness or future needs; protection of intellectual property; security and integrity of software and systems; laws and government regulation, including those relating to gaming licenses, permits and operations; inability to identify, complete and integrate future acquisitions; inability to benefit from, and risks associated with, strategic equity investments and relationships; failure of Northstar to meet the net income targets or otherwise realize the anticipated benefits under its private management agreement with the Illinois Lottery; seasonality; inability to identify and capitalize on trends and changes in the lottery and gaming industries, including the potential expansion of regulated gaming via the internet; inability to enhance and develop successful gaming concepts; dependence on suppliers and manufacturers; liability for product defects; fluctuations in foreign currency exchange rates and other factors associated with international operations; influence of certain stockholders; dependence on key personnel; failure to perform on contracts; resolution of pending or future litigation; labor matters; and stock price volatility. Additional information regarding risks and uncertainties and other factors that could cause actual results to differ materially from those contemplated in forward-looking statements is included from time to time in our filings with the Securities and Exchange Commission ("SEC"), including under the heading "Risk Factors" in this Annual Report on Form 10-K. Forward-looking statements speak only as of the date they are made and, except for our ongoing obligations under the U.S. federal securities laws, we undertake no obligation to publicly update any forward-looking statements whether as a result of new information, future events or otherwise.

        You should also note that this Annual Report on Form 10-K contains various references to industry market data and certain industry forecasts. The industry market data and industry forecasts were obtained from publicly available information and industry publications. Industry publications generally state that the information contained therein has been obtained from sources believed to be reliable, but that the accuracy and completeness of that information is not guaranteed. Similarly, industry forecasts, while we believe them to be accurate, are not independently verified by us and we do not make any representation as to the accuracy of that information. In general, we believe there is less publicly available information concerning the international lottery industry than the lottery industry in the U.S.

ITEM 1.    BUSINESS

        Unless otherwise specified or the context otherwise indicates, all references to the words "Scientific Games," "we," "us," "our," and the "Company" refer to Scientific Games Corporation and its consolidated entities. "SGI" refers to Scientific Games International, Inc., a wholly owned subsidiary of Scientific Games Corporation. "U.S. jurisdictions" refer to the 50 states in the U.S. plus the District

2


of Columbia and Puerto Rico. "International" refers to non-U.S. jurisdictions. "Online lottery" refers to a computerized system in which lottery terminals in retail outlets are continuously connected to a central computer system for the activation, sale and validation of lottery tickets and related functions. "Wide area gaming" generally refers to a collection of video lottery and/or other gaming terminals in which the terminals are distributed across a large number of venues, with relatively few terminals per venue. "Net win" generally refers to amounts wagered less prize payouts and taxes.

        Scientific Games Corporation was incorporated in the state of Delaware on July 2, 1984. We are a global leader in providing customized, end-to-end gaming solutions to lottery and gaming organizations worldwide. Our integrated products and services include instant lottery games, lottery gaming systems, terminals and related services, and internet applications, as well as server-based interactive gaming machines and associated gaming control systems. We also gain access to technology and pursue global expansion through strategic equity investments.

Industry Overview

Lottery

        Lotteries are operated by domestic and international government authorities and their licensees in approximately 179 jurisdictions throughout the world. Currently, 45 U.S. jurisdictions have online draw lotteries and 44 U.S. jurisdictions have instant ticket lotteries. Governments typically authorize lotteries as a means of generating revenues without imposing additional taxes. Net lottery proceeds are frequently set aside for a particular public purpose, such as education, aid to the elderly, conservation, transportation and economic development. Many jurisdictions have come to rely on the proceeds from lottery ticket sales as a significant source of funding for these programs. Although there are many types of lottery games worldwide, the two principal categories of products offered by government authorized lotteries are instant tickets and draw games.

        An instant ticket lottery is typically played by removing a scratch-off coating from a preprinted ticket to determine whether it is a winner. Draw lottery games, such as Powerball® and Mega Millions®, are based on a random selection of a series of numbers, and prizes are generally based on the number of winners who share the prize pool, although set prizes are also offered. Online draw lotteries are conducted through a computerized system in which lottery terminals in retail outlets are continuously connected to a central computer system. Online lottery systems may also be used to validate instant lottery tickets to confirm that a ticket is a winner and prevent duplicate payments. In some jurisdictions, separate instant ticket validation systems may be installed. Based on industry information, U.S. instant ticket lottery retail sales and U.S. draw lottery retail sales totaled approximately $33 billion and approximately $23 billion, respectively, during the U.S. lottery industry's 2011 fiscal year (which is generally June 30, 2011). Based on industry information, we estimate that worldwide instant ticket lottery retail sales and worldwide draw lottery retail sales totaled approximately $65 billion and approximately $181 billion, respectively, during fiscal year 2010. Recent industry data indicates that instant ticket retail sales in the U.S. have generally been growing faster than draw lottery retail sales, which we believe is due to offering a variety of price-points, increased prize payouts and more frequent game introductions.

        In early 2010, U.S. lotteries began cross-selling the multi-state Powerball and Mega Millions draw lottery games, enabling players in lottery states to play big jackpot games with drawings four days a week. During 2011, U.S. lotteries authorized certain changes to the Powerball multi-state draw lottery game, including an increase in the ticket price to $2, which were effective on January 15, 2012. The increase in the Powerball ticket price potentially provides an impetus for growth in draw lottery retail sales.

        Lotteries may offer a range of other games. In the U.S., some lotteries offer monitor games such as keno, which is typically played every four to five minutes in restricted social settings, such as bars,

3


and is usually offered as an extension of the online lottery system. Domestic and international lotteries may also offer video lottery terminals ("VLTs"), which enable players to wager on games such as poker, blackjack and slot machine-like line games, with the terminals connected to a central monitoring and control system for security and accounting by the lottery. In the U.S., VLTs are typically offered at horse and greyhound racetracks, bars, truck stops, nightclubs and similar establishments. Internationally, lotteries may also offer other forms of gaming such as casino games, bingo and sports wagering.

Wide Area Gaming

        Wide area gaming refers to a collection of gaming machines that are distributed across a large number of venues, with relatively few terminals per venue. This contrasts with casino-type venues, where a large number of gaming machines are housed in a single venue. Wide area gaming may involve commercial gaming operators, such as licensed betting shops in the U.K., or gaming operators affiliated with governments such as lotteries.

        Wide area gaming encompasses a number of categories including server-based gaming machines and other gaming devices that are increasingly converging as networked video gaming machines. Server-based technologies provide for a quick and easy refresh of game content on gaming machines in the field from a central location. We offer operators in the wide area gaming industry an integrated product offering comprised of server-based gaming machines, systems and content.

Operational Overview

        We report our operations in three business segments: Printed Products; Lottery Systems; and Gaming. Certain financial information relating to our segments, including segment revenue, operating income (loss) and total assets for the last three fiscal years, is included in Note 15 to our Consolidated Financial Statements (Business Segments), which information is incorporated herein by reference. Note 15 also includes information regarding our revenue attributed to, and our long-lived assets held in, the U.S. and the other geographic areas in which we operate or hold assets. Risks related to our international operations are described under the heading "Risk Factors" in this Annual Report on Form 10-K.

4


        The following table summarizes the primary business activities and investments included in each segment.

Segment
  Primary Business Activities   Strategic Equity Investments



Printed Products



 



Design, printing and sale of instant lottery tickets to lottery operators

Provision of instant ticket-related value-added services to lottery operators

Provision of licensed properties, player loyalty programs, second chance drawings and internet-based products primarily to lottery operators

Printing and sale of phone cards



 



Lotterie Nazionali S.r.l. ("LNS")—20% equity interest in the operator of the Gratta e Vinci instant ticket lottery in Italy

Northstar Lottery Group ("Northstar")—20% equity interest in the private manager of the Illinois Lottery

CSG Lottery Technology (Beijing) Co., Ltd. ("CSG")—49% equity interest in the instant ticket supplier to the China Sports Lottery

Lottery Systems

 

Provision of lottery systems, including equipment, software, data communication services and support to lottery operators

 

Guard Libang—50% equity interest in a provider of lottery systems and services for the China Welfare Lottery

 

Provision of instant ticket validation systems to lottery operators

   

 

Provision of central monitoring and control systems to lottery operators and gaming regulators

   

 

Provision of software, hardware and support for sports wagering systems and keno to lottery operators

   

Gaming

 

Provision of server-based gaming machines, systems and content to commercial gaming operators such as betting shops, bingo halls, arcades and pubs

 

Roberts Communication Network ("RCN")—29.4% equity interest in provider of communications services to racing and non-racing customers

 

Provision of interactive gaming products and content primarily to gaming operators

 

Sportech Plc ("Sportech")—20% equity interest in operator and supplier of football pools and tote systems

Printed Products

        Our Printed Products segment is primarily comprised of our global instant ticket lottery business. We generate revenue from the manufacturing and sale of instant tickets, as well as the provision of value-added services such as game design, sales and marketing support, specialty games and promotions, inventory management and warehousing and fulfillment services. We also provide lotteries with cooperative service programs, or CSPs, to help them efficiently and effectively manage and

5


support their operations to achieve higher retail sales and lower operating costs. Moreover, we provide licensed games, promotional entertainment and internet-based services to the lottery industry.

        In 1974, we introduced the first secure instant lottery game ticket. We believe we are the leading designer, manufacturer and distributor of instant lottery tickets in the world. We market instant lottery tickets and related services to domestic and international lotteries and commercial (non-lottery) customers. We supply instant lottery tickets to 41 of the 44 U.S. jurisdictions that sell instant lottery tickets. In addition, we have sold instant lottery tickets to customers in approximately 50 countries. Our U.S. instant ticket contracts typically have an initial term of three to five years and frequently include multiple renewal options for additional periods ranging from one to five years, which our customers have generally exercised in the past. We typically sell our instant lottery tickets for a price per thousand units ("PPK") or for a fee equal to a percentage of the retail sales of the instant lottery tickets sold ("POS"). Some international customers purchase instant lottery tickets as needed rather than through multi-game supply contracts.

        We pioneered the concept of providing lotteries with customized CSPs in which we help manage a lottery's instant ticket program as a means to increase profits of the lottery. Our CSP contracts bundle the design and manufacturing of instant lottery tickets, instant game management systems, marketing services, which can include the design and installation of game management software, inventory and distribution, sales, accounting, training and advisory services, marketing and research, and retailer training and recruitment. Under our CSP contracts, we are typically paid on a POS basis.

        We operate six instant ticket printing facilities across five continents (including the facility owned by CSG) with an aggregate capacity to print approximately 45 billion 2" × 4" equivalent standard instant lottery tickets annually. The instant lottery tickets we manufacture are typically printed on recyclable ticket stock by a series of computer-controlled presses and ink-jet imagers, which we believe incorporate the most advanced technology and security in the industry. Instant lottery tickets generally range in size from 2" × 3" to as large as 8" × 12". Instant lottery tickets are normally played by removing a scratch-off coating to determine if they are winning tickets.

        Technology and security requirements necessary to manufacture and service instant lottery tickets continue to separate our business from conventional forms of printing. We believe we are generally recognized within the lottery industry as the leader in applying computer-based technologies to the manufacturing and sale of instant lottery tickets. In order to maintain our position as a leading innovator within the lottery industry, we intend to continue to explore and develop new technologies and their applications to instant lottery tickets and systems.

        We provide lotteries with access to some of the world's most popular entertainment brands on lottery products through our subsidiary MDI Entertainment LLC ("MDI"), which we believe helps increase their instant ticket sales. Our licensed entertainment brands include Harley-Davidson®, Major League Baseball®, Monopoly™, National Basketball Association®, The Price is Right®, Wheel-of-Fortune® and World Poker Tour®. We also provide branded merchandise prizes, advertising, promotional support, turnkey drawing management services and prize fulfillment programs. In addition, we offer lotteries a web-based platform called Properties Plus®, which features players clubs, reward programs, second chance promotional websites, interactive games and, subject to applicable law, a subscription system that enables players to purchase lottery games securely over the internet.

        LNS.    We are a 20% equity owner in LNS, an entity comprised principally of us, Lottomatica Group S.p.A. ("Lottomatica") and Arianna 2001, a company owned by the Federation of Italian Tobacconists, that was awarded the concession from the Italian Monopoli di Stato to be the exclusive operator of the Italian Gratta e Vinci instant ticket lottery beginning on October 1, 2010. The concession has an initial term of nine years (subject to a performance evaluation during the fifth year) and could be extended by the Monopoli di Stato for an additional nine years. We are the primary

6


supplier of instant lottery tickets for LNS, under which we expect to provide no less than 80% of total instant tickets through our PPK supply contract with LNS.

        Northstar.    We are a 20% equity owner in Northstar, an entity formed with GTECH Corporation, a subsidiary of Lottomatica, to bid for the agreement to be the private manager for the Illinois Lottery for a ten-year term. Northstar was selected as the private manager following a competitive procurement and entered into a private management agreement with the State of Illinois on January 18, 2011 (the "PMA"). Operations under the PMA commenced on July 1, 2011. As the private manager, Northstar, subject to the oversight of the Illinois Lottery, manages the day-to-day operations of the lottery including lottery game development and portfolio management, retailer recruitment and training, supply of goods and services and overall marketing strategy. Under our CSP contract with Northstar, we are the exclusive supplier of instant lottery tickets and are responsible for the instant ticket design, development, manufacturing, warehousing and distribution.

        CSG.    We are a 49% equity owner in CSG, which holds a 15-year contract to supply instant lottery tickets to the China Sports Lottery. In connection with the contract, CSG established an instant ticket manufacturing facility that began producing instant lottery tickets at the end of 2008. The facility has capacity to print eight billion 2" by 4" standard instant ticket units annually. We also receive a royalty fee from CSG for intellectual property rights deemed necessary to promote lottery ticket sales equal to 1% of the total gross profits distributed by CSG.

Lottery Systems

        We are a leading provider of customized computer software, software support, equipment and data communication services to lotteries. In the U.S., we typically provide the necessary equipment, software and maintenance services pursuant to long-term contracts that typically have an initial term of at least five years under which we are generally paid a fee equal to a percentage of the lottery's total retail sales. Our U.S. contracts typically contain multiple renewal options that generally have been exercised by our customers in the past. Internationally, we typically sell point-of-sale terminals and/or computer software to lottery authorities and may provide ongoing fee-based systems and software support services.

        Our lottery systems use proprietary technology that facilitates high-speed processing of wagers as well as validation of winning draw and instant tickets. Our lottery systems business includes the supply of transaction-processing software, draw lottery games, keno, point-of-sale terminals, central site computers and communication platforms as well as ongoing operational support and maintenance services. We have contracts to operate online lottery systems for 11 of the 45 U.S. jurisdictions that operate draw lotteries. We believe we are the second largest online lottery provider in the U.S. and a leading provider in Europe. Internationally, we have lottery systems operating in Argentina, Australia, Canada, China, France, Germany, Hungary, Iceland, Israel, Latvia, Mexico, Norway, the Philippines, Spain, Sweden and Switzerland. We are the exclusive instant ticket validation network provider to the China Sports Lottery.

        In addition, we provide video lottery central monitoring and control systems and networks primarily to lotteries and gaming regulators. We currently have central monitoring and control systems contracts in Australia, Canada, Delaware, Iceland, Illinois, Maine, New Mexico South Dakota and West Virginia. We also provide software, hardware and support for sports wagering systems.

        Guard Libang.    We have a 50% equity ownership interest in Guard Libang, a provider of instant ticket activation and validation and inventory management systems and services to a majority of the China Welfare Lottery provincial jurisdictions.

7


Gaming

        We are a leading provider of server-based gaming machines and systems and other products and services to operators in the wide area gaming industry. Our Gaming segment includes The Global Draw Limited ("Global Draw"), a leading supplier of server-based gaming machines and systems and game content primarily to bookmakers that operate licensed betting offices ("LBOs") in the U.K. and, increasingly, to gaming operators outside the U.K. The Gaming segment also includes Barcrest Group Limited ("Barcrest") and Games Media Limited ("Games Media"), leading suppliers of gaming machines, systems and game content to pubs, bingo halls and arcades in the U.K. and continental Europe. We provide many of our Gaming customers with a turnkey offering, which typically includes gaming machines, remote management of game content and management information, central computer systems, secure data communication and field support services. We develop our own game content and supplement our offering with content from third parties.

        Our U.K. LBO contracts generally have initial terms of two to four years under which we are typically paid a fee equal to a percentage of net win. We had an installed base of approximately 23,100 LBO gaming machines in the U.K. as of December 31, 2011, which included approximately 8,000 LBO gaming machines rolled out in 2011 for Ladbrokes Betting and Gaming Ltd. ("Ladbrokes") under a contract awarded to Global Draw in 2010. In 2011, Global Draw completed the migration of its server-based gaming machines in the U.K. to a new back-end technology platform. Global Draw began migrating its server-based gaming machines outside the U.K. to this technology during the third quarter of 2011.

        On September 23, 2011, we completed the acquisition of Barcrest, a leading supplier of gaming content, platforms and systems to gaming operators in the U.K. and continental Europe, including pubs, LBOs, bingo halls and arcades. The acquisition provides us with an expansive library of gaming titles and properties, as well as an existing base of business in interactive gaming in which Barcrest game content is made available through internet, mobile and other digital delivery channels.

        In January 2012, following a comprehensive strategic review, we announced our exit of the Barcrest analog amusement with prize ("AWP") machine business in order to focus our game design and other resources solely on a digital server-based model in light of prevailing conditions in the pub sector and the contracting business for analog AWP products. This strategic review also resulted in a decision to reorganize the Games Media digital supply business to more effectively capitalize on the Barcrest acquisition. Games Media's content and terminals are offered as part of a turnkey digital gaming product offering to pubs. As of December 31, 2011, we had an installed base of approximately 6,100 gaming machines in our U.K. pub, bingo hall and arcade business.

        We continue to seek to expand our server-based gaming machine business outside the U.K., with current deployments in the Caribbean, Czech Republic, Italy, Mexico, Lithuania, Puerto Rico, and Poland. As of December 31, 2011, the Company had an installed base of approximately 6,500 gaming machines outside of the U.K.

        Sciplay.    As of December 31, 2011, we owned a 50% interest in Sciplay, a joint venture with Playtech Services (Cyprus) Limited ("Playtech"), a subsidiary of Playtech Limited to deliver internet gaming solutions to government-sponsored and government-regulated lotteries and certain other gaming operators. Sciplay was formed to capitalize on the combination of Playtech's internet gaming software and content and our experience and relationships with lotteries and other gaming operators. On January 23, 2012, we entered into an agreement with Playtech that restructured this strategic relationship from a joint venture arrangement to a license arrangement. Under the agreement, Playtech will license its internet gaming software to us on a mutually non-exclusive basis for use by certain categories of our current and prospective customers, including U.S. casinos and lotteries worldwide. The Sciplay-related entities are now wholly owned subsidiaries of Scientific Games.

8


        Roberts Communication Network.    We have a 29.4% equity interest in RCN, which provides communications services to racing and non-racing customers.

        Sportech.    We own approximately 20% of the outstanding shares of Sportech. Sportech operates football pools and associated games through various distribution channels including direct mail and telephone, agent-based collection and via the internet. Sportech also provides wagering technology solutions to racetracks and off-track wagering networks and also operates a portfolio of online casino, poker, bingo and fixed-odds games.

Company Strategy

        Our goal is to be a global leader in providing customized technology and games in the regulated lottery and gaming industries. We seek to maximize our return on invested capital by capitalizing on our competitive strengths. The primary elements of our strategy are set forth below.

9


10


Contract Procurement

Lottery

        Government authorized lotteries in the U.S. typically operate under state-mandated public procurement regulations. See "Government Regulation." Lotteries select an instant ticket or online supplier by issuing a request for proposals ("RFP"), which outlines the products and services to be delivered and related contractual obligations. An evaluation committee frequently comprised of key lottery staff evaluates responses based on various criteria. These criteria usually include quality of product and/or technical solutions, security plan and features, experience in the industry, quality of personnel and services to be delivered, and price. We believe that our product functionality and game content, the quality of our personnel, our technical expertise and our demonstrated ability to help the lotteries increase their revenues may give us an advantage relative to the competition when responding to lottery RFPs in the U.S. However, many lotteries still award the contract to the qualified vendor offering the lowest price, regardless of other factors. Contract awards by lottery authorities are sometimes challenged by unsuccessful competitors, which can result in protracted legal proceedings. Internationally, lottery authorities do not always utilize such a formal bidding process, but rather negotiate with one or more potential vendors.

        The table below lists our lottery and video-related contracts in the U.S. and certain related information. We are the exclusive provider of systems in all lottery and video systems contracts and the primary supplier of instant lottery tickets unless otherwise noted. The commencement date of the contract is the date we began generating revenues under such contract, which for our lottery and video systems contracts is typically the start-up date. The table also includes instant ticket or draw game retail sales, as applicable, for each jurisdiction.

11


State/District
  Fiscal 2011 *
State Instant Ticket
or Lottery Systems
Retail Sales
(in millions)
  Type of
Contract **
  Commencement
Date of
Current Contract
  Expiration Date of
Current Contract
(before any exercise
of remaining
renewal options)
  Current Renewal
Options
Remaining

Arizona

  $ 374.5   ITRS-PPK   January 2010   January 2015   5 one-year

Arkansas

    390.1   ITRS-CSP   August 2009   August 2016   3 one-year

Arkansas

    390.1   Properties Plus   August 2009   August 2016   3 one-year

California

    2,002.1   ITRS-POS   July 2005   June 2013   None

Colorado (1)

    344.9   ITRS-PPK   February 2011   June 2014   3 one-year

Colorado

    174.0   Lottery Systems   April 2005   October 2014   None

Connecticut

    610.6   ITRS-PPK   August 2007   August 2012   None

Connecticut

    405.9   Lottery Systems   May 2008   May 2013   5 one-year

Delaware

    40.9   ITRS-CSP   January 2012   January 2015   3 one-year

Delaware

    83.2   Lottery Systems   February 2003   February 2015   None

Delaware

    499.5   Video   February 2003   February 2015   None

District of Columbia

    56.5   ITRS-CSP   August 2005   August 2012   None

Florida

    2,225.7   ITRS-CSP   October 2008   September 2014   2 two-year

Georgia

    2,423.8   ITRS-CSP   September 2003   September 2018   None

Idaho

    97.1   ITRS-POS   August 2007   August 2012   1 three-year

Illinois (1)

    1,279.6   ITRS-CSP   January 2011   January 2021   None

Illinois (1)

    N/A   Video   December 2011   December 2017   4 one-year

Indiana

    519.3   ITRS-POS   January 2003   December 2012   None

Indiana

    272.2   Lottery Systems   August 2010   August 2016   4 one-year

Iowa

    183.6   ITRS-PPK   January 2008   December 2012   None

Iowa (1)

    183.6   Properties Plus   February 2011   June 2012   None

Iowa (1)

    87.8   Lottery Systems   July 2011   June 2018   3 one-year

Kansas (2)

    137.4   ITRS-PPK   August 2008   September 2013   3 one-year

Kentucky (1)

    479.4   ITRS-POS   June 2011   June 2018   8 one-year

Louisiana

    148.1   ITRS-POS   December 2010   October 2020   None

Maine (3)

    156.9   ITRS-CSP   July 2001   June 2012   None

Maine (3)

    59.5   Lottery Systems   July 2001   June 2012   None

Maine

    N/A   Video   July 2008   June 2018   None

Maryland (2)

    493.5   ITRS-PPK   July 2006   June 2013   None

Maryland

    1,220.8   Lottery Systems   October 2005   June 2016   None

Massachusetts

    2,998.4   ITRS-PPK   July 2009   June 2012   2 one-year

Minnesota (2)

    354.8   ITRS-PPK   June 2010   May 2014   2 one-year

Missouri (1)

    666.8   ITRS-POS   July 2011   June 2014   7 one-year

Missouri (1)

    666.8   Properties Plus   October 2011   June 2014   None

Montana

    15.0   ITRS-PPK   August 2008   August 2013   2 one-year

New Hampshire (4)

    160.8   ITRS-PPK   July 2006   June 2012   None

New Jersey (2)

    1,364.6   ITRS-PPK   November 2001   June 2012   None

New Mexico (2)

    75.8   ITRS-PPK   March 2010   March 2014   4 one-year

New Mexico

    N/A   Video   December 2005   December 2013   None

New York (1)

    3,546.4   ITRS-PPK   August 2011   August 2018   None

North Carolina (5)

    862.1   ITRS-POS   March 2006   March 2017   None

North Dakota

    23.0   Lottery Systems   February 2004   March 2014   None

Ohio

    1,460.3   ITRS-PPK   June 2007   June 2013   1 two-year

Oklahoma

    103.0   ITRS-CSP   August 2005   August 2012   1 one-year

Oklahoma

    95.2   Lottery Systems   August 2005   August 2012   1 one-year

Oregon

    115.9   ITRS-PPK   July 2010   June 2013   4 one-year

Pennsylvania

    1,922.1   ITRS-CSP   August 2007   August 2015   2 one-year

Pennsylvania

    1,285.8   Lottery Systems   January 2009   December 2014   4 one-year

Puerto Rico

    372.2   Lottery Systems   March 2005   June 2012   2 two-year

Puerto Rico

    59.4   ITRS-CSP   July 2009   June 2012   2 two-year

Rhode Island

    77.3   ITRS-PPK   July 2007   June 2012   1 one-year

South Carolina

    698.3   ITRS-CSP   October 2006   September 2013   None

South Dakota

    22.1   ITRS-PPK   August 2010   August 2016   None

South Dakota

    583.4   Video   December 2009   December 2019   5 one-year

Tennessee

    948.7   ITRS-CSP   January 2004   April 2015   None

Tennessee (1)

    948.7   Properties Plus   September 2011   April 2015   None

Texas (4)

    2,826.6   ITRS-PPK   September 2004   August 2012   None

Vermont

    71.3   ITRS-PPK   January 2010   January 2013   1 one-year

Virginia

    756.8   ITRS-CSP   June 2004   June 2014   None

Washington

    309.0   ITRS-POS   March 2006   March 2014   None

West Virginia

    1,128.6   Video   February 2006   January 2013   3 one-year

Wisconsin

    302.4   ITRS-PPK   November 2009   October 2012   2 one-year

(1)
The contracts that commenced in 2011 or 2012 include the PPK contracts in Colorado and New York, the POS contracts in Missouri and Kentucky, the CSP and video systems contracts in Illinois, the lottery systems contract in Iowa and the Properties Plus contracts in Tennessee, Iowa and Missouri.

12


(2)
Secondary instant ticket supplier.

(3)
During 2010, the lottery authority in Maine awarded a new lottery systems contract to one of our competitors, which award was subsequently invalidated as a result of our protest. The competitor's appeal of the protest ruling was denied on October 21, 2011. Our contract with Maine was extended for one year until June 30, 2012 pending further action by the Maine lottery authority.

(4)
An RFP has been issued by the lottery and is pending as of the date hereof.

(5)
Subcontract through GTECH, a subsidiary of Lottomatica.

*
U.S. lottery industry's 2011 fiscal year generally ended June 30, 2011.

