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Aristocrat Stock Rises on Firing of CEO, CFO

4 April 2003

SYDNEY, Australia -- Shares of Aristocrat Leisure Ltd. surged as much as 11 percent today after the world's second-largest maker of slot machines fired Chief Executive Des Randall and Chief Financial Officer Lionel Jeyaraj as part of a review of U.S. businesses that contributed to a profit slide.

David Creary was named acting CEO. Permanent replacements for Randall and Jeyaraj have to be approved by U.S. gaming regulators and Aristocrat can't say how long that may take. Aristocrat's stock has lost two-thirds of its value since Feb. 7, when it said last year's profit lagged analysts' forecasts because of lower-than expected U.S. sales and a failed South American contract.

The company said today it has cut about 10 percent of its Las Vegas-based U.S. unit to control costs, leaving about 530 employees in the United States. It also has installed several key executives to replace those who have left or to create new positions to lead the unit, known as Aristocrat Technologies Inc.

The new executives include Ron Dufficy, a financial controller for Aristocrat in Australia who will serve as financial controller in the United States until the company decides whether to create a permanent chief financial officer position.

Andrew Neagle, a former chief of Aristocrat's New Zealand operations, has moved to Las Vegas to take a permanent position as vice president of major accounts. Nik Wyman, operations manager, has also come from Australia to assist in the restructuring until the company finds a permanent replacement. Terry Usendorff, who has looked after the company's Caribbean business for about seven years, becomes sales manager of the company's South American operations, which are also under review. A search is under way for a permanent appointment.

Aristocrat last month announced that Gavin Isaacs, former managing director of the company's European operations, would replace Mark Newburg as president of the U.S. division. Newburg was fired after the company disclosed that U.S. profits would be far lower than initially expected.

Isaacs, Dufficy, Neagle and Wyman will be based in Las Vegas.

The company is looking for other executives and salespeople to replace those who have left and to bolster its operations, Issacs said today.

"We've got some pretty good people in place but we want to bolster that with other recruits," he said. "Controlled growth is the key word here."

Recent turbulence aside, employees are bullish on the future, he said.

"I think what's happened has happened. It's restructure and build time. Everyone is running forward and not backwards."

The cuts were focused on the United States, which didn't meet profit targets, he said. Australia, which accounts for the majority of the company's operations, hasn't cut staff and is performing strongly, he said.

In a conference call with investors in February, Randall acknowledged that the company's aggressive effort to expand into the United States in recent years was mishandled. The company had focused on the Las Vegas Strip, an entrenched market where themed games are more popular, rather than capturing outlying areas poised for future growth, he said.

Randall initially refused shareholders' demands that he step down, saying he wasn't fully aware of problems in the U.S. unit.

The company faces an uphill battle as it tries to compete with International Game Technology of Reno, the world's largest slot maker, as well as Alliance Gaming Corp. of Las Vegas, considered the second or third-largest manufacturer in the United States, experts say.

Aristocrat entered the U.S. market in 2001, helped by that year's acquisition of Casino Data Systems. The technology-driven company in Las Vegas makes a casino data management system and a progressive jackpot system for slot machines.

While some products have had limited success, the company doesn't yet have the pull needed to aggressively compete for slot floor space, analysts say. It also lacks a foothold in the growing "cashless" slot machine market now dominated by IGT. Cashless slot machines have software that allows them to dispense paper vouchers in addition to coins and are being snapped up by major casinos as a cost savings and a driver of additional slot play.

The company's shares rose 14 cents to A$1.79 as at 3:40 p.m. today in Sydney.

Under Randall, the company had targeted a one-fifth share of the slot market in the United States, its largest and fastest growing market outside its home territory. Sales in 2002 almost doubled to A$293.5 million from A$162.4 million a year earlier. Investors, though, say Aristocrat had indicated even faster sales growth.

"It's a company that has chronically over-promised and under- delivered," said Steve Coffey, who helps manage the equivalent of $360 million at Challenger Portfolio Management Ltd. "It would have been a very hard slog to get the market's confidence without major changes."

"There's a lot of doubt out there about the information it was releasing" about its U.S. business, added Paul Trainor, who helps manage $84 million at Direct Portfolio Services Ltd. Direct sold its Aristocrat shares when the company cut its profit estimate in February.

As part of the U.S. review, Aristocrat will take charges of A$16.2 million, including A$14.3 million to reduce the value of contracts with four customers in South America and A$1.9 million to restructure the Las Vegas-based U.S. business, it said in a statement.

The Americas business is expected to make a loss in the six months ended June 30, Aristocrat said. Chairman John Ducker declined to make a first-half profit forecast on a conference call with reporters.

The charge doesn't include provision for the departure of Randall and Jeyaraj, it said. Ducker declined to comment on the severance for Randall and Jeyaraj.

Some investors said they want to know how long it will take the axed executives' replacements to be approved by U.S. regulators -- a requirement for companies in the U.S. gaming industry.

The new executives "have to have the appropriate probity checks otherwise (Aristocrat) may lose its license to operate in U.S. jurisdictions," said Dennis Tighe, who helps manage the equivalent of $100 million at Allianz Dresdner Asset Management Australia Ltd.

Tighe said he won't buy the shares because the company doesn't provide enough information about its businesses.

Net income for the maker of slots such as "Queen of the Nile" and "Penguin Pays" last year fell 7 percent to A$80.2 million, the company said in February. Five months earlier, Aristocrat had indicated profit may meet analysts' forecasts of about A$109 million in calendar 2002.

The Australia securities regulator is investigating Aristocrat's sudden downgrade of its earnings and the problems about the South American contracts

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