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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the Quarter ended December 31, 2002

OR

[ ] 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 0-4281

ALLIANCE GAMING CORPORATION

(Exact name of registrant as specified in its charter)
         
    NEVADA
(State or other jurisdiction of
incorporation or organization)
  88-0104066
(I.R.S. Employer
Identification No.)
         
    6601 S. Bermuda Rd.
Las Vegas, Nevada

(Address of principal executive offices)
  89119
(Zip Code)

Registrant’s telephone number: (702) 270-7600
Registrant’s internet: www.alliancegaming.com

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. [X]    Yes    [ ]    No

The number of shares of Common Stock, $0.10 par value, outstanding as of February 1, 2002, according to the records of the registrant’s registrar and transfer agent was 49,336,000.

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TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE SIX MONTHS ENDED
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 4. DISCLOSURE CONTROLS AND PROCEDURES
ITEM 1. Legal Proceedings
ITEM 4. Submission of Matters to a Vote of Security Holders
ITEM 6. Exhibits and Reports on Form 8-K
SIGNATURES
CERTIFICATIONS
EXHIBIT 99.1


Table of Contents

ALLIANCE GAMING CORPORATION
FORM 10-Q

For the Quarter Ended December 31, 2002

I N D E X

           
PART I. FINANCIAL INFORMATION
      Page
Item 1. Unaudited Financial Statements
       
 
Unaudited Condensed Consolidated Balance Sheets as of June 30, 2002 and December 31, 2002
    3  
 
Unaudited Condensed Consolidated Statements of Operations for the three months ended December 31, 2001 and 2002
    4  
 
Unaudited Condensed Consolidated Statements of Operations for the six months ended December 31, 2001 and 2002
    5  
 
Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the six months ended December 31, 2002
    6  
 
Unaudited Condensed Consolidated Statements of Cash Flows for the six months ended December 31, 2001 and 2002
    7  
 
Notes to Unaudited Condensed Consolidated Financial Statements
    8-22  
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
    23-30  
Item 3. Quantitative and Qualitative Disclosures About Market Risk
    31  
Item 4. Disclosure Controls and Procedures
    31  
PART II. OTHER INFORMATION
       
Item 1. Legal Proceedings
    32  
Item 4. Submission of matters to a vote of Security Holders
    32  
Item 6. Exhibits and Reports on Form 8-K
    32  
SIGNATURES
    33  
CERTIFICATIONS
    34-36  

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Table of Contents

PART 1
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(In 000’s, except share data)
                         
            June 30,   Dec. 31,
            2002   2002
           
 
ASSETS
Current assets:
               
 
Cash and cash equivalents
  $ 62,508     $ 54,920  
 
Short-term investments (restricted)
    896       845  
 
Accounts and short-term notes receivable, net of allowance for doubtful accounts of $15,695 and $13,987
    96,832       111,642  
 
Inventories, net of reserves of $7,814 and $6,512
    42,997       41,079  
 
Deferred tax assets, net
    27,605       27,606  
 
Other current assets
    13,975       14,355  
 
   
     
 
   
Total current assets
    244,813       250,447  
 
   
     
 
Long-term notes receivable, net of allowance for doubtful accounts of $456 and $366
    2,389       20,559  
Leased equipment, net of accumulated depreciation of $9,931 and $13,800
    19,560       27,554  
Property, plant and equipment, net of accumulated depreciation and amortization of $63,313 and $70,740
    90,314       91,401  
Excess of costs over net assets of acquired businesses, net of accumulated amortization of $6,517 and $6,556
    47,713       49,586  
Intangible assets, net of accumulated amortization of $25,148 and $27,425
    32,512       38,011  
Deferred tax assets, net
    18,240       8,521  
Other assets, net of reserves of $1,818 and $1,818
    4,339       4,775  
 
   
     
 
       
Total assets
  $ 459,880     $ 490,854  
 
   
     
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
               
 
Accounts payable
  $ 15,894     $ 16,106  
 
Accrued liabilities
    45,841       47,559  
 
Jackpot liabilities
    5,915       8,798  
 
Current maturities of long-term debt
    4,116       4,944  
 
   
     
 
     
Total current liabilities
    71,766       77,407  
 
   
     
 
Long-term debt, net
    338,148       338,169  
Other liabilities
    2,747       3,552  
 
   
     
 
       
Total liabilities
    412,661       419,128  
 
   
     
 
Minority interest
    1,233       920  
Commitments and contingencies
               
Stockholders’ equity
               
 
Special Stock, 10,000,000 shares authorized: Series E, $100 liquidation value; 120 shares and 115 shares issued and outstanding
    12       12  
 
Common Stock, $.10 par value; 100,000,000 shares authorized; 49,227,000 and 49,774,000 shares issued
    4,927       4,982  
 
Treasury stock at cost, 513,000 shares
    (501 )     (501 )
 
Additional paid-in capital
    157,866       161,641  
 
Accumulated other comprehensive losses
    (19,364 )     (16,485 )
 
Accumulated deficit
    (96,954 )     (78,843 )
 
   
     
 
   
Total stockholders’ equity
    45,986       70,806  
 
   
     
 
       
Total liabilities and stockholders’ equity
  $ 459,880     $ 490,854  
 
   
     
 

See notes to unaudited condensed consolidated financial statements.

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ALLIANCE GAMING CORPORATION AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In 000’s, except per share data)
                     
        Three Months Ended December 31,
        2001   2002
       
 
Revenues:
               
 
Gaming equipment and systems
  $ 51,783     $ 86,627  
 
Wall machines and amusement games
    25,462       16,900  
 
Route operations
    55,764       53,321  
 
Casino operations
    17,607       16,778  
 
   
     
 
 
    150,616       173,626  
 
   
     
 
Costs and expenses:
               
   
Cost of gaming equipment and systems
    22,844       39,663  
   
Cost of wall machines and amusement games
    13,108       9,809  
   
Cost of route operations
    46,074       44,682  
   
Cost of casino operations
    7,866       8,062  
   
Selling, general and administrative
    29,201       31,124  
   
Research and development costs
    3,807       5,912  
   
Depreciation and amortization
    7,316       8,921  
 
   
     
 
 
    130,216       148,173  
 
   
     
 
Operating income
    20,400       25,453  
Other income (expense):
               
 
Interest income
    369       452  
 
Interest expense
    (7,033 )     (6,566 )
 
Minority interest
    (405 )     (309 )
 
Other, net
    (432 )     268  
 
   
     
 
Income before income taxes
    12,899       19,298  
Income tax provision
    (83 )     (7,445 )
 
   
     
 
Net income
  $ 12,816     $ 11,853  
 
   
     
 
Basic earnings per share
  $ 0.29     $ 0.24  
 
   
     
 
Diluted earnings per share
  $ 0.27     $ 0.24  
 
   
     
 
Weighted average common shares outstanding
    44,950       49,208  
 
   
     
 
Weighted average common and common share equivalents outstanding
    47,258       50,316  
 
   
     
 

See notes to unaudited condensed consolidated financial statements.

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ALLIANCE GAMING CORPORATION AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In 000’s, except per share data)
                     
        Six Months Ended December 31,
        2001   2002
       
 
Revenues:
               
 
Gaming equipment and systems
  $ 97,098     $ 150,166  
 
Wall machines and amusement games
    38,123       27,466  
 
Route operations
    109,564       108,158  
 
Casino operations
    35,786       34,568  
 
   
     
 
 
    280,571       320,358  
 
   
     
 
Costs and expenses:
               
 
Cost of gaming equipment and systems
    42,395       65,921  
 
Cost of wall machines and amusement games
    20,613       15,979  
 
Cost of route operations
    90,472       90,402  
 
Cost of casino operations
    16,201       16,250  
 
Selling, general and administrative
    53,090       60,540  
 
Research and development costs
    7,499       10,672  
 
Depreciation and amortization
    15,040       16,920  
 
   
     
 
 
    245,310       276,684  
 
   
     
 
Operating income
    35,261       43,674  
Other income (expense):
               
   
Interest income
    764       733  
   
Interest expense
    (14,680 )     (13,202 )
   
Minority interest
    (868 )     (754 )
   
Other, net
    (12 )     197  
 
   
     
 
Income before income taxes
    20,465       30,648  
Income tax provision
    (221 )     (12,537 )
 
   
     
 
Net income
  $ 20,244     $ 18,111  
 
   
     
 
Basic earnings per share
  $ 0.46     $ 0.37  
 
   
     
 
Diluted earnings per share
  $ 0.44     $ 0.37  
 
   
     
 
Weighted average common shares outstanding
    43,786       48,461  
 
   
     
 
Weighted average common and common share equivalents outstanding
    45,700       49,560  
 
   
     
 

See notes to unaudited condensed consolidated financial statements.

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ALLIANCE GAMING CORPORATION AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Six Months Ended December 31, 2002
(In 000’s)
                                                                   
                                                      Accumulated   Total
                                      Additional           Other   Stock-
      Common Stock   Series E   Treasury   Paid-in   Comprehensive   Accum.   holders'
      Shares   Dollars   Special Stock   Stock   Capital   Loss   Deficit   Equity
     
 
 
 
 
 
 
 
Balances at June 30, 2002
    49,227     $ 4,927     $ 12     $ (501 )   $ 157,866     $ (19,364 )   $ (96,954 )   $ 45,986  
Net income
                                        18,111       18,111  
Foreign currency translation adjustment
                                  2,879             2,879  
 
                                                           
 
 
Total comprehensive income
                                                            20,990  
Shares issued upon exercise of options
    547       55                   1,737                   1,792  
Tax benefit of employee stock option exercises
                            2,038                   2,038  
 
   
     
     
     
     
     
     
     
 
Balances at December 31, 2002
    49,774     $ 4,982     $ 12     $ (501 )   $ 161,641     $ (16,485 )   $ (78,843 )   $ 70,806  
 
   
     
     
     
     
     
     
     
 

See notes to unaudited condensed consolidated financial statements.