**
"ITRS" refers to a contract for the supply of instant tickets (and related services). "Lottery Systems" refers to a lottery system (and related services) contract. "PPK" refers to an ITRS contract under which we are paid for instant tickets on a price-per-thousand-units basis. "POS" refers to an ITRS contract under which we are paid based on a percentage of retail sales. "CSP" refers to an ITRS contract that includes CSP services under which we are paid on a POS basis. "Properties Plus" refers to a contract under which we provide our Properties Plus platform and are paid on a POS basis. "Video" refers to a video lottery central monitoring and control systems contract.

International Jurisdictions—Printed Products

        Certain of our more significant international instant ticket contracts and related information are included in the table below.

Lottery/Operator
  Type of
Contract
  Commencement
Date of
Current Contract
  Expiration Date of
Current Contract
(before any exercise
of remaining
renewal options)
  Current Renewal
Options
Remaining

Atlantic Lottery Corp (Canada) (1)

  ITRS-PPK   August 2005   July 2012   None

Loto-Québec (Canada)

  ITRS-PPK   February 2007   January 2014   None

Loto-Québec (Canada) (2)

  ITRS-PPK   February 2010   February 2015   2 one-year

La Francaise des Jeux (France) (3)

  ITRS-PPK   January 2008   December 2012   1 one-year

LNS (Italy) (4)

  ITRS-PPK   July 2010   June 2019   1 one-year

De Lotto (Netherlands)

  ITRS-CSP   December 2010   March 2015   1 four-year/4 one-year

Camelot Group plc (U.K.) (5)

  ITRS-POS   February 2009   January 2019   None

(1)
RFP has been issued by the lottery and is pending as of the date hereof.

(2)
Contract for the supply of a special type of tickets.

(3)
Non-exclusive contract under which the lottery selects the instant ticket printer on a game-by-game basis.

(4)
LNS, in which we have a 20% equity interest, is the lottery operator of the Gratta e Vinci instant ticket lottery in Italy.

(5)
Camelot Group plc is the lottery operator of the U.K. National Lottery.

International jurisdictions—Lottery Systems

        Internationally, we typically sell point-of-sale terminals, host hardware and/or computer software to lottery authorities and provide ongoing fee-based systems and software support services under long-term contracts. Our international lottery service contracts typically include automatic renewal provisions and/or do not have specified expiration dates. These service contracts can generally be terminated at any time upon notification by either the customer or us subject to the applicable notice periods. We hold lottery system service contracts with customers in Argentina, Australia, Canada, China, France, Germany, Hungary, Iceland, Israel, Italy, Latvia, Mexico, Norway, the Philippines, Spain, Sweden and Switzerland. Our exclusive instant ticket validation contract with the China Sports Lottery ("CSL") is scheduled to expire in January 2016.

13


Gaming

        Our U.K. gaming machine contracts typically have a four-year term. U.K. pub contracts are generally one to three years in length and machines supplied are based on product performance and pub company approvals.?

        In the U.K., four large bookmakers operate approximately 80% of the LBOs. For the year ended December 31, 2011, our contracts with these bookmakers represented approximately 63% of our total Gaming service revenue. William Hill PLC, one of these four large bookmakers, recently awarded a contract to one of our principal competitors (currently the supplier for a majority of gaming machines for William Hill) for the sole supply of gaming machines to William Hill's LBOs following the expiration of our gaming machine supply contract with William Hill in March 2012.

        Our gaming machine contracts with the large bookmakers (excluding the expiring contract with William Hill) and certain related information are set forth in the table below.

Customer
  Commencement Date
of Current Contract
  Expiration Date of Current Contract
(before any exercise of remaining renewal options)
 

Ladbrokes plc

    8/5/2010     3/31/2015  

Gala Coral Group Ltd. 

    1/1/2010     12/31/2013  

Tote (Retail division of Betfred)

    12/21/2009     12/31/2013  

        Outside the U.K., our gaming machine contracts typically have a term of four or five years.

Research and Product Development

        We believe our ability to attract new lottery and wide area gaming customers and retain existing customers depends in part on our ability to continue to incorporate technological advances into, and to improve, our products, systems and related equipment. Our development efforts are focused on new systems and products, as well as the improvement and refinement of our existing products including the expansion of their uses and applications. We are also focused on expanding utilization of the internet and other interactive technologies to grow lottery playership and pursue regulated gaming opportunities. Many of our product developments and innovations have quickly become industry standards, including games for Printed Products and multiplier games for Lottery Systems.

Intellectual Property

        We have a number of U.S. and international patents that we consider, in the aggregate, to be of material importance to our business. Terms of patents vary based on the date of patent filing or grant and the law of the various countries where patent protection is obtained. In the U.S., the term of a patent generally expires 20 years from the date of filing. The actual protection afforded by a patent, which can vary from country to country, depends upon the type of patent, the scope of its coverage and the availability of legal remedies in the applicable country.

        Certain technology material to our lottery processes and systems is the subject of patents issued and patent applications currently pending in the U.S. and certain other countries. In our lottery business, we utilize our patented and patent-pending technology for the production, secure printing, validation and distribution of instant lottery tickets. In addition, MDI, Global Draw, Games Media and Barcrest patent and license game content as part of their businesses. Our patents have various expiration dates through 2031. We also have a number of U.S. and international registered trademarks and other common law trademark rights for certain of our products and services, including BOODLE®, FailSafe®, Properties Plus®, Points for Prizes®, Winner's Choice™, PlayCentral®, SciScan Technology™, Aegis®, Wave™, EXTREMA® and SGI-NET™. Trademark protection continues in some countries, including the U.S., for as long as the mark is used and in other countries for as long as it is registered. Registrations generally are for fixed, but renewable, terms.

14


        From time to time we become aware of potential infringement of our intellectual property by competitors and other third parties and consider what action, if any, to take in that regard, including litigation where appropriate. Historically, others have threatened or brought litigation against us.

Production Processes, Sources and Availability of Components

        Our dedicated computer-controlled printing process is specifically designed to produce secure instant lottery game tickets for government-sanctioned lotteries. Our facilities are designed for the efficient and secure production of instant lottery tickets and support high-speed variable image printing, packaging and storage of instant game tickets. Instant ticket games are delivered finished and ready for distribution by the lottery authority (or by us in the jurisdictions where we have CSP contracts). Paper and ink are the principal raw materials consumed in our ticket manufacturing operations.

        Production of our lottery terminals and gaming machines (and related component products) primarily involves the assembly of electronic components into more complex systems and products. Third-party vendors manufacture and assemble for us most of our lottery terminals and gaming machines.

        We normally have sufficient lead time between reaching an agreement and the commencement of operations so that we are able to provide the customer with a fully functioning system that is customized to meet its requirements. In the event that current suppliers of central processing units were no longer available, we believe we would be able to adapt our application software to run on the then-available hardware in time to meet new contractual obligations, although the price competitiveness of our products might change. The lead time for obtaining most of the electronic components that we use is approximately 90 days. We believe that this is consistent with our competitors' lead times and is also consistent with the needs of our customers.

Competition

Printed Products

        The instant lottery ticket business is highly competitive and we operate in a period of intense price-based competition. Our principal instant lottery ticket competitors in the U.S. are Pollard Banknote Limited ("Pollard") and GTECH. Except as permitted by the applicable provisions of the North American Free Trade Agreement with respect to Canada, it is currently illegal to import lottery tickets into the U.S. from a foreign country. Our business could be adversely affected should additional international competitors in Canada export lottery products to the U.S. or should other international competitors establish printing facilities in the U.S. or Canada to supply the U.S. Internationally, a number of lottery instant ticket vendors compete with us including the competitors noted above as well as diversified printers in India, China and Latin America. Our principal competitors in our provision of licensed games, promotional entertainment and loyalty or rewards programs to the lottery industry include BI Worldwide Ltd., Alchemy3, LLC, ePrize, LLC, GTECH, Pollard and Intralot Technologies, Inc., a subsidiary of Intralot, S.A. ("Intralot").

Lottery Systems

        The lottery and video systems businesses are highly competitive and continue to be subject to intense price-based competition.

        Our principal competitors in these businesses are GTECH and Intralot. GTECH and Intralot are also our major competitors in the international lottery systems business, along with International Lottery and Totalizator Systems, Inc. and others. We also compete with various suppliers of lottery system components, such as terminals and computer systems, and lottery operators themselves that chose to internally develop their systems.

15


        As countries liberalize gaming, lotteries may expand their scope by offering sports wagering, gaming machines, internet gaming or other forms of gaming, which may introduce new suppliers to lotteries resulting in new forms of competition to us. In some jurisdictions, liberalization includes privatization or the outsourcing of lottery operations to bidders. We believe companies such as Camelot Group, Plc, the Tattersalls Group, Lottomatica and Intralot to be among those who may bid on such opportunities.

Gaming

        Our wide area gaming business competes with a variety of suppliers in the U.K. and internationally. Our principal direct competitor in the U.K. LBO business is Inspired Gaming Group Limited ("Inspired"). In the U.K. AWP and skill with prize ("SWP") machine business, we compete directly with other suppliers of gaming machines and gaming operators, including the Bell-Fruit and Gamestec divisions of Danoptra Ltd, Sceptre Leisure plc and Games Warehouse Limited, a division of Merit Industries, Inc. In other wide area gaming jurisdictions, we compete with video lottery and other gaming terminal and systems suppliers. Our competitors in these industries include International Game Technology ("IGT"), Lottomatica, Bally Technologies, Inc., Inspired, Aristocrat Leisure Ltd, Novomatic AG, Multimedia Games, Inc., WMS Industries Inc. and Konami Digital Entertainment, Inc. Our primary competitors in the provision of game content include Amaya Gaming Group, Inc., Cryptologic Ltd., IGT, Microgaming Software Systems Ltd., Net Entertainment NE AB, NYX Gaming Group, OpenBet Technology Ltd. and Playtech Limited.

Employees

        As of December 31, 2011, we employed approximately 3,500 persons. Most of our employees are not represented by labor unions. However, unions represent some employees at our printing facilities in Australia, Canada, Chile and the U.K.

Government Regulation

General

        Lotteries and other forms of gaming are generally subject to extensive and evolving regulation that customarily includes some form of licensing or regulatory screening of operators and suppliers and their applicable subsidiaries, as well as their officers and directors. Regulators in those jurisdictions review many facets of an applicant or holder of a license, including its financial stability, integrity and business experience. Any failure to receive a material license or the loss of a material license that we currently hold could have a material adverse effect on us or on our operations or financial condition.

        While we believe that we are in substantial compliance with all material gaming laws and regulatory requirements applicable to us, there can be no assurance that our activities or the activities of our customers will not become the subject of any regulatory or law enforcement proceeding or that any such proceeding would not have a material adverse impact on us or our operations or financial condition.

        We have developed and implemented a rigorous internal compliance program in an effort to ensure that we comply with legal requirements imposed in connection with our gaming-related activities, as well as legal requirements generally applicable to all publicly traded companies. The compliance program is run on a day-to-day basis by our Chief Compliance Officer with legal advice provided by our legal department and outside experts. The compliance program is overseen by the Compliance Committee of our Board of Directors, comprised entirely of outside directors. While we are firmly committed to full compliance with all applicable laws, there can be no assurance that such steps will prevent the violation of one or more laws or regulations, or that a violation by us or an

16


employee will not result in the imposition of a monetary fine or suspension or revocation of one or more of our licenses.

        In the United States, the Unlawful Internet Gambling Enforcement Act of 2006 ("UIGEA") among other things, prohibits the transmission of any wager, at least in part, by means of the Internet where such wager is prohibited by any applicable law where initiated, received or otherwise made. It imposes potentially severe criminal and civil sanctions on the owners and operators of such systems and on financial institutions that process wagering transactions. The law contains a safe harbor for wagers placed within a single state (disregarding intermediate routing of the transmission) where the method of placing the bet and receiving the bet is authorized by that state's law, provided the underlying regulations establish appropriate age and location verification. The Wire Act generally prohibits anyone engaged in the business of betting or wagering from knowingly using a wire communication facility for the transmission in interstate or foreign commerce of wagers or information assisting in the placing of wagers on any "sporting event or contest." Until recently, there was uncertainty, in light of prior interpretations and pronouncements of representatives of the DOJ, as to whether the Wire Act may prohibit states from conducting in-state lottery transactions via the internet if the transmissions over the internet during the transaction cross state lines, notwithstanding that UIGEA appears to permit out-of-state routing of data associated with in-state lottery transactions authorized by that state's law. In late 2011, the Office of Legal Counsel of the DOJ issued an opinion to the effect that state lottery ticket sales over the internet to in-state adults do not violate the Wire Act since lotteries do not involve "sporting event[s] or contest[s]" within the meaning of the Wire Act.

        In the European Union, various judgments by the Court of Justice of the European Union have addressed the ability of member states to grant, or to maintain, monopolies for lottery and other gaming providers in the situations addressed by those judgments. Certain of these judgments have also addressed the power of a member state to limit access by lottery and/or gaming providers established elsewhere in the European Union.

        To varying degrees, a number of the governments in Europe have taken steps to change the regulation of internet wagering through the implementation of new or revised licensing and taxation regimes, including the possible imposition of sanctions on unlicensed providers.

        While we believe that we have developed the proper procedures and policies to comply with the requirements of these evolving laws and legal pronouncements, there can be no assurance that our activities or the activities of our customers will not become the subject of law enforcement proceedings or that any such proceedings would not have a material adverse impact on us or our business plans.

        From time to time we retain government affairs representatives in various U.S. and international jurisdictions to advise elected and appointed officials and the public concerning our views on lottery-and gaming-related legislation, to monitor such legislation and to advise us in our relations with lottery authorities.

Lottery Operations

        Currently, 45 U.S. jurisdictions, all the Canadian provinces, Mexico, China and many other countries outside the U.S., including countries in Europe, authorize lotteries. The operations of lotteries in the U.S. and internationally are subject to extensive regulation. Although certain features of a lottery, such as the percentage of gross revenues that must be paid back to players in prize money, are usually set by legislation, the various lottery regulatory authorities generally exercise significant discretion, including with respect to the determination of the types of games played, the price of each wager, the manner in which the lottery is marketed and the selection of suppliers of equipment, technology and services and retailers of lottery products. Furthermore, laws and regulations applicable to lotteries in U.S. and international jurisdictions are subject to change, and the effect of such changes on our ongoing and potential operations cannot be predicted with certainty.

17


        To ensure the integrity of the contract award and lottery operations, most jurisdictions require detailed background disclosure on a continuous basis from, and conduct background investigations of, the supplier and its officers, directors, subsidiaries, affiliates and principal stockholders. Background investigations of the supplier's employees who will be directly responsible for the operation of the system are also generally conducted, and most states reserve the right to require the removal of employees who they deem to be unsuitable or whose presence they believe may adversely affect the operational security or integrity of the lottery. Certain jurisdictions also require extensive personal and financial disclosure and background checks from persons and entities beneficially owning a specified percentage (typically five percent or more) of a supplier's securities. The failure of such beneficial owners of our securities to submit to background checks and provide such disclosure could result in the imposition of penalties upon these beneficial owners and could jeopardize the award of a lottery contract to us or provide grounds for termination of an existing lottery contract.

        The award of lottery contracts and ongoing operations of lotteries in international jurisdictions are also extensively regulated, although this regulation usually varies from that prevailing in the U.S. Restrictions are frequently imposed on international corporations seeking to do business in such jurisdictions and, as a consequence, we have in a number of instances allied ourselves with local companies when seeking international lottery contracts.

Wide Area Gaming

        The existing and emerging wide area gaming industry is governed by gaming regulations. Coin or voucher operated gambling devices offering electronic, video versions of spinning reels, poker, blackjack and similar games include VLTs, server-based gaming machines, AWPs and SWPs.

        Companies that manufacture, sell or distribute VLTs or other gaming machines or provide the central computer systems that monitor these devices are subject to various provincial, state, county and municipal laws and regulations. The primary purposes of these rules are to (1) ensure the responsibility, financial stability and character of companies involved and their officers and directors and stockholders through licensing requirements, (2) ensure the integrity and randomness of the machines and (3) prohibit the use of machines at unauthorized locations or for the benefit of undesirable individuals or entities.

        Sixteen U.S. states authorize wagering on VLTs at state regulated and licensed facilities. Although some states currently restrict VLTs to already existing wagering facilities (e.g., racetracks), others permit these devices to be placed at venues such as bars, restaurants, truck stops and other specifically licensed gaming facilities. In addition, all of the Canadian provinces and various other international jurisdictions have authorized VLTs.

        In the U.K., the Gambling Act of 2005 regulates, among other things, the type of licensed gaming activity that is carried out by operators, the licensing of the various types of venues for the conduct of licensed gaming activities, the categories and number of gaming machines allowed in each type of venue, the licensing and regulation of the supply and operation of those machines and the issuance of technical specifications and standards and specific licensing requirements for each category of gaming machine.

        In late 2010, the U.K. government announced its intention to change the taxation of gaming machines by introducing a new machine games duty ("MGD") that would replace both the currently applicable amusement machine license duty and value-added tax. A consultation process between the government and industry representatives regarding the announced tax changes in ongoing. The rates of MGD will be determined as part of the normal budget process. The tax changes are expected to be implemented in February 2013. Although we cannot predict the precise effect of these tax changes on our U.K. gaming machine business, which will depend in large part on the rates of the MGD, we believe that these tax changes could potentially have an overall negative impact on this business.

18


Executive Officers of the Company

        Certain information regarding each of our executive officers is set forth below.

Name
  Age   Position

A. Lorne Weil

    66   Chief Executive Officer and Chairman of the Board

David L. Kennedy

    65   Vice Chairman and Chief Administrative Officer

Michael R. Chambrello

    54   Chief Executive Officer—Asia-Pacific Region

Jeffrey S. Lipkin

    41   Senior Vice President and Chief Financial Officer

Grier C. Raclin

    59   Senior Vice President, General Counsel and Corporate Secretary

Larry A. Potts

    64   Vice President, Chief Compliance Officer and Director of Security

Robert C. Becker

    52   Vice President and Treasurer

Jeffrey B. Johnson

    47   Vice President Finance, Chief Accounting Officer and Corporate Controller

James B. Trask

    61   Senior Vice President and President of Printed Products Group (SGI)

William J. Huntley

    62   Senior Vice President and President of Lottery Systems Group (SGI)

Stephen Frater

    59   Executive Chairman—Global Draw & Games Media

Steve W. Beason

    50   Senior Vice President and Enterprise Chief Technology Officer (SGI)

James C. Kennedy

    55   Senior Vice President and Chief Marketing Officer (SGI)

        A. Lorne Weil has been Chairman of the Board of Directors since October 1991. Mr. Weil became Chief Executive Officer in November 2010, a position he previously held from 1992 to 2008. Mr. Weil also served as President of the Company from August 1997 to June 2005. Mr. Weil was President of Lorne Weil, Inc., a firm providing strategic planning and corporate development services to high technology industries, from 1979 to November 1992. Previously, Mr. Weil was Vice President of Corporate Development at General Instrument Corporation, working with wagering and cable systems.

        David L. Kennedy became Chief Administrative Officer in April 2011 and has served as Vice Chairman of the Board of Directors since joining the Board in October 2009. Mr. Kennedy intends to cease serving as Chief Administrative Officer effective March 1, 2012. Mr. Kennedy will continue to serve on the Board as Vice Chairman, in a non-executive capacity. Mr. Kennedy also serves as Senior Executive Vice President of MacAndrews & Forbes Holdings Inc. and Vice Chairman of Revlon, Inc. Mr. Kennedy served as the President and Chief Executive Officer of Revlon from September 2006 through May 2009 and has held various senior management and senior financial positions with Revlon, the Coca-Cola Company and affiliates during his 40-year business career. Mr. Kennedy is a director of Revlon, Inc. and Revlon Consumer Products Corporation.

        Michael R. Chambrello became Chief Executive Officer—Asia-Pacific Region in November 2010 after serving as Chief Executive Officer since January 2010. From July 2005 to December 2009, Mr. Chambrello was President and Chief Operating Officer. From November 2000 to June 2005, Mr. Chambrello was President and Chief Executive Officer of Environmental Systems Products Holdings Inc. ("ESP"), which provides vehicle emissions testing systems and services to government agencies. Prior to ESP, he was Chief Executive Officer of Transmedia Asia Pacific, Inc. and Transmedia Europe Inc., which provide membership-based consumer and business services. Mr. Chambrello has 25 years of lottery industry experience, having served as President of GTECH Corporation and Executive Vice President of GTECH Holdings Corporation.

19


        Jeffrey S. Lipkin serves as Senior Vice President and Chief Financial Officer of the Company. Mr. Lipkin joined the Company in April 2009 as Vice President and Chief Financial Officer. Prior to joining the Company, Mr. Lipkin was a Managing Director at Credit Suisse in the Media & Telecom group within the Investment Banking division. Mr. Lipkin joined Credit Suisse in September 2003. Prior to Credit Suisse, Mr. Lipkin spent five years in the Investment Banking division at Merrill Lynch & Co and spent four years in public accounting with Coopers & Lybrand LLP. Mr. Lipkin is a certified public accountant.

        Grier C. Raclin joined the Company in October 2011 and serves as Senior Vice President, General Counsel and Corporate Secretary. Mr. Raclin served as Of Counsel at Thompson Coburn LLP from January 2010 through September 2011. Prior to that, Mr. Raclin served as Executive Vice President, General Counsel and later Chief Administrative Officer of Charter Communications, Inc., a cable television operator. Prior to joining Charter in 2005, Mr. Raclin served as General Counsel and in other executive capacities with SAVVIS, Inc. and Global TeleSystems, Inc. Prior to moving in-house at Global TeleSystems in 1997, Mr. Raclin was in private practice for 17 years.

        Larry A. Potts has served as Vice President, Chief Compliance Officer and Director of Security since February 2006. Mr. Potts joined the Company in September 2004 as Vice President, Security and Compliance. Previously, he was the Chief Operating Officer of an international consulting and investigative company in Washington, D.C. Prior to that, he served as a Special Agent of the Federal Bureau of Investigation for over 23 years, where he served in a number of management positions, including Deputy Director.

        Robert C. Becker has served as Treasurer since October 1996 and as Vice President and Treasurer since April 2001. Prior to joining the Company, Mr. Becker served as Assistant Treasurer for the Fuller Company, a multi-national engineering and manufacturing company, from 1990 to 1994.

        Jeffrey B. Johnson joined the Company in September 2011 and serves as Vice President, Finance, Chief Accounting Officer and Corporate Controller. Previously, Mr. Johnson was the Executive Vice President and Chief Financial Officer for Tensar Corporation, a private equity-backed global engineering services and construction products manufacturing company. Prior to that, he served as Vice President, Corporate Controller and Chief Accounting Officer for Tempur-Pedic International Inc., a publicly traded consumer products company. Prior to 1999, Mr. Johnson was a Manager of Audit and Business Advisory Services at Andersen LLP. Mr. Johnson is a certified public accountant and a certified management accountant.

        James B. Trask became President of the Printed Products segment in January 2011 and has served as Senior Vice President of SGI since 2007. Mr. Trask joined the Company in 2002 as Managing Director of its printed products operations in Europe, Middle East and Africa, based out of Leeds, England. Mr. Trask has over 35 years of experience in the lottery and gaming industries. Prior to joining the Company, Mr. Trask headed the lotteries group of Canadian Bank Note, a lottery systems provider based in Ottawa, Canada and owner of Creative Games International, Inc., an instant lottery ticket printer in the United States. Prior to that time, Mr. Trask held various senior positions with Oberthur Gaming Technologies, responsible for operations, sales, marketing and new product development.

        William J. Huntley became President of the Lottery Systems segment in January 2011 and Senior Vice President of SGI in February 2011. Mr. Huntley was previously with the Company and its predecessor company for 37 years, including serving as President of Autotote Lottery Corporation from 1997 to 2000, President of the Systems Division of SGI from 2000 to 2006, and President of Scientific Games Racing, LLC from 2006 to 2007. Mr. Huntley also served as Vice President of Autotote Systems, Inc. (which became Scientific Games Racing, LLC) from 1989 to 1997 and as Vice President of Operations of the Company from 1991 to 1994. From February 2009 to December 2010, Mr. Huntley served as a consultant to the Company.

20


        Stephen Frater has served as Executive Chairman of Global Draw and Games Media since March 2010. Mr. Frater served as Chairman and Chief Executive Officer of Global Draw and Games Media from July 2008 to March 2010. Mr. Frater joined the Company in 2006 as part of the Company's acquisition of Global Draw, serving as Managing Director of Global Draw. Mr. Frater has worked in the bookmaking industry for over 30 years. Mr. Frater co-founded Global Draw in 1997 and was instrumental in the establishment of its gaming business in the U.K. Prior to that, Mr. Frater co-founded Great Mark, which operated the Admiral Betting chain in the U.K. Prior to co-founding Great Mark and Global Draw, Mr. Frater worked for both the Mecca and William Hill groups as Head of Customer Relations.

        Steve W. Beason has served as Enterprise Chief Technology Officer since January 2011 and has served as Vice President since August 2005. Previously he served as Chief Technology Officer from August 2005 until January 2011 and President, Lottery Systems Group, from November 2006 to November 2010. Prior to joining the Company, Mr. Beason was Executive Director, Information Technology, of The Hong Kong Jockey Club managing a staff of nearly 400 information technology professionals.

        James C. Kennedy was appointed Chief Marketing Officer of the Company in January 2011. Since 2005, Mr. Kennedy has served as Senior Vice President of SGI, responsible for global lottery product marketing including in China, Europe and Latin America. In addition to his marketing responsibilities, he also managed sales, customer service and creative service for all of the Company's North American lottery businesses. From 2000 to 2005, Mr. Kennedy served as Vice President of U.S. Sales for SGI and, prior to 2000, he served as President of SGI Retail Solutions. Prior to joining the Company in 1985, Mr. Kennedy was a Systems Engineer for Computer Task Group.

Access to Public Filings

        We file annual reports, quarterly reports, current reports, proxy statements and other documents with the SEC under the Securities Exchange Act of 1934, as amended. The SEC maintains an internet website that contains reports, proxy and information statements, and other information regarding issuers, including us, that file electronically with the SEC. The public can obtain any documents that we file with the SEC at http://www.sec.gov.

        We make the following information available free of charge through the Investor Information link (or, in the case of our code of business conduct, the Corporate Governance link) on our website at www.scientificgames.com:

ITEM 1A.    RISK FACTORS

Risks Relating to Our Business

We operate in highly competitive industries and our success depends on our ability to effectively compete with numerous domestic and foreign businesses.

        We face competition from a number of domestic and foreign businesses, some of which have substantially greater financial resources than we do, which impacts our ability to win new contracts and

21


renew existing contracts. We continue to operate in a period of intense price-based competition, which has affected and could continue to affect the number and the profitability of the contracts we win.

        Contract awards by lottery authorities are sometimes challenged by unsuccessful bidders, which can result in costly and protracted legal proceedings that can result in delayed implementation or cancellation of the award. In addition, the U.S. lottery industry has matured such that the number of states conducting lotteries is unlikely to increase materially in the near-term.

