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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 quarterly period ended March 31, 2003

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 is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). [X] Yes [  ] No

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 April 28, 2003, according to the records of the registrant’s registrar and transfer agent was 49,352,000.

 


TABLE OF CONTENTS

PART 1
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
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
PART II
ITEM 1. Legal Proceedings
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 March 31, 2003

I N D E X

           
      Page
       
PART I. FINANCIAL INFORMATION
       
Item 1.  Unaudited Financial Statements
       
 
 Unaudited Condensed Consolidated Balance Sheets as of June 30, 2002 and March 31, 2003
    3  
 
 Unaudited Condensed Consolidated Statements of Operations for the three months ended March 31, 2002 and 2003
    4  
 
 Unaudited Condensed Consolidated Statements of Operations for the nine months ended March 31, 2002 and 2003
    5  
 
 Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the nine months ended March 31, 2003
    6  
 
 Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended March 31, 2002 and 2003
    7  
 
 Notes to Unaudited Condensed Consolidated Financial Statements
    8-23  
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations
    24-31  
Item 3.  Quantitative and Qualitative Disclosures About Market Risk
    32  
Item 4.  Disclosure Controls and Procedures
    32  
PART II. OTHER INFORMATION
       
Item 1.  Legal Proceedings
    33  
Item 6.  Exhibits and Reports on Form 8-K
    33  
SIGNATURES
    34  
CERTIFICATIONS
    35-37  

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Table of Contents

PART 1
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(In 000s, except share data)

                         
            June 30,   March 31,
            2002   2003
           
 
       
ASSETS
               
Current assets:
               
 
Cash and cash equivalents
  $ 62,508     $ 65,847  
 
Short-term investments (restricted)
    896       854  
 
Accounts and short-term notes receivable, net of allowance for doubtful accounts of $15,695 and $14,474
    96,832       123,190  
 
Inventories, net of reserves of $7,814 and $6,450
    42,997       42,965  
 
Deferred tax assets, net
    27,605       27,606  
 
Other current assets
    13,975       15,230  
 
 
   
     
 
   
Total current assets
    244,813       275,692  
 
 
   
     
 
Long-term notes receivable, net of allowance for doubtful accounts of $456 and $450
    2,389       17,506  
Leased equipment, net of accumulated depreciation of $9,931 and $16,153
    19,560       30,396  
Property, plant and equipment, net of accumulated depreciation and amortization of $63,313 and $74,720
    90,314       91,411  
Goodwill, net of accumulated amortization of $6,517 and $6,582
    47,713       53,584  
Intangible assets, net of accumulated amortization of $25,148 and $30,022
    32,512       41,639  
Deferred tax assets, net
    18,240       3,416  
Other assets, net of reserves of $1,818 and $1,818
    4,339       4,057  
 
 
   
     
 
       
Total assets
  $ 459,880     $ 517,701  
 
 
   
     
 
       
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Current liabilities:
               
 
Accounts payable
  $ 15,894     $ 23,964  
 
Accrued liabilities
    45,841       44,335  
 
Jackpot liabilities
    5,915       8,301  
 
Current maturities of long-term debt
    4,116       4,425  
 
   
     
 
   
Total current liabilities
    71,766       81,025  
 
   
     
 
Long-term debt, net
    338,148       345,908  
Other liabilities
    2,747       3,575  
 
   
     
 
       
Total liabilities
    412,661       430,508  
 
   
     
 
Minority interest
    1,233       1,424  
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 49,821,000 shares issued
    4,927       4,985  
 
Treasury stock at cost, 513,000 shares
    (501 )     (501 )
 
Additional paid-in capital
    157,866       161,922  
 
Accumulated other comprehensive income (loss)
    (19,364 )     (14,586 )
 
Accumulated deficit
    (96,954 )     (66,063 )
 
   
     
 
       
Total stockholders’ equity
    45,986       85,769  
 
   
     
 
       
Total liabilities and stockholders’ equity
  $ 459,880     $ 517,701  
 
   
     
 

See notes to unaudited condensed consolidated financial statements.