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ALLIANCE GAMING CORPORATION AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In 000’s)
                         
            Six Months Ended December 31,
            2001   2002
           
 
Cash flows from operating activities:
               
 
Net income
  $ 20,244     $ 18,111  
   
Adjustments to reconcile net income to net cash provided by operating activities:
               
       
Depreciation and amortization
    15,040       16,920  
       
Amortization of debt discount
    40       40  
       
(Gain) loss on sale of assets
    97       (15 )
       
Provision for losses on receivables
    1,719       1,033  
       
Deferred income taxes
    (215 )     9,718  
       
Other
    1,401       (365 )
   
Net change in operating assets and liabilities:
               
       
Accounts and notes receivable
    (10,312 )     (32,020 )
       
Inventories
    (11,024 )     (2,564 )
       
Other current assets
    (1,656 )     940  
       
Accounts payable
    1,702       2,180  
       
Accrued liabilities
    2,847       4,357  
 
   
     
 
       
   Net cash provided by operating activities
    19,883       18,335  
 
   
     
 
Cash flows from investing activities:
               
   
Additions to property, plant and equipment
    (6,205 )     (8,775 )
   
Additions to leased gaming equipment
    (8,248 )     (10,010 )
   
Additions to other long-term assets
    (1,976 )     (4,311 )
   
Acquisitions, net of cash acquired
    (6,731 )     (3,038 )
   
Proceeds from disposal of property and equipment and other assets
    42       9  
 
   
     
 
       
Net cash used in investing activities
    (23,118 )     (26,125 )
 
   
     
 
Cash flows from financing activities:
               
   
Reduction of long-term debt
    (746 )     (2,190 )
   
Capitalized debt issuance costs
    (651 )      
   
Net increase (decrease) in revolving credit facility
           
   
Proceeds from exercise of stock options and warrants
    4,080       1,792  
 
   
     
 
       
Net cash provided by (used in) financing activities
    2,683       (398 )
 
   
     
 
Effect of exchange rate changes on cash
    154       600  
Cash and cash equivalents:
               
       
Increase (decrease) for period
    (398 )     (7,588 )
       
Balance, beginning of period
    54,845       62,508  
 
   
     
 
       
Balance, end of period
  $ 54,447     $ 54,920  
 
   
     
 

See notes to unaudited condensed consolidated financial statements

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ALLIANCE GAMING CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Six Months Ended December 31, 2001 and 2002

1. BASIS OF PRESENTATION

    Principles of consolidation
 
    The accompanying unaudited interim condensed consolidated financial statements reflect all adjustments, consisting of normal recurring adjustments, which management believes are necessary to present fairly the financial position, results of operations and cash flows of Alliance Gaming Corporation (“Alliance” or the “Company”) for the respective periods presented. The results of operations for an interim period are not necessarily indicative of the results that may be expected for any other interim period or for the year as a whole. The accompanying unaudited interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes in the Company’s annual report on Form 10-K for the year ended June 30, 2002. All intercompany accounts and transactions have been eliminated in consolidation.
 
    The accompanying consolidated financial statements include the accounts of Alliance Gaming Corporation, and its wholly owned and partially owned, controlled subsidiaries. In the case of Video Services, Inc. (“VSI”), the Company owns 100% of the voting stock. The Company is entitled to receive 71% of dividends declared by VSI, if any, at such time that dividends are declared. All significant intercompany accounts and transactions have been eliminated. Certain reclassifications have been made to prior year financial statements to conform to the current year presentation.
 
    The Company, through a wholly-owned subsidiary, is the general partner of Rainbow Casino Vicksburg Partnership, L.P. (“RCVP”) the limited partnership that operates the Rainbow Casino. The limited partner, Rainbow Corporation, an independent third party, is entitled to receive 10% of the net available cash flows after debt service and other items, as defined (which amount increases to 20% of such amount for the proportional revenues above $35.0 million) each year through December 31, 2010. The Company holds the remaining economic interest in the partnership and consolidates the partnership with minority interest being reflected for the portion not owned.
 
    On November 13, 2002, the Company announced the acquisition of Casino Management System Software Company (CMS), a leading supplier of software solutions focusing on player database management, player tracking and casino promotions. The $6.5 million purchase, consisting of cash and a two-year note, was accounted for pursuant to the provisions of Statement of Financial Accounting Standards No.141 “Business Combinations” (SFAS No. 141). Certain pro forma disclosure for the CMS acquisition normally required under SFAS No. 141 have been omitted as this acquisition did not exceed the materiality provisions contained therein. The allocation of the purchase price to the assets and liabilities acquired will be completed prior to June 30, 2003.
 
    Revenue recognition
 
    Revenue from sales of gaming machines and amusement games is generally recognized at the time products are shipped and title has passed to the customer. The Company sells gaming equipment on normal credit terms (generally 2%, net 30) and also offers financing to qualified customers for periods generally between 6 and 48 months.
 
    Revenue from sales of computerized monitoring systems is recognized in accordance with the AICPA’s Statement of Position 97-2 (SOP 97-2) “Software Revenue Recognition.” In accordance with the provisions of SOP 97-2, the contracts for the sales of computerized monitoring units are considered to have “multiple elements” because they include hardware, software, installation supervision, training, and post-contract customer support. Accordingly, revenues from the sale of systems are deferred and begin to be recognized at the point when the system is deemed to be functionally operational, and the residual method is used to recognize revenue for the remaining elements as they are delivered, each having vendor specific objective evidence of relative sales values. Post-contract customer support revenues are recognized over the period of the support agreement (generally one year).

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ALLIANCE GAMING CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Six Months Ended December 31, 2001 and 2002

    Our Bally Gaming and Systems business unit earns revenues from recurring revenue sources which consist of the operations of the wide-area progressive jackpot systems and revenues from gaming machines placed in a casino on a daily lease or rental basis. Revenue from these sources is recognized based on the contractual terms of the participation or rental agreements and is generally based on a share of money wagered, a share of the net winnings, or on a fixed daily rental rate basis.
 
    In accordance with industry practice, we recognize gaming revenues in our route and casino operations as the net win from gaming machine operations, which is the difference between coins and currency deposited into the machines and payments to customers and, for other games, the difference between gaming wins and losses. We recognize total net win from gaming machines as revenues for route operations which we operate pursuant to revenue-sharing arrangements and revenue-sharing payments (either fixed or variable) as a cost of route operations.
 
    The Company constantly monitors its exposure for credit losses and maintains allowances for anticipated losses.

2. INVENTORIES

    Inventories are stated at the lower of cost, determined on a first-in, first-out basis, or market. Cost elements included for work-in-process and finished goods include raw materials, freight, direct labor and manufacturing overhead.
 
    Inventories, net of reserves, consist of the following (in 000’s):

                   
      June 30,   Dec. 31,
      2002   2002
     
 
Raw materials
  $ 17,158     $ 17,960  
Work-in-process
    936       2,764  
Finished goods
    24,903       20,355  
 
   
     
 
 
Total inventories
  $ 42,997     $ 41,079  
 
   
     
 

3. DEBT

    Long-term debt consists of the following (in 000’s):

                   
      June 30,   Dec. 31,
      2002   2002
     
 
Term loan facility
  $ 189,525     $ 188,575  
10% Senior Subordinated Notes due 2007, net of unamortized discount of $416 and $376
    149,584       149,624  
Other subordinated debt
    2,495       1,495  
Other, primarily secured by related equipment
    660       3,419  
 
   
     
 
 
    342,264       343,113  
Less current maturities
    4,116       4,944  
 
   
     
 
 
Long-term debt, less current maturities
  $ 338,148     $ 338,169  
 
   
     
 

    The Company’s debt structure consists primarily of a $190 million term loan facility and a $25 million revolving credit facility (which can be increased by $15 million at the Company’s discretion) (collectively referred to herein as the “bank facility”) and $150 million Senior Subordinated Notes. The term loan has an interest rate of LIBOR plus 3.25% (or 4.7% as of December 31, 2002), has a 1% per year mandatory principal amortization, and matures on December 31, 2006. The revolving credit facility commitment decreases ratably over its 5 year commitment, which ends on June 30, 2005. As of December 31, 2002, there were no borrowings outstanding on the revolving credit facility. The bank facility loan contains certain customary financial and operational covenants.

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ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Six Months Ended December 31, 2001 and 2002

    The bank facility is collateralized by substantially all domestic property and is guaranteed by each domestic subsidiary of the U.S. Borrower and German Subsidiaries (both as defined in the credit agreement), other than the entity that holds the Company’s interest in its Louisiana and Mississippi operations, and is secured by both a U.S. and German Pledge Agreement (both as defined). The bank facility contains a number of maintenance covenants and other significant covenants that, among other things, restrict the ability of the Company and the ability of certain of its subsidiaries to dispose of assets, incur additional indebtedness, pay dividends or make other distributions, enter into certain acquisitions, repurchase equity interests or subordinated indebtedness, issue or sell equity interests of the Company’s subsidiaries, engage in mergers or acquisitions, or engage in certain transactions with subsidiaries and affiliates, and that otherwise restrict corporate activities. As of December 31, 2002, we are in compliance with these covenants.
 