        We believe our principal competitors in the instant ticket lottery business have increased their production capacity, which is expected to increase pricing pressures in the instant ticket business and adversely affect our ability to win or renew instant ticket contracts or reduce the profitability of instant ticket contracts that we do win. Our domestic instant ticket business could also be adversely affected should additional foreign competitors in Canada export their lottery products to the U.S. or should other foreign competitors establish printing facilities in the U.S. or Canada to supply the U.S. We also compete in the international instant ticket lottery business with low-price, low-quality printers in a regulated environment where laws are being reinterpreted so as to create competition from non-traditional lottery vendors and products.

        We face increased price competition in our lottery systems business from our two principal competitors. Since late 2007, we have lost lottery systems contracts in South Carolina, West Virginia, South Dakota, New Hampshire and Vermont to our competitors following the expiration of our contracts. During 2010, the lottery authority in Maine awarded a new lottery contract to one of our competitors, which award was subsequently invalidated as a result of our protest. The competitor's appeal of the protest ruling was denied on October 21, 2011. Our contract with Maine was extended for one year until June 30, 2012 pending further action by the Maine lottery authority.

        Pricing pressures and potential privatizations (including partial privatizations through private management agreements or otherwise) of some lotteries may also change the manner in which lottery system and instant ticket contracts are awarded and the profitability of those contracts. Any future success of our lottery business will also depend, in part, on the success of the lottery industry in attracting and retaining players in the face of increased competition for these players' entertainment dollars, as well as our own success in developing innovative products and systems to achieve this goal. Our failure to achieve this goal could reduce our revenue from our lottery operations. As a result of pressures on state and other government budgets, other forms of gaming may be legalized, which could adversely impact our business.

        Our gaming-related businesses face competition from other vendors as well as illegal operators, and changes in law and regulation can affect our future profitability. William Hill PLC, a U.K. bookmaker, recently awarded a contract to one of our principal competitors (currently the supplier for a majority of gaming machines for William Hill) for the sole supply of gaming machines to William Hill following the expiration of our gaming machine supply contract with William Hill in March 2012.

        We expect to face significant competition as we seek to offer products and services for the evolving internet lottery and gaming industries, not only from our traditional competitors in the lottery business but also from a number of other domestic and foreign providers (or the operators themselves), some of which have substantially greater financial resources and/or experience in this area than we do.

        In our prepaid phone card business, we are operating in a period of intense price-based competition, which is likely to continue to negatively affect our revenues and operating margins.

Unfavorable domestic and international economic conditions may adversely affect our business and financial condition.

        Unfavorable general economic conditions, including relatively high rates of unemployment, have had and may continue to have a negative effect on our business and results of operations.

22


        We cannot fully predict the effects that unfavorable economic conditions and economic uncertainty will have on us as it also impacts our customers, suppliers and business partners. However, we believe that the difficult economic conditions have contributed to reductions in spending on marketing by our customers and, in certain instances, less favorable terms under our contracts, as many of our customers face significant budget shortfalls and look to cut costs.

        We believe that the lottery and wide area gaming businesses are less susceptible to reductions in consumer spending than the destination gaming business (e.g., resort/casino venues, which are typically less accessible than lottery and wide area gaming retail outlets) and other parts of the consumer sector. However, we believe that declines in consumer spending have adversely impacted our lottery and wide area gaming businesses to some extent, and further declines will likely exacerbate these negative effects.

        There are ongoing concerns regarding the debt burden of certain countries, particularly in the European Union, and their ability to meet their future financial obligations, which have resulted in recent downgrades of the debt ratings for these countries. These sovereign debt concerns, whether real or perceived, could result in a recession, prolonged economic slowdown, or otherwise negatively impact the general health and stability of the economies in these countries or more broadly. In more severe cases, this could result in a limitation on the availability of capital, thereby restricting our liquidity and negatively impacting our operating results. Our growth strategy may involve pursuing expansion or business opportunities in certain countries potentially facing real or perceived sovereign debt concerns, such as Italy and Greece.

Our business is subject to evolving technology.

        The sales of all of our products and services are affected by changing technology, new legislation and evolving industry standards. Our ability to anticipate or respond to such changes and to develop and introduce new and enhanced products and services on a timely basis will be a significant factor in our ability to remain competitive, retain existing contracts, and expand and attract new customers.

        We can give no assurance that we will achieve the necessary technological advances or have the financial resources needed to introduce new products or services on a timely basis or that we will otherwise have the ability to compete effectively in the industries we serve.

We may not be able capitalize on the expansion of internet or other forms of interactive gaming or other trends and changes in the lottery and gaming industries.

        Part of our strategy is to take advantage of the liberalization of internet and mobile gaming, both within the U.S. and internationally. This strategy involves several risks and uncertainties, including legal, business and financial risks.

        In general, our ability to successfully pursue our interactive gaming strategy depends on the laws and regulations relating to wagering over the internet and through interactive channels. Until recently, there was uncertainty as to whether the Wire Act prohibits states from conducting intrastate lottery transactions via the internet if the transmissions over the internet during the transaction cross state lines. In late 2011, the Office of Legal Counsel of the DOJ issued an opinion to the effect that state lottery ticket sales over the internet to in-state adults do not violate the Wire Act. The opinion may provide an impetus for states to authorize internet or other forms of interactive gaming in order to create an additional revenue stream. However, as a general matter, we believe states will be required or otherwise deem it advisable to enact enabling legislation or new regulations addressing the sale of lottery tickets or the offering of other forms of gaming over the internet. The enactment of internet gaming legislation that federalizes significant aspects of the regulation of internet gaming could have an adverse impact on our ability to pursue our interactive strategy in the U.S. Internationally, laws relating to internet gaming are evolving, particularly in Europe. To varying degrees, a number of European governments have taken steps to change the regulation of internet wagering through the

23


implementation of new or revised licensing and taxation regimes, including the possible imposition of sanctions on unlicensed providers. We cannot predict the timing, scope or terms of any such state, federal or foreign laws and regulations, or the extent to which any such legislation will facilitate or hinder our interactive strategy.

        In jurisdictions that authorize internet gaming, there can be no assurance that we will be successful in selling our technology, content and services to internet gaming operators as we expect to face intense competition from our traditional competitors in the lottery business as well as a number of other domestic and foreign providers (or the operators themselves), some of which have substantially greater financial resources and/or experience in this area than we do. In addition, there is a risk that the authorization of the sale of lottery tickets or games or other forms of gaming via the internet in a particular jurisdiction could, under certain circumstances, adversely impact our revenue relating to sales of lottery products through traditional channels in such jurisdiction. Any such adverse impact would be magnified to the extent we are not involved in and generating revenue from, the provision of products or services for internet gaming in such jurisdiction.

        Our ability to compete effectively in the internet gaming space will depend on the acceptance by our customers of the products and services we offer. Such products and services may rely on technology that we acquire or license from third parties. On January 23, 2012, we entered into an agreement with Playtech that restructured our strategic relationship relating to internet and gaming products and services. Under the agreement, Playtech will license its internet gaming software to us on a mutually non-exclusive basis for use by certain categories of our current and prospective customers, including U.S. casinos and lotteries worldwide. There can be no assurance that we will be able to successfully develop and market internet gaming solutions under our new agreement with Playtech or otherwise. Our performance under any arrangement with a customer that contemplates the customer's use of Playtech's software will be dependent to some extent on Playtech's performance and reliability. We will be required to share with Playtech a significant portion of our revenue from any such offering in the form of a license fee.

        We are also internally developing potential internet gaming solutions for our customers. Such internal development is costly and there can be no assurance that such development will result in commercially viable products. In addition, there can be no assurance that our internally developed products will not infringe upon the proprietary rights of others, or that other parties will not assert infringement claims against us.

We are heavily dependent on our ability to renew our long-term contracts with our customers and we could lose substantial revenue and profits if we are unable to renew certain of our contracts.

        Generally, our customer contracts contain initial multi-year terms, with optional renewal periods held by the customer. Upon the expiration of a contract, including any extensions thereof, new contracts may be awarded through a competitive bidding process.

        Since late 2007, we have lost lottery systems contracts in South Carolina, West Virginia, South Dakota, New Hampshire and Vermont to our competitors following the expiration of our contracts. During 2010, the lottery authority in Maine awarded a new lottery contract to one of our competitors, which award was subsequently invalidated as a result of our protest. The competitor's appeal of the protest ruling was denied on October 21, 2011. Our contract with Maine was extended for one year beyond its expiration until June 30, 2012 pending further action by the Maine lottery authority.

        We are also required by certain of our lottery customers to provide surety or performance bonds in connection with our contracts. As of December 31, 2011, we had approximately $206.9 million of outstanding surety and performance bonds. There can be no assurance that we will continue to be able to obtain surety or performance bonds on commercially reasonable terms or at all. Our inability to

24


provide such bonds would materially and adversely affect our ability to renew existing, or obtain new lottery contracts.

        In our U.K. gaming business, William Hill, a U.K. bookmaker, recently awarded a contract to one of our principal competitors (currently the supplier for a majority of gaming machines for William Hill) for the sole supply of gaming machines to William Hill following the expiration of our gaming machine supply contract with William Hill in March 2012.

        There can be no assurance that our current contracts will be extended or that we will be awarded new contracts as a result of competitive bidding processes or otherwise in the future. The termination, expiration or failure to renew one or more of our contracts could cause us to lose substantial revenues and profits, which could have an adverse effect on our ability to win or renew other contracts or pursue acquisitions or other growth initiatives. For additional information regarding the potential expiration dates of certain other contracts, see the table in "Business—Contract Procurement" in Item 1 of this Annual Report on Form 10-K.

We may not have sufficient cash flows from operating activities, cash on hand and available borrowings under our credit facilities to finance required capital expenditures under new contracts, service our indebtedness and meet our other cash needs. These obligations require a significant amount of cash.

        Our lottery systems and gaming machine businesses generally require significant upfront capital expenditures for terminal assembly, software customization and implementation, systems and equipment installation and telecommunications configuration. In connection with a renewal or re-bid of a lottery systems or gaming machine contract, a customer may seek to obtain new equipment or impose new service requirements, which may require additional capital expenditures in order to retain the contract. Historically, we have funded these upfront costs through cash flows generated from operations, available cash on hand and borrowings under our credit facilities. Our ability to generate revenue and to continue to procure new contracts will depend on, among other things, our then present liquidity levels or our ability to obtain additional financing on commercially reasonable terms.

        If we do not have adequate liquidity or are unable to obtain financing for these upfront costs on favorable terms or at all, we may not be able to bid on certain contracts, which could restrict our ability to grow and have a material adverse effect on our results of operations. Moreover, we may not realize the return on investment that we anticipate on new or renewed contracts due to a variety of factors, including lower than anticipated retail sales, higher than anticipated capital or operating expenses and unanticipated regulatory developments or litigation. We may not have adequate liquidity to pursue other aspects of our strategy, including bringing our products and services to new customers or new or underpenetrated geographies (including through equity investments) or pursuing strategic acquisitions.

        As of December 31, 2011, we had total indebtedness of approximately $1,390.7 million, or approximately 75.8% of our total capitalization, consisting primarily of senior secured term loan and revolving credit facilities under our credit agreement and senior subordinated notes. Our ability to make payments on and to refinance our indebtedness will depend on our ability to generate cash in the future. This, to some extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. Our lenders, including the lenders participating in our revolving credit facilities, may have suffered losses related to their lending and other financial relationships, especially because of the general weakening of the national and global economy and increased financial instability of many borrowers. As a result, lenders may become insolvent or tighten their lending standards, which could make it more difficult for us to borrow under our revolving credit facilities or to obtain other financing on favorable terms or at all. Our financial condition and results of operations would be adversely affected if we were unable to draw funds under our revolving credit facilities because of a lender default or to obtain other cost-effective financing. Any default by a lender

25


in its obligation to fund its commitment under our revolving credit facilities (or its participation in letters of credit) could limit our liquidity to the extent of the defaulting lender's commitment.

        If we are unable to generate sufficient cash flow from operations in the future to meet our commitments, we will be required to adopt one or more alternatives, such as refinancing or restructuring our indebtedness, selling material assets or operations or seeking to raise additional debt or equity capital. We cannot assure you that any of these actions could be completed on a timely basis or on satisfactory terms or at all, or that these actions would enable us to continue to satisfy our capital requirements. Moreover, our existing debt agreements contain, and our future debt agreements may contain, restrictive covenants that may prohibit us from adopting these alternatives. Our failure to comply with these covenants could result in an event of default which, if not cured or waived, could result in the acceleration of all of our debt.

Our credit facilities and the indentures governing our senior subordinated notes impose certain restrictions. Failure to comply with any of these restrictions could result in the acceleration of the maturity of our indebtedness. Were this to occur, we would not have sufficient cash to pay our accelerated indebtedness.

        The operating and financial restrictions and covenants in our debt agreements, including our credit agreement and the indentures governing our senior subordinated notes may adversely affect our ability to finance future operations or capital needs or to engage in new business activities. Our credit facilities and/or indentures restrict our ability to, among other things:

26


        In addition, our credit agreement require us to maintain certain financial ratios. As a result of these covenants, we will be limited in the manner in which we can conduct our business, and may be unable to engage in favorable business activities or finance future operations or capital needs. A failure to comply with the restrictions contained in our credit agreement or indentures, or to maintain the financial ratios required by our credit agreement, could lead to an event of default which could result in an acceleration of our indebtedness. See Note 8 (Long-Term and Other Debt) to our Consolidated Financial Statements for additional information regarding these financial ratios.

        There can be no assurance that our future operating results will be sufficient to ensure compliance with the covenants in our credit agreement, indentures or other debt instruments or to remedy any such default. In addition, in the event of acceleration, we may not have or be able to obtain sufficient funds to make any accelerated payments.

Our business depends on the protection of our intellectual property and proprietary information.

        We believe that our success depends, in part, on protecting our intellectual property in the U.S. and in foreign countries. Our intellectual property includes certain patents and trademarks relating to our instant ticket games and wagering systems, as well as proprietary or confidential information that is not subject to patent or similar protection. Our intellectual property protects the integrity of our games, systems, products and services, which is a core value of our business. For example, our intellectual property is designed to ensure the security of the printing of our instant lottery tickets and provide simple and secure validation of our lottery tickets. Competitors may independently develop similar or superior products, software, systems or business models. In cases where our intellectual property is not protected by an enforceable patent, such independent development may result in a significant diminution in the value of our intellectual property.

        There can be no assurance that we will be able to protect our intellectual property. We enter into confidentiality or license agreements with our employees, vendors, consultants and, to the extent legally permissible, our customers, and generally control access to, and the distribution of, our game designs, systems and other software documentation and proprietary information, as well as the designs, systems and other software documentation and information that we license from others. Despite our efforts to protect these proprietary rights, unauthorized parties may try to copy our gaming products, business models or systems, use certain of our confidential information to develop competing products, or develop independently or otherwise obtain and use our gaming products or technology, any of which could have a material adverse effect on our business. Policing unauthorized use of our technology is difficult and expensive, particularly because of the global nature of our operations. The laws of other countries may not adequately protect our intellectual property.

        There can be no assurance that our business activities, games, products and systems will not infringe upon the proprietary rights of others, or that other parties will not assert infringement claims (with or without merit) against us. Any such claim and any resulting litigation, should it occur, could subject us to significant liability for damages and could result in invalidation of our proprietary rights, distract management, and/or require us to enter into costly and burdensome royalty and licensing agreements. Such royalty and licensing agreements, if required, may not be available on terms acceptable to us, or may not be available at all. In the future, we may also need to file or respond to lawsuits to defend the validity of our intellectual property rights and trade secrets, or to determine the validity and scope of the proprietary rights of others. Such litigation, whether successful or unsuccessful, could result in substantial costs and diversion of resources.

        We rely on products and technologies that we license from third parties. There can be no assurance that these third-party licenses, or the support for such licenses, will continue to be available to us on commercially reasonable terms, if at all.

27


Our business competes on the basis of the security and integrity of our systems and products.

        We believe that our success depends, in part, on providing secure products and systems to our customers. Attempts to penetrate security measures may come from various combinations of customers, retailers, vendors, employees and others. Our ability to monitor and ensure the quality of our products is periodically reviewed and enhanced. Similarly, we regularly assess the adequacy of our security systems to protect against any material loss to any of our customers and the integrity of our products to end-users. Expanded utilization of the internet and other interactive technologies may result in increased security concerns for us and our customers. There can be no assurance that our business will not be affected by a security breach or lapse, which could have a material adverse impact on our results of operations, business and/or prospects.

Our industry is subject to strict government regulations that may limit our existing operations and have an adverse impact on our ability to grow.

        In the U.S. and many other countries, lotteries and other forms of gaming is subject to extensive and evolving regulation. Such gaming regulatory requirements vary from jurisdiction to jurisdiction. Therefore, we are subject to a wide range of complex gaming laws and regulations in the jurisdictions in which we are licensed or operate. Most jurisdictions require that we be licensed, that our key personnel and certain of our security holders be found suitable or be licensed, and that our products be reviewed and approved before placement. If a license, approval or finding of suitability is required by a regulatory authority and we fail to seek or do not receive the necessary approval, license or finding of suitability, then we may be prohibited from providing our products or services for use in the particular jurisdiction.

        The regulatory environment in any particular jurisdiction may change in the future, and any such change could have a material adverse effect on our results of operations, business or prospects. Moreover, there can be no assurance that the operation of lotteries, video gaming machines, internet gaming or other forms of lottery or gaming will be approved by additional jurisdictions or that those jurisdictions in which these activities are currently permitted will continue to permit such activities. Laws and regulations relating to internet and other form of interactive gaming are evolving. For additional discussion regarding risks associated with the evolving interactive gaming regulatory landscape, see the risk factor above captioned "—We may not be able capitalize on the expansion of internet or other forms of interactive gaming or other trends and changes in the lottery and gaming industries."

        There can be no assurance that law enforcement or gaming regulatory authorities will not seek to restrict our business in their jurisdictions or even institute enforcement proceedings. In addition, there can be no assurance that any instituted enforcement proceedings will be favorably resolved, or that such proceedings will not have a material adverse impact on our ability to retain and renew existing licenses or to obtain new licenses in other jurisdictions.

        Moreover, in addition to the risk of an enforcement action, we also potentially risk an impact on our reputation in the event of any potential legal or regulatory investigation whether or not we are ultimately accused of or found to have committed any violation. We are required to obtain and maintain licenses from various jurisdictions in order to operate certain aspects of our business and we are subject to extensive background investigations and suitability standards in our business. We also will become subject to regulation in any other jurisdiction in which our customers operate in the future. There can be no assurance that we will be able to obtain new licenses or renew any of our existing licenses, or that if such licenses are obtained, that such licenses will not be conditioned, suspended or revoked, and the loss, denial or non-renewal of any of our licenses could have a material adverse effect on our results of operations, business or prospects. Lottery authorities generally conduct background investigations of the winning vendor and its employees prior to and after the award of a lottery

28


contract. Generally, regulatory authorities have broad discretion when granting, renewing or revoking these approvals and licenses. Lottery authorities with which we do business may require the removal of any of our employees deemed to be unsuitable and are generally empowered to disqualify us from receiving a lottery contract or operating a lottery system as a result of any such investigation. Our failure, or the failure of any of our key personnel, systems or machines, in obtaining or retaining a required license or approval in one jurisdiction could negatively impact our ability (or the ability of any of our key personnel, systems or gaming machines) to obtain or retain required licenses and approvals in other jurisdictions. The failure to obtain or retain a required license or approval in any jurisdiction would decrease the geographic areas where we may operate and generate revenues, decrease our share in the lottery or gaming industry and put us at a disadvantage relative to our competitors.

        Some jurisdictions also require extensive personal and financial disclosure and background checks from persons and entities beneficially owning a specified percentage (typically 5% or more) of our equity securities. The failure of these beneficial owners to submit to such background checks and provide required disclosure could jeopardize the award of a contract to us or provide grounds for termination of an existing contract. Additional restrictions are often imposed on foreign entities such as us by international jurisdictions in which we seek to market our products or services. In light of these regulations and the potential impact on our business, our restated certificate of incorporation allows for the restriction of stock ownership by persons or entities who fail to comply with informational or other regulatory requirements under applicable gaming laws, who are found unsuitable to hold our stock by gaming authorities or whose stock ownership adversely affects our ability to obtain, maintain, renew or qualify for a license, contract, franchise or other regulatory approval from a gaming authority. The licensing procedures and background investigations of the authorities that regulate our businesses and the restriction in our certificate of incorporation may inhibit potential investors from becoming significant stockholders or inhibit existing stockholders from retaining or increasing their ownership.

        We have developed and implemented an internal compliance program in an effort to ensure that we comply with legal requirements imposed in connection with our gaming-related activities, as well as legal requirements generally applicable to all publicly traded corporations. The compliance program is run on a day-to-day basis by our Chief Compliance Officer with legal advice provided by our legal department and outside experts. The compliance program is overseen by the Compliance Committee of our Board of Directors, consisting entirely of outside directors. There can be no assurance that such steps will prevent the violation of one or more laws or regulations, or that a violation by us or an employee will not result in the imposition of a monetary fine or suspension or revocation of one or more of our licenses.

Gaming opponents persist in their efforts to curtail the expansion of legalized gaming, which, if successful, could limit the growth of our operations.

        Legalized gaming is subject to opposition from gaming opponents. There can be no assurance that this opposition will not succeed in preventing the legalization of gaming in jurisdictions where these activities are presently prohibited or prohibiting or limiting the expansion of gaming where it is currently permitted, in either case to the detriment of our business, financial condition, results and prospects.

We may not succeed in realizing the anticipated benefits of our strategic equity investments and relationships.

        Under certain circumstances we pursue growth through strategic equity investments, including joint ventures, as a means to, among other things, gain access to new and tactically important geographies, business opportunities and technical expertise, while simultaneously offering the potential for reducing capital requirements.

29


        These strategic equity investments currently include investments in LNS, Northstar, Sportech, RCN and our equity investments in China. We are party to strategic agreements with Playtech relating to gaming machines that contemplate our use of and reliance on Playtech's back-end technology platform in international jurisdictions. In 2011, Global Draw completed the migration of its server-based gaming machines to this back-end technology platform in the U.K. and began migrating server-based gaming machines outside the U.K. to this technology during the third quarter of 2011.

        As of December 31, 2011, we owned a 50% interest in Sciplay with Playtech to deliver internet gaming solutions to government-sponsored and government-regulated lotteries and certain other gaming operators. Sciplay was formed to capitalize on the combination of Playtech's internet gaming software and content and our experience and relationships with lotteries and other gaming operators. On January 23, 2012, we entered into an agreement with Playtech that restructured this strategic relationship from a joint venture arrangement to a license arrangement. Under the agreement, Playtech will license its internet gaming software to us on a mutually non-exclusive basis for use by certain categories of our current and prospective customers, including U.S. casinos and lotteries worldwide. The Sciplay-related entities are now wholly owned subsidiaries of Scientific Games. There can be no assurance that we will be able to successfully develop and market internet gaming solutions under our restructured arrangement with Playtech.

        Northstar, in which we are a 20% equity holder, was awarded the agreement to be the private manager for the Illinois Lottery for a ten-year term following a competitive procurement process, which agreement was executed on January 18, 2011. See "Business—Operational Overview—Printed Products—Northstar" in Item 1 of this Annual Report on Form 10-K. On January 26, 2011, the Illinois Appellate Court upheld a constitutional challenge to the revenue statute that, among other things, amended the Illinois lottery law to facilitate the PMA, on grounds that the statute impermissibly addressed more than one subject. On July 11, 2011, the Illinois Supreme Court reversed the Appellate Court decision and upheld the revenue statute. Operations under the PMA commenced on July 1, 2011. Under the terms of the PMA, Northstar is entitled to receive annual incentive compensation payments from Illinois to the extent it is successful in increasing the lottery's net income above specified target levels of lottery net income, subject to a cap of 5% of the applicable year's net income. Northstar will be responsible for payments to Illinois to the extent the lottery net income levels set forth in Northstar's successful bid are not achieved, subject to a similar cap. The lottery net income levels set forth in Northstar's successful bid were $851.1 million, $950 million, $980 million, $986 million and $1 billion for the five fiscal years ending June 30, 2012, 2013, 2014, 2015 and 2016, respectively, representing a compound annual growth rate in lottery net income of approximately 44%, including an approximate 27% increase in lottery net income in the first year. These net income target levels are subject to upward or downward adjustment under certain circumstances in accordance with the terms of the PMA.

        We may not realize the anticipated benefits of these strategic equity investments and other strategic relationships that we may enter into, or may not realize them in the timeframe expected. These arrangements pose significant risks that could have a negative effect on our operations, including: the potential diversion of our management's attention from our core business to, for example, integrate technologies; the potential failure to realize anticipated synergies, economies of scale or other value associated with the arrangements; unanticipated costs and other unanticipated events or circumstances; possible adverse effects on our operating results during any integration process; impairment charges if our strategic equity investments or relationships are not as successful as we originally anticipate; and our potential inability to achieve the intended objectives of the arrangements.

        Furthermore, our strategic equity investment and other strategic relationships pose risks arising from our reliance on our partners and our lack of sole decision-making authority, which may give rise to disputes between us and our partners. For instance, our investment in LNS is a minority investment in a venture whose largest equity holder is Lottomatica, the parent company of one of our principal

30


competitors, and, although certain corporate actions require our prior consent, we do not control decisions relating to the governance of LNS. Our partners may have economic or business interests or goals that are inconsistent with our interests and goals, take actions contrary to our objectives or policies, undergo a change of control, experience financial and other difficulties or be unable or unwilling to fulfill their obligations under our arrangements.

        The failure to avoid or mitigate the risks described above or other risks associated with such arrangements could have a material adverse effect on our business, financial condition and results of operations.

We may be required to recognize additional impairment charges.

        We assess our goodwill and other intangible assets and our long-lived assets as and when required by accounting principles generally accepted in the U.S. ("GAAP") to determine whether they are impaired. We recorded accelerated depreciation expense of $6.4 million and $8.3 million in 2011 and 2010, respectively, as a result of Global Draw's migration to a new platform technology. In 2010, we recorded asset impairment charges of approximately $17.5 million related to underperforming Lottery Systems contracts, $3.0 million of impairments related to obsolete equipment in Lottery Systems and $2.5 million of impairments related to obsolete equipment in Global Draw. In 2009, we recorded asset impairment charges of approximately $24.7 million primarily related to underperforming Lottery Systems contracts. Refer to the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies—Valuation of long-lived and intangible assets and goodwill" in Item 7 of this Annual Report on Form 10-K and Note 1 (Description of the Business and Summary of Significant Accounting Policies) and Note 4 (Property and Equipment) to our Consolidated Financial Statements in this Annual Report on Form 10-K. We cannot predict the occurrence of impairments and there can be no assurance that we will not have to record additional impairment charges in the future.

Our inability to complete future acquisitions of gaming and related businesses and integrate those businesses successfully could limit our future growth.

        Part of our corporate strategy is to continue to pursue expansion and strategic acquisition opportunities. In connection with any such acquisitions, we could face significant challenges in managing and integrating the expanded or combined operations, including acquired assets, operations and personnel. There can be no assurance that acquisition opportunities will be available on acceptable terms or at all or that we will be able to obtain necessary financing or regulatory approvals to complete potential acquisitions. Our ability to succeed in implementing our strategy will depend to some degree upon the ability of our management to identify, complete and successfully integrate commercially viable acquisitions. Acquisition transactions may disrupt our ongoing business and distract management from other responsibilities.