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Table of Contents

ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In 000s, except per share data)

                     
        Three Months Ended March 31,
        2002   2003
       
 
Revenues:
               
 
Gaming equipment and systems
  $ 57,729     $ 82,341  
 
Wall machines and amusement games
    20,531       18,974  
 
Route operations
    57,781       54,783  
 
Casino operations
    19,001       19,357  
 
   
     
 
 
    155,042       175,455  
 
   
     
 
Costs and expenses:
               
 
Cost of gaming equipment and systems
    24,279       34,249  
 
Cost of wall machines and amusement games
    9,608       9,427  
 
Cost of route operations
    47,270       45,806  
 
Cost of casino operations
    8,104       8,356  
 
Selling, general and administrative
    28,779       35,356  
 
Research and development costs
    4,227       6,513  
 
Depreciation and amortization
    8,070       10,470  
 
   
     
 
 
    130,337       150,177  
 
   
     
 
Operating income
    24,705       25,278  
Other income (expense):
               
 
Interest income
    282       293  
 
Interest expense
    (6,820 )     (6,272 )
 
Minority interest
    (609 )     (729 )
 
Other, net
    (757 )     (217 )
 
   
     
 
Income before income taxes
    16,801       18,353  
Income tax provision
    (902 )     (5,573 )
 
   
     
 
Net income
  $ 15,899     $ 12,780  
 
   
     
 
Basic earnings per share
  $ 0.33     $ 0.26  
 
   
     
 
Diluted earnings per share
  $ 0.32     $ 0.25  
 
   
     
 
Weighted average common shares outstanding
    48,118       49,294  
 
   
     
 
Weighted average common and common share equivalents outstanding
    49,570       50,162  
 
   
     
 

See notes to unaudited condensed consolidated financial statements.

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ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In 000s, except per share data)

                     
        Nine Months Ended March 31,
        2002   2003
       
 
Revenues:
               
 
Gaming equipment and systems
  $ 154,827     $ 232,507  
 
Wall machines and amusement games
    58,654       46,440  
 
Route operations
    167,345       162,941  
 
Casino operations
    54,787       53,925  
 
   
     
 
 
    435,613       495,813  
 
   
     
 
Costs and expenses:
               
 
Cost of gaming equipment and systems
    66,674       100,170  
 
Cost of wall machines and amusement games
    30,221       25,406  
 
Cost of route operations
    137,742       136,208  
 
Cost of casino operations
    24,305       24,606  
 
Selling, general and administrative
    81,869       95,896  
 
Research and development costs
    11,726       17,185  
 
Depreciation and amortization
    23,110       27,390  
 
   
     
 
 
    375,647       426,861  
 
   
     
 
Operating income
    59,966       68,952  
Other income (expense):
               
 
Interest income
  1,046       1,026  
 
Interest expense
    (21,500 )     (19,474 )
 
Minority interest
    (1,477 )     (1,483 )
 
Other, net
    (769 )     (20 )
 
   
     
 
Income before income taxes
    37,266       49,001  
Income tax provision
    (1,123 )     (18,110 )
 
   
     
 
Net income
  $ 36,143     $ 30,891  
 
   
     
 
Basic earnings per share
  $ 0.80     $ 0.64  
 
   
     
 
Diluted earnings per share
  $ 0.77     $ 0.62  
 
   
     
 
Weighted average common shares outstanding
    45,060       48,567  
 
   
     
 
Weighted average common and common share equivalents outstanding
    46,904       49,581  
 
   
     
 

See notes to unaudited condensed consolidated financial statements.

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ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

Nine Months Ended March 31, 2003
(In 000s)

                                                                   
                                              Accumulated           Total
      Common Stock                   Additional   Other           Stock-
     
  Series E   Treasury   Paid-in   Comprehensive   Accum.   holders’
      Shares   Dollars   Special Stock   Stock   Capital   Losses   Deficit   Equity
     
 
 
 
 
 
 
 
Balances at June 30, 2002
    49,227     $ 4,927     $ 12     $ (501 )   $ 157,866     $ (19,364 )   $ (96,954 )   $ 45,986  
Net income
                                        30,891       30,891  
Foreign currency translation adjustment
                                  4,778             4,778  
 
                                                           
 