    The Senior Subordinated Notes bear interest at 10%, are due in 2007, and are general unsecured obligations of the Company, ranking subordinate in right of payment to all Senior Debt (as defined) of the Company, including indebtedness under the bank facility. The Senior Subordinated Notes are fully and unconditionally guaranteed on a joint and several senior subordinated basis by all existing and future domestic Restricted Subsidiaries of the Company, subject to certain exceptions including the partially-owned entities through which its Mississippi casino and Louisiana route operations are conducted. The Subsidiary Guarantees are general unsecured obligations of the Guarantors, ranking subordinate in right of payment to all Senior Debt of the Guarantors. The Company will be able to designate other current or future subsidiaries as Unrestricted Subsidiaries under certain circumstances. Unrestricted Subsidiaries will not be required to issue a Subsidiary Guarantee and will not be subject to many of the restrictive covenants set forth in the Indenture pursuant to which the Senior Subordinated Notes were issued. The Indenture for the Company’s Senior Subordinated Notes contains various covenants, including limitations on incurrence of additional indebtedness, on restricted payments and on dividend and payment restrictions on subsidiaries. The Senior Subordinated Notes may be redeemed beginning in August 2002 at 105%, which decreases ratably over the remaining term. Upon the occurrence of a Change of Control (as defined), the holders of the Senior Subordinated Notes will have the right to require the Company to purchase their notes at a price equal to 101% of the aggregate principal amount thereof, plus accrued and unpaid interest to the date of purchase. As of December 31, 2002, we are also in compliance with the covenants contained in the Indenture for the Senior Subordinated Notes.

4. INCOME TAXES

    The Company has significant deferred tax assets, which consist primarily of net operating loss carry forwards and other timing differences. Management conducts periodic recoverability assessments of these deferred tax assets, which includes evaluating both positive and negative evidential matter to determine if it is “more likely than not” that the deferred tax assets will be realizable. On June 30, 2002, management conducted a recoverability assessment and determined that $37 million in previously reserved deferred tax assets were realizable due to the Company’s profitable operating results in 2001 and 2002 and projected future taxable income. Until the fourth quarter of fiscal year 2002, management did not believe sufficient evidence existed that it was more likely than not that such profitable operating results would allow such deferred tax assets to be realized.
 
    Beginning July 1, 2002, the Company began recognizing Federal income tax expense based on 35% of pre-tax domestic income and state income taxes at a rate of approximately 2% of domestic income. For the prior year quarter ended December 31, 2001, substantially all of the Company’s taxable income was offset against Federal net operating loss carry forwards, which reduced the Company’s tax expense for the quarter ended December 31, 2001 from approximately $4.6 million to approximately $83,000.

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ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Six Months Ended December 31, 2001 and 2002

5. EARNINGS PER SHARE

    The computation of basic and diluted earnings per share is as follows (in 000’s except per share amounts):

                                   
      Three months ended   Six months ended
      December 31,   December 31,
      2001   2002   2001   2002
     
 
 
 
Net income
  $ 12,816     $ 11,853     $ 20,244     $ 18,111  
Weighted average common shares outstanding
    44,950       49,208       43,786       48,461  
 
Effect of stock options outstanding
    1,694       1,106       1,606       1,097  
 
Effect of warrants outstanding
    612             306        
 
Effect of Series E Special Stock
    2       2       2       2  
 
   
     
     
     
 
Weighted average common and potential dilutive shares outstanding
    47,258       50,316       45,700       49,560  
Basic earnings per share
  $ 0.29     $ 0.24     $ 0.46     $ 0.37  
 
   
     
     
     
 
Diluted earnings per share
  $ 0.27     $ 0.24     $ 0.44     $ 0.37  
 
   
     
     
     
 

    Stock options outstanding that were potentially convertible into approximately 600,000 common shares as of December 31, 2002, were not included in the computation of diluted EPS because the exercise price was greater than the average market price of the common shares during the period.

6. SEGMENT AND GEOGRAPHICAL INFORMATION

    The Company operates in four business segments: (i) Gaming Equipment and Systems designs, manufactures and distributes gaming machines and computerized monitoring systems for gaming machines; (ii) Wall Machines and Amusement Games designs, manufactures and distributes wall-mounted gaming machines and distributes third party manufactured amusement games; (iii) Route Operations owns and manages a significant installed base of gaming machines; and (iv) Casino Operations owns and operates two regional casinos. The accounting policies of these segments are consistent with Company’s policies for the Consolidated Financial Statements.
 
    The tables below present information as to the Company’s revenues, intersegment revenues and operating income (in 000’s):

                                   
      Three Months Ended   Six Months Ended
      December 31,   December 31,
      2001   2002   2001   2002
     
 
 
 
Revenues:
                               
 
Gaming equipment and systems
  $ 51,783     $ 86,627     $ 97,098     $ 150,166  
 
Wall machines and amusement games
    25,462       16,900       38,123       27,466  
 
Route operations
    55,764       53,321       109,564       108,158  
 
Casino operations
    17,607       16,778       35,786       34,568  
 
   
     
     
     
 
Total revenues
  $ 150,616     $ 173,626     $ 280,571     $ 320,358  
 
   
     
     
     
 
Intersegment revenues:
                               
 
Gaming equipment and systems
  $ 4,752     $ 9,270     $ 8,286     $ 14,326  
 
Wall machines and amusement games
                       
 
Route operations
                       
 
Casino operations
                       
 
   
     
     
     
 
Total intersegment revenues
  $ 4,752     $ 9,270     $ 8,286     $ 14,326  
 
   
     
     
     
 

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ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Six Months Ended December 31, 2001 and 2002

                                   
      Three Months Ended   Six Months Ended
      December 31,   December 31,
      2001   2002   2001   2002
     
 
 
 
Operating income:
                               
 
Gaming equipment and systems
  $ 10,009     $ 21,775     $ 19,939     $ 36,910  
 
Wall machines and amusement games
    4,491       554       3,133       (1,261 )
 
Route operations
    4,024       2,468       7,144       5,133  
 
Casino operations
    5,284       3,821       11,151       8,836  
 
Corporate
    (3,408 )     (3,165 )     (6,106 )     (5,944 )
 
   
     
     
     
 
Total operating income
  $ 20,400     $ 25,453     $ 35,261     $ 43,674  
 
   
     
     
     
 

    The Company has operations based primarily in the United States and Germany. The German operation’s customers are a diverse group of operators of wall machines and amusement games at arcades, hotels, restaurants and taverns, primarily in Germany. Gaming Equipment and Systems’ customers are primarily casinos and gaming machine distributors in the United States and abroad. Receivables of the German operations and Gaming Equipment and Systems are generally collateralized by the related equipment.
 
    The table below presents information as to the Company’s revenues and operating income by geographic region (in 000’s):

                                     
        Three Months Ended   Six Months Ended
        December 31,   December 31,
        2001   2002   2001   2002
       
 
 
 
Revenues:
                               
 
United States
  $ 117,545     $ 144,445     $ 230,427     $ 274,926  
 
Germany
    30,361       26,931       44,857       41,883  
 
Other foreign
    2,710       2,250       5,287       3,549  
 
   
     
     
     
 
Total revenues
  $ 150,616     $ 173,626     $ 280,571       320,358  
 
   
     
     
     
 
Operating income:
                               
 
United States
  $ 14,074     $ 23,519     $ 29,363     $ 43,350  
 
Germany
    5,658       1,799       4,432       306  
 
Other foreign
    668       135       1,466       18  
 
   
     
     
     
 
Total operating income
  $ 20,400     $ 25,453     $ 35,261     $ 43,674  
 
   
     
     
     
 

7. SUPPLEMENTAL CASH FLOW INFORMATION

    The following supplemental information is related to the unaudited condensed consolidated statements of cash flows (in 000’s).

                 
    Six months ended December 31,
   
    2001   2002
   
 
Interest expense paid
  $ 13,430     $ 13,164  
State income taxes paid
    220       1,001  
Non-cash transactions:
               
Reclassify other assets to property, plant and equipment
  $ 3,037     $ 4,764  
(Favorable) unfavorable translation rate adjustment
    (2,538 )     (2,279 )
Notes payable issued in acquisitions
    4,000       3,000  

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ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Six Months Ended December 31, 2001 and 2002

8. UNAUDITED CONSOLIDATING FINANCIAL STATEMENTS

    The following unaudited condensed consolidating financial statements are presented to provide certain financial information regarding guaranteeing and non-guaranteeing subsidiaries in relation to the Company’s Senior Subordinated Notes (see note 3). The financial information presented includes Alliance Gaming Corporation (the “Parent”), its wholly-owned guaranteeing subsidiaries (“Guaranteeing Subsidiaries”), and the non-guaranteeing subsidiaries, Video Services, Inc., United Gaming Rainbow, BGI Australia Pty. Limited, Bally Gaming de Puerto Rico, Inc., and Alliance Automaten GmbH & Co. KG (the subsidiary that holds the Company’s German interests) (together the “Non-Guaranteeing Subsidiaries”). The notes to consolidating financial statements should be read in conjunction with these consolidating financial statements.