Our revenues fluctuate due to seasonality and timing of equipment sales and, therefore, our periodic operating results are not guarantees of future performance.

        Our revenues can fluctuate due to seasonality in some components of our business. The summer season historically has been the weakest part of the year for certain parts of our lottery business, particularly where our revenues are tied to a percentage of retail sales under our CSP or POS contracts. The third quarter is typically the weakest quarter for Global Draw, which could adversely affect the amounts wagered and our corresponding service revenue.

        In addition, our revenue from Lottery Systems can be somewhat dependent on the size of jackpots of lottery games such as Powerball and Mega Millions during the relevant period.

31


Our success depends in part on our ability to develop, enhance and/or introduce successful gaming concepts and game content.

        Lottery and gaming equipment sales and software license revenue usually reflects a limited number of large transactions, which may not recur on an annual basis. Consequently, revenue and operating margins can vary substantially from period to period as a result of the timing and magnitude of major equipment sales and software license revenue. As a general matter, lottery and gaming equipment sales generate lower operating margins than revenue from other aspects of our business. In addition, instant ticket sales may vary depending on the season and timing of contract awards, changes in customer budgets, ticket inventory levels, lottery retail sales and general economic conditions.

        Our Global Draw, Games Media and Barcrest businesses develop and source game content both internally and through third-party suppliers. Games Media and Barcrest also seek to secure third-party brands for incorporation into its game content. We believe creative and appealing game content produces more revenue and net win for the gaming machine customers of these businesses and provides them with a competitive advantage, which in turn enhances the revenues of Global Draw, Games Media and Barcrest and their ability to attract new business or to retain existing business. In our lottery business, we believe that innovative gaming concepts and game content, such as multiplier games from Lottery Systems and licensed brand game content from Printed Products, can enhance the revenue of our lottery customers and distinguish us from our competitors. There can be no assurance that we will be able to sustain the success of our existing game content or effectively develop or obtain from third parties new or enhanced game content that will be widely accepted both by our customers and their end users.

We are dependent on our suppliers and contract manufacturers, and any failure of these parties to meet our performance and quality standards or requirements could cause us to incur additional costs or lose customers.

        Our production of instant lottery tickets, in particular, depends upon a continuous supply of raw materials, supplies, power and natural resources. Our operating results could be adversely affected by an interruption or cessation in the supply of these items or a serious quality assurance lapse, including as a result of the insolvency of any of our key suppliers.

        Similarly, production of our presses and lottery and gaming systems is dependent upon a regular and continuous supply of components many of which are manufactured outside of the United States. The assembly of many of our terminals and other hardware is performed by third parties. Any interruption or cessation in the supply of these items or services or any material quality assurance lapse with respect thereto could materially adversely affect our ability to fulfill customer orders, our financial condition or our results of operations.

        We transmit certain wagering data utilizing satellite transponders, generally pursuant to long-term contracts. The technical failure of any of these satellites would require us to obtain other communication services, including other satellite access. In some cases, we employ backup systems to limit our exposure in the event of such a failure. There can be no assurance of access to such other satellites or, if available, the ability to obtain the use of such other satellites on favorable terms or in a timely manner. While satellite failures are infrequent, the operation of satellites is outside of our control.

        In addition, our gaming businesses include a number of significant contracts whose performance depends upon our third-party suppliers delivering equipment on schedule in order to meet our contract commitments. Failure of the suppliers to meet their delivery commitments could result in us being in breach of, and subsequently losing, those contracts, which loss could have a material adverse effect on our results of operations.

32


We may be liable for product defects or other claims relating to our products.

        Our products could be defective, fail to perform as designed or otherwise cause harm to our customers, their equipment or their products. If any of our products are defective, we may be required to recall the products and/or repair or replace them, which could result in substantial expenses and affect our profitability. Any problems with the performance of our products, such as an instant ticket misprint, could harm our reputation, which could result in a loss of sales to customers and/or potential customers. In addition, if our customers believe that they have suffered harm caused by our products, they could bring claims against us that could result in significant liability. Any claims brought against us by customers may result in diversion of management's time and attention, expenditure of large amounts of cash on legal fees, expenses and payment of damages, decreased demand for our products or services, or injury to our reputation. Our insurance may not sufficiently cover a large judgment against us or a large settlement payment, and is subject to customary deductibles, limits and exclusions.

We have foreign operations, which subjects us to foreign currency exchange rate fluctuations and other risks.

        We are a global business and derive a substantial and growing portion of our revenue and profits from operations outside the United States. In the year ended December 31, 2011, we derived approximately 52% of our revenue from sales to customers outside of the United States.

        Our consolidated financial results are significantly affected by foreign currency exchange rate fluctuations. Foreign currency exchange rate exposures arise from current transactions and anticipated transactions denominated in currencies other than U.S. dollars and from the translation of foreign currency balance sheet accounts into U.S. dollar-denominated balance sheet accounts. We are exposed to currency exchange rate fluctuations because a significant portion of our revenue is denominated in currencies other than the U.S. dollar, particularly the British Pound Sterling and the Euro. In particular, uncertainty regarding economic conditions in the Europe and the debt crisis affecting certain countries in the European Union poses risk to the stability of the Euro. Exchange rate fluctuations have in the past adversely affected our operating results and cash flows and may adversely affect our results of operations and cash flows and the value of our assets outside the U.S. in the future.

        In January 2012, we entered into foreign currency forward contracts with an aggregate notional value of €23.5 million to hedge a portion of our net investment in certain of our subsidiaries that is denominated in Euros. As a result, the Company is subject to the risk that the counterparty to one or more of these contracts defaults on its performance under the contracts. During an economic downturn, the counterparty's financial condition may deteriorate rapidly and with little notice and we may be unable to take action to protect our exposure. In the event of a counterparty default, we could incur losses, which may harm our business and financial condition. In the event that one or more of our counterparties becomes insolvent or files for bankruptcy, our ability to eventually recover any losses suffered as a result of that counterparty's default may be limited by the liquidity of the counterparty.

        Our operations in foreign jurisdictions subject us to additional risks customarily associated with such operations, including:

        Additionally, foreign taxes paid by our foreign subsidiaries and equity investees on their earnings may not be recovered against our U.S. tax liability. At December 31, 2011, we had a deferred tax asset for our foreign tax credit ("FTC") carry forward of approximately $30.1 million. Although we will continue to explore tax planning strategies to use all of our FTC, at December 31, 2011, we established

33


a valuation allowance of approximately $30.1 million against the FTC deferred tax asset to reduce the asset to the net amount that our management estimates is "more likely than not" to be realized.

        In addition, our ability to expand successfully in foreign jurisdictions involves other risks, including difficulties in integrating foreign operations, risks associated with entering jurisdictions in which we may have little experience and the day-to-day management of a growing and increasingly geographically diverse company. Our investment in foreign jurisdictions often entails entering into joint ventures or other business relationships with locally based entities, which can involve additional risks arising from our lack of sole decision-making authority, our reliance on a partner's financial condition, inconsistency between our business interests or goals and those of our partners and disputes between us and our partners.

        Through our joint ventures and wholly owned foreign enterprises, we have lottery-related investments and business operations in China, from which we expect to derive a growing portion of income. Our business in, and results of operations from, China are subject to a number of risks, including risks relating to competition in China, our ability to finance or refinance our operations in China, the complex regulatory environment in China, the political climate in China, the Chinese economy and our joint venture and other business partners in China. Our joint ventures in China are with locally based state-owned enterprises, which can potentially heighten the joint venture-related risks described above relating to inconsistency of business interests and disputes.

        We anticipate that continued lottery-related growth in China depends in part on sustained demand for lottery tickets at higher price points, as well as continued expansion of the retailer network, optimization of retailer inventories and other growth initiatives. There can be no assurance that lottery ticket demand will be sustained at higher price points, and we cannot predict the rate of retailer expansion, the extent of inventory optimization or the success of our other growth initiatives.

        There can be no assurance that legal and regulatory requirements in China will not change or that China's central or local governments will not impose new, stricter regulations or interpretations of existing regulations that would impose additional costs on our operations in China or even restrict or prohibit such operations. For example, comprehensive legislation regulating competition took effect on August 1, 2008. This law, among other things, prohibits certain types of agreements (unless they fall within specified exemptions) and certain behavior classified as abuse of dominant market position or intellectual property rights. Additionally, new lottery regulations providing for enhanced supervision of the lottery industry in China became effective on July 1, 2009. We cannot predict with certainty what impact these laws and regulations or any future laws and regulations (or implementing rules or enforcement policies relating to any of the foregoing) will have on our business in China.

        We may not realize the operating efficiencies, competitive position or financial results that we anticipate from our investments in foreign jurisdictions and our failure to effectively manage the risks associated with our operations in foreign jurisdictions could have a material adverse effect on our results of operations, business or prospects.

Certain holders of our common stock exert significant influence over the Company and may make decisions with which other stockholders may disagree.

        In August 2004, MacAndrews & Forbes Holdings Inc. was issued approximately 25% of our outstanding common stock in connection with its conversion of our then outstanding Series A Convertible Preferred Stock. According to an amendment to Schedule 13D filed with the SEC on June 16, 2011, this holder beneficially owns 31,700,737 shares of our common stock, or approximately 34.4% of our currently outstanding common stock. Pursuant to a stockholders' agreement with us, which we originally entered into with holders of the Series A Convertible Preferred Stock, such holder is entitled to appoint up to four member of our Board of Directors and certain actions of the Company require the approval of such holder. As a result, this holder has the ability to exert significant influence

34


over our business and may make decisions with which other stockholders may disagree, including, among other things, delaying, discouraging or preventing a change of control of the Company or a potential merger, consolidation, tender offer, takeover or other business combination.

If certain of our key personnel leave us, our business will be significantly adversely affected.

        We depend on the continued performance of A. Lorne Weil, our Chairman and Chief Executive Officer, and Michael Chambrello, our Chief Executive Officer—Asia-Pacific Region, as well as the other members of our senior management team. Messrs. Weil and Chambrello have extensive experience in the lottery and gaming industries and have contributed significantly to the growth of our business. We rely on Mr. Weil's overall strategic vision and his direction on business development projects, including mergers and acquisitions. We rely on Mr. Chambrello to maintain and grow our China business. If we lose the services of them or any of our other senior officers and cannot find suitable replacements for such persons in a timely manner, it could have a material adverse effect on our business. Mr. Weil has an employment agreement that is scheduled to expire at the end of 2015. Mr. Chambrello has an employment agreement that is scheduled to expire at the end of 2013.

We could incur costs in the event of violations of or liabilities under environmental laws.

        Our operations and real property are subject to U.S. and foreign environmental laws and regulations, including those relating to air emissions, the management and disposal of hazardous substances and wastes, and the cleanup of contaminated sites. We could incur costs, including cleanup costs, fines or penalties, and third-party claims as a result of violations of or liabilities under environmental laws. Some of our operations require environmental permits and controls to prevent or reduce environmental pollution, and these permits are subject to review, renewal and modification by issuing authorities.

Failure to perform under our lottery contracts may result in litigation, substantial monetary liquidated damages and contract termination.

        Our business subjects us to contract penalties and risks of litigation, including due to potential allegations that we have not fully performed under our contracts or that goods or services we supply are defective in some respect. Litigation is pending in Colombia arising out of the termination of certain Colombian lottery contracts in 1993. An agency of the Colombian government has asserted claims against certain parties, including our subsidiary, SGI, which owned a minority interest in Wintech de Colombia S.A., or Wintech (now liquidated), the former operator of the Colombian national lottery. The claims are for, among other things, contract penalties, interest and the costs of a bond issued by a Colombian surety. For additional information regarding this litigation, see "Legal Proceedings" in Item 3 of this Annual Report on Form 10-K. There can be no assurance that this litigation will not be finally resolved adversely to us or result in material liability.

        In addition, our lottery contracts typically permit a lottery authority to terminate the contract at any time for material failure to perform, other specified reasons and, in many cases, for no reason at all. Lottery contracts to which we are a party also frequently contain exacting implementation schedules and performance requirements and the failure to meet these schedules and requirements may result in substantial monetary liquidated damages, as well as possible contract termination. We are also required by certain of our lottery customers to provide surety or performance bonds. We have paid or incurred liquidated damages under our lottery contracts and material amounts of liquidated damages could be imposed on us in the future, which could, if imposed, have a material adverse effect on our results of operations, business or prospects.

35


Labor disputes may have an adverse effect on our operations.

        Certain of our employees are represented by unions, including employees at our printing facilities in Australia, Canada, Chile and the United Kingdom. There can be no assurance that we will not encounter any conflicts or strikes with any labor union that represents our employees, which could have an adverse effect on our business or results of operations, could cause us to lose customers or could cause our customers' operations to be affected and might have permanent effects on our business.

The price of our common stock has been volatile and may continue to be volatile

        Our stock price may fluctuate in response to a number of events and factors, such as, variations in operating results, actions by various regulatory agencies, litigation, financial estimates and recommendations by securities analysts, rating agency reports, performance of other companies that investors or security analysts deem comparable to us, news reports relating to our business, our markets and general market conditions. During the 52-week period ended February 24, 2012, our stock price fluctuated between a high of $13.08 and a low of $6.50. This significant stock price fluctuation may make it more difficult for our stockholders to sell their common stock when they want and at prices they find attractive.

ITEM 1B.    UNRESOLVED STAFF MATTERS

        No disclosure required pursuant to this Item.

ITEM 2.    PROPERTIES

        We occupy approximately 1,013,000 square feet of space throughout the United States and Puerto Rico. Our principal facilities include approximately 355,000 square feet owned (subject to mortgage encumbrance) in Alpharetta, Georgia for administrative offices, manufacturing and warehousing (supporting all of our segments) and approximately 23,000 square feet of leased office space in New York, New York for our corporate offices.

        Internationally, we occupy approximately 986,000 square feet of owned or leased space, including administrative offices and manufacturing and warehouse facilities supporting the Printer Products segment in Leeds, England (approximately 150,000 square feet that is owned), Montreal, Canada (approximately 119,000 square feet that is owned), Santiago, Chile (approximately 47,000 square feet that is owned) and Sydney, Australia (approximately 49,000 square feet that is leased). Additionally, we own approximately 65,000 square feet in Germany for administrative offices and warehouse and distribution.

ITEM 3.    LEGAL PROCEEDINGS

        Although we are a party to various claims and legal actions arising in the ordinary course of business, we believe, on the basis of information presently available to us, that the ultimate disposition of these matters will not likely have a material adverse effect on our consolidated financial position or results of operations.

        Our subsidiary, SGI, owned a minority interest in Wintech de Colombia S.A., or Wintech (now liquidated), which formerly operated the Colombian national lottery under contract with Empresa Colombiana de Recursos para la Salud, S.A. (together with its successor agency, "Ecosalud"), an agency of the Colombian government. The contract provided for a penalty against Wintech, SGI and the other shareholders of Wintech of up to $5.0 million if certain levels of lottery sales were not achieved. In addition, SGI delivered to Ecosalud a $4.0 million surety bond as a further guarantee of performance under the contract. Wintech started the instant lottery in Colombia, but, due to difficulties beyond its control, including, among other factors, social and political unrest in Colombia, frequently

36


interrupted telephone service and power outages, and competition from another lottery being operated in a province of Colombia that we believe was in violation of Wintech's exclusive license from Ecosalud, the projected sales level was not met for the year ended June 30, 1993.

        On July 1, 1993, Ecosalud declared that the contract was in default and asserted various claims against Wintech, SGI and other shareholders of Wintech for, among other things, realization of the full amount of the penalty, plus interest and costs of the bond. On June 4, 1999, Ecosalud filed a collection proceeding against SGI before the Tribunal Contencioso of Cundinamarca in Colombia. In July 2002, the Tribunal denied SGI's preliminary motion to dismiss the lawsuit and the decision was upheld on appeal. SGI's procedural defense motion was also denied. As a result of these decisions, this lawsuit will be heard in due course on its merits by the Tribunal and an appeal stage will be available. In July 2009, a Colombian court ruled against Wintech's appeal (to which we are not party) of an action by the Colombian governmental agency that arises out of the same claims asserted by the Colombian governmental agency against SGI.

        SGI believes it has various defenses on the merits against Ecosalud's claims. Although we believe that any potential losses arising from these claims will not result in a material adverse effect on our consolidated financial position or results of operations, it is not feasible to predict the final outcome, and there can be no assurance that these claims might not be finally resolved adversely to us or result in material liability.

ITEM 4.    MINE SAFETY DISCLOSURES

        No disclosure required pursuant to this Item.

37



PART II

ITEM 5.    MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

        Our outstanding common stock is listed for trading on the Nasdaq Global Select Market under the symbol "SGMS". The following table sets forth, for the periods indicated, the range of high and low sales prices of our Class A common stock.

 
  Sales Price of
Scientific Games
Common Stock
 
 
  High   Low  

Fiscal Year 2011 (January 1, 2011 - December 31, 2011)

             

First Quarter

  $ 11.27   $ 8.26  

Second Quarter

  $ 10.83   $ 8.32  

Third Quarter

  $ 10.59   $ 6.80  

Fourth Quarter

  $ 9.82   $ 6.50  

Fiscal Year 2010 (January 1, 2010 - December 31, 2010)

             

First Quarter

  $ 17.01   $ 13.22  

Second Quarter

  $ 15.09   $ 9.18  

Third Quarter

  $ 11.99   $ 9.04  

Fourth Quarter

  $ 10.09   $ 6.58  

        On February 24, 2012, the last reported sale price for our common stock on the Nasdaq Global Select Market was $12.09 per share. There were approximately 1,044 holders of record of our common stock as of February 24, 2012.

        We have never paid any cash dividends on our Class A common stock. Our Board of Directors presently intends to retain earnings for use in the business. Any future determination as to payment of dividends will depend upon our financial condition and results of operations and such other factors as are deemed relevant by our Board. Further, under the terms of certain of our debt agreements, we are limited in our ability to pay cash dividends or make certain other restricted payments (other than stock dividends) on our Class A common stock.

        On December 8, 2011, our Board of Directors approved an extension of our existing stock repurchase program to December 31, 2012. The program, originally announced in May 2010, was due to expire on December 31, 2011. Under the program, we are authorized to repurchase, from time to time through open market purchases or otherwise, shares of our outstanding common stock in an aggregate amount up to $200 million. As of December 31, 2011, we had approximately $173.7 million

38


available for potential repurchases under the program. Repurchases for the fourth quarter ended December 31, 2011 are reflected on the following table:

Period
  Total Number
of Shares
Purchased (1)
  Average
Price Paid
per Share
  Total Number of Shares
Purchased as Part of
Publicly Announced
Plans or Programs
  Approximate Dollar Value
of Shares that May Yet Be
Purchased Under the
Plans or Programs (2)

10/1/2011 - 10/31/2011

    5,118   $ 7.25       $173.7 million

11/1/2011 - 11/30/2011

    41,501   $ 8.72       $173.7 million

12/1/2011 - 12/31/2011

    142,616   $ 9.54       $173.7 million
                   

Total

    189,235   $ 9.30       $173.7 million
                   

(1)
There were no shares purchased as part of the publicly announced repurchase program during the quarter ended December 31, 2011. The activity in this column reflects 189,235 shares acquired from employees to satisfy the withholding taxes associated with the vesting of restricted stock units and the exercise of stock options during the quarter ended December 31, 2011.

(2)
The $200 million stock repurchase program, which expires on December 31, 2012, was publicly announced on May 10, 2010.

Shareholder Return Performance Graph

        The following graph compares the cumulative total stockholder return over the five-year period ended December 31, 2011 of our common stock, the Nasdaq Composite Index and an index of peer group companies that operate in industries or lines of business similar to ours.

        The peer group index consists of Bally Technologies, Inc. (New York Stock Exchange ("NYSE"): BYI), IGT (NYSE: IGT), WMS Industries Inc. (NYSE: WMS), Multimedia Games, Inc. (Nasdaq Global Select Market: MGAM), Aristocrat Leisure Limited (Australian Securities Exchange: ALL), Lottomatica (Borsa Italiana S.p.A.: LTO), Intralot (Athens Stock Exchange: INLOT), Pollard (Toronto Stock Exchange: PLB.UN-TO) and Playtech Limited (AIM: PTEC).

        The companies in each peer group have been weighted based on their relative market capitalization each year. The graph assumes that $100 was invested in our common stock, the Nasdaq Composite Index and the peer group index at the beginning of the five-year period and that all dividends were reinvested. The comparisons are not intended to be indicative of future performance of our common stock.

39



COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Scientific Games Corporation, the NASDAQ Composite Index, and a Peer Group

GRAPHIC


*
$100 invested on December 31, 2006 in stock or index, including reinvestment of dividends. Fiscal year ended December 31.

 
  12/31/06   12/31/07   12/31/08   12/31/09   12/31/10   12/31/11  

Scientific Games Corporation

    100.00     109.99     58.02     48.13     32.95     32.09  

NASDAQ Composite Index

    100.00     110.26     65.65     95.19     112.10     110.81  

Peer Group Index

    100.00     102.63     35.08     55.21     49.41     42.99  

ITEM 6.    SELECTED FINANCIAL DATA

        Selected financial data presented below as of and for the years ended December 31, 2011, 2010, 2009, 2008 and 2007 have been derived from our audited consolidated financial statements. The information below reflects the acquisitions and dispositions of certain businesses from 2007 through 2011, including the sale of our racing communications business and our 70% interest in NASRIN, a data communications business, to RCN in exchange for a 29.4% interest in RCN on February 28, 2007, the acquisition of Oberthur Gaming Technologies on May 1, 2007, the acquisition of certain assets of Sceptre Leisure Solutions Limited on April 19, 2010, the acquisition of substantially all of GameLogic's assets on August 5, 2010, the disposition of our racing and venue management businesses ("the Racing Business") on October 5, 2010 and the acquisition of Barcrest on September 23, 2011. This data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 7 of this Annual Report on Form 10-K and our Consolidated Financial Statements and the Notes thereto included in Item 8 of this Annual Report on Form 10-K.

40



FIVE YEAR SUMMARY OF SELECTED FINANCIAL DATA
(in thousands, except per share amounts)

 
  Year Ended December 31,  
 
  2011   2010   2009   2008   2007  

Revenue:

                               

Instant tickets

  $ 493,275   $ 465,090   $ 453,238   $ 548,308   $ 498,179  

Services

    331,701     363,138     410,014     451,664     424,236  

Sales

    53,746     54,271     64,497     118,857     124,289  
                       

Total Revenue

    878,722     882,499     927,749     1,118,829     1,046,704  
                       

Operating expenses:

                               

Cost of instant tickets (1)

    281,565     270,787     270,836     331,501     283,924  

Cost of services (1)

    171,374     206,034     234,093     263,284     237,509  

Cost of sales (1)

    38,340     38,045     44,539     85,856     90,347  

Selling, general and administrative expenses (a)

    183,022     158,500     168,248     184,213     165,080  

Write-down of assets held for sale (b)

        8,029     54,356          

Employee termination and restructuring costs (c)

    1,997     602     3,920     13,695     3,642  

Depreciation and amortization (d)

    118,603     141,766     151,784     218,643     160,366  
                       

Operating income (loss)

    83,821     58,736     (27 )   21,637     105,836  
                       

Other (income) expense:

                               

Interest expense

    104,703     101,613     87,498     78,071     70,772  

Earnings from equity investments

    (29,391 )   (49,090 )   (59,220 )   (58,570 )   (41,252 )

Loss (gain) on early extinguishment of debt

    4,185     2,932     (4,829 )   2,960      

Other

    911     8,594     2,856     (4,691 )   (2,050 )
                       

    80,408     64,049     26,305     17,770     27,470  
                       

Net income (loss) before income taxes

    3,413     (5,313 )   (26,332 )   3,867     78,366  

Income tax expense

    15,983     143,888     13,547     8,352     25,211  
                       

Net (loss) income

    (12,570 )   (149,201 )   (39,879 )   (4,485 )   53,155  
                       

Basic and diluted net income (loss) per share:

                               

Basic

  $ (0.14 ) $ (1.61 ) $ (0.43 ) $ (0.05 ) $ 0.57  
                       

Diluted

  $ (0.14 ) $ (1.61 ) $ (0.43 ) $ (0.05 ) $ 0.55  
                       

Weighted average number of shares used in per share calculations:

                               

Basic shares

    92,068     92,666     92,701     92,875     92,566  
                       

Diluted shares

    92,068     92,666     92,701     92,875     95,996  
                       

(1)
Exclusive of depreciation and amortization.

Selected balance sheet data (end of period)

                               

Total assets

  $ 2,161,901   $ 2,151,538   $ 2,291,792   $ 2,182,453   $ 2,098,786  

Total long-term debt, including current installments

    1,390,667     1,396,690     1,367,063     1,239,467     1,043,938  

Stockholders' equity

    443,714     452,658     619,758     595,829     693,591  

Ratio of earnings to fixed charges (2)

    1.1     0.8     0.4     0.7     1.6  
(2)
See Exhibit 12 to this Annual Report on Form 10-K for the calculation of ratio of earnings to fixed charges.

41


        The following notes are an integral part of these selected historical consolidated financial data.

42


ITEM 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

        The following Management's Discussion and Analysis (this "MD&A") is intended to enhance the reader's understanding of our operations and current business environment. This MD&A should be read in conjunction with the description of our business (Item 1 of this Annual Report on Form 10-K) and our Consolidated Financial Statements and Notes thereto (Item 8 of this Annual Report on Form 10-K).

        This MD&A also contains forward-looking statements and should be read in conjunction with the disclosures and information contained under "Forward-Looking Statements" at the beginning of this Annual Report on Form 10-K and "Risk Factors" (Item 1A of this Annual Report on Form 10-K).

        As used in this MD&A, the terms "we," "us," "our" and the "Company" mean Scientific Games Corporation together with its consolidated subsidiaries.

Business Overview

General

        We are a leading global supplier of products and services to lotteries and a leading provider of gaming technology and content to gaming operators worldwide. We also gain access to technology and pursue global expansion through strategic acquisitions and equity investments. We manage and report our operations in three business segments: Printed Products; Lottery Systems; and Gaming. Corporate expenses are not allocated to segments. See "—Business Segment Results" below and Note 15 (Business and Geographic Segments) for additional business segment information.

        The discussion below highlights certain key drivers of our business and certain known trends, demands, commitments, events and uncertainties that have affected our recent financial and operating performance and may affect our future financial and operating performance.

        Our revenue is classified as instant ticket revenue, service revenue and sales revenue. Instant ticket revenue includes revenue related to our instant ticket fulfillment and services businesses, including our brand licensing and Properties Plus businesses. Revenue generated from our sales of lottery systems, terminals, gaming machines, gaming content and phone cards, which sales are typically non-recurring in nature and not subject to multi-year supply agreements, is categorized as sales revenue. All other revenue generated from Lottery Systems (including revenue from the validation of instant tickets) and Gaming is classified as service revenue.