 
Total comprehensive income
                                                            35,669  
Shares issued upon exercise of options
    594       58                   1,903                   1,961  
Tax benefit of employee stock option exercises
                            2,153                   2,153  
 
   
     
     
     
     
     
     
     
 
Balances at March 31, 2003
    49,821     $ 4,985     $ 12     $ (501 )   $ 161,922     $ (14,586 )   $ (66,063 )   $ 85,769  
 
   
     
     
     
     
     
     
     
 

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 000s)

                         
            Nine Months Ended March 31,
            2002   2003
           
 
Cash flows from operating activities:
               
 
Net income
  $ 36,143     $ 30,891  
   
Adjustments to reconcile net income to net cash provided by operating activities:
               
       
Depreciation and amortization
    23,110       27,390  
       
Provision for losses on receivables
    3,266       2,157  
       
Deferred income taxes
    (215 )     14,823  
       
Other
    684       222  
   
Net change in operating assets and liabilities:
               
       
Accounts and notes receivable
    (12,393 )     (39,528 )
       
Inventories
    (18,469 )     (7,192 )
       
Other current assets
    693       2,457  
       
Accounts payable
    (3,328 )     10,171  
       
Accrued liabilities
    701       (176 )
 
   
     
 
       
Net cash provided by operating activities
    30,192       41,215  
 
   
     
 
Cash flows from investing activities:
               
   
Additions to property, plant and equipment
    (12,218 )     (13,472 )
   
Additions to leased gaming equipment
    (12,498 )     (14,794 )
   
Additions to other long-term assets
    (4,301 )     (5,842 )
   
Acquisitions, net of cash acquired
    (15,333 )     (3,038 )
 
   
     
 
       
Net cash used in investing activities
    (44,350 )     (37,146 )
 
   
     
 
Cash flows from financing activities:
               
   
Reduction of long-term debt
    (1,376 )     (3,596 )
   
Capitalized debt issuance costs
    (660 )      
   
Net increase (decrease) in revolving credit facility
           
   
Proceeds from exercise of stock options and warrants
    6,529       1,961  
 
   
     
 
       
Net cash provided by (used in) financing activities
    4,493       (1,635 )
 
   
     
 
Effect of exchange rate changes on cash
    2,914       905  
Cash and cash equivalents:
               
       
Increase (decrease) for period
    (6,751 )     3,339  
       
Balance, beginning of period
    54,845       62,508  
 
   
     
 
       
Balance, end of period
  $ 48,094     $ 65,847  
 
   
     
 

See notes to unaudited condensed consolidated financial statements

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Table of Contents

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

Nine Months Ended March 31, 2002 and 2003

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. Certain reclassifications have been made to prior year financial statements to conform to the current year presentation.
 
    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.
 
    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 disclosures 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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Table of Contents

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

Nine Months Ended March 31, 2002 and 2003

    Our Bally Gaming and Systems business unit earns revenues from recurring revenue sources that 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 000s):

                   
      June 30,   March 31,
      2002   2003
     
 
Raw materials
  $ 17,158     $ 17,557  
Work-in-process
    936       4,014  
Finished goods
    24,903       21,394  
 
   
     
 
 
Total inventories
  $ 42,997     $ 42,965  
 
   
     
 

3.   DEBT
 
    Long-term debt consists of the following (in 000s):

                   
      June 30,   March 31,
      2002   2003
     
 
Term loan facility
  $ 189,525     $ 188,100  
10% Senior Subordinated Notes due 2007, net of unamortized discount of $416 and $357
    149,584       149,643  
Other subordinated debt
    2,495       995  
Other
    660       11,595  
 
   
     
 
 
    342,264       350,333  
Less current maturities
    4,116       4,425  
 
   
     
 
 
Long-term debt, less current maturities
  $ 338,148     $ 345,908  
 
   
     
 

    The Company’s debt structure consists primarily of a $190.0 million term loan facility and a $24.3 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 March 31, 2003), 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 March 31, 2003, there were no borrowings outstanding on the revolving credit facility. The bank facility contains certain customary financial and operational covenants.