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ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATING BALANCE SHEETS
June 30, 2002
(In 000’s)

                                                 
                                    Reclas-   Alliance
                                    sification   Gaming
                            Non-   and   Corporation
                    Guaranteeing   Guaranteeing   Elimina-   and
            Parent   Subsidiaries   Subsidiaries   tions   Subsidiaries
           
 
 


ASSETS
                                       
Current assets:
                                       
 
Cash and cash equivalents
  $ 8,121     $ 38,362     $ 16,025     $     $ 62,508  
 
Short-term investments (restricted)
          896                   896  
 
Accounts and short-term notes receivable, net
    13,860       52,838       43,956       (13,822 )     96,832  
 
Inventories, net
          28,469       14,738       (210 )     42,997  
 
Deferred tax assets, net
    16,489       11,097       19             27,605  
 
Other current assets
    260       12,307       1,408             13,975  
 
   
     
     
     
     
 
       
Total current assets
    38,730       143,969       76,146       (14,032 )     244,813  
Long-term notes receivable, net
    147,595       60,912       408       (206,526 )     2,389  
Leased equipment, net
          19,560                   19,560  
Property, plant and equipment, net
    129       57,368       32,817             90,314  
Excess of costs over net assets of acquired businesses, net
    (4,842 )     48,232       4,323             47,713  
Intangible assets, net
    9,033       23,478       1             32,512  
Investment in subsidiaries
    335,739       81,855             (417,594 )      
Deferred tax assets, net
    22,394             751       (4,905 )     18,240  
Other assets, net
    (145,694 )     154,180       (4,131 )     (16 )     4,339  
 
   
     
     
     
     
 
 
  $ 403,084     $ 589,554     $ 110,315     $ (643,073 )   $ 459,880  
 
   
     
     
     
     
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
                                       
Current liabilities:
                                       
 
Accounts payable
  $ 135     $ 13,398     $ 2,361     $     $ 15,894  
 
Accrued liabilities
    11,506       22,333       13,033       (1,031 )     45,841  
 
Jackpot liabilities
          5,812       103             5,915  
 
Current maturities of long-term debt
    3,900       79       12,952       (12,815 )     4,116  
 
   
     
     
     
     
 
       
Total current liabilities
    15,541       41,622       28,449       (13,846 )     71,766  
 
   
     
     
     
     
 
Long term debt
    337,704       206,698       12       (206,266 )     338,148  
Deferred tax liabilities, net
          4,905             (4,905 )      
Other liabilities
    2,620       127                   2,747  
 
   
     
     
     
     
 
       
Total liabilities
    355,865       253,352       28,461       (225,017 )     412,661  
 
   
     
     
     
     
 
Minority interest
    1,233                         1,233  
Commitments and contingencies
                                       
Stockholders’ equity:
                                       
   
Series E Special Stock
    12                         12  
   
Common Stock
    4,927       478       17,832       (18,310 )     4,927  
   
Treasury stock
    (501 )                       (501 )
   
Additional paid-in capital
    157,866       190,449       70,382       (260,831 )     157,866  
   
Accumulated other comprehensive loss
    (19,364 )     (19,361 )     (19,384 )     38,745       (19,364 )
   
Retained earnings (accumulated deficit)
    (96,954 )     164,636       13,024       (177,660 )     (96,954 )
 
   
     
     
     
     
 
     
Total stockholders’ equity
    45,986       336,202       81,854       (418,056 )     45,986  
 
   
     
     
     
     
 
 
  $ 403,084     $ 589,554     $ 110,315     $ (643,073 )   $ 459,880  
 
   
     
     
     
     
 

See accompanying unaudited note.

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ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATING BALANCE SHEETS
December 31, 2002
(In 000’s)

                                                 
                                    Reclas-   Alliance
                                    sification   Gaming
                            Non-   and   Corporation
                    Guaranteeing   Guaranteeing   Elimina-   and
            Parent   Subsidiaries   Subsidiaries   tions   Subsidiaries
           
 
 
 
 
ASSETS
                                       
Current assets:
                                       
   
Cash and cash equivalents
  $ 11,418     $ 24,635     $ 18,867     $     $ 54,920  
   
Short term investments (restricted)
          845                   845  
   
Accounts and short-term notes receivable, net
    10,114       65,137       46,456       (10,065 )     111,642  
   
Inventories, net
          30,764       10,547       (232 )     41,079  
   
Deferred tax assets
    16,490       11,097       19             27,606  
   
Other current assets
    446       12,805       1,104             14,355  
 
   
     
     
     
     
 
       
Total current assets
    38,468       145,283       76,993       (10,297 )     250,447  
 
   
     
     
     
     
 
Long-term notes receivable, net
    153,659       84,823       334       (218,257 )     20,559  
Leased equipment, net
          23,134       4,420             27,554  
Property, plant and equipment, net
    98       56,876       34,427             91,401  
Excess of costs over net assets of acquired businesses, net
    (4,706 )     49,694       4,598             49,586  
Intangible assets, net
    7,981       29,928       102             38,011  
Investment in subsidiaries
    373,084       85,864             (458,948 )      
Deferred tax assets, net
    12,489             802       (4,770 )     8,521  
Other assets, net
    (160,889 )     175,909       (10,200 )     (45 )     4,775  
 
   
     
     
     
     
 
 
  $ 420,184     $ 651,511     $ 111,476     $ (692,317 )   $ 490,854  
 
   
     
     
     
     
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
                                       
Current liabilities:
                                       
 
Accounts payable
  $ 197     $ 12,959     $ 2,950     $     $ 16,106  
 
Accrued liabilities
    5,947       29,207       13,347       (942 )     47,559  
 
Jackpot liabilities
          8,675       123             8,798  
 
Current maturities of long-term debt
    3,395       1,538       9,186       (9,175 )     4,944  
 
   
     
     
     
     
 
       
Total current liabilities
    9,539       52,379       25,606       (10,117 )     77,407  
 
   
     
     
     
     
 
Long term debt
    336,299       219,861       6       (217,997 )     338,169  
Deferred tax liabilities, net
          4,770             (4,770 )      
Other liabilities
    2,620       932                   3,552  
 
   
     
     
     
     
 
       
Total liabilities
    348,458       277,942       25,612       (232,884 )     419,128  
 
   
     
     
     
     
 
Minority interest
    920                         920  
Commitments and contingencies
                                       
Stockholders’ equity:
                                       
   
Series E Special Stock
    12                         12  
   
Common Stock
    4,982       478       17,832       (18,310 )     4,982  
   
Treasury stock
    (501 )                       (501 )
   
Additional paid-in capital
    161,641       190,449       70,418       (260,867 )     161,641  
   
Accumulated other comprehensive loss
    (16,485 )     (16,482 )     (16,505 )     32,987       (16,485 )
   
Retained earnings (accumulated deficit)
    (78,843 )     199,124       14,119       (213,243 )     (78,843 )
 
   
     
     
     
     
 
     
Total stockholders’ equity
    70,806       373,569       85,864       (459,433 )     70,806  
 
   
     
     
     
     
 
 
  $ 420,184     $ 651,511     $ 111,476     $ (692,317 )   $ 490,854  
 
   
     
     
     
     
 

See accompanying unaudited note.

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ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATING STATEMENTS OF OPERATIONS

Three Months Ended December 31, 2001
(In 000’s)

                                           
                                      Alliance
                                      Gaming
                      Non-           Corporation
              Guaranteeing   Guaranteeing   Elimina-   and
      Parent   Subsidiaries   Subsidiaries   tions   Subsidiaries
     
 
 
 
 
Revenues:
                                       
 
Gaming equipment and systems
  $     $ 48,911     $ 7,624     $ (4,752 )   $ 51,783  
 
Wall machines and amusement games
                25,462             25,462  
 
Route operations
          52,283       3,481             55,764  
 
Casino operations
          5,518       14,214       (2,125 )     17,607  
 
   
     
     
     
     
 
 
          106,712       50,781       (6,877 )     150,616  
Costs and expenses:
                                       
 
Cost of gaming equipment and systems
          22,806       4,775       (4,737 )     22,844  
 
Cost of wall machines and amusement games
                13,108             13,108  
 
Cost of route operations
          43,761       2,313             46,074  
 
Cost of casino operations
          2,784       5,082             7,866  
 
Selling, general and administrative
    2,826       16,139       12,376       (2,140 )     29,201  
 
Research and development costs
          3,142       665             3,807  
 
Depreciation and amortization
    582       5,197       1,726       (189 )     7,316  
 
   
     
     
     
     
 
 
    3,408       93,829       40,045       (7,066 )     130,216  
 
   
     
     
     
     
 
Operating income (loss)
    (3,408 )     12,883       10,736       189       20,400  
Earnings in consolidated subsidiaries
    18,962       8,837             (27,799 )      
Other income (expense):
                                       
 
Interest income
    3,061       1,479       242       (4,413 )     369  
 
Interest expense
    (7,019 )     (4,124 )     (303 )     4,413       (7,033 )
 
Rainbow royalty
    1,589             (1,589 )            
 
Minority interest
    (405 )                       (405 )
 
Other, net
    (32 )     (271 )     (129 )           (432 )
 
   
     
     
     
     
 
Income before income taxes
    12,748       18,804       8,957       (27,610 )     12,899  
Income tax provision
    68       (31 )     (120 )           (83 )
 
   
     
     
     
     
 
Net income
  $ 12,816     $ 18,773     $ 8,837     $ (27,610 )   $ 12,816  
 
   
     
     
     
     
 

See accompanying unaudited note.