        We believe we are likely to continue to experience a highly competitive procurement environment for domestic and international customer contracts in connection with bids, re-bids, extensions and renewals, which could lead to the loss of contracts or rate reductions and/or additional service requirements in contracts that we win or retain. In 2012, a number of our customer contracts are up for re-bid, extension or renewal. See the table in "Business—Contract Procurement" in Item 1 of this Annual Report on Form 10-K for additional information regarding our customer contracts. Our strategy to counter-balance these industry trends includes working with our customers to grow their sales through a variety of methods including launching new products and services, implementing innovative technologies and marketing tools and expanding retail distribution.

        For the year ended December 31, 2011, we derived approximately 52% of our revenue from sales to customers outside of the U.S. and were affected by fluctuations in foreign currency exchange rates. The foreign currencies to which we are most exposed are the British Pound Sterling and Euro. We refer herein to the impact of changes in foreign currency exchange rates, which results from translating foreign functional currencies into U.S. dollars for reporting purposes. The impact of foreign currency exchange rate fluctuations represents the difference between the relevant period rates and the prior period rates applied to the relevant period activity.

43


        Retail sales of instant tickets can be a key performance indicator of our instant ticket revenue, although there may not always be a direct correlation between retail sales and our instant ticket revenue due to the type of contract (e.g., PPK versus POS or CSP contracts), the impact of changes in our customer contracts or other factors. Based on third-party data, our customers' total instant ticket lottery retail sales in the U.S. increased approximately 6.5% in 2011 compared to 2010. Most of our U.S. customers reported year-over-year growth in sales of instant tickets, which we believe was primarily driven by sales of higher price-point tickets. Our U.S. instant ticket revenue increased approximately 6% in 2011 compared to 2010 due in part to the improvement in retail sales. Internationally, we also experienced instant ticket revenue growth in 2011 from our POS and CSP contracts, which we believe was also attributable to sales of higher price-point tickets.

        Our licensed game contracts are generally game-specific and therefore short-term and non-recurring. Our instant ticket revenue may be negatively impacted to the extent we are unable to continue to win licensed game-specific or multi-state game contracts. There has been an increase in interest within the lottery industry in player loyalty programs, which we believe may result in growth opportunities for our Properties Plus® offering. In the third quarter of 2011, the Iowa lottery launched Properties Plus and the Tennessee lottery awarded us a contract for a player loyalty system. In addition, the Missouri lottery is expected to begin a Properties Plus program in the first quarter of 2012. We expect our 2012 results of operations to be positively impacted by these new opportunities.

        We are the primary supplier of instant lottery tickets for LNS, which was awarded the concession to be the exclusive operator of the Italian Gratta e Vinci instant ticket lottery beginning on October 1, 2010. LNS succeeded Consorzio Lotterie Nazionali ("CLN"), a consortium comprised of essentially the same group that owns LNS, which held the prior concession. Over the life of the new concession, we expect that we will supply no less than 80% of LNS' instant ticket production requirements. Retail sales of the Italian instant ticket lottery increased 8.4% in 2011 compared to 2010. Our 2011 results reflect a year-over-year increase in instant ticket revenue related to our PPK contract with LNS, which we believe resulted from LNS' increased focus on business operations following the completion of the tender process for the new concession, increased retail distribution and the success of a €20 ticket. However, retail sales for the fourth quarter of 2011 were flat compared to the prior-year period, and preliminary retail sales information through mid-February 2012 indicates a decline in retail sales of approximately 3% compared to the prior-year period, despite retail sales growth of approximately 18% in January 2012. While we believe February 2012 sales may have been negatively impacted to some extent by severe inclement weather in certain parts of Italy, the recent sales information illustrates the volatility of instant ticket retail sales in Italy.

        The upfront fees paid by LNS in 2010 associated with the new concession are amortized by LNS (anticipated to be approximately €89.0 million per year of the new concession), which reduces our earnings from equity investments. Our share of the amortization is approximately €18.0 million per year on a pre-tax basis. In light of the corporate structure of LNS, we record earnings from our equity investment in LNS on an after-tax basis, which impacted the comparability of our results of operations from our equity investment during 2011 since we recorded earnings from CLN on a pre-tax basis.

        Under our CSP agreement with Northstar, we are responsible for the design, development, manufacturing, warehousing and distribution of instant lottery tickets and are compensated based on a percentage of retail sales. Our increase in instant ticket revenue in 2011 reflected the commencement of our CSP agreement with Northstar on July 1, 2011.

        Northstar is entitled to receive annual incentive compensation payments from Illinois to the extent it is successful in increasing the lottery's net income above specified target levels, subject to a cap of 5% of the applicable year's net income. Northstar will be responsible for payments to Illinois to the extent such targets are not achieved, subject to a similar cap. The lottery net income levels set forth in

44


Northstar's successful bid for the private management agreement, or PMA, were $851.1 million, $950 million, $980 million, $986 million and $1 billion for the five fiscal years ending June 30, 2012, 2013, 2014, 2015 and 2016, respectively, representing a compound annual growth rate in lottery net income of approximately 44%, including an approximate 27% increase in lottery net income in the first year. These net income target levels are subject to upward or downward adjustment under certain circumstances in accordance with the terms of the PMA. Northstar is entitled to be reimbursed on a monthly basis for most of its operating expenses under the PMA, although certain expenses of Northstar associated with managing the lottery are not reimbursable. Earnings and cash flows from our equity investment in Northstar may be impacted to the extent the lottery achieves, or fails to achieve, the applicable net income targets and will be impacted to the extent Northstar incurs non-reimbursable expenses. The impact of this equity method investment was not material to our earnings from our equity investments in 2011.

        As U.S. states and international jurisdictions increasingly look towards lottery and gaming as a source to grow revenue, we believe they could pursue an outsourcing model whereby the day-to-day management of their lotteries are conducted by a third party, similar to the private management agreement the Illinois lottery awarded to our Northstar.

        We believe that instant lottery tickets currently comprise less than 20% of lottery sales outside of the U.S., compared to almost 60% in the U.S. We are especially focused on increasing instant ticket penetration in both underpenetrated and new jurisdictions, particularly in Asia, South/Latin America and Eastern/Central Europe. In Greece, we recently submitted an expression of interest to operate a new instant ticket lottery through a consortium comprised of us and three other lottery and gaming companies.

        Based on third-party data, our Lottery Systems customers' total draw game retail sales in the U.S. increased approximately 0.1% in 2011 compared to 2010. In 2011, our service revenue in the U.S. was flat, reflecting this improvement in retail sales offset by lost contracts in New Hampshire and Vermont as of June 30, 2010. The level of jackpots of the Powerball and Mega Millions multi-state draw lottery games impact our service revenues. In 2011, U.S. lottery directors authorized certain changes to the Powerball game, including an increase in the ticket price to $2, which became effective on January 15, 2012. The increase in the Powerball ticket price potentially provides an impetus for sales growth in draw lottery retail sales. Our service revenue is also impacted by increases or decreases in retail sales of instant tickets where we provide the instant ticket validation services as part of a lottery systems contract.

        We are the exclusive instant ticket validation network provider to the CSL. Instant ticket retail sales of the CSL increased approximately 21% in 2011 compared to 2010. We believe the increase is a result of our strategic initiatives related to our China operations, which focus on accelerating growth through the offering of higher price-point instant tickets, such as the launch of a 30RMB ticket in the third quarter of 2011, the expansion of the retailer and validation network, the introduction of tickets with licensed brands such as the NBA and advertising campaigns to build brand awareness. We also continue to focus on the pursuit of additional distribution channels. The rate we receive on retail sales under our China instant ticket validation contract decreased by 0.2% in January 2011, decreased by an additional 0.1% in January 2012 and is scheduled to decrease an additional 0.1% in January 2014. To the extent we are not able to continue to offset these rate reductions by retail sales growth, our revenue and gross margin from this contract may be adversely affected.

        Our lottery system sales revenue is non-recurring and generated primarily outside the U.S.

        We have recently seen an increase in bidding opportunities to provide central monitoring and control systems for video gaming networks, particularly in jurisdictions in North America, as these

45


jurisdictions pursue VLTs as an opportunity to address budget deficits. We believe that this could be an attractive growth opportunity for the Company in the coming years. On January 3, 2012, we signed a contract to design, implement and administer our sixth generation AEGIS-Video™ Central Communication System (CCS) for the Illinois Gaming Board. Under the terms of the contract, we will provide real-time communication and control between every licensed video gaming terminal in the State of Illinois, as well as day-to-day management of the operation of the CCS and service throughout the State. The contract was awarded through a competitive procurement process, has an initial term of six years and may be extended by mutual agreement up to four additional years. Beginning in 2012, we expect that our results of operations will be impacted as a result of this contract.

        Our Gaming segment included the Racing Business prior to its sale to Sportech on October 5, 2010. Due to the Company's continued involvement with Sportech, including our equity interest in Sportech, the disposal of the Racing Business did not qualify as discontinued operations and was not reflected as such in our Consolidated Statements of Operations. The comparability of our results of operations during 2011 was affected by the sale of the Racing Business.

        The LBO sector of the U.K. gaming industry is highly competitive and concentrated to approximately four large LBO operators in the U.K. In 2010, Global Draw began migrating its server-based gaming machines to a new back-end technology platform and rolling out this new technology to its U.K. customers. Global Draw completed the U.K. migration in the second quarter of 2011. Net win per machine increased in 2011 compared to 2010, which we believe was attributable in part to the new technology platform. We began migrating server-based gaming machines located outside the U.K. to the new technology platform during the third quarter of 2011.

        In 2011, we completed the installation of gaming machines for the entire Ladbrokes LBO estate in accordance with the four-year contract that was awarded to us in 2010. The roll-out of gaming machines for Ladbrokes represented a significant portion of the increase in our installed gaming machine base from 22,000 at December 31, 2010 to 35,700 at December 31, 2011. Our 2011 operating results reflect an increase in revenue resulting from our higher installed base of gaming machines. In January 2012, William Hill PLC, a U.K. bookmaker, awarded a contract to one of our principal competitors (currently the supplier for a majority of gaming machines for William Hill) for the sole supply of gaming machines to William Hill's LBOs following the expiration of our gaming machine supply contract with William Hill in March 2012. The loss of this contract will impact our operating results in 2012.

        On September 23, 2011, we completed the acquisition of Barcrest, a leading supplier of games, gaming content, gaming platforms and systems to gaming operators and venues in the U.K. and in continental Europe. Barcrest is being integrated with our existing gaming business. The comparability of our 2011 results of operations was, and the comparability of our 2012 results of operations will be, affected by the acquisition.

        In January 2012, following a comprehensive strategic review, we announced our exit from the Barcrest analog AWP machine business in order to focus our game design and other resources solely on a digital server-based model. We also reorganized the Games Media digital supply business to more effectively capitalize on the Barcrest acquisition. In 2011, we recorded approximately $1.0 million of employee termination and restructuring costs associated with the integration of Barcrest. We expect that our operating results may be impacted in the first half of 2012 by increased employee termination and restructuring costs of approximately $4.0 million to $6.0 million resulting from our exit from the analog Barcrest AWP business and the reorganization of Games Media.

        In late 2010, the U.K. government announced its intention to change the taxation of gaming machines by introducing a new a new machine games duty, or MGD, that would replace both the

46


currently applicable amusement machine license duty and value-added tax. A consultation process between the government and industry representatives regarding the announced tax changes is ongoing. The rates of MGD will be determined as part of the normal budget process. The tax changes are expected to be implemented in February 2013. Although we cannot predict the precise effect of these tax changes on our U.K. gaming machine business, which will depend in large part on the rates of the MGD, these tax changes could potentially have an overall negative impact on this business.

        We continue to seek to expand our wide-area gaming deployments of server-based gaming machines and systems outside the U.K. into jurisdictions including the Caribbean, Mexico, Lithuania, Puerto Rico, and Poland. In addition, the acquisition of Barcrest provided us with entry into the Czech and Italy wide area gaming sectors. As of December 31, 2011, we had approximately 6,500 gaming machines deployed outside the U.K.

Recently Issued Accounting Guidance

        In September 2009, the Financial Accounting Standards Board ("FASB") amended the Accounting Standards Codification ("ASC") as summarized in Accounting Standards Update ("ASU") 2009-14, Software (Topic 985): Certain Revenue Arrangements That Include Software Elements, and ASU 2009-13, Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements. As summarized in ASU 2009-14, ASC Topic 985 has been amended to remove from the scope of industry-specific revenue accounting guidance for software and software related transactions tangible products containing software components and non-software components that function together to deliver the product's essential functionality. As summarized in ASU 2009-13, ASC Topic 605 has been amended: (1) to provide updated guidance on whether multiple deliverables exist, how the deliverables in an arrangement should be separated, and the consideration allocated; (2) to require an entity to allocate revenue in an arrangement using estimated selling prices of deliverables if a vendor does not have vendor-specific objective evidence or third-party evidence of the selling price; and (3) to eliminate the use of the residual method and require an entity to allocate revenue using the relative selling price method. The accounting changes summarized in ASU 2009-14 and ASU 2009-13 are both effective for fiscal years beginning on or after June 15, 2010, with early adoption permitted. Adoption may either be on a prospective basis or by retrospective application.

        We adopted these amendments to the ASC on January 1, 2011 on a prospective basis as applicable to our revenue generated from licensing branded properties that are coupled with a service component, where we also purchase and distribute prizes on behalf of lottery authorities. The impact of these accounting changes was not material to our consolidated financial statements.

        In May 2011, the FASB issued guidance to amend the accounting and disclosure requirements on fair value measurements. The new guidance limits the highest-and-best-use measure to nonfinancial assets, permits certain financial assets and liabilities with offsetting positions in market or counterparty credit risks to be measured at a net basis, and provides guidance on the applicability of premiums and discounts. Additionally, the new guidance expands the disclosures on Level 3 inputs by requiring quantitative disclosure of the unobservable inputs and assumptions, as well as description of the valuation processes and the sensitivity of the fair value to changes in unobservable inputs. We adopted the new guidance on January 1, 2012.

        In June 2011, the FASB issued guidance on presentation of comprehensive income. The new guidance eliminates the current option to report other comprehensive income and its components in the statement of changes in equity. Instead, an entity will be required to present net income and other comprehensive income either in one continuous statement or in two separate but consecutive statements. The new guidance was adopted on January 1, 2012 and will impact our financial statement presentation of comprehensive income for the period ending March 31, 2012 and the prior-year period that will be reflected in our Form 10-Q that we will file for the period ending March 31, 2012. The new

47


guidance also requires presentation of reclassification adjustments from other comprehensive income to net income on the face of the financial statements. However, the effective date pertaining to this requirement was deferred by the update issued by FASB in December 2011.

        In September 2011, the FASB issued guidance on testing goodwill for impairment. The new guidance provides an entity the option to first perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If an entity determines that this is the case, it is required to perform the currently prescribed two-step goodwill impairment test to identify potential goodwill impairment and measure the amount of goodwill impairment loss to be recognized for that reporting unit (if any). If an entity determines the fair value of a reporting unit is less than its carrying amount, the two-step goodwill impairment test is required. We will apply the new guidance to our December 31, 2012 annual goodwill impairment valuation.

CONSOLIDATED RESULTS—(in thousands)

 
   
   
   
  Favorable (Unfavorable)
(in millions)
 
 
  2011   2010   2009   2011 vs 2010   2010 vs 2009  

Revenue:

                                           

Instant tickets

  $ 493,275   $ 465,090   $ 453,238   $ 28.2     6 % $ 11.9     3 %

Services

    331,701     363,138     410,014     (31.4 )   (9 )%   (46.9 )   (11 )%

Sales

    53,746     54,271     64,497     (0.5 )   (1 )%   (10.2 )   (16 )%
                               

Total Revenue

    878,722     882,499     927,749     (3.8 )   0 %   (45.3 )   (5 )%

Operating expenses:

                                           

Cost of instant tickets (1)

    281,565     270,787     270,836     10.8     4 %   0.0     0 %

Cost of services (1)

    171,374     206,034     234,093     (34.7 )   (17 )%   (28.1 )   (12 )%

Cost of sales (1)

    38,340     38,045     44,539     0.3     1 %   (6.5 )   (15 )%

Selling, general and administrative expenses

    183,022     158,500     168,248     24.5     15 %   (9.7 )   (6 )%

Write-down of assets held for sale

        8,029     54,356     (8.0 )   (100 )%   (46.3 )   (85 )%

Employee termination and restructuring costs

    1,997     602     3,920     1.4     232 %   (3.3 )   (85 )%

Depreciation and amortization

    118,603     141,766     151,784     (23.2 )   (16 )%   (10.0 )   (7 )%
                               

Operating income (loss)

    83,821     58,736     (27 )   25.1     43 %   58.8     (217641 )%

Other (income) expense:

                                           

Interest expense

    104,703     101,613     87,498     3.1     3 %   14.1     16 %

Earnings from Equity Investments

    (29,391 )   (49,090 )   (59,220 )   19.7     (40 )%   10.1     (17 )%

Loss on early extinguishment of debt

    4,185     2,932     (4,829 )   1.3     43 %   7.8     (161 )%

Other

    911     8,594     2,856     (7.7 )   (89 )%   5.7     201 %
                               

    80,408     64,049     26,305     16.4     26 %   37.7     143 %
                               

Net income (loss) before income tax expense

    3,413     (5,313 )   (26,332 )   8.7     (164 )%   21.0     (80 )%

Income tax expense

    15,983     143,888     13,547     (127.9 )   (89 )%   130.3     962 %
                               

Net loss

  $ (12,570 ) $ (149,201 ) $ (39,879 ) $ 136.6     (92 )% $ (109.3 )   274 %
                               

(1)
Exclusive of depreciation and amortization.

48


Year Ended December 31, 2011 Compared to Year Ended December 31, 2010

Revenue Analysis

        The decrease in our consolidated revenue was principally due to the sale of the Racing Business, which generated $83.8 million in revenue in 2010. The decrease in consolidated revenue was offset by increases in each of our categories of revenue from our core businesses and the acquisition of Barcrest, which increased our consolidated revenues by $14.3 million. The increase in our instant ticket revenue reflected increased revenue from both our domestic and international businesses driven by increases in retail sales and higher sales of licensed products, including our multi-state games. The decrease in service revenue of $31.4 million in 2011 included the impact of service revenue related to the Racing Business of $76.0 million. The decrease in our service revenue was offset by increases in our service revenue from international Lottery Systems of $4.9 million, the expansion of our Global Draw U.K. LBO business resulting in increased service revenue of $29.6 million, and $6.9 million from the acquisition of Barcrest. The decrease in our sales revenue in 2011 included the impact of the sale of the Racing Business, resulting in a decrease of $7.8 million which was predominantly offset by increased sales resulting from the acquisition of Barcrest. Our consolidated revenue includes a favorable impact of foreign currency translation of $12.0 million.

Operating Expenses

Cost of Revenues

        Consolidated cost of revenues decreased in 2011 versus 2010 reflecting the decrease in consolidated revenue for the same period, as well as achievement of our cost reduction and efficiency efforts. Our cost of instant tickets increased 4% in 2011 versus 2010 compared to an increase in instant ticket revenue of 6% for the same period. Cost of services decreased 17% in 2011 versus 2010 compared to a decrease in service revenue of 9% for the same period. Cost of sales increased by 1% in 2011 versus 2010 compared to a 1% decrease in sales revenue for the same period.

Selling, General and Administrative Expense ("SG&A")

        The increase in our SG&A reflected increased headcount and incentive compensation expense of $11.1 million relating to support of our strategic growth initiatives and an accrual of $4.3 million for potential compensation related to our Asia-Pacific Plan. The increase also reflected $9.9 million of higher acquisition-related due diligence and advisory fees and expenses related to a customer claim, increase in expense of $2.1 million resulting from the acquisition of Barcrest and an increase of $2.0 million to support expansion of China operations. We also incurred an increase in expense of $2.0 million to support the expansion of the Global Draw business, an increase in professional fees of $1.8 million during 2011 primarily related to our financing activities and the impact of foreign currency translation of $1.8 million. The increases were partially offset by lower expenses of $9.3 million due to the sale of the Racing Business, lower costs of $2.2 million as a result of the costs incurred in 2010 related to the Italian instant ticket concession tender and lower stock-based compensation expense of $1.3 million.

Write-down of Assets Held for Sale

        The write-down of assets held for sale of $8.0 million included in the year ended December 31, 2010 was the result of valuing the held for sale assets of the Racing Business at fair market value less the estimated costs to sell prior to its sale on October 5, 2010.

49


Employee Termination and Restructuring Costs

        Employee termination and restructuring costs in 2011 and 2010 were a result of our cost reduction initiatives related to Global Draw's migration to a new back-end technology platform and the integration of Barcrest into the gaming divisions.

Depreciation and Amortization Expense

        Depreciation and amortization expenses decreased in 2011 primarily due to the long-lived asset impairments related to underperforming Lottery Systems contracts and obsolete equipment recorded in 2010 and accelerated depreciation expense from Global Draw recorded in 2010 on existing technology as we migrated to a new platform that did not repeat to the same extent in 2011.

Other Income and Expenses

        Interest expense increased from 2010 to 2011 primarily due to the issuance of our 8.125% senior subordinated notes due 2018 (the "2018 Notes") and the retirement of the 2012 Notes in 2010.

        Loss on early extinguishment of debt of $4.2 million in 2011 was the result of the write-off of deferred financing fees related to the August 25, 2011 credit agreement amendment. Loss on early extinguishment of debt of $2.9 million for the year ended December 31, 2010 was the result of the write-off of debt-related costs related to the purchase of $187.1 million in aggregate principal amount of the Company's 2012 Notes and a prepayment on a portion of the outstanding borrowings under the term loan facilities under the Company's credit agreement.

        Earnings from equity investments for 2011 decreased from 2010, which was primarily related to a decline in earnings from our equity investment in LNS of $20.8 million. The Company's share of earnings from LNS is reported on an after-tax basis (it was previously reported on a pre-tax basis under the prior equity investment, CLN) and reflects the amortization of a portion of the upfront fees for the new concession, which together reduced our earnings from our equity investment by approximately $34.8 million. The decrease was partially offset by an increase in earnings from our equity investment in CSG of $4.9 million.

        In 2010, we incurred a loss on foreign currency forward contracts related to the Italian instant ticket concession tender of $12.6 million. The foreign currency forward contracts were settled in 2010.

Income Tax Expense

        Income tax expense was $16.0 million for the year ended December 31, 2011 compared to $143.9 million for the year ended December 31, 2010. The effective income tax rates for the years ended December 31, 2011 and 2010 were 468.7% and (2,708.9)%, respectively. During the year ended December 31, 2010, we recorded a valuation allowance of $149.6 million against our U.S. deferred tax assets. The income tax expense in 2011 was primarily attributable to income tax expense in our foreign jurisdictions. The effective tax rate for 2011 does not include the benefit of the 2011 U.S. pre-tax loss as a result of the valuation allowance against our U.S. deferred tax assets.

Year Ended December 31, 2010 Compared to Year Ended December 31, 2009

Revenue Analysis

        The decrease in consolidated revenue in 2010 reflected lower revenue of $24.9 million due to the sale of the Racing Business on October 5, 2010. The decrease in consolidated revenue was offset by an increase in our instant ticket revenue primarily due to higher sales under our domestic and international CSP contracts and international POS contracts and increased sales of licensed products. The decrease in service revenue in 2010 included the impact from the sale of the Racing Business of

50


$29.2 million. Service revenue also decreased in 2010 due to terminated Lottery Systems contracts in the U.S., lower revenue from Gaming due to revised contracts in the U.K. and lower revenue from our Austrian over-the-counter business. Our sales revenue decreased $10.2 million in 2010 compared to 2009, primarily due to lower international hardware and software sales, offset by increased hardware and software sales of $4.2 million from the Racing Business prior to its sale on October 5, 2010.

Operating Expenses

Cost of Revenues

        Consolidated cost of revenue decreased in 2010 versus 2009 consistent with the decrease in consolidated revenue for the same period, as well as improved cost reduction and efficiency efforts. Our cost of instant tickets was flat in 2010 versus 2009 compared to an increase in instant ticket revenue of 3% for the same period. Cost of services decreased 12% in 2010 versus 2009 compared to a decrease in service revenue of 11% for the same period. Cost of sales decreased 15% in 2010 versus 2009 compared to a 16% decrease in sales revenue for the same period.

SG&A

        The decrease in SG&A was principally the result of lower stock-based compensation expense of $11.8 million, lower selling and administrative expenses of $3.8 million due to the sale of the Racing Business and lower consulting and other professional service expenses of $5.8 million, partially offset by higher legal fees and proposal costs of $4.9 million, higher incentive compensation costs of $4.3 million and recognition of an earn out of $2.3 million related to an acquisition completed in 2004.

Write-down of Assets Held for Sale

        The write-down of assets held for sale of $8.0 million included in 2010 was the result of valuing the held for sale assets of the Racing Business at fair market value less the estimated costs to sell prior to its sale on October 5, 2010.

Employee Termination and Restructuring Costs

        Employee termination costs of $0.6 million for 2010 decreased $3.3 million from 2009. Employee termination costs of $3.9 million for 2009 were a result of our cost reduction efforts.

Depreciation and Amortization Expense

        Depreciation and amortization expense decreased due to the impairment of long-lived assets recorded in 2010 of $17.5 million related to underperforming Lottery Systems contracts, offset by a reduction in depreciation expense of $24.7 million due to impairment of long-lived assets recorded in 2009 related to underperforming Lottery Systems contracts. In addition, the held for sale accounting treatment of the Racing Business prior to its sale on October 5, 2010 resulted in lower depreciation expense of $19.2 million. The decreases were partially offset by accelerated depreciation expense of approximately $8.3 million recorded on existing technology as Global Draw migrated to a new platform beginning in 2010. In addition, in 2010, we recorded impairments of long-lived assets totaling $5.5 million related to obsolete equipment.

Other Income and Expenses

        The increase in interest expense was attributable to a net increase in outstanding debt from December 31, 2009 of $1,367.1 million to $1,396.7 million as of December 31, 2010 as well as an increase in the weighted average interest rate on fixed rate debt. The increase in debt was partially offset by a decline in LIBOR rates. See Note 8 (Long-Term and Other Debt) to our Consolidated Financial Statements for additional information related to our debt.

51


        The decrease in earnings from equity investments was primarily due to lower equity in earnings of from our equity investment in LNS/CLN of $10.3 million as a result of lower sales of instant lottery tickets by LNS/CLN during the tender process for the new instant ticket concession, recording earnings on an after-tax basis in the fourth quarter of 2010 rather than on a pre-tax basis as we had done historically and the amortization of the associated upfront fees, which reduced our equity in earnings by approximately $8.0 million during 2010.

        Loss on early extinguishment of debt of $2.9 million in 2010 was the result of the write-off of debt-related costs related to the purchase of $187.1 million in aggregate principal amount of the 2012 Notes and a prepayment on a portion of the outstanding borrowings under the term loan facilities under the Company's credit agreement.

        Other expense in 2010 of $8.6 million increased by $5.7 million from other expense of $2.9 million in 2009. The increase was primarily due to the net loss on foreign currency forward contracts related to our hedging of the upfront fees for the new Italian instant ticket concession.