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

Nine Months Ended March 31, 2002 and 2003

    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 March 31, 2003, 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 March 31, 2003, 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 temporary 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. The income generated in Germany was offset against German NOLs. For the prior year quarter ended March 31, 2002, 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 March 31, 2002, from approximately $5.7 million to approximately $902,000.

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

Nine Months Ended March 31, 2002 and 2003

5.   STOCK-BASED COMPENSATION
 
    The Company accounts for its stock-based employee compensation awards in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”). Under APB 25, because the exercise price of the Company’s employee stock options equals or exceeds the market price on date of grant, no compensation expense is recognized.
 
    In 1998, the Company adopted FASB No. 123 “Accounting for Stock-Based Compensation” (“FASB No. 123”). Under FASB No. 123 companies may continue to account for employee stock-based compensation under APB 25, but are required to disclose historical and pro forma net income and earnings per share that would have resulted from the use of the fair value method described in FASB No. 123. In December 2002, the FASB issued SFAS 148, “Accounting for Stock-Based Compensation-Transition and Disclosure”. This Statement amends FASB Statement No. 123, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of Statement No. 123 and APB Opinion No. 28 “Interim Financial Reporting” to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. Under fair value method, compensation costs are measured using an options pricing model and amortized over the life of the option, which is generally three to ten years, with option forfeitures accounted for at the time of the forfeiture, and all amounts reflected net of tax. The historical and pro forma net income (assuming an after-tax charge for stock-based compensation) and related per share data are as follows (in 000s, except per share data):

                                   
      Three Months Ended   Nine Months Ended
      March 31,   March 31,
      2002   2003   2002   2003
     
 
 
 
Net Income:
                               
 
As reported
  $ 15,899     $ 12,780     $ 36,143     $ 30,891  
 
Stock-based compensation under FASB No. 123
    753       308       2,259       2,570  
       
     
     
     
 
 
Pro forma
  $ 15,146     $ 12,472     $ 33,884     $ 28,321  
       
     
     
     
 
Earnings per diluted share:
                               
 
Diluted
  $ 0.32     $ 0.25     $ 0.77     $ 0.62  
 
Pro forma diluted
  $ 0.31     $ 0.25     $ 0.72     $ 0.57  

    On the date of grant using the Black-Scholes option-pricing model the following assumptions were used to value the options in the periods indicated:

                                 
    Three Months Ended   Nine Months Ended
    March 31,   March 31,
    2002   2003   2002   2003
   
 
 
 
Per share weighted-average fair value of stock options granted
  $ 5.72     $ 2.31     $ 5.72     $ 2.69  
Risk-free interest rate
    3.5 %     3.5 %     3.5 %     3.5 %
Expected volatility
    0.70       0.28       0.70       0.28  
Expected dividend yield
    0       0       0       0  
Expected life
  3-10 years   3-10 years   3-10 years   3-10 years

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

Nine Months Ended March 31, 2002 and 2003

6.   EARNINGS PER SHARE
 
    The computation of basic and diluted earnings per share is as follows (in 000s except per share amounts):

                                   
      Three months ended   Nine months ended
      March 31,   March 31,
      2002   2003   2002   2003
     
 
 
 
Net income
  $ 15,899     $ 12,780     $ 36,143     $ 30,891  
Weighted average common shares outstanding
    48,118       49,294       45,060       48,567  
 
Effect of stock options outstanding
    1,448       866       1,326       1,012  
 
Effect of warrants outstanding
    2             516        
 
Effect of Series E Special Stock
    2       2       2       2  
 
   
     
     
     
 
Weighted average common and potential dilutive shares outstanding
    49,570       50,162       46,904       49,581  
Basic earnings per share
  $ 0.33     $ 0.26     $ 0.80     $ 0.64  
 
   
     
     
     
 
Diluted earnings per share
  $ 0.32     $ 0.25     $ 0.77     $ 0.62  
 
   
     
     
     
 

    Stock options outstanding that were potentially convertible into approximately 700,000 common shares as of March 31, 2003, 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.
 