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Table of Contents

ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATING STATEMENTS OF OPERATIONS

Three Months Ended December 31, 2002
(In 000’s)

                                           
                                      Alliance
                                      Gaming
                      Non-           Corporation
              Guaranteeing   Guaranteeing   Elimina-   and
      Parent   Subsidiaries   Subsidiaries   tions   Subsidiaries
     
 
 
 
 
Revenues:
                                       
 
Gaming equipment and systems
  $     $ 83,616     $ 12,304     $ (9,293 )   $ 86,627  
 
Wall machines and amusement games
                16,900             16,900  
 
Route operations
          49,727       3,594             53,321  
 
Casino operations
          5,800       13,186       (2,208 )     16,778  
 
   
     
     
     
     
 
 
          139,143       45,984       (11,501 )     173,626  
Costs and expenses:
                                       
 
Cost of gaming equipment and systems
          39,835       9,076       (9,248 )     39,663  
 
Cost of wall machines and amusement games
                9,809             9,809  
 
Cost of route operations
          42,295       2,387             44,682  
 
Cost of casino operations
          2,839       5,223             8,062  
 
Selling, general and administrative
    2,623       19,068       11,664       (2,231 )     31,124  
 
Research and development costs
          4,159       1,753             5,912  
 
Depreciation and amortization
    542       7,324       1,055             8,921  
 
   
     
     
     
     
 
 
    3,165       115,520       40,967       (11,479 )     148,173  
 
   
     
     
     
     
 
Operating income (loss)
    (3,165 )     23,623       5,017       (22 )     25,453  
Earnings in consolidated subsidiaries
    21,821       3,168             (24,989 )      
Other income (expense):
                                       
 
Interest income
    3,274       1,648       347       (4,817 )     452  
 
Interest expense
    (6,501 )     (4,678 )     (204 )     4,817       (6,566 )
 
Rainbow royalty
    1,458             (1,458 )            
 
Minority interest
    (309 )                       (309 )
 
Other, net
    665       (1,282 )     885             268  
 
   
     
     
     
     
 
Income before income taxes
    17,243       22,479       4,587       (25,011 )     19,298  
Income tax provision
    (5,390 )     (636 )     (1,419 )           (7,445 )
 
   
     
     
     
     
 
Net income
  $ 11,853     $ 21,843     $ 3,168     $ (25,011 )   $ 11,853  
 
   
     
     
     
     
 

See accompanying unaudited note.

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Table of Contents

ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATING STATEMENTS OF OPERATIONS

Six Months Ended December 31, 2001
(In 000’s)

                                           
                                      Alliance
                                      Gaming
                      Non-           Corporation
              Guaranteeing   Guaranteeing   Elimina-   and
      Parent   Subsidiaries   Subsidiaries   tions   Subsidiaries
     
 
 
 
 
Revenues:
                                       
 
Gaming equipment and systems
  $     $ 93,333     $ 12,051     $ (8,286 )   $ 97,098  
 
Wall machines and amusement games
                38,123             38,123  
 
Route operations
          102,554       7,010             109,564  
 
Casino operations
          11,033       28,976       (4,223 )     35,786  
 
   
     
     
     
     
 
 
          206,920       86,160       (12,509 )     280,571  
Costs and expenses:
                                       
 
Cost of gaming equipment and systems
          43,126       7,525       (8,256 )     42,395  
 
Cost of wall machines and amusement games
                20,613             20,613  
 
Cost of route operations
          85,872       4,600             90,472  
 
Cost of casino operations
          5,554       10,647             16,201  
 
Selling, general and administrative
    5,002       29,787       22,554       (4,253 )     53,090  
 
Research and development costs
          6,212       1,287             7,499  
 
Depreciation and amortization
    1,104       10,905       3,410       (379 )     15,040  
 
   
     
     
     
     
 
 
    6,106       181,456       70,636       (12,888 )     245,310  
 
   
     
     
     
     
 
Operating income (loss)
    (6,106 )     25,464       15,524       379       35,261  
Earnings in consolidated subsidiaries
    31,195       11,070             (42,265 )      
Other income (expense):
                                       
 
Interest income
    6,050       2,943       459       (8,688 )     764  
 
Interest expense
    (14,643 )     (8,064 )     (661 )     8,688       (14,680 )
 
Rainbow royalty
    3,235             (3,235 )            
 
Minority interest
    (868 )                       (868 )
 
Other, net
    1,246       (552 )     (706 )           (12 )
 
   
     
     
     
     
 
Income before income taxes
    20,109       30,861       11,381       (41,886 )     20,465  
Income tax provision
    135       (45 )     (311 )           (221 )
 
   
     
     
     
     
 
Net income
  $ 20,244     $ 30,816     $ 11,070     $ (41,886 )   $ 20,244  
 
   
     
     
     
     
 

See accompanying unaudited note.

18


Table of Contents

ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATING STATEMENTS OF OPERATIONS

Six Months Ended December 31, 2002
(In 000’s)

                                           
                                      Alliance
                                      Gaming
                      Non-           Corporation
              Guaranteeing   Guaranteeing   Elimina-   and
      Parent   Subsidiaries   Subsidiaries   tions   Subsidiaries
     
 
 
 
 
Revenues:
                                       
 
Gaming equipment and systems
  $     $ 146,526     $ 18,005     $ (14,365 )   $ 150,166  
 
Wall machines and amusement games
                27,466             27,466  
 
Route operations
          100,874       7,284             108,158  
 
Casino operations
          11,512       27,431       (4,375 )     34,568  
 
   
     
     
     
     
 
 
          258,912       80,186       (18,740 )     320,358  
Costs and expenses:
                                       
 
Cost of gaming equipment and systems
          67,638       12,587       (14,304 )     65,921  
 
Cost of wall machines and amusement games
                15,979             15,979  
 
Cost of route operations
          85,546       4,856             90,402  
 
Cost of casino operations
          5,730       10,520             16,250  
 
Selling, general and administrative
    4,858       36,679       23,417       (4,414 )     60,540  
 
Research and development costs
          7,342       3,330             10,672  
 
Depreciation and amortization
    1,086       14,114       1,720             16,920  
 
   
     
     
     
     
 
 
    5,944       217,049       72,409       (18,718 )     276,684  
 
   
     
     
     
     
 
Operating income (loss)
    (5,944 )     41,863       7,777       (22 )     43,674  
Earnings in consolidated subsidiaries
    37,406       4,035             (41,441 )      
Other income (expense):
                                       
 
Interest income
    6,573       3,274       553       (9,667 )     733  
 
Interest expense
    (13,119 )     (9,300 )     (450 )     9,667       (13,202 )
 
Rainbow royalty
    3,044             (3,044 )            
 
Minority interest
    (754 )                       (754 )
 
Other, net
    766       (1,349 )     780             197  
 
   
     
     
     
     
 
Income before income taxes
    27,972       38,523       5,616       (41,463 )     30,648  
Income tax provision
    (9,861 )     (1,095 )     (1,581 )           (12,537 )
 
   
     
     
     
     
 
Net income
  $ 18,111     $ 37,428     $ 4,035     $ (41,463 )   $ 18,111  
 
   
     
     
     
     
 

See accompanying unaudited note.

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Table of Contents

ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATING STATEMENTS OF CASH FLOWS
Six Months Ended December 31, 2001
(In 000’s)

                                               
                                          Alliance
                                          Gaming
                          Non-           Corporation
                  Guaranteeing   Guaranteeing   Elimina-   and
          Parent   Subsidiaries   Subsidiaries   tions   Subsidiaries
         
 
 
 
 
Net cash provided by (used in) operating activities
  $ (5,333 )   $ 17,055     $ 11,231     $ (3,070 )   $ 19,883  
 
   
     
     
     
     
 
Cash flows from investing activities:
                                       
 
Additions to property, plant and equipment
    (15 )     (5,112 )     (1,078 )           (6,205 )
 
Additions to leased gaming equipment
          (8,248 )                 (8,248 )
 
Additions to other long term assets
          (1,976 )                 (1,976 )
 
Acquisitions, net of cash acquired
          (6,731 )                 (6,731 )
 
Proceeds from disposal of property and equipment and other assets
          15       27             42  
 
   
     
     
     
     
 
     
Net cash used in investing activities
    (15 )     (22,052 )     (1,051 )           (23,118 )
 
   
     
     
     
     
 
Cash flows from financing activities:
                                       
 
Reduction of long-term debt
    (506 )     (5 )     (3,305 )     3,070       (746 )
 
Debt issuance costs
    (651 )                       (651 )
 
Proceeds from exercise of stock options
    4,080                         4,080  
 
Dividends received (paid)
          5,121       (5,121 )            
 
   
     
     
     
     
 
     
Net cash provided by (used in) financing activities
    2,923       5,116       (8,426 )     3,070       2,683  
 
   
     
     
     
     
 
Effect of exchange rate changes on cash
                154             154  
Cash and cash equivalents:
                                       
 
Increase (decrease) for period
    (2,425 )     119       1,908             (398 )
 
Balance, beginning of period
    18,237       23,265       13,343             54,845  
 
   
     
     
     
     
 
 
Balance, end of period
  $ 15,812     $ 23,384     $ 15,251     $     $ 54,447  
 
   
     
     
     
     
 

See accompanying unaudited note.

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Table of Contents

ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATING STATEMENTS OF CASH FLOWS
Six Months Ended December 31, 2002
(In 000’s)

                                             
                                        Alliance
                                        Gaming
                        Non-           Corporation
                Guaranteeing   Guaranteeing   Elimina-   and
        Parent   Subsidiaries   Subsidiaries   tions   Subsidiaries
       
 
 
 
 
Net cash provided by (used in) operating activities
  $ 3,458     $ 7,241     $ 11,750     $ (4,114 )   $ 18,335  
 
   
     
     
     
     
 
Cash flows from investing activities:
                                       
 
Additions to property, plant and equipment
    (3 )     (6,041 )     (2,731 )           (8,775 )
 
Additions to leased gaming equipment
          (10,010 )                 (10,010 )
 
Additions to other long term assets
          (4,210 )     (101 )           (4,311 )
 
Acquisitions, net of cash acquired
          (3,038 )                 (3,038 )
 
Proceeds from disposal of property and equipment and other assets
          9                   9  
 
   
     
     
     
     
 
   
Net cash used in investing activities
    (3 )     (23,290 )     (2,832 )           (26,125 )
 
   
     
     
     
     
 
Cash flows from financing activities:
                                       
 
Reduction of long-term debt
    (1,950 )     (618 )     (3,772 )     4,150       (2,190 )
 
Proceeds from exercise of stock options
    1,792                         1,792  
 
Dividends received (paid)
          2,940       (2,940 )            
 
Other
                36       (36 )      
 
   
     
     
     
     
 
   
Net cash provided by (used in) financing activities
    (158 )     2,322       (6,676 )     4,114       (398 )
 
   
     
     
     
     
 
Effect of exchange rate changes on cash
                600             600  
Cash and cash equivalents:
                                       
 
Increase (decrease) for period
    3,297       (13,727 )     2,842             (7,588 )
 
Balance, beginning of period
    8,121       38,362       16,025             62,508  
 
   
     
     
     
     
 
 
Balance, end of period
  $ 11,418     $ 24,635     $ 18,867     $     $ 54,920  
 
   
     
     
     
     
 

See accompanying unaudited note.