Income Tax Expense

        Income tax expense was $143.9 million for 2010 compared to $13.5 million for 2009. The effective income tax rates for 2010 and 2009 were (2,708.9)% and (51.5)%, respectively. During 2010, we recorded a valuation allowance of $149.6 million against our U.S. deferred tax assets and this valuation allowance caused the effective tax rate for 2010 to be greater than the effective tax rate for the comparable year period.

BUSINESS SEGMENTS RESULTS

PRINTED PRODUCTS

 
   
   
   
  Favorable (Unfavorable)
(in millions)
 
 
  2011   2010   2009   2011 vs 2010   2010 vs 2009  

Revenue:

                                           

Instant tickets

  $ 493,275   $ 465,090   $ 453,238   $ 28.2     6 % $ 11.9     3 %

Services

                0.0         0.0      

Sales

    9,664     9,222     13,374     0.4     5 %   (4.2 )   (31 )%
                               

Total Revenue

    502,939     474,312     466,612     28.6     6 %   7.7     2 %

Operating expenses:

                                           

Cost of instant tickets (1)

    281,565     270,787     270,836     10.8     4 %   (0.0 )   0 %

Cost of services (1)

                0.0         0.0      

Cost of sales (1)

    5,928     6,981     8,923     (1.1 )   (15 )%   (1.9 )   (22 )%

Selling, general and administrative expenses

    49,269     46,894     37,411     2.4     5 %   9.5     25 %

Employee termination and restructuring costs

            2,016     0.0         (2.0 )   (100 )%

Depreciation and amortization

    32,746     33,303     32,982     (0.6 )   (2 )%   0.3     1 %
                               

Operating income

  $ 133,431   $ 116,347   $ 114,444   $ 17.1     15 % $ 1.9     2 %

(1)
Exclusive of depreciation and amortization.

52


Year Ended December 31, 2011 Compared to Year Ended December 31, 2010

Revenue Analysis

        Instant ticket revenue reflected higher revenue of $17.1 million from U.S. customers primarily from our POS and CSP contracts, including our CSP agreement with Northstar, and sales of higher price-point games resulting in higher lottery retail sales. The growth in our U.S. instant ticket revenue in 2011 was also attributable to our successful introduction of the multi-state Wheel of Fortune® licensed game in the second quarter of 2011.

        The increases in the U.S. were offset by lower U.S. PPK contract revenue primarily due to timing of orders as a result of contract revisions and increased competition where we are not the exclusive instant ticket supplier. Our international revenue increased $5.0 million primarily due to growth in revenue from our European CSP and POS contracts and higher price-point games, offset by a decrease in PPK contract revenue due in part to the loss of our Lotto West contract in 2011. Revenue also increased as a result of favorable foreign currency translation of $6.0 million. Printed Products sales revenue primarily includes phone cards sales.

Operating Income

        Operating income increased in 2011 compared to 2010 due to a higher and more profitable mix of revenue offset by an increase in SG&A expenses primarily due to non-recurring expenses related to a contract dispute.

Year Ended December 31, 2010 Compared to Year Ended December 31, 2009

Revenue Analysis

        The increase in instant ticket revenue was primarily due to an increase in revenue of $8.5 million from our U.S. and European CSP contracts, attributable to our CSP contracts in Arkansas (effective September 2009) and Puerto Rico (effective December 2009), partially offset by our lost CSP contracts in Ohio (ended June 2009) and Arizona (ended January 2010). Instant ticket revenue also increased $5.8 million due to the conversion of a U.K. contract to a POS contract in the prior-year period, increases from our U.S. instant ticket business and a full year of revenue from our Properties Plus contract with Arkansas that began in the fourth quarter of 2009 and an increase in our international licensing revenue. The increase in revenue was partially offset by lower international sales of instant lottery tickets of $6.4 million and lower sales of tickets to CLN and LNS of $8.6 million. Revenue also increased as a result of favorable foreign currency translation of $5.7 million. The decrease in sales revenue was impacted by a decline in phone card sales.

Operating Income

        Operating income increased in 2010 compared to 2009 due to higher and more profitable mix of revenues and a decrease in employee termination costs recorded in 2009 that did not repeat in 2010. Operating income was negatively impacted by higher SG&A costs primarily attributable to higher incentive compensation expense, increased legal fees and increased costs related to the new Italian instant ticket tender offer in 2010.

53


LOTTERY SYSTEMS

 
   
   
   
  Favorable (Unfavorable)
(in millions)
 
 
  2011   2010   2009   2011 vs 2010   2010 vs 2009  

Revenue:

                                           

Instant tickets

  $   $   $   $       $      

Services

    205,801     199,439     211,015     6.4     3 %   (11.6 )   (5 )%

Sales

    36,528     36,597     46,372     (0.1 )   0 %   (9.8 )   (21 )%
                               

Total Revenue

    242,329     236,036     257,387     6.3     3 %   (21.4 )   (8 )%

Operating expenses:

                                           

Cost of instant tickets (1)

                0.0         0.0      

Cost of services (1)

    109,016     104,274     110,660     4.7     5 %   (6.4 )   (6 )%

Cost of sales (1)

    25,134     25,716     32,619     (0.6 )   (2 )%   (6.9 )   (21 )%

Selling, general and administrative expenses

    23,713     22,973     22,769     0.7     3 %   0.2     1 %

Employee termination and restructuring costs

            125     0.0         (0.1 )   (100 )%

Depreciation and amortization

    46,891     64,979     68,902     (18.1 )   (28 )%   (3.9 )   (6 )%
                               

Operating income

  $ 37,575   $ 18,094   $ 22,312   $ 19.5     108 % $ (4.2 )   (19 )%

(1)
Exclusive of depreciation and amortization.

Year Ended December 31, 2011 Compared to Year Ended December 31, 2010

Revenue Analysis

        The increase in Lottery Systems service revenue reflected service revenue from U.S. customers that was flat year over year and approximately $4.9 million of increased revenue from international customers. In the U.S., instant ticket validation service revenue increased, offset by lost contracts in New Hampshire and Vermont which both ended June 30, 2010. The increase in international revenue reflected higher instant ticket validation revenues from the CSL of $2.5 million and an increase in service revenue of $2.5 million from other international customers. Revenue also increased $1.7 million as a result of favorable foreign currency translation. Lottery systems sales revenue was flat in 2011 compared to 2010.

Operating Income

        Operating income increased primarily due to the $18.1 million lower depreciation and amortization expense as a result of the long-lived asset impairments recorded in 2010 that did not repeat in 2011.

Year Ended December 31, 2010 Compared to Year Ended December 31, 2009

Revenue Analysis

        The decrease in Lottery Systems service revenue was primarily due to contract losses in West Virginia (ended June 2009), South Dakota (ended August 2009) and Vermont and New Hampshire (both ended June 30, 2010) resulting in lower revenue of approximately $9.4 million, lower international revenue of $3.9 million and the negative impact of foreign currency translation of $0.9 million. The decrease was partially offset by higher instant ticket validation revenue from the CSL of $2.6 million. The decrease in lottery system sales revenue was primarily due to a decline in hardware sales outside of the U.S. of $15.4 million as compared to the prior year and the negative impact of foreign currency translation of $1.0 million, partially offset by an increase in hardware sales in the U.S. of $6.5 million.

54


Operating Income

        Operating income decreased as a result of the decrease in revenue, offset by a decrease in depreciation and amortization expense due to long-lived asset impairments recorded in 2009 that did not repeat to the same extent in 2010.

GAMING

 
   
   
   
  Favorable (Unfavorable)
(in millions)
 
 
  2011   2010   2009   2011 vs 2010   2010 vs 2009  

Revenue:

                                           

Instant tickets

  $   $   $   $       $      

Services

    125,900     163,699     198,999     (37.8 )   (23 )%   (35.3 )   (18 )%

Sales

    7,554     8,452     4,751     (0.9 )   (11 )%   3.7     78 %
                               

Total Revenue

    133,454     172,151     203,750     (38.7 )   (22 )%   (31.6 )   (16 )%

Operating expenses:

                                           

Cost of instant tickets (1)

                0.0         0.0      

Cost of services (1)

    62,358     101,760     123,433     (39.4 )   (39 )%   (21.7 )   (18 )%

Cost of sales (1)

    7,278     5,348     2,997     1.9     36 %   2.4     78 %

Selling, general and administrative expenses

    16,408     20,518     24,923     (4.1 )   (20 )%   (4.4 )   (18 )%

Write-down of assets held for sale

        8,029     54,356     (8.0 )   (100 )%   (46.3 )   (85 )%

Employee termination and restructuring costs

    1,997     602     433     1.4     232 %   0.2     39 %

Depreciation and amortization

    38,435     42,983     49,224     (4.5 )   (11 )%   (6.2 )   (13 )%
                               

Operating (loss) income

  $ 6,978   $ (7,089 ) $ (51,616 ) $ 14.1     (198 )% $ 44.5     (86 )%

(1)
Exclusive of depreciation and amortization.

Year Ended December 31, 2011 Compared to Year Ended December 31, 2010

Revenue Analysis

        The decrease in service revenue was primarily due to the sale of the Racing Business, resulting in a decrease of $76.0 million. The decrease was partially offset by increased revenue of $29.6 million primarily from the expansion of Global Draw's terminal base, higher net win per terminal, $6.9 million from the acquisition of Barcrest on September 23, 2011 and higher revenue of $3.2 million due to favorable foreign currency translation. Sales revenue was lower due to a decrease of $7.8 million from the sale of the Racing Business, partially offset by terminal sales to Barcrest customers.

Operating Income

        Operating income increased in part due to the sale of the Racing Business resulting in a more profitable mix of revenue and a decrease in SG&A costs of $9.3 million. The decrease in SG&A was partially offset by an increase of $4.1 million primarily due to the acquisition of Barcrest and expansion of the Global Draw business during 2011. Employee termination costs increased in 2011 primarily related to Global Draw's migration to a new back-end technology platform and the integration of Barcrest. The write down of assets held for sale of $8.0 million recorded in 2010 was the result of valuing the held for sale assets of the Racing Business prior to its sale on October 5, 2010. Depreciation expense decreased due in part to the accelerated depreciation and amortization expense in 2010 and impairments of long-lived assets in 2010 related to obsolete equipment.

55


Year Ended December 31, 2010 Compared to Year Ended December 31, 2009

Revenue Analysis

        The decrease in service revenue was principally due to the sale of the Racing Business, resulting in a decrease of $29.2 million. Global Draw revenue decreased $6.1 million, primarily due to lower revenue from our Austrian over-the-counter business of $4.1 million, lower revenue of $7.2 million from revised contract terms in the U.K., lower revenue from independent betting shops of $1.2 million and lower revenue from Games Media of $1.6 million. The decreases were offset by higher revenue of $8.6 million from expansion of the U.K. LBO business. Sales revenue increased primarily due to increased hardware and software sales from the Racing Business prior to its sale on October 5, 2010.

Operating Income

        Operating income increased primarily due to the sale of the Racing Business resulting in lower SG&A expenses, lower depreciation and amortization expenses, and a decrease of $46.3 million in the write-down of assets held for sale year-over-year.

Critical Accounting Policies

        The SEC defines "critical accounting policies" as those that require application of management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods.

        The following is not intended to be a comprehensive list of all of our accounting policies. Our significant accounting policies are more fully described in Note 1 (Description of the Business and Summary of Significant Accounting Policies) to our Consolidated Financial Statements. In many cases, the accounting treatment of a particular transaction is specifically dictated by accounting principles generally accepted in the United States of America, with no need for management's judgment in their application. There are also areas in which management's judgment in selecting an available alternative would not produce a materially different result.

Revenue recognition

        We recognize revenue when it is realized or realizable and earned. As described below, the determination of when to recognize revenue for certain revenue transactions requires judgment.

        Revenue from licensed branded property coupled with a service component whereby we purchase and distribute merchandise prizes on behalf of the lottery authorities to identified winners is recognized pursuant to ASU 2009-13, Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements. Under ASU 2009-13, two deliverables in this arrangement, the license and the merchandising services, become separate units of accounting. We then allocate revenue to the deliverables based on their relative selling prices. Revenue allocated to the license is recognized when the use of the licensed brand is permitted, typically when the contract is signed. Revenue allocated to the merchandising services is recognized on a proportional performance method as this method best reflects the pattern in which the obligations of the merchandising services to the customer are fulfilled. A performance measure is used based on total estimated cost allocated to the merchandising services. By accumulating costs for services as they are incurred, and dividing such costs by the total costs of merchandising services which is estimated based on a budget prior to contract inception, a percentage is determined. The percentage determined is applied to the revenue allocated to the merchandising services and that proportionate amount of revenue is recognized on a monthly basis.

        Revenue from the sale of lottery systems that require the production and delivery of terminals and customized software is recognized using the cost-to-cost measure of the percentage-of-completion method of accounting. The percentage-of-completion method recognizes income as work on a contract progresses. The use of the percentage-of-completion method depends on our ability to make reasonably dependable cost estimates for the design, manufacture, and delivery of our products. Estimation of

56


these costs requires the use of judgment. Revenues under percentage-of-completion contracts are recorded as costs are incurred.

Stock-based compensation

        We measure compensation cost for stock awards at fair value and recognize compensation over the service period for awards expected to vest. The fair value of restricted stock units is determined based on the number of shares granted and the quoted price of our common stock and the fair value of stock options are determined using the Black-Scholes valuation model. The estimation of stock-based awards that will ultimately vest requires judgment and, to the extent actual results or updated estimates differ from our current estimates, such amounts will be recorded as a cumulative adjustment in the period estimates are revised. We consider many factors when estimating expected forfeitures, including types of awards, employee class, and historical experience. Actual results and future changes in estimates may differ substantially from our current estimates.

        We may grant certain stock-based awards that are contingent upon the Company achieving certain financial performance targets. Upon determining the performance target is probable, the fair value of the award is recognized over the service period, subject to potential adjustment.

Valuation of long-lived and intangible assets and goodwill

        We assess the recoverability of long-lived assets and intangible assets whenever events or changes in circumstances indicate that the carrying value of the asset may not be recoverable. We assess the impairment of goodwill annually or more frequently if events or changes in circumstances indicate the carrying value of goodwill may not be recoverable. The Company has three reporting units: Printed Products; Lottery Systems; and Gaming. Factors we consider important that could trigger an impairment review include:

        We evaluate goodwill for impairment by comparing the carrying value of each reporting unit to its fair value using a two-step impairment test. If the carrying amount of reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. When we determine that the carrying value of the long-lived assets, intangible assets and goodwill may not be recoverable based upon the existence of one or more of the above indicators of impairment, we measure any impairment based on the projected discounted cash flow or by a comparison to third-party indications of fair market value. The estimate of a reporting unit's fair value requires the use of assumptions and estimates regarding the reporting unit's future cash flows, growth rates and weighted average cost of capital. Any significant adverse changes in key assumptions about these businesses and their prospects or an adverse change in market conditions may cause a change in the estimation of fair value and could result in an impairment charge. Given the significance of goodwill, an adverse change to the estimated fair value could result in an impairment charge that could be material to our financial statements.

        Our annual impairment valuation as of December 31, 2011 produced estimated fair values of equity for our reporting units in excess of the carrying value of equity. In each case, the estimated fair value of the reporting unit substantially exceeded the carrying value. Accordingly, we do not believe

57


that any of our reporting units were at risk of failing step one of the goodwill impairment test as of December 31, 2011.

        Significant judgment is required in the forecasting of future operating results, which are used in the preparation of projected cash flows. Due to uncertain market conditions and potential changes in our strategy and products, it is possible that forecasts used to support our goodwill may change in the future, which could result in significant non-cash charges that would adversely affect our results of operations.

Income Taxes and Deferred Income Taxes

        Income taxes are determined using the liability method of accounting for income taxes. The Company's tax expense includes the U.S. and international income taxes but excludes the provision for U.S. taxes on undistributed earnings of international subsidiaries deemed to be permanently invested.

        The Company applies a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The Company recognizes in the financial statements the impact of a tax position, if that position is more likely than not of being sustained on audit, based on the technical merits of the position.

        Certain items of income and expense are not reported in tax returns and financial statements in the same year. The tax effect of such temporary differences is reported as deferred income taxes. The measurement of deferred tax assets is reduced, if necessary, by the amount of any tax benefits that, based on available evidence, are not expected to be realized. The Company establishes a valuation allowance for deferred tax assets for which realization is not likely. At December 31, 2011, the Company has a valuation allowance of $236.3 million recorded against the benefit of certain deferred tax assets of foreign and domestic subsidiaries.

        The Company operates within multiple taxing jurisdictions and in the normal course of business is examined in various jurisdictions. The reversal of the accruals is recorded when examinations are completed, statutes of limitation are closed or tax laws are changed.

LIQUIDITY, CAPITAL SOURCES AND WORKING CAPITAL

Sources of Liquidity

        At December 31, 2011, our principal sources of liquidity were cash and equivalents and amounts available under our revolving credit facility discussed below under "—Credit Agreement and Other Debt."

        At December 31, 2011, our available cash and equivalents and borrowing capacity totaled $296.1 million (including cash and cash equivalents of $104.4 million and availability of $191.7 million under the revolving credit facility) compared to $258.6 million at December 31, 2010 (including cash and cash equivalents of $124.3 million and availability of $134.3 million under our $250.0 million revolving credit facility). There were no borrowings outstanding; however, we had $58.3 million in outstanding letters of credit as of December 31, 2011, which reduces our available borrowings under our revolving credit facility. The amount of our available cash and equivalents fluctuates principally based on borrowings or repayments under our credit facilities, investments, acquisitions and changes in our working capital position. Our borrowing capacity under the revolving credit facility will depend on outstanding borrowings and letters of credit issued under the revolving credit facility and will depend on us remaining in compliance with the limitations imposed by our credit agreement, including the maintenance of our financial ratios and other covenants. We were in compliance with all covenants under our credit agreement as of December 31, 2011.

58


        We believe that our cash flow from operations, available cash and equivalents and available borrowing capacity under our revolving credit facility will be sufficient to meet our liquidity needs for the foreseeable future; however, there can be no assurance that this will be the case. We believe that substantially all cash held outside the U.S. is free from legal encumbrances or similar restrictions that would prevent it from being available to meet the Company's global liquidity needs. The Company's intention is to reinvest undistributed earnings of foreign subsidiaries and current plans do not indicate a need to repatriate earnings of foreign subsidiaries to fund operations in the U.S.

        Total cash held by our foreign subsidiaries was $81.5 million as of December 31, 2011. To the extent that a portion of our foreign cash were required to meet liquidity needs in the U.S. (which we do not currently anticipate), we might incur a tax liability, the timing and amount of which would depend on a variety of factors. A significant amount of the cash held by our foreign subsidiaries as of December 31, 2011 could be transferred to the U.S. as repayments of intercompany loans and we have significant foreign tax credit carryovers that would be available to reduce any potential U.S. tax liability.

        Our contracts are periodically subject to renewal and there can be no assurance that we will be successful in sustaining our cash flow from operations should our existing contracts not be renewed, be renewed on less favorable terms, 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. As of December 31, 2011, our aggregate outstanding performance bonds were $206.9 million. Our ability to obtain performance bonds on commercially reasonable terms is subject to the Company's financial condition and by prevailing market conditions, which may be impacted by economic and political events. Although we have not experienced difficulty in obtaining such bonds to date, there can be no assurance that we will continue to be able to obtain performance bonds on commercially reasonable terms or at all. If we need to refinance all or part of our indebtedness, on or before maturity, or provide letters of credit or cash in lieu of performance bonds, there can be no assurance that we will be able to obtain new financing or to refinance any of our indebtedness, on commercially reasonable terms or at all.

Cash Flow Summary—A Three Year Comparative

Years Ended December 31,
  2011   2010   2009   2011 vs 2010   2010 vs 2009  

Net cash provided by operating activities

  $ 171.1   $ 170.6   $ 220.1   $ 0.5   $ (49.5 )

Net cash used in investing activities

    (161.1 )   (287.6 )   (188.2 )   126.5     (99.4 )

Net cash (used in) provided by financing activities

    (24.6 )   (9.8 )   92.1     (14.8 )   (101.9 )

Effect of exchange rates on cash and cash equivalents

    (5.2 )   (9.0 )   0.4     3.8     (9.4 )
                       

Increase (decrease) in cash and cash equivalents

  $ (19.8 ) $ (135.8 ) $ 124.4   $ 116.0   $ (260.2 )
                       

Cash flows from operating activities

        Cash flow from operating activities in 2011 was relatively consistent with levels in 2010 as working capital and net loss exclusive of non-cash charges were consistent between years.

        Cash flows from operating activities decreased $49.5 million in 2010. The decrease in 2010 was primarily due to an increase in net loss. This increase in net loss was due primarily to the change in deferred income taxes due to a valuation allowance in 2010. This was partially offset by a non-cash loss recorded in 2009 related to the sale of racing.

59


Cash flows from Investing activities

        Net cash used in investing activities decreased in 2011. Capital expenditures totaled $8.6 million in 2011 compared to $9.4 million in 2010. Wagering system expenditures, including software and intangible expenditures totaled $83.3 million in 2011, compared to $99.3 million in 2010, primarily due to decreased contract capital requirements for our lottery and gaming systems in 2011 compared to 2010. Our net cash used for equity investments decreased due to our cash investment made in LNS in 2010 of $203.2 million compared to our cash investment in Northstar and ITL during 2011 totaling $12.0 million and $23.8 million, respectively. We also received return of capital payments totaling $17.8 million from LNS during 2011. We acquired Barcrest on September 23, 2011 for approximately $48.4 million and we received cash proceeds of $35.9 million from the sale of the Racing Business on October 5, 2010.

        Net cash used in investing activities increased in 2010 compared to the prior year. Capital expenditures totaled $9.4 million in the year 2010, compared to $12.9 million in the prior year. Wagering system expenditures, including software expenditures, totaled $99.3 million in the year ended December 31, 2010, compared to $98.6 million in the prior year. The wagering expenditures primarily related to the Indiana lottery contract and gaming terminals related to Global Draw and Games Media. Our cash used in equity method investments in 2010 reflected the investment in LNS of $203.2 million. Our cash used in business acquisitions decreased in 2010 from 2009. We acquired Sceptre Leisure Solutions Limited and GameLogic during 2010 for an aggregate of $12.5 million. Net cash used in investing activities was partially offset by net cash proceeds received of approximately $35.9 million from the sale of the Racing Business.

Cash flows from financing activities

        Net cash used in financing activities in 2011 reflected repayments under the Credit Agreement and fees associated with amendments to the Credit Agreement (as defined below).

        Net cash used in financing activities in 2010 reflected the borrowings and repayments under the Credit Agreement and in connection with the issuance of the 2018 Notes, as well as repurchases of stock.

Credit Agreement and Other Debt

Credit Agreement

        We are party to a credit agreement, dated as of June 9, 2008, as amended and restated as of February 12, 2010, and amended as of December 16, 2010, March 11, 2011 and as further amended and restated as of August 25, 2011 (as so amended, the "Credit Agreement"), among SGI, as borrower, the Company, as a guarantor, the several lenders from time to time parties thereto and JPMorgan Chase Bank, N.A. ("JPMorgan"), as administrative agent. A summary of the terms of the Credit Agreement and the financial ratios that the Company is required to maintain under the terms of the Credit Agreement is included in Note 8 (Long-Term and Other Debt).

        On March 11, 2011, the Company and SGI entered into an amendment to the Credit Agreement (the "March Amendment"). Under the March Amendment, from and after December 31, 2010, "consolidated EBITDA" (as such term is defined in the Credit Agreement) will generally include the Company's share of the earnings from our equity investment in LNS, whether or not such earnings have been distributed to the Company, before interest expense (other than interest expense in respect of debt of LNS if such debt exceeds $25.0 million), income tax expense and depreciation and amortization expense, provided that the amount of "consolidated EBITDA" attributable to the Company's interest in LNS that would not have otherwise been permitted to be included in "consolidated EBITDA" prior to giving effect to the March Amendment will be capped at $25.0 million

60


in any period of four consecutive quarters (or $30.0 million in the case of any such period ending on or prior to June 30, 2012). Prior to giving effect to the March Amendment, "consolidated EBITDA" generally included only the Company's share of the earnings of LNS that was distributed to the Company. In addition, under the terms of the March Amendment, any cash compensation expense incurred but not paid in a particular period will be added back for purposes of determining "consolidated EBITDA" so long as no cash payment in respect thereof is required prior to the scheduled maturity of the borrowings under the Credit Agreement. This add-back was revised pursuant to the subsequent amendment described below to permit up to $993,000 of non-cash compensation expense accrued prior to August 25, 2011 to be added back notwithstanding that cash payments may be required to be made in respect thereof prior to the scheduled maturity of the borrowings under the Credit Agreement. "Consolidated EBITDA" is relevant for determining whether the Company is in compliance with the financial ratios required to be maintained under the terms of the Credit Agreement.

        The March Amendment also provides that up to $100.0 million of unrestricted cash and cash equivalents of the Company and its subsidiaries in excess of $15.0 million will be netted against "consolidated total debt" for purposes of determining the Company's "consolidated leverage ratio" and "consolidated senior debt ratio" (as such terms are defined in the Credit Agreement) as of any date from and after December 31, 2010. In connection with the March Amendment, SGI paid approximately $2.6 million of fees and expenses to (or for the benefit of) the consenting lenders. For more information regarding the March Amendment, see our Current Report on Form 8-K filed with the SEC on March 14, 2011.

        On August 25, 2011, the Company and SGI entered into an amendment to the Credit Agreement (the "August Amendment"). In connection with the August Amendment, the scheduled maturity date of approximately $247.0 million (or 99%) of the revolving credit facility commitments and approximately $555.8 million (or 98%) of the outstanding term loans under the Credit Agreement was extended from June 9, 2013 to June 30, 2015. Under the amended Credit Agreement, SGI has the flexibility to extend the maturity date of, or reduce or prepay without premium or penalty (other than break-funding costs), the approximately $16.4 million of revolving credit facility commitments and outstanding term loans that were not extended in connection with the August Amendment, subject to certain conditions set forth in the August Amendment or the Credit Agreement, as applicable. On February 21, 2012, the Company and SGI entered into an agreement to refinance the approximately $16.4 million of revolving credit facility and term loan commitments that were not extended in connection with the August Amendment and extend the maturity dates on these commitments to June 30, 2015. SGI paid approximately $0.06 million of fees and expenses to (or for the benefit of) the new lender.

        Under the terms of the August Amendment, certain financial covenant ratios were revised. In addition, borrowings under the Credit Agreement bear interest at a rate per annum equal to, at SGI's option, either (1) a base rate determined by reference to the higher of (a) the prime rate of JPMorgan, (b) the federal funds effective rate plus 0.50% and (c) the LIBOR rate for a deposit in dollars with a maturity of one month plus 1.00%, or (2) a reserve-adjusted LIBOR rate, in each case plus an applicable margin based on the consolidated leverage ratio as set forth in a grid. Under the terms of the August Amendment, the two lowest applicable margin levels in the grid were eliminated such that the applicable margin now varies based on the consolidated leverage ratio from 1.50% to 2.50% above the base rate for base rate loans, and from 2.50% to 3.50% above LIBOR for LIBOR-based loans

        The August Amendment provides for additional refinancing flexibility in the form of (1) permitted bank debt or debt securities that may be unsecured or secured on a pari passu or junior basis with the collateral securing the obligations under the Credit Agreement and (2) replacement facilities under the Credit Agreement that can be used to refinance either the term loans or the revolving commitments under the Credit Agreement in whole. In addition, SGI will have the capability to request one or more

61


additional tranches of term loans, increase the existing tranche of term loans, or increase the revolving commitments in an amount not to exceed $200 million after the effective date of the amendment (the "Incremental Facility"). In lieu of incurring additional indebtedness pursuant to the Incremental Facility, the August Amendment also provides SGI with the flexibility to incur additional incremental indebtedness in the form of one or more series of debt securities in an aggregate principal amount not to exceed the amounts allowed to be incurred under the Incremental Facility.

        In addition, the August Amendment renews most of the negative covenant baskets as of the effective date of such amendment and provides investment flexibility for SGI by allowing the borrower to move capital stock, property and cash from non-guarantor subsidiaries to loan parties and then back to non-guarantor subsidiaries, subject to certain limitations set forth in the Credit Agreement. The August Amendment also provides SGI the ability to use an existing restricted payment basket comprised of $200 million plus a permitted expenditure amount that is based in part on the cumulative consolidated net income of the Company for investments and prepayments of certain indebtedness. In connection with the August Amendment, SGI paid an aggregate of approximately $6.3 million of fees and expenses to (or for the benefit of) the consenting and new lenders of which approximately $5.8 million was capitalized as deferred financing fees. The Company recorded a loss on early extinguishment of debt of approximately $4.2 million. For more information regarding the August Amendment, see our Current Report on Form 8-K filed with the SEC on August 31, 2011.

Other Debt

        On October 27, 2011, SGI completed a consent solicitation commenced on October 19, 2011 in which SGI sought and obtained consents from the holders of a majority in aggregate principal amount of SGI's 7.875% senior subordinated notes due 2016 (the "2016 Notes") to certain amendments to the indenture governing the 2016 Notes (the "Indenture"). SGI paid consenting holders $5.0 million in the aggregate in connection with the consent solicitation.

        SGI and the other parties to the indenture entered into a supplemental indenture (the "Supplemental Indenture") implementing the amendments to the Indenture. The Supplemental Indenture amends the Indenture to conform certain provisions of the Indenture to those contained in the indenture governing the Company's 2018 Notes and thereby provides the Company with additional flexibility for investment opportunities that it may decide to pursue, including potential strategic partnerships, equity investments and other acquisitions.

        In particular, the Supplemental Indenture amends the definition of "consolidated net income" in the Indenture to exclude certain items, including net after-tax impairment charges and asset write-offs, which will, among other things, increase the Company's capacity to make additional "restricted investments" under the Indenture. In addition, the Supplemental Indenture amends the definition of "permitted investments" to include certain investments relating to the Italian instant ticket concession held by LNS. The primary effect of this amendment is to "grandfather" the investments the Company made in 2010 to cover the Company's portion of the upfront fees associated with the new concession for purposes of determining the Company's capacity to make additional "restricted investments" under the Indenture. For more information regarding the consent solicitation and the Supplemental Indenture, see our Current Report on Form 8-K filed with the SEC on October 28, 2011.

        On May 6, 2011, we paid the remaining £0.6 million aggregate principal amount outstanding of the promissory notes we issued to defer a portion of the earn-out payable in connection with our acquisition of Global Draw in 2006.

        On January 17, 2012 we repaid RMB 12.5 million of RMB 178.5 million in aggregate principal amount of Chinese bank loans with cash on hand.

62


        Effective October 17, 2008, SGI entered into a three-year interest rate swap agreement (the "Hedge") with JPMorgan, which expired on October 17, 2011. Under the Hedge, which was designated as a cash flow hedge, SGI paid interest on a $100 million notional amount of debt at a fixed rate of 3.49% and received interest on a $100 million notional amount of debt at the then prevailing three-month LIBOR rate. The objective of the Hedge was to eliminate the variability of cash flows attributable to the LIBOR component of interest expense paid on $100 million of our variable-rate debt.

Contractual Obligations

        Our contractual obligations and commercial commitments principally include obligations associated with our outstanding indebtedness, contractual purchase obligations and future minimum operating lease obligations and other long-term liabilities as set forth in the table below as of December 31, 2011:

 
  Cash Payments Due By Period  
 
  In thousands  
 
  Total   Within
1 Year
  Within
2 - 3 Years
  Within
4 - 5 Years
  After
5 Years
 

Long-term debt, 7.875% notes (1)

  $ 200,000             200,000      

Long-term debt, 8.125% notes (1)

    250,000                 250,000  

Long-term debt, 9.25% notes (1)

    350,000                 350,000  

Long-term debt, term loan (1)

    566,010     6,280     25,860     533,870      

Unsecured borrowings denominated in
RMB (1)

    28,256     18,758     9,498          

Capital leases

    163     85     71     7        

Other long-term debt

    1,084     1,068     16          

Interest expense (2)

    526,770     91,575     179,326     139,385     116,484  

Contractual purchase obligations and capital requirements (3)

    96,544     41,092     55,452          

Operating leases (4)

    77,776     16,721     29,095     19,938     12,022  

Other liabilities (5)

    35,165     7,816     18,409     800     8,140  
                       

Total contractual obligations

  $ 2,131,768   $ 183,395   $ 317,727   $ 894,000   $ 736,646  
                       

(1)
See Note 8 (Long-Term and Other Debt) to our Consolidated Financial Statements for information regarding long-term and other debt.

(2)
Based on rates in effect at December 31, 2011.

(3)
Includes, among other obligations, estimated obligations and/or capital commitments in connection with our lottery contracts.

(4)
See Note 9 (Leases) to our Consolidated Financial Statements for information regarding our operating leases.

(5)
We have excluded approximately $19.5 million of long-term pension plan and other post retirement liabilities, deferred compensation liabilities of approximately $2.8 million, and the liability for uncertain tax positions of $2.3 million at December 31, 2011. Due to the high degree of uncertainty regarding the timing of potential future cash flows associated with these liabilities, we are unable to make a reasonably reliable estimate of the amount and period in which these liabilities might be paid.

        Periodically, we bid on new online lottery contracts. Once awarded, these contracts generally require significant upfront capital expenditures for terminal assembly, customization of software,

63


software and equipment installation and telecommunications configuration. Historically, we have funded these upfront costs through cash flows generated from operations, available cash on hand and borrowings under our credit facilities. Our ability to continue to commit to 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 upfront costs. The actual level of capital expenditures will ultimately largely depend on the extent to which we are successful in winning new contracts. Periodically, we elect to upgrade the technological capabilities of older terminals and replace terminals that have exhausted their useful lives. Servicing our installed terminal base requires that we maintain a supply of parts and accessories on hand. We are also required, contractually in some cases, to provide spare parts over an extended period of time, principally in connection with our systems and terminal sale transactions. To meet our contractual obligations and maintain sufficient levels of on-hand inventory to service our installed base, we purchase inventory on an as-needed basis. We presently have no inventory purchase obligations, other than in the ordinary course of business.

        Under the terms of its private management agreement with the State of Illinois (the "PMA"), Northstar is entitled to receive annual incentive compensation payments to the extent it is successful in increasing the Illinois lottery's net income above specified target levels, subject to a cap of 5% of the applicable year's net income. Northstar will be responsible for payments to the State to the extent such targets are not achieved, subject to a similar cap. We may be required to make capital contributions to Northstar to fund our pro rata share (i.e., based on our percentage interest in Northstar) of any shortfall payments that may be owed by Northstar to the State under the PMA. Northstar is expected to be reimbursed on a monthly basis for most of its operating expenses under the PMA.

        In December 2010, the Company adopted the Asia-Pacific Plan. The purpose of the Asia Pacific Plan is to provide an equitable and competitive compensation opportunity to certain key employees and consultants of the Company who are involved in the Company's business in China (and potentially other jurisdictions in the Asia-Pacific region) (the "Asia-Pacific Business") and to promote the creation of long-term value for the Company's stockholders by directly linking Asia-Pacific Plan participants' compensation under the plan to the appreciation in value of such business. Each participant will be eligible to receive a cash payment following the end of 2014 equal to a pre-determined share of an Asia-Pacific Business incentive compensation pool. The incentive compensation pool will equal a certain percentage of the growth in the value of the Asia-Pacific Business over four years, calculated in the manner provided under the Asia-Pacific Plan and subject to a cap of (1) $35 million, in the event an Asia-Pacific Business liquidity event does not occur by December 31, 2014 or (2) $50 million, in the event an Asia-Pacific Business liquidity event occurs by December 31, 2014. An "Asia-Pacific Business liquidity event" means an initial public offering of at least 20% of the Asia-Pacific Business or a strategic investment by a third-party to acquire at least 20% of the Asia-Pacific Business, in each case, that is approved by the Company. As of December 31, 2011, we have recorded an accrual of $4.3 million related to the Asia-Pacific Plan which is included in the Contractual Obligations table above.

ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

        Our products and services are sold to a diverse group of customers throughout the world. As such, we are subject to certain risks and uncertainties as a result of changes in general economic conditions, sources of supply, competition, foreign exchange rates, tax reform, litigation and regulatory developments. (See "Risk Factors" in Item 1A of this Annual Report on Form 10-K for a more complete description of these risks and uncertainties.) The diversity and breadth of our products and geographic operations mitigate the risk that adverse changes from any single event would materially affect our financial position.

        Additionally, as a result of the diversity of our customer base, we do not consider ourselves exposed to concentration of credit risks. These risks are further minimized by setting credit limits

64


where appropriate, 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 or terminal manufacturing are significantly affected. Available supply from the paper and electronics industries tends to fluctuate and prices may be affected by supply.

        For fiscal year 2011, inflation was not a significant factor in our results of operations, and we were not impacted by significant pricing changes in our costs. We are unable to forecast the prices or supply of substrate, component parts or other raw materials in 2012, 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. Although 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 debt and equity market risks as we seek debt and equity capital to sustain our operations. All of our interest rate sensitive financial instruments are held for purposes other than trading purposes. At December 31, 2011, approximately 59% of our debt was in fixed-rate instruments.

        The table below 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 "Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity, Capital Resources and Working Capital" in Item 7 of this Annual Report on Form 10-K for additional information about our financial instruments.

December 31, 2011
(Dollars in thousands)

 
  Twelve Months Ended December 31  
 
  2012   2013   2014   2015   2016   Thereafter   Total   FMV  

Debt at fixed interest rates

    19,911     9,564     21     7     200,000     600,000     829,503     855,178  

Weighted-average interest rates

    5.1 %   5.3 %   5.3 %   5.6 %   7.9 %   8.8 %   8.4 %      

Debt at variable interest rates

   
6,280
   
19,580
   
6,280
   
533,870
   
   
   
566,010
   
566,010
 

Weighted-average interest rates

    4.8 %   4.8 %   4.8 %   4.8 %               4.8 %      

        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 Australia, Austria, Chile, China, Germany, Ireland, Italy, Mexico, Canada, China, Spain, Sweden and the United Kingdom. Our investments in foreign subsidiaries with a functional currency other than the U.S. dollar are generally considered long-term investments. In addition, a significant portion of the cost attributable to our international operations is incurred in the local currencies. Although we provide technology- based products, systems and services to gaming industries worldwide, some of our transactions and their resulting financial impact are transacted in U.S. dollars. The foreign currencies to which we have the most exposure are the Euro and the British Pound Sterling, representing approximately 16% and 56% of our non-U.S dollar revenues in 2011. Historically, our exposure to foreign currency fluctuations has been more significant with respect to revenues than expenses, as a significant portion of our expenses, such as paper and ink, are contracted for in U.S. dollars. At December 31, 2011, a hypothetical 10% strengthening in the

65


value of the U.S. dollar relative to the Euro and the British Pound Sterling would result in a decrease in revenue of approximately $5.3 million and $17.7 million, respectively, and a decrease in operating income of approximately $1.2 million and $4.6 million, respectively. We also have exposure to fluctuations in foreign currencies from our equity investments denominated in Euro and British Pound Sterling.

        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 the functional currency of the selling subsidiary, when possible; (ii) entering into foreign currency exchange contracts; and (iii) netting asset and liability exposures denominated in similar foreign currencies to the extent possible. 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, net investments and certain assets and liabilities denominated in foreign currencies. In January 2012, we entered into foreign currency forward contracts (the "2012 Hedges"), designated as effective hedging instruments, to hedge a portion of the net investment in one of our subsidiaries that is denominated in Euros. The notional amounts of the forward contracts, which provide for the sale of Euro for U.S. dollars at a weighted-average exchange rate of approximately 1.3194, total €23,500. The 2012 Hedges are scheduled for delivery between April and December 2012.

        Our cash and cash equivalents and investments are in a variety of governmental or institutional securities with high credit ratings. The investment policy limits our exposure to concentration of credit risks. We believe that the impact of a 10% increase or decrease in interest rates would not be material to our investment income and interest expense from bank loans.

ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

        The financial statements and other information required by this item are included in Part IV, Item 15 of this Annual Report on Form 10-K and are presented beginning on page 75.

ITEM 9.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

        None.

ITEM 9A.    CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

        As of the end of the period covered by this Annual Report on Form 10-K, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)). Based upon that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.

Management Report on Internal Control over Financial Reporting

        Our management is responsible for establishing and maintaining adequate internal control over financial reporting. With the participation of our Chief Executive Officer and Chief Financial Officer, our management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework and criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The scope of management's assessment of the effectiveness of internal control over financial reporting includes all of our businesses except for Barcrest, which was acquired on September 23, 2011 and whose financial

66


statements constitute 11% and 3% of net and total assets, respectively, 2% of revenues, and 4% of net loss of the consolidated financial statement amounts as of and for the year ended December 31, 2011. Further discussion of this acquisition can be found in Note 22 (Acquisitions and Dispositions) to our consolidated financial statements. Based on this evaluation, our management has concluded that our internal control over financial reporting was effective as of December 31, 2011. Deloitte & Touche LLP, the registered public accounting firm that audited our consolidated financial statements, has issued an attestation report on our internal control over financial reporting.

Changes in Internal Control over Financial Reporting

        There were no changes in our internal control over financial reporting during the quarter ended December 31, 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

67



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of Scientific Games Corporation

        We have audited the internal control over financial reporting of Scientific Games Corporation and subsidiaries (the "Company") as of December 31, 2011, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.

        As described in Management Report on Internal Control over Financial Reporting, management excluded from its assessment the internal control over financial reporting at Barcrest, which was acquired on September 23, 2011 and whose financial statements constitute 11% and 3% of net and total assets, respectively, 2% of revenues, and 4% of net loss of the consolidated financial statement amounts as of and for the year ended December 31, 2011. Accordingly, our audit did not include the internal control over financial reporting at Barcrest.

        We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

        A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

        Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

        In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2011, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

68


        We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and financial statement schedule as of and for the year ended December 31, 2011 of the Company and our report dated February 29, 2012 expressed an unqualified opinion on those financial statements and financial statement schedule based on our audit and the report of other auditors.

/s/ DELOITTE & TOUCHE LLP

Atlanta, Georgia
February 29, 2012

69


ITEM 9B.    OTHER INFORMATION.

        None.

70



PART III

ITEM 10.    DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

        We have adopted a Code of Business Conduct that applies to all of our officers, directors and employees (including our Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer) and have posted the Code on our website at www.scientificgames.com. In the event that we have any amendments to or waivers from any provision of the Code applicable to our Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer, we intend to satisfy the disclosure requirement under Item 5.05 of Form 8-K by posting such information on our website.

        Information relating to our executive officers is included in Part I, Item 1 of this Annual Report on Form 10-K. The other information called for by this item is incorporated by reference to our definitive proxy statement relating to our 2012 Annual Meeting of Stockholders, which will be filed with the SEC. If such proxy statement is not filed on or before April 29, 2012, the information called for by this item will be filed as part of an amendment to this Annual Report on Form 10-K on or before such date.

ITEM 11.    EXECUTIVE COMPENSATION

        The information called for by this item is incorporated herein by reference to our definitive proxy statement relating to our 2012 Annual Meeting of Stockholders, which will be filed with the SEC. If such proxy statement is not filed on or before April 29, 2012, the information called for by this item will be filed as part of an amendment to this Annual Report on Form 10-K on or before such date.

ITEM 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

        The information called for by this item is incorporated herein by reference to our definitive proxy statement relating to our 2012 Annual Meeting of Stockholders, which will be filed with the SEC. If such proxy statement is not filed on or before April 29, 2012, the information called for by this item will be filed as part of an amendment to this Annual Report on Form 10-K on or before such date.

ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

        The information called for by this item is incorporated herein by reference to our definitive proxy statement relating to our 2012 Annual Meeting of Stockholders, which will be filed with the SEC. If such proxy statement is not filed on or before April 29, 2012, the information called for by this item will be filed as part of an amendment to this Annual Report on Form 10-K on or before such date.

ITEM 14.    PRINCIPAL ACCOUNTANT FEES AND SERVICES

        The information called for by this item is incorporated herein by reference to our definitive proxy statement relating to our 2012 Annual Meeting of Stockholders, which will be filed with the SEC. If such proxy statement is not filed on or before April 29, 2012, the information called for by this item will be filed as part of an amendment to this Annual Report on Form 10-K on or before such date.

71



PART IV

ITEM 15.    EXHIBITS, FINANCIAL STATEMENT SCHEDULES

(a)

1. Financial statements:

       

Report of Deloitte & Touche, LLP, Independent Registered Public Accounting Firm

    76  

Consolidated Balance Sheets as of December 31, 2011 and 2010

    77  

Consolidated Statements of Operations for the years ended December 31, 2011, 2010 and 2009

    78  

Consolidated Statements of Stockholders Equity and Comprehensive Income for the years ended December 31, 2011, 2010, 2009

    79  

Consolidated Statements of Cash Flows for the years ended December 31, 2011, 2010 and 2009

    80  

Notes to Consolidated Financial Statements

    82  

2. Financial Statement Schedule:

       

Schedule II. Valuation and Qualifying Accounts

    149  

All other schedules have been omitted because they are inapplicable, not required, or the information is included elsewhere in the consolidated financial statements or related notes.

       

3. Exhibits

   
150
 

The Exhibit Index attached to this report is incorporated by reference into this Item 15(a)(3) and is filed as part of this Annual Report on Form 10-K.

       

72



SIGNATURES

        Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

February 29, 2012   SCIENTIFIC GAMES CORPORATION

 

 

By:

 

/s/ JEFFREY S. LIPKIN

Jeffrey S. Lipkin,
Chief Financial Officer

 

 

By:

 

/s/ JEFFREY B. JOHNSON

Jeffrey B. Johnson
Chief Accounting Officer

        Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on February 29, 2012.

Signature
 
Title

 

 

 
/s/ A. LORNE WEIL

A. Lorne Weil
  Chief Executive Officer and Chairman of the Board (principal executive officer)

/s/ JEFFREY S. LIPKIN

Jeffrey S. Lipkin

 

Senior Vice President and Chief Financial Officer (principal financial officer)

/s/ JEFFREY B. JOHNSON

Jeffrey B. Johnson

 

Vice President, Chief Accounting Officer and Corporate Controller (principal accounting officer)

/s/ DAVID L. KENNEDY

David L. Kennedy

 

Chief Administrative Officer and Vice Chairman of the Board

/s/ MICHAEL R. CHAMBRELLO

Michael R. Chambrello

 

Chief Executive Officer—Asia-Pacific Region and Director

/s/ PETER A. COHEN

Peter A. Cohen

 

Vice Chairman of the Board

73


Signature
 
Title
   

 

 

 

 

 
/s/ GERALD J. FORD

Gerald J. Ford
  Director    

/s/ ERIC M. TURNER

Eric M. Turner

 

Director

 

 

/s/ BARRY F. SCHWARTZ

Barry F. Schwartz

 

Director

 

 

/s/ FRANCIS F. TOWNSEND

Francis F. Townsend

 

Director

 

 

/s/ MICHAEL J. REGAN

Michael J. Regan

 

Director

 

 

74



INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULE

SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES

 
  Form 10-K
Page
 

Report of Independent Registered Public Accounting Firm

    76  

Consolidated Financial Statements:

       

Consolidated Balance Sheets as of December 31, 2011 and 2010

    77  

Consolidated Statements of Operations for the years ended December 31, 2011, 2010 and 2009

    78  

Consolidated Statements of Stockholders' Equity and Comprehensive Income for the years ended December 31, 2011, 2010 and 2009

    79  

Consolidated Statements of Cash Flows for the years ended December 31, 2011, 2010 and 2009

    80  

Notes to Consolidated Financial Statements

    82  

Schedule:

       

II. Valuation and Qualifying Accounts

    149  

        All other schedules are omitted as the required information is not applicable or the information is presented in the consolidated financial statements or related notes.

75


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of Scientific Games Corporation

        We have audited the accompanying consolidated balance sheets of Scientific Games Corporation and subsidiaries (the "Company") as of December 31, 2011 and 2010, and the related consolidated statements of operations, stockholders' equity and comprehensive income, and cash flows for each of the three years in the period ended December 31, 2011. Our audits also included the financial statement schedule listed in the Index. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits. We did not audit the financial statements of Lotterie Nazionali S.r.l. ("LNS"), the Company's investment which is accounted for by use of the equity method (see note 16 to the consolidated financial statements), as of and for the year ended December 31, 2011. We also did not audit the financial statements of Consorzio Lotterie Nazionali ("CLN"), the Company's investment which is accounted for by use of the equity method (see note 16 to the consolidated financial statements), as of December 31, 2010 and for each of the two years in the period ended December 31, 2010. The Company's equity in income of LNS was $18,623 for the year ended December 31, 2011. The Company's equity in income of CLN was $35,236 and $49,952 for the years ended December 31, 2010 and 2009, respectively. Those statements were prepared in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board and were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for LNS and CLN, on the basis of International Financial Reporting Standards as issued by the International Accounting Standards Board, for the three years ended December 31, 2011, is based solely on the report of the other auditors. We have applied auditing procedures to the adjustments to reflect equity in net income of LNS and CLN in accordance with accounting principles generally accepted in the United States of America.

        We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the report of the other auditors provide a reasonable basis for our opinion.

        In our opinion, based on our audits and the report of the other auditors, such consolidated financial statements present fairly, in all material respects, the financial position of Scientific Games Corporation and subsidiaries as of December 31, 2011 and 2010, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2011, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

        We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of December 31, 2011, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 29, 2012 expressed an unqualified opinion on the Company's internal control over financial reporting based on our audit.

/s/ DELOITTE & TOUCHE LLP

Atlanta, Georgia
February 29, 2012

76



SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

As of December 31, 2011 and 2010

(in thousands)

 
  As of December 31,  
 
  2011   2010  

ASSETS

 

Current assets:

             

Cash and cash equivalents

  $ 104,402   $ 124,281  

Accounts receivable, net of allowance for doubtful accounts of $4,782 and $2,175 in 2011 and 2010, respectively

    182,467     178,179  

Inventories

    81,711     68,744  

Deferred income taxes, current portion

    4,697     2,448  

Prepaid expenses, deposits and other current assets

    35,805     40,013  
           

Total current assets

    409,082     413,665  

Property and equipment, at cost

    788,529     776,367  

Less: accumulated depreciation

    (362,041 )   (325,786 )
           

Net property and equipment

    426,488     450,581  

Goodwill, net

    766,349     763,915  

Intangible assets, net

    86,859     70,613  

Equity investments

    340,494     321,180  

Other assets

    132,629     131,584  
           

Total assets

  $ 2,161,901   $ 2,151,538  
           

LIABILITIES AND STOCKHOLDERS' EQUITY

 

Current liabilities:

             

Debt payments due within one year

  $ 26,191   $ 8,431  

Accounts payable

    66,221     50,642  

Accrued liabilities

    144,671     136,925  
           

Total current liabilities

    237,083     195,998  

Deferred income taxes

    56,264     60,858  

Other long-term liabilities

    60,364     53,765  

Long-term debt, excluding current installments

    1,364,476     1,388,259  
           

Total liabilities

    1,718,187     1,698,880  

Commitments and contingencies

             

Stockholders' equity:

             

Class A common stock, par value $0.01 per share, 199,300 shares authorized, 98,181 and 97,474 shares issued and 92,433 and 91,725 shares outstanding as of December 31, 2011 and 2010, respectively

    982     975  

Additional paid-in capital

    693,600     674,691  

Accumulated loss

    (143,591 )   (131,021 )

Treasury stock, at cost, 5,749 shares held as of December 31, 2011 and 2010

    (74,460 )   (74,460 )

Accumulated other comprehensive loss

    (32,817 )   (17,527 )
           

Total stockholders' equity

    443,714     452,658  
           

Total liabilities and stockholders' equity

  $ 2,161,901   $ 2,151,538  
           

   

See accompanying notes to consolidated financial statements.

77



SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

 
  Years Ended December 31,  
 
  2011   2010   2009  

Revenue:

                   

Instant tickets

  $ 493,275   $ 465,090   $ 453,238  

Services

    331,701     363,138     410,014  

Sales

    53,746     54,271     64,497  
               

Total Revenue

    878,722     882,499     927,749  

Operating expenses:

                   

Cost of instant tickets (1)

    281,565     270,787     270,836  

Cost of services (1)

    171,374     206,034     234,093  

Cost of sales (1)

    38,340     38,045     44,539  

Selling, general and administrative expenses

    183,022     158,500     168,248  

Write-down of assets held for sale

        8,029     54,356  

Employee termination and restructuring costs

    1,997     602     3,920  

Depreciation and amortization

    118,603     141,766     151,784  
               

Operating income (loss)

    83,821     58,736     (27 )

Other (income) expense:

                   

Interest expense

    104,703     101,613     87,498  

Earnings from equity investments

    (29,391 )   (49,090 )   (59,220 )

Loss (gain) on early extinguishment of debt

    4,185     2,932     (4,829 )

Other

    911     8,594     2,856  
               

    80,408     64,049     26,305  
               

Net income (loss) before income tax expense

    3,413     (5,313 )   (26,332 )

Income tax expense

    15,983     143,888     13,547  
               

Net loss

  $ (12,570 ) $ (149,201 ) $ (39,879 )
               

Basic and diluted net loss per share:

                   

Basic

  $ (0.14 ) $ (1.61 ) $ (0.43 )
               

Diluted

  $ (0.14 ) $ (1.61 ) $ (0.43 )
               

Weighted average number of shares used in per share calculations:

                   

Basic shares

    92,068     92,666     92,701  
               

Diluted shares

    92,068     92,666     92,701  
               

(1)
Exclusive of depreciation and amortization.

   

See accompanying notes to consolidated financial statements.