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Table of Contents

ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

    Debt and Revolving Credit Facility
 
    Long-term debt and lines of credit at June 30, 2002, consisted of the following (in 000’s):

                                         
                                    Alliance
                                    Gaming
                    Non-           Corporation
            Guaranteeing   Guaranteeing   Elimina-   and
    Parent   Subsidiaries   Subsidiaries   tions   Subsidiaries
   
 
 
 
 
Term loan facility
  $ 189,525     $     $     $     $ 189,525  
10% Senior Subordinated Notes due 2007, net of unamortized discount
    149,584                         149,584  
Other subordinated note
    2,495                         2,495  
Intercompany notes payable
          206,267       12,814       (219,081 )      
Other
          510       150             660  
 
   
     
     
     
     
 
 
    341,604       206,777       12,964       (219,081 )     342,264  
Less current maturities
    3,900       79       12,952       (12,815 )     4,116  
 
   
     
     
     
     
 
Long-term debt, less current maturities
  $ 337,704     $ 206,698     $ 12     $ (206,266 )   $ 338,148  
 
   
     
     
     
     
 

Long-term debt and lines of credit at December 31, 2002, consisted of the following (in 000’s):
                                         
                                    Alliance
                                    Gaming
                    Non-           Corporation
            Guaranteeing   Guaranteeing   Elimina-   and
    Parent   Subsidiaries   Subsidiaries   tions   Subsidiaries
   
 
 
 
 
Term loan facility
  $ 188,575     $     $     $     $ 188,575  
10% Senior Subordinated Notes due 2007, net of unamortized discount
    149,624                         149,624  
Other subordinated note
    1,495                         1,495  
Intercompany notes payable
          217,998       9,174       (227,172 )      
Other
          3,401       18             3,419  
 
   
     
     
     
     
 
 
    339,694       221,399       9,192       (227,172 )     343,113  
Less current maturities
    3,395       1,538       9,186       (9,175 )     4,944  
 
   
     
     
     
     
 
Long-term debt, less current maturities
  $ 336,299     $ 219,861     $ 6     $ (217,997 )   $ 338,169  
 
   
     
     
     
     
 

22


Table of Contents

ALLIANCE GAMING CORPORATION
FORM 10-Q

December 31, 2002

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

Liquidity and Capital Resources

As of December 31, 2002, the Company had $54.9 million in cash and cash equivalents, and $40.0 million in unborrowed availability on its revolving credit facility. In addition we had net working capital of approximately $173.0 million at December 31, 2002, virtually unchanged compared to the balance at June 30, 2002. The changes within working capital are more fully described in the cash flow section below. Consolidated cash and cash equivalents at December 31, 2002, includes approximately $21.7 million of cash which is utilized in Casino and Route Operations held in vaults, cages or change banks, as well as $8.8 million held in jackpot reserve accounts which we maintain to ensure availability of funds to pay wide-area progressive jackpot awards. We also maintain restricted investments to pay the annual installments for the long-term jackpots previously awarded, which totaled $0.8 million at December 30, 2002.

Management believes that cash flows from operating activities, cash and cash equivalents held and the up to $40.0 million revolving credit facility commitment will provide the Company with sufficient capital resources and liquidity. At December 31, 2002, we had no material commitments for capital expenditures.

Cash Flow

During the six months ended December 31, 2002, we generated $18.3 million of cash flows from operating activities, which was down compared to $19.9 million in the prior period. The current period operating cash flow included cash used by increases in both accounts and notes receivable of $32.0 million and inventories of $2.6 million, offset by increases in accrued liabilities and accounts payable of $6.5 million. The increase in accounts and notes receivable resulted from the increase in sales at the Bally Gaming and Systems business unit and the financing of two significant product sales to Native American casinos during the quarter ended December 31, 2002.

During the six months ended December 31, 2002, we used $26.1 million of cash in investing activities resulting from capital expenditures totaling $8.8 million, costs incurred to produce participation games totaling $10.0 million, and payments for gaming rights totaling $2.8 million.

During the six months ended December 31, 2002, cash flow from financing activities included $1.8 million of cash provided from the exercise of stock options, offset by principal payments on other long term debt totaling $2.2 million.

23


Table of Contents

ALLIANCE GAMING CORPORATION
FORM 10-Q

December 31, 2002

Results of Operations:

General

The following tables set forth operating income for the Company’s four business units and the earnings before interest, taxes, depreciation and amortization (EBITDA) for the following periods (in 000’s):

                                   
      Three Months Ending December 31,   Six Months Ending December 31,
      2001   2002   2001   2002
     
 
 
 
Operating Income (Expense):
                               
Bally Gaming and Systems
  $ 10,009     $ 21,775     $ 19,939     $ 36,910  
Wall Machines and Amusement Games
    4,491       554       3,133       (1,261 )
Route Operations
    4,024       2,468       7,144       5,133  
Casino Operations
    5,284       3,821       11,151       8,836  
Corporate Administrative Expenses
    (3,408 )     (3,165 )     (6,106 )     (5,944 )
 
   
     
     
     
 
 
Total Operating Income
  $ 20,400     $ 25,453     $ 35,261     $ 43,674  
 
   
     
     
     
 
EBITDA by Business Unit:
                               
Bally Gaming and Systems
  $ 12,405     $ 25,552     $ 24,289     $ 43,951  
Wall Machines and Amusement Games
    5,782       1,049       5,693       (627 )
Route Operations
    6,596       5,783       13,236       11,758  
Casino Operations
    5,759       4,613       12,085       10,370  
Corporate Administrative Expenses
    (2,826 )     (2,623 )     (5,002 )     (4,858 )
 
   
     
     
     
 
 
EBITDA
  $ 27,716     $ 34,374     $ 50,301     $ 60,594  
 
   
     
     
     
 

We believe that the analysis of EBITDA is a useful adjunct to operating income, net income, cash flow and other GAAP measurement. However, this information should not be construed as an alternative to net income (loss) or any other GAAP measure of performance as an indicator of our performance or to GAAP-defined cash flows generated by (or used in) operating, investing and financing activities as an indicator of cash flows or a measure of liquidity. EBITDA may not be comparable to similarly titled measures reported by other companies.

We disclose EBITDA primarily because it is a common metric utilized by analysts for our industry and also because it is utilized in both our bank credit agreement and the Indenture of our Senior Subordinated Notes for purposes of computing various covenants.

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Table of Contents

ALLIANCE GAMING CORPORATION
FORM 10-Q

December 31, 2002

Bally Gaming and Systems

                                     
        Three Months Ending December 31,   Six Months Ending December 31,
        2001   2002   2001   2002
       
 
 
 
Revenues
                               
 
Game sales
  $ 26,935     $ 50,421     $ 47,883     $ 84,204  
 
System sales
    11,934       23,041       24,924       38,316  
 
Gaming operations
    12,914       13,165       24,291       27,646  
 
   
     
     
     
 
   
Total revenues
    51,783       86,627       97,098       150,166  
Gross Margin
                               
 
Game sales
    10,043       21,621       20,427       37,546  
 
System sales
    9,110       17,106       18,666       29,039  
 
Gaming operations
    9,786       8,237       15,610       17,660  
 
   
     
     
     
 
   
Total gross margin
    28,939       46,964       54,703       84,245  
Selling, general and administrative
    13,392       16,254       24,202       31,161  
Research and development costs
    3,142       5,158       6,212       9,133  
Depreciation and amortization
    2,396       3,777       4,350       7,041  
 
   
     
     
     
 
Operating income
  $ 10,009     $ 21,775     $ 19,939     $ 36,910  
 
   
     
     
     
 
Operating Statistics:
                               
New Gaming Devices Sold
    3,250       5,430       5,700       9,430  
Game Monitoring Units Sold
    8,500       8,900       17,580       15,030  
WAP and daily-fee games
                       
End of period installed base
    3,700       3,930       3,700       3,930  
 
Average installed base
    3,580       3,900       3,480       3,800  

Our Bally Gaming and Systems business unit reported an overall increase in revenues of 67% for the quarter and 55% for the year-to-date period. Bally game sales division reported an increase in revenues of 87% for the quarter and 76% for the year-to-date period. New units sold increased 66% during the quarter and 64% for the year-to-date period. The average new unit selling price (excluding OEM games) increased 26% for the quarter and 21% for the year-to-date period. Bally Systems reported an increase in revenues of 93% for the quarter and 54% for the year-to-date period. Bally Systems reported a 6% increase in sales of game monitoring units for the quarter, but a 14% decrease for the year-to-date period. For the current quarter and year-to-date period, Bally Systems experienced significantly higher average selling price per unit driven by the larger proportion of player tracking and promotion software revenues, as well as an increase in recurring hardware and software support revenues to $4.2 million, resulting from the larger base of installed units, which now stands at approximately 225,000. Gaming Operations reported an increase of 2% in revenues for the quarter and 14% for the year-to-date period, driven by the 9% increase in the average installed base of wide-area and daily-fee games units outstanding.

For the quarter ended December 31, 2002, the overall gross margin percentage for Bally Gaming and Systems decreased to 54% compared to 56% in the prior year quarter, resulting from the higher mix of game sales revenue which have lower margins compared to system and gaming operations. The year-to-date gross margin percentage remained constant at 56%.

The overall selling, general and administrative expenses increased 21% for the quarter and 29% for the year-to-date period, resulting from the additional headcount added with the acquisition of Casino Marketplace in October 2001 and Advanced Casino Systems Corporation in March 2002. Selling, general and administrative costs as a percentage of this business unit’s

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ALLIANCE GAMING CORPORATION
FORM 10-Q

December 31, 2002

revenue declined to 21% in the current year-to-date period compared to 25% for the prior year-to-date period. Research and development costs increased 64% for the quarter and 47% for the year-to-date period, resulting from the increase in hardware and software engineers added during the current year. Total depreciation expense increased 58% for the quarter and 62% for the year-to-date period, driven by the increase in the installed base of wide-area progressive and daily fee games.

Wall Machines and Amusement Games

                                 
    Three Months Ending December 31,   Six Months Ending December 31,
    2001   2002   2001   2002
   
 
 
 
Revenues
  $ 25,462     $ 16,900     $ 38,123     $ 27,466  
Gross Margin
    12,354       7,091       17,510       11,487  
Selling, general and administrative
    5,907       5,288       10,530       10,575  
Research and development costs
    665       754       1,287       1,539  
Depreciation and amortization
    1,291       495       2,560       634  
 
   
     
     
     
 
Operating income (loss)
  $ 4,491     $ 554     $ 3,133     $ (1,261 )
 
   
     
     
     
 
Operating Statistics:
                               
Number of New Wall Machines Sold
    3,960       1,770       5,810       2,470  
Number of New Wall Machines Leased
    1,630       1,380       2,610       2,320  
Installed Base of Leased Machines
    7,130       6,680       7,130       6,680  

Wall Machines and Amusement Games reported a decrease in revenues of 34% for the quarter and 28% for the year-to-date period. For the quarter, the decrease in revenues was a result of a 55% decrease in new units sold, offset by a 34% increase in the average selling price and a 17% increase in revenues from leased games. For the year-to-date period, the decrease in revenues is a result of a 58% decrease in new units sold, offset by a 21% increase in the average selling price and a 19% increase in revenues from leased games. The prior year’s quarterly and year-to-date results reflect the positive impact of units that were sold to meet the deadline for the full implementation of the Euro currency. In general, the Wall Machine industry in Germany is currently experiencing a significant slowdown that is tied to the overall slowness in the German economy. The current quarter’s revenues included approximately 1,000 Sky games which were delivered in the September 2002 quarter but which had certain right of return privileges that did not expire until the December 2002 quarter, at which time revenue was recognized.

For the quarter ended December 31, 2002, the gross margin percentage for Wall Machines and Amusement Games decreased to 42% compared to 49% in the prior year quarter, resulting primarily from fixed manufacturing overhead costs being allocated over fewer units produced. The year to-date gross margin percentage decreased to 42% from 46% for the same reason.

The selling, general and administrative expenses decreased 10% for the quarter, which reflects the reduction in both permanent and temporary staff as a result of the workforce reductions put in place in light of the lower sales levels. Research and development costs increased 13% for the quarter and 20% for the year-to-date period as a result of the increase in new product development efforts. Total depreciation expense decreased 62% for the quarter and 75% for the year-to-date period, which reflects the fact that almost all of the long-lived assets were fully written off in June 2002.

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ALLIANCE GAMING CORPORATION
FORM 10-Q

December 31, 2002

Route Operations

                                     
        Three Months Ending December 31,   Six Months Ending December 31,
        2001   2002   2001   2002
       
 
 
 
Revenues
                               
 
Nevada
  $ 52,283     $ 49,727     $ 102,554     $ 100,874  
 
Louisiana
    3,481       3,594       7,010       7,284  
 
   
     
     
     
 
   
Total revenues
    55,764       53,321       109,564       108,158  
Gross Margin
                               
 
Nevada
    8,522       7,432       16,682       15,328  
 
Louisiana
    1,168       1,207       2,410       2,428  
 
   
     
     
     
 
   
Total gross margin
    9,690       8,639       19,092       17,756  
Selling, general and administrative
    3,094       2,856       5,856       5,998  
Depreciation and amortization
    2,572       3,315       6,092       6,625  
 
   
     
     
     
 
Operating income
  $ 4,024     $ 2,468     $ 7,144     $ 5,133  
 
   
     
     
     
 
Operating Statistics:
                               
Average Number of Gaming Devices
                               
 
Nevada
    8,380       8,130       8,275       8,235  
 
Louisiana
    680       711       665       711  
 
   
     
     
     
 
   
Total Gaming Devices
    9,060       8,841       8,940       8,946  

Revenues from the Nevada route operations decreased 5% for the quarter and 2% for year-to-date period. This decrease was attributable to a decrease in the average net win per gaming machine per day of 2% to $65.85 from $67.25 and a 3% decrease in the weighted average number of gaming machines for the quarter. The revenue decrease for the year-to-date period is a result of a 2% decrease in the average net win per gaming machine per day to $65.50 from $66.80 and the weighted average number of games remained relatively flat. The Nevada route operations were adversely impacted during the quarter by the closure of the Raley’s supermarkets locations in Southern Nevada. Certain of these locations later re-opened as Food-4-Less stores, where we retained the gaming rights. Gamblers’ Bonus, a cardless players club and player tracking system continued to have a favorable impact on the net win per day. As of December 31, 2002, the Gamblers’ Bonus product was installed in over 4,140 gaming machines at approximately 415 locations statewide or 52% of the installed base of gaming machines. Revenues from route operations in Louisiana reported a slight increase of 3% for the quarter and 4% for year-to-date period. For the quarter the increase was primarily the result of a 5% increase in the number of gaming units deployed, offset by a slight decline in the net win per gaming machine per day of 2% to $54.65 from $55.50. For the year-to-date period the revenue increase resulted from a 7% increase in the number of gaming units deployed, offset by a 3% decline in the net win per gaming machine per day.

For the quarter and year-to-date ended December 31, 2002, the overall gross margin percentage for the Route Operations decreased slightly to 16% compared to 17% in the prior year. This decrease was a result of the decrease in revenues, with incremental increases in certain operating costs.

The overall selling, general and administrative expenses decreased 8% for the quarter and increased 2% for the year-to-date period. Selling, general and administrative costs as a percentage of revenue remained constant at 5% for the year-to-date period. Total depreciation expense increased 29% for the quarter and 9% for the year-to-date period, driven by the increase in gaming rights fees amortization and depreciation on a higher capital invested in the installed base of gaming devices.

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ALLIANCE GAMING CORPORATION
FORM 10-Q

December 31, 2002

Casino Operations

                                     
        Three Months Ending December 31,   Six Months Ending December 31,
        2001   2002   2001   2002
       
 
 
 
Revenues
                               
 
Rainbow Casino
  $ 12,621     $ 11,600     $ 25,823     $ 24,267  
 
Rail City Casino
    4,986       5,178       9,963       10,301  
 
   
     
     
     
 
   
Total revenues
    17,607       16,778       35,786       34,568  
Gross Margin
                               
 
Rainbow Casino
    7,539       6,377       15,176       13,747  
 
Rail City Casino
    2,202       2,339       4,409       4,571  
 
   
     
     
     
 
   
Total gross margin
    9,741       8,716       19,585       18,318  
Selling, general and administrative
    3,982       4,103       7,500       7,948  
Depreciation and amortization
    475       792       934       1,534  
 
   
     
     
     
 
Operating income
  $ 5,284     $ 3,821     $ 11,151     $ 8,836  
 
   
     
     
     
 
Operating Statistics:
                               
Average Number of Gaming Devices Rainbow Casino
    970       904       940       930  
 
Rail City Casino
    530       546       520       545  
 
   
     
     
     
 
   
Total Gaming Devices
    1,500       1,450       1,460       1,475  
Average Number of Table Games
    24       24       24       24  

Rainbow Casino reported a decrease in revenues of 8% for the quarter and 6% for the year-to-date period. The Rainbow Casino revenue decrease for the quarter was attributable to a 7% decrease in the average number of gaming machines, offset by a 1% increase in the slot machines net win per day to $135. The Vicksburg gaming market grew approximately 3% in the December 31, 2002, quarter compared to the prior year quarter. During the quarter Rainbow completed a number of significant remodeling projects including the addition of a deli and an entertainment lounge. The internal remodeling projects caused a significant amount of disruption to the casino operations in the current quarter. The external remodeling project, which began late in January and is expected to be completed early in the June quarter, is expected to be less disruptive to the casino operations. Rail City Casino reported an increase in revenues of 4% for the quarter and 3% for the year-to-date period. The revenue improvement at the Rail City Casino was attributable to a 2% increase in the average number of gaming machines and an increase in the average gaming machine net win per day of 2% to $83 for the quarter.

The cost of revenues for Casino Operations as a percentage of revenues, increased to 48% for the quarter and 47% for the year-to-date period. This increase was a result of the decrease in revenues, with incremental increases in certain operating costs. Cost of casino revenues includes gaming taxes, rental costs and direct labor including payroll taxes and benefits.