78



SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

AND COMPREHENSIVE INCOME

(in thousands)

 
  Years Ended December 31,  
 
  2011   2010   2009  

Common stock:

                   

Beginning balance

  $ 975   $ 939   $ 926  

Issuance of Class A common stock in connection with employee stock purchase plan

    1     1     1  

Issuance of Class A common stock in connection with stock options, restricted stock units and warrants

    6     35     17  

Purchases of Class A common stock

            (5 )
               

Ending balance

    982     975     939  
               

Additional paid-in capital:

                   

Beginning balance

    674,691     651,348     628,356  

Issuance of Class A common stock in connection with employee stock purchase plan

    611     664     797  

Issuance of Class A common stock in connection with stock options, restricted stock units and warrants

    (2,971 )   913     1,662  

Repurchase of stock options

        (772 )   (1,892 )

Stock-based compensation

    21,538     22,807     34,589  

Tax benefit from employee stock options and restricted stock units

    (435 )   (4,024 )   (1,236 )

Tax benefit from repurchase of convertible debentures

            3,141  

Unwind of bond hedge

            1,335  

Deferred compensation

    166     3,755     (5,456 )

Convertible debt feature in accordance with Convertible Debt Guidance

            (9,948 )
               

Ending balance

    693,600     674,691     651,348  
               

Accumulated (losses) earnings:

                   

Beginning balance

    (131,021 )   18,180     58,059  

Net loss

    (12,570 )   (149,201 )   (39,879 )
               

Ending balance

    (143,591 )   (131,021 )   18,180  
               

Treasury stock:

                   

Beginning balance

    (74,460 )   (48,125 )   (42,586 )

Purchase of Class A common stock

        (26,335 )   (5,539 )
               

Ending balance

    (74,460 )   (74,460 )   (48,125 )
               

Accumulated other comprehensive (loss):

                   

Beginning balance

    (17,527 )   (2,584 )   (48,926 )

Other comprehensive (loss) income

    (15,290 )   (14,943 )   46,342  
               

Ending balance

    (32,817 )   (17,527 )   (2,584 )
               

Total stockholders' equity

  $ 443,714   $ 452,658   $ 619,758  
               

Comprehensive (loss) income:

                   

Net loss

  $ (12,570 ) $ (149,201 ) $ (39,879 )

Other comprehensive (loss) income

                   

Pension gains and losses, net of tax

    (5,219 )   447     (1,410 )

Foreign currency translation adjustment

    (11,860 )   (16,325 )   45,304  

Effective portion of derivative financial instruments

    1,862     935     2,486  

Unrealized loss on investments, net of tax

    (73 )       (38 )
               

Other comprehensive (loss) income

    (15,290 )   (14,943 )   46,342  
               

Comprehensive (loss) income

  $ (27,860 ) $ (164,144 ) $ 6,463  
               

   

See accompanying notes to consolidated financial statements.

79



SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

 
  Years Ended December 31,  
 
  2011   2010   2009  

Cash flows from operating activities:

                   

Net loss

  $ (12,570 ) $ (149,201 ) $ (39,879 )

Adjustments to reconcile net loss to cash provided by operating activities:

                   

Depreciation and amortization

    118,603     141,766     151,784  

Change in deferred income taxes

    (81 )   124,143     15,196  

Stock-based compensation

    21,538     22,807     34,589  

Non-cash interest expense

    8,107     7,163     14,035  

Earnings from equity investments

    (29,391 )   (49,090 )   (59,220 )

Distributed earnings from equity investments

    35,167     34,411     31,920  

Loss on sale of assets held for sale

        8,390     54,075  

Loss (gain) on early extinguishment of debt

    4,185     2,932     (4,829 )

Changes in current assets and liabilities, net of effects of acquisitions

                   

Accounts receivable

    13,815     (4,396 )   30,054  

Inventories

    (3,645 )   4,136     2,525  

Other current assets

    1,036     24,365     17,124  

Accounts payable

    (2,095 )   (2,915 )   (4,504 )

Accrued liabilities

    12,600     6,919     (28,236 )

Other

    3,809     (857 )   5,443  
               

Net cash provided by operating activities

    171,078     170,573     220,077  

Cash flows from investing activities:

                   

Capital expenditures

    (8,577 )   (9,352 )   (12,932 )

Lottery and gaming systems expenditures

    (43,459 )   (62,926 )   (64,610 )

Other intangible assets and software expenditures

    (39,848 )   (36,372 )   (34,039 )

Proceeds from asset disposals

    1,728     465     3,770  

Change in other assets and liabilities, net

    1,363     946     6,169  

Equity method investments

    (37,210 )   (203,795 )    

Distributions of capital on equity investments

    17,817          

Proceeds from sale of Racing Business

        35,942      

Business acquisitions, net of cash acquired

    (52,953 )   (12,493 )   (86,560 )
               

Net cash used in investing activities

    (161,139 )   (287,585 )   (188,202 )

Cash flows from financing activities:

                   

Repayments under revolving credit facility

             

Proceeds from issuance of long-term debt

        355,542     386,533  

Payment on long-term debt

    (7,806 )   (323,854 )   (273,876 )

Payment of financing fees

    (14,620 )   (13,655 )   (15,647 )

Purchases of treasury stock

        (26,335 )   (5,539 )

Excess tax benefit from stock-based compensation plans

    139     502     (1,236 )

Net proceeds from issuance of common stock

    (2,354 )   (1,995 )   1,912  
               

Net cash (used in) provided by financing activities

    (24,641 )   (9,795 )   92,147  

Effect of exchange rate changes on cash and cash equivalents

    (5,177 )   (9,043 )   432  
               

Increase (decrease) in cash and cash equivalents

    (19,879 )   (135,850 )   124,454  

Cash and cash equivalents, beginning of period

    124,281     260,131     140,639  

Change in cash and cash equivalents of held for sale operations

            (4,962 )
               

Cash and cash equivalents, end of period

  $ 104,402   $ 124,281   $ 260,131  
               

   

See accompanying notes to consolidated financial statements.

80



SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

Non-cash investing and financing activities

For the years ended December 31, 2011, 2010 and 2009

        Our total investment in International Terminal Leasing ("ITL"), which is described in Note 16 (Earnings from Equity Investments), was approximately $28,500 as of December 31, 2011, which includes a non-cash investment of approximately $4,700 during the year ended December 31, 2011. See Note 6 (Other Assets) and Note 8 (Long-Term and Other Debt) for a description of deferred financing fee write-offs and capital lease transactions.

        See Note 22 (Acquisitions and Dispositions) for a description of the non-cash consideration that the Company received for the sale of our racing and venue management businesses (the "Racing Business") to Sportech Plc ("Sportech") on October 5, 2010, which included ordinary shares of Sportech valued at approximately $26,300 and a note receivable of $10,000.

Supplemental cash flow information

        Cash paid during the period for:

 
  2011   2010   2009  

Interest

  $ 97,199   $ 86,486   $ 77,399  

Income taxes, net of refunds

    8,354     (3,393 )   (3,813 )

   

See accompanying notes to consolidated financial statements.

81



SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share amounts)

(1) Description of the Business and Summary of Significant Accounting Policies

        When used in these notes, unless otherwise specified or the context otherwise indicates, all references to the words "Scientific Games," "we," "us," "our," and the "Company" refer to Scientific Games Corporation and all entities included in our consolidated financial statements.

(a) Basis of Presentation and Description of the Business

        The accompanying consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"). Intercompany transactions have been eliminated. The Company has evaluated subsequent events through the date these financial statements were issued.

        We are a supplier of technology-based products, systems and services to gaming markets worldwide. We report our operations in three business segments: Printed Products; Lottery Systems; and Gaming.

Printed Products

        Printed Products is primarily comprised of our global instant ticket lottery business. We generate revenue from the manufacturing and sale of instant tickets, as well as the provision of value-added services such as game design, sales and marketing support, specialty games and promotions, inventory management and warehousing and fulfillment services. We also provide lotteries with cooperative service programs ("CSPs") to help them efficiently and effectively manage and support their operations to achieve higher retail sales and lower operating costs. Printed Products also includes MDI, our subsidiary that provides licensed games, promotional entertainment and internet-based services to the lottery industry.

Lottery Systems

        We are a leading provider of customized computer software, software support, equipment and data communication services to lotteries. Our offering includes the provision of transaction processing software for the accounting and validation of both instant and online lottery games, point-of-sale terminals, central site computers, communications technology, and ongoing support and maintenance for these products. Central computer systems, terminals and associated software are typically provided in the U.S. through contracts under which the Company deploys and operates the system on behalf of the lottery and internationally through outright sales, which often include a service and maintenance component. In addition, we are the exclusive instant ticket validation network provider to the China Sports Lottery.

Gaming

        We are a leading provider of server-based gaming machines and systems and other products and services to operators in the wide area gaming industry. Our Gaming segment includes The Global Draw Limited ("Global Draw"), a leading supplier of server-based gaming machines and systems and game content primarily to bookmakers that operate licensed betting offices ("LBOs") in the U.K. and, increasingly, to gaming operators outside the U.K. The Gaming segment also includes Barcrest Group Limited ("Barcrest") and Games Media Limited ("Games Media"), leading suppliers of gaming

82



SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands, except per share amounts)

(1) Description of the Business and Summary of Significant Accounting Policies (Continued)

machines, systems and game content to pubs, bingo halls and arcades in the U.K. and continental Europe. We provide many of our Gaming customers with a turnkey offering, which typically includes gaming machines, remote management of game content and management information, central computer systems, secure data communication and field support services. We develop our own game content and supplement our offering with content from third parties.

        On September 23, 2011, we completed the acquisition of Barcrest. The acquisition provides us with an expansive library of gaming titles and properties as well as an existing base of business in interactive gaming, in which Barcrest game content is made available through internet, mobile and other digital delivery channels.

        Our Gaming segment included the Racing Business prior to its sale to Sportech on October 5, 2010. Due to the Company's continued involvement with Sportech through an equity interest in Sportech that we received upon the closing of the sale, the sale of the Racing Business did not qualify for discontinued operations accounting treatment and was not reflected as such in our Consolidated Statement of Operations.

(b) Principles of Consolidation

        The accompanying consolidated financial statements include the Company's accounts and subsidiaries that are wholly owned and in which we have a controlling financial interest. Investments in other entities in which we do not have a controlling financial interest but we exert significant influence are accounted for in the consolidated financial statements using the equity method of accounting. All intercompany balances and transactions have been eliminated in consolidation.

(c) Cash and Cash Equivalents

        Cash and cash equivalents include all cash balances and highly liquid investments with an initial maturity of three months or less. We place our temporary cash investments with high credit quality financial institutions. At times, such investments may be in excess of the Federal Deposit Insurance Corporation insurance limit.

(d) Accounts Receivable and Allowance for Doubtful Accounts

        Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The allowance for doubtful accounts is our best estimate of the amount of probable credit losses in our existing accounts receivable; however, changes in circumstances relating to accounts receivable may result in additional allowances in the future. We determine the allowance based on historical experience, current market trends and, for larger accounts, the ability to pay outstanding balances. We continually review our allowance for doubtful accounts. Past due balances and other higher risk amounts are reviewed individually for collectability. Account balances are charged against the allowance

83



SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands, except per share amounts)

(1) Description of the Business and Summary of Significant Accounting Policies (Continued)

after all collection efforts have been exhausted and the potential for recovery is considered remote. Accounts receivable, net, consists of the following:

 
  As of December 31,  
 
  2011   2010  

Accounts receivable

  $ 137,084   $ 135,962  

Unbilled accounts receivable

    50,165     44,392  

Allowance for doubtful accounts

    (4,782 )   (2,175 )
           

  $ 182,467   $ 178,179  
           

        Under certain of our contracts, contractual billings do not coincide with revenue recognized under the contract. Unbilled accounts receivable represent revenue recorded in excess of amounts billable pursuant to contract provisions and generally become billable at contractually specified dates or upon the attainment of milestones.

(e) Inventories

        Inventories are stated at the lower of cost or market, including provisions for obsolescence commensurate with known or estimated exposures. Cost is determined as follows:

Item
  Cost method

Parts

  First-in, first-out or weighted moving average.

Work-in-process and finished goods

 

First-in, first-out or weighted moving average for direct material and labor; other fixed and variable production costs are allocated as a percentage of direct labor cost.

(f) Property and Equipment

        Property and equipment are stated at cost on acquisition date and are depreciated using the straight-line method over the estimated useful lives of the assets as follows:

Item
  Estimated Life in Years

Machinery and equipment

  3 - 12

Transportation equipment

  3 - 8

Furniture and fixtures

  5 - 10

Buildings and improvements

  15 - 40

        Costs incurred for equipment associated with specific lottery and gaming contracts not yet placed in service are classified as construction in progress in property and equipment and are not depreciated. Leasehold improvements are amortized over the term of the corresponding lease.

84



SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands, except per share amounts)

(1) Description of the Business and Summary of Significant Accounting Policies (Continued)

(g) Deferred Installation Costs

        Certain lottery and gaming contracts require us to perform installation activities. Direct installation activities, which include costs for terminals, facilities wiring, computers, internal labor and travel, are performed at the inception of a specific contract with a specific customer to enable us to perform under the terms of the contract. These activities begin after a contract is entered into and end when the setup activities are substantially complete. Such activities do not represent a separate earnings process and therefore, the costs are deferred and amortized over the expected life of the contract, which we define as the original life of the contract plus all available extensions. Deferred installation costs, net of accumulated depreciation, included in property and equipment were approximately $40,900 and $40,200 at December 31, 2011 and 2010, respectively.

(h) Goodwill and Intangible Assets

        Goodwill represents the excess of the purchase price over the fair value of the net assets of acquired companies. We follow the purchase method of accounting for all business combinations. All goodwill and intangible assets with indefinite useful lives are not amortized, but instead, are evaluated for impairment on an annual basis or more frequently if events and circumstances indicate that assets might be impaired.

(i) Other Assets and Investments

        We capitalize costs associated with internally developed and purchased software systems for use in our lottery and gaming contracts. Capitalized costs are amortized on a straight-line basis over the expected useful life of the asset, which is typically two to ten years. We also capitalize costs associated with long-term financing, marketing rights, and non-competition and employment agreements arising primarily from business acquisitions. An evaluation is performed to determine if any impairment has occurred with respect to any amortized or non-amortized assets.

(j) Derivative Financial Instruments

        We record derivative instruments on the balance sheet at their respective fair values. From time to time, we utilize interest rate swap agreements to mitigate any gains or losses associated with the change in expected cash flows due to fluctuations in interest rates on variable rate debt. We also enter into foreign currency forward contracts from time to time to mitigate the risk associated with cash payments required to be made by the Company in non-functional currencies or to mitigate the foreign currency translation risk of our investments. If the derivative qualifies for hedge accounting, the effective portion of the hedge is recorded in other comprehensive income (loss) and the ineffective portion of the hedge, if any, is recorded in our Consolidated Statement of Operations. If the derivative does not qualify for hedge accounting, any periodic changes to the fair value are recognized in our Consolidated Statement of Operations.

(k) Impairment of Long-Lived Assets and Intangible Assets

        We assess the recoverability of long-lived assets and identifiable intangible assets with finite useful lives whenever events or changes in circumstances indicate that the carrying value of such an asset may

85



SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands, except per share amounts)

(1) Description of the Business and Summary of Significant Accounting Policies (Continued)

not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the asset to the expected net future undiscounted cash flows to be generated by that asset or, for identifiable intangibles with finite useful lives, by determining whether the amortization of the intangible asset balance over its remaining life can be recovered through expected net future undiscounted cash flows. The amount of impairment of other long-lived assets is measured by the amount by which the carrying value of the asset exceeds the fair market value of the asset. Assets held for sale are reported at the lower of the carrying amount or fair market value, less expected costs to sell.

(l) Income Taxes

        Income taxes are determined using the liability method of accounting for income taxes. The Company's tax expense includes U.S. and international income taxes but excludes the provision for U.S. taxes on undistributed earnings of international subsidiaries deemed to be permanently invested.

        The Company applies a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The Company recognizes in the financial statements the impact of a tax position if that position is more likely than not to be sustained on an audit based on the technical merits of the position.

        Certain items of income and expense are not reported in tax returns and financial statements in the same year. The tax effect of such temporary differences is reported as deferred income taxes. The measurement of deferred tax assets is reduced, if necessary, by the amount of any tax benefits that, based on available evidence, are not expected to be realized. The Company establishes a valuation allowance for deferred tax assets for which realization is not likely. At December 31, 2011 and 2010, the Company had a valuation allowance of $236,296 and $234,813, respectively, recorded against the benefit of certain deferred tax assets of foreign and domestic subsidiaries.

        The Company operates within multiple taxing jurisdictions and in the normal course of business is examined in various jurisdictions. The reversal of accruals is recorded when examinations are completed, statutes of limitation are closed or tax laws are changed.

(m) Foreign Currency Translation

        Significant operations where their local currency is the functional currency include our operations in the U.K., continental Europe and China. Assets and liabilities of foreign operations are translated at period-end rates of exchange and operations are translated at the average rates of exchange for the period. Gains or losses resulting from translating the foreign currency financial statements are accumulated as a separate component of accumulated other comprehensive income (loss) in stockholders' equity. Gains or losses resulting from foreign currency transactions are included in other income (expense) in the Consolidated Statements of Operations.

(n) Revenue Recognition

        We derive our revenue from three sources: instant lottery tickets; services; and sales. Our instant lottery ticket business consists of long-term contracts to supply instant lottery tickets and provide related services to our lottery customers. We offer our customers a number of related, value-added

86



SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands, except per share amounts)

(1) Description of the Business and Summary of Significant Accounting Policies (Continued)

services as part of an integrated offering. These services include game design, determination of prize structure, game programming, warehousing and distribution of tickets and rights to use licensed products. We recognize revenue when it is realized or realizable and earned. We consider revenue realized or realizable and earned when we have persuasive evidence of an arrangement, prices are fixed or determinable, services and products are provided to the customer and collectability is probable or reasonably assured depending on the applicable revenue recognition guidance followed.

        In addition to the general policy discussed above, the following are the specific revenue recognition policies for our operating segments:

Printed Products

Lottery Systems

87



SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands, except per share amounts)

(1) Description of the Business and Summary of Significant Accounting Policies (Continued)

Gaming

88



SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands, except per share amounts)

(1) Description of the Business and Summary of Significant Accounting Policies (Continued)

(o) Shipping and Handling Costs

        Shipping and handling costs are included in cost of sales for all periods presented.

(p) Stock-Based Compensation

        We measure compensation cost for stock awards at fair value and recognize compensation expense ratably over the service period for awards expected to vest. The fair value of restricted stock units is determined based on the number of shares underlying the units granted and the quoted market price of our common stock. The fair value of stock options is determined using the Black-Scholes valuation model. The estimation of stock awards that will ultimately vest requires judgment and, to the extent actual results or updated estimates differs from our current estimates, such amounts will be recorded as a cumulative adjustment in the period estimates are revised. We consider many factors when estimating expected forfeitures, including types of awards, employee class, and historical experience. Actual results, and future changes in estimates, may differ substantially from our current estimates.

        The Company may grant certain awards that are contingent upon the Company achieving certain performance targets. Upon determining the performance target is probable, the fair value of the award is recognized over the service period. Certain equity awards may be settled in cash or a variable number of shares. The fair value of these awards are measured each reporting period and recorded as a liability and corresponding compensation expense. As the fair value changes each reporting period, the corresponding liability and compensation expense are adjusted, such that the liability and cumulative compensation expense equal the total fair value of the obligation upon the reporting date.

(q) Comprehensive Income

        We include and separately classify in comprehensive income unrealized gains and losses from our foreign currency translation adjustments, gains or losses associated with pension or other post-retirement benefits, prior service costs or credits associated with pension or other postretirement benefits, transition assets or obligations associated with pension or other post-retirement benefits, the effective portion of derivative financial instruments and unrealized gains and losses on investments.

(r) Use of Estimates

        The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Some of the significant estimates involve percentage of completion for contracted lottery development projects, stock-based and/or performance-based compensation expense, capitalization of software development costs, evaluation of the recoverability of assets, assessment of litigation and contingencies, allocation of purchase price to assets acquired and liabilities assumed in business combinations and income and other taxes. Actual results could differ from estimates.

89



SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands, except per share amounts)

(2) Basic Income Per Common Share and Diluted Income Per Common Share

        Basic income per common share is computed by dividing net income available to common stockholders by the weighted-average number of common shares outstanding during the period. Diluted income per common share gives effect to all potentially dilutive common shares that were outstanding during the period. As of December 31, 2011, 2010 and 2009 we had outstanding stock options and restricted stock units which could potentially dilute basic earnings per share in the future. As of December 31, 2009, we also had outstanding potentially dilutive 0.75% convertible senior subordinated debentures due 2024 (the "Convertible Debentures"). The following represents a reconciliation of the numerator and denominator used in computing basic and diluted income available to common stockholders per common share for the years ended December 31, 2011, 2010 and 2009:

 
  Years Ended December 31,  
 
  2011   2010   2009  

Income (numerator)

                   

Net loss

  $ (12,570 ) $ (149,201 ) $ (39,879 )

Shares (denominator)

                   

Basic weighted-average common shares outstanding

    92,068     92,666     92,701  

Effect of dilutive securities-stock rights

             

Effect of dilutive shares related to Convertible Debentures

             
               

Diluted weighted-average common shares outstanding

    92,068     92,666     92,701  
               

Basic and diluted per share amounts

                   

Basic net (loss) per share

  $ (0.14 ) $ (1.61 ) $ (0.43 )
               

Diluted net (loss) per share

  $ (0.14 ) $ (1.61 ) $ (0.43 )
               

        For the years ended December 31, 2011, 2010 and 2009, there were no dilutive stock rights due to the net loss reported for the periods.

        For the year ended December 31, 2009, the aggregate number of shares that we could have been obligated to issue upon conversion of the then remaining $9,943 in aggregate principal amount of the Convertible Debentures was approximately 342. The Convertible Debentures provided for net share settlement upon conversion. In December 2004, we purchased a bond hedge to mitigate the potential dilution from conversion of the Convertible Debentures during the term of the bond hedge.

        On June 1, 2010, the remaining $9,943 in aggregate principal amount of the Convertible Debentures was repurchased or redeemed at a price equal to 100% of the aggregate principal amount thereof, together with accrued but unpaid interest thereon. In connection with the repurchase and redemption, we unwound the corresponding remaining portion of the bond hedge (and warrants we had sold to partially offset the cost of the bond hedge).

        During 2010 and 2009, the average price of our common stock did not exceed the conversion price of the Convertible Debentures. Therefore we did not include potentially dilutive shares related to the Convertible Debentures in our diluted weighted-average common shares outstanding.

90



SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands, except per share amounts)

(3) Inventories

        Inventories consist of the following:

 
  As of December 31,  
 
  2011   2010  

Parts and work-in-process

  $ 36,499   $ 23,224  

Finished goods

    45,212     45,520  
           

  $ 81,711   $ 68,744  
           

        Point-of-sale terminals may be sold to customers or included as part of a long-term lottery or gaming contract. Parts and work-in-process includes costs for equipment expected to be sold.

(4) Property and Equipment

        Property and equipment, including assets under capital leases, consist of the following:

 
  As of December 31,  
 
  2011   2010  

Machinery, equipment and deferred installation costs

  $ 661,733   $ 654,652  

Land and buildings

    65,379     65,181  

Transportation equipment

    3,490     4,274  

Furniture and fixtures

    12,679     12,773  

Leasehold improvements

    12,864     13,440  

Construction in progress

    32,384     26,047  
           

Property and equipment, at cost

    788,529     776,367  

Less: accumulated depreciation

    (362,041 )   (325,786 )
           

Net property and equipment

  $ 426,488   $ 450,581  
           

        Depreciation expense for the years ended December 31, 2011, 2010 and 2009 was approximately $76,900, $99,700 and $104,300, respectively.

        Cost for equipment associated with specific lottery and gaming contracts not yet placed into service are recorded as construction in progress and not depreciated. When the equipment is placed into service the related costs are transferred from construction in progress to machinery and equipment, and we commence depreciation.

        Depreciation expense is excluded from cost of sales and other operating expenses and is separately stated with amortization expense on the Consolidated Statements of Operations.

        During the fourth quarter of 2010, we recorded long-lived asset impairment charges of approximately $17,500 related to underperforming Lottery Systems contracts. The fair value of the assets related to these contracts was approximately $32,200. We determine the fair value of the assets by using Level 3 valuation techniques within the fair value hierarchy and based on the present value of future cash flows of the respective contracts. The impairment charges are included in depreciation and amortization expense in our Consolidated Statements of Operations for the year ended December 31, 2010. During the fourth quarter of 2010, we also recorded an impairment charge of approximately $3,000 related to obsolete Lottery Systems equipment.

91



SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands, except per share amounts)

(4) Property and Equipment (Continued)

        We recorded accelerated depreciation expense of approximately $6,400 and $8,300 in 2011 and 2010, respectively. As a result of Global Draw's transition to a new platform technology, we also recorded an impairment charge of approximately $2,500 in 2010 related to obsolete Global Draw equipment.

(5) Goodwill and Intangible Assets

Intangible Assets

        The following presents certain information on our intangible assets as of December 31, 2011 and 2010. Amortizable intangible assets are being amortized on a straight-line basis over their estimated useful lives with no estimated residual values.

Intangible Assets
  Gross Carrying
Amount
  Accumulated
Amortization
  Net Balance  

Balance as of December 31, 2011

                   

Amortizable intangible assets:

                   

Patents

  $ 12,941     5,260     7,681  

Customer lists

    35,742     20,511     15,231  

Licenses

    78,556     56,706     21,850  

Intellectual property

    23,335     18,102     5,233  

Lottery contracts

    1,500     1,195     305  
               

    152,074     101,774     50,300  
               

Non-amortizable intangible assets:

                   

Trade names

    38,677     2,118     36,559  
               

Total intangible assets

  $ 190,751     103,892     86,859  
               

Balance as of December 31, 2010

                   

Amortizable intangible assets:

                   

Patents

  $ 12,106     4,321     7,785  

Customer lists

    30,083     19,009     11,074  

Licenses

    62,124     46,381     15,743  

Intellectual property

    17,833     17,719     114  

Lottery contracts

    1,500     1,093     407  
               

    123,646     88,523     35,123  
               

Non-amortizable intangible assets:

                   

Trade names

    37,608     2,118     35,490  
               

Total intangible assets

  $ 161,254     90,641     70,613  
               

        The aggregate intangible asset amortization expense for the years ended December 31, 2011, 2010 and 2009 was approximately $15,300, $13,700 and $17,500, respectively. The estimated intangible asset amortization expense for the year ending December 31, 2012 and each of the subsequent four years is approximately $15,200, $13,700, $8,400, $5,400 and $2,500 respectively.

92



SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands, except per share amounts)

(5) Goodwill and Intangible Assets (Continued)

Goodwill

        The table below reconciles the change in the carrying amount of goodwill, by reporting segment, for the period from December 31, 2009 to December 31, 2011. In 2011, we recorded an increase in goodwill of approximately $7,600 as a result of acquisitions and a decrease of approximately $5,200 as a result of foreign currency translation.

        In 2010, we recorded an increase in goodwill of approximately $4,700 as a result of the acquisition of substantially all of the assets of GameLogic Inc. ("GameLogic") and a decrease in goodwill of approximately $13,500 as a result of foreign currency translation.

Goodwill
  Printed
Products
  Lottery
Systems
  Gaming   Totals  

Balance at December 31, 2009

  $ 329,659     192,833     250,240     772,732  

Adjustments

    5,822     (5,889 )   (8,750 )   (8,817 )
                   

Balance at December 31, 2010

    335,481     186,944     241,490     763,915  

Adjustments