The overall selling, general and administrative expenses increased 3% for the quarter and 6% for the year-to-date period, as result of an increase in advertising and promotional expenses. Selling, general and administrative costs as a percentage of revenue increased to 23% compared to 21% for the year-to-date-period. Total depreciation expense increased 67% for the quarter and 64% for the year-to-date period as a result of the additional capital improvements made to the Rainbow Casino in the current year.

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ALLIANCE GAMING CORPORATION
FORM 10-Q

December 31, 2002

Parent Company and other unallocated other income (expense)

                                     
        Three Months Ending December 31,   Six Months Ending December 31,
        2001   2002   2001   2002
       
 
 
 
General and administrative
  $ 2,826     $ 2,623     $ 5,002     $ 4,858  
Depreciation and amortization
    582       542       1,104       1,086  
 
   
     
     
     
 
 
Total Parent company expense
  $ 3,408     $ 3,165     $ 6,106     $ 5,944  
 
   
     
     
     
 
Other income (expense):
                               
 
Interest income
  $ 369     $ 452     $ 764     $ 733  
 
Interest expense
    (7,033 )     (6,566 )     (14,680 )     (13,202 )
 
Minority interest
    (405 )     (309 )     (868 )     (754 )
 
Other, net
    (432 )     268       (12 )     197  
 
   
     
     
     
 
   
Total other income (expense)
  $ (7,501 )   $ (6,155 )   $ (14,796 )   $ (13,026 )
 
   
     
     
     
 
Income tax provision
  $ (83 )   $ (7,445 )   $ (221 )   $ (12,537 )
 
   
     
     
     
 

The general and administrative expenses decreased 7% for the quarter and 3% for the year-to-date period. Compared to the prior year periods, in the current year periods we are incurring higher director and officer and general liability insurance premiums, offset by lower accruals for certain elements of our incentive based compensations plan. Total depreciation expense decreased 7% for the quarter and 2% for the year-to-date period.

Interest expense (net of interest income) decreased 8% for the quarter and 10% for the year-to-date-period. The decrease is a result of a lower interest rate on our LIBOR-based bank credit facility.

The Company has significant deferred tax assets, which consist primarily of net operating loss carry forwards and other timing differences. Management conducts periodic recoverability assessments of these deferred tax assets, which includes evaluating both positive and negative evidential matter to determine if it is “more likely than not” that the deferred tax assets will be realizable. On June 30, 2002, management conducted a recoverability assessment and determined that $37 million in previously reserved deferred tax assets were realizable due to the Company’s profitable operating results in 2001 and 2002 and projected future taxable income. Until the fourth quarter of fiscal year 2002, management did not believe sufficient evidence existed that it was more likely than not that such profitable operating results would allow such deferred tax assets to be realized.

Beginning July 1, 2002, the Company began recognizing Federal income tax expense based on 35% of pre-tax domestic income and state income taxes at a rate of approximately 2% of domestic income. For the prior year quarter ended December 31, 2001, substantially all of the Company’s taxable income was offset against Federal net operating loss carry forwards, which reduced the Company’s tax expense for the quarter ended December 31, 2001 from approximately $4.6 million to approximately $83,000.

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ALLIANCE GAMING CORPORATION
FORM 10-Q

December 31, 2002

* * * * *

The information contained in this Form 10-Q may contain “forward-looking” statements within the meaning of section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Act of 1933, as amended, and is subject to the safe harbor created thereby. Such information involves important risks and uncertainties that could significantly affect results in the future and, accordingly, such results may differ from those expressed in any forward looking statements herein. Future operating results may be adversely affected as a result of a number of factors such as the Company’s high leverage, its holding company structure, its operating history and recent losses, competition, risks of product development, customer financing, sales to non-traditional gaming markets, foreign operations, dependence on key personnel, strict regulation by gaming authorities, gaming taxes and value added taxes, and other risks, as detailed from time to time in the Company’s filings with the Securities and Exchange Commission.

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ALLIANCE GAMING CORPORATION
FORM 10-Q

December 31, 2002

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Currency Rate Fluctuations

We derive revenues from our non-U.S. subsidiaries, all of which revenues are denominated in their local currencies, and their results are affected by changes in the relative values of non-U.S. currencies and the U.S. dollar. Most of the currencies in countries in which we have foreign operations strengthened versus the U.S. dollar in 2001 and 2002, which resulted in assets and liabilities denominated in local currencies being translated into more dollars. We do not currently utilize hedging instruments.

Market risks

During the normal course of our business, we are routinely subjected to a variety of market risks, examples of which include, but are not limited to, interest and currency rate movements, collectibility of accounts and notes receivable, and recoverability of residual values on leased assets. We continually assess these risks and have established policies and practices designed to protect against the adverse effects of these and other potential exposures. Although we do not anticipate any material losses in these risk areas, no assurances can be made that material losses will not be incurred in these areas in the future.

We have performed a sensitivity analysis of our financial instruments, which consist of our cash and cash equivalents and debt. We have no derivative financial instruments. In performing the sensitivity analysis, we define risk of loss as the hypothetical impact on earnings of changes in the market interest rates or currency exchange rates.

The results of the sensitivity analysis at December 31, 2002, are as follows:

Interest Rate Risk:

We had total debt as of December 31, 2002, of $343.1 million, of which $190.0 million are Term Loans with interest rates tied to LIBOR. These Term Loans are broken into individual loans with varying terms from one to six months. The interest rate for each loan is set on the borrowing date and is effective for the term outstanding. If the LIBOR rates were to increase or decrease by 100 basis points, with all other factors remaining constant, earnings would decrease or increase by approximately $0.5 million on a pre-tax basis.

Foreign Currency Exchange Rate Risk:

Our German subsidiaries currently utilize the euro as our functional currency. Prior to January 2002, the German deutschemark was used. A 10% fluctuation in the exchange rate against the U.S. dollar would result in an immaterial corresponding change in earnings reported in the consolidated group. Such a change in the euro would result in a charge to accumulated other comprehensive income (loss), which is a component of stockholder’s equity, of approximately $3.9 million, all other factors remaining constant.

ITEM 4. DISCLOSURE CONTROLS AND PROCEDURES

     (a)  Evaluation of disclosure controls and procedures. Within the 90 days prior to the date of this report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s President and Chief Executive Officer and the Company’s Sr. Vice President, Chief Financial Officer and Treasurer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, the Company’s President and Chief

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ALLIANCE GAMING CORPORATION
FORM 10-Q

December 31, 2002

Executive Officer and the Company’s Sr. Vice President, Chief Financial Officer and Treasurer concluded that the Company’s disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company’s periodic SEC filings.

     (b)  Changes in internal control. No significant changes were made in the Company’s internal controls or in the other factors that could significantly affect these controls subsequent to the date of their evaluation.

PART II

ITEM 1. Legal Proceedings

      There have been no material changes in any legal proceedings since filing of the Company’s annual report on Form 10-K for the fiscal year ended June 30, 2002.

ITEM 4. Submission of Matters to a Vote of Security Holders

      On December 3, 2002, the Company held its annual shareholders meeting at which the shareholders were asked to vote on the election of three directors and the approval of the Company’s Amended 2001 Long Term Incentive Plan (the “2001 Plan”). Of the 49,162,770 shares of common stock outstanding, 36,932,014 shares were voted for and 4,918,105 withheld from Mr. Kevin Verner; 27,868,674 shares were voted for and 13,981,445 withheld from Mr. Joel Kirschbaum; and 29,448,618 shares were voted for and 12,401,501 withheld from Mr. Anthony DiCesare; and 39,501,694 shares were voted for and 2,068,046 shares against the approval of amendment to the 2001 Plan to increase the number of shares of the Common Stock issuable thereunder by 2,000,000 shares. Additionally, the shareholders ratified the Board of Director’s appointment of Deloitte & Touche LLP to act as independent public accountants of the Company for the fiscal year ending June 30, 2003.

ITEM 6. Exhibits and Reports on Form 8-K

  a.   Exhibits – None
 
  b.   Reports on Form 8-K – None
 
  c.   Exhibits
 
  c.   99.1 Certification of Chief Executive Officer and Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002.

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ALLIANCE GAMING CORPORATION
FORM 10-Q

December 31, 2002

SIGNATURES

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

 
ALLIANCE GAMING CORPORATION                                                                                                                  February 12, 2003
(Registrant)
       
  By   /s/ Robert L. Miodunski
     
      President and Chief Executive Officer
(Principal Executive Officer)
       
  By   /s/ Robert L. Saxton
     
      Sr. Vice President, Chief Financial
Officer and Treasurer (Principal
Financial and Accounting Officer)

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ALLIANCE GAMING CORPORATION
FORM 10-Q

December 31, 2002

CERTIFICATIONS

I, Robert L. Miodunski, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Alliance Gaming Corporation;
 
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
 
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
 
4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

          a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

          b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

          c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

          a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

          b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: February 12, 2003

  /s/
Robert L. Miodunski
Robert L. Miodunski
Director, President and
Chief Executive Officer

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Table of Contents

ALLIANCE GAMING CORPORATION
FORM 10-Q

December 31, 2002

I, Robert L. Saxton, certify that:

1.    I have reviewed this quarterly report on Form 10-Q of Alliance Gaming Corporation;
 
2.    Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
 
3.    Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
 
4.    The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

          a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

          b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

          c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.    The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

          a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

          b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6.    The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: February 12, 2003

  /s/
Robert L. Saxton
Robert L. Saxton
Sr. Vice President, Treasurer and
Chief Financial Officer (Principal Financial and Accounting
Officer)

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