7.   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 000s):

                                   
      Three Months Ended   Nine Months Ended
      March 31,   March 31,
      2002   2003   2002   2003
     
 
 
 
Revenues:
                               
 
Gaming equipment and systems
  $ 57,729     $ 82,341     $ 154,827     $ 232,507  
 
Wall machines and amusement games
    20,531       18,974       58,654       46,440  
 
Route operations
    57,781       54,783       167,345       162,941  
 
Casino operations
    19,001       19,357       54,787       53,925  
 
 
   
     
     
     
 
Total revenues
  $ 155,042     $ 175,455     $ 435,613     $ 495,813  
 
 
   
     
     
     
 
Intersegment revenues:
                               
 
Gaming equipment and systems
  $ 613     $ 272     $ 1,679     $ 2,538  
 
Wall machines and amusement games
                       
 
Route operations
                       
 
Casino operations
                       
 
 
   
     
     
     
 
Total intersegment revenues
  $ 613     $ 272     $ 1,679     $ 2,538  
 
 
   
     
     
     
 

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

Nine Months Ended March 31, 2002 and 2003

                                   
      Three Months Ended   Nine Months Ended
      March 31,   March 31,
      2002   2003   2002   2003
     
 
 
 
Operating income:
                               
 
Gaming equipment and systems
  $ 13,638     $ 19,056     $ 33,577     $ 55,966  
 
Wall machines and amusement games
    3,207       1,975       6,340       714  
 
Route operations
    4,648       1,563       11,792       6,696  
 
Casino operations
    6,435       6,180       17,586       15,016  
 
Corporate
    (3,223 )     (3,496 )     (9,329 )     (9,440 )
 
 
   
     
     
     
 
Total operating income
  $ 24,705     $ 25,278     $ 59,966     $ 68,952  
 
 
   
     
     
     
 

    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 000s):

                                     
        Three Months Ended   Nine Months Ended
        March 31,   March 31,
        2002   2003   2002   2003
       
 
 
 
Revenues:
                               
 
United States
  $ 129,438     $ 145,455     $ 359,865     $ 420,381  
 
Germany
    24,410       26,283       69,267       68,166  
 
Other foreign
    1,194       3,717       6,481       7,266  
 
   
     
     
     
 
Total revenues
  $ 155,042     $ 175,455     $ 435,613       495,813  
 
   
     
     
     
 
Operating income:
                               
 
United States
  $ 20,491     $ 22,489     $ 49,854     $ 65,839  
 
Germany
    3,965       2,510       8,397       2,816  
 
Other foreign
    249       279       1,715       297  
 
   
     
     
     
 
Total operating income
  $ 24,705     $ 25,278     $ 59,966     $ 68,952  
 
   
     
     
     
 

8.   SUPPLEMENTAL CASH FLOW INFORMATION
 
    The following supplemental information is related to the unaudited condensed consolidated statements of cash flows (in 000s).

                 
    Nine months ended March 31,
    2002   2003
   
 
Interest expense paid
  $ 23,922     $ 23,126  
Income taxes paid
    605       1,643  
Non-cash transactions:
               
Reclassify inventory to property, plant and equipment
  $ 4,649     $ 7,887  
(Favorable) unfavorable translation rate adjustment
    1,429       (3,873 )
Notes payable issued in acquisitions
    4,000       11,606  

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

Nine Months Ended March 31, 2002 and 2003

9.   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., Bally Gaming GmbH, 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 000s)

                                                 
                                    Reclas-   Alliance
                                    sifications   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  
Goodwill, 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, net
    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  
   
Accum. other comprehensive income (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
March 31, 2003
(In 000s)

                                                 
                                    Reclas-   Alliance
                                    sifications   Gaming
                            Non-   and   Corporation
                    Guaranteeing   Guaranteeing   Elimina-   and
            Parent   Subsidiaries   Subsidiaries   tions   Subsidiaries
           
 
 
 
 
ASSETS
                                       
Current assets:
                                       
   
Cash and cash equivalents
  $ 13,808     $ 34,150     $ 17,889     $     $ 65,847  
   
Short term investments (restricted)
          854                   854  
   
Accounts and short-term notes receivable, net
    8,801       71,713       51,474       (8,798 )     123,190  
   
Inventories, net
          31,116       11,945       (96 )     42,965  
   
Deferred tax assets
    16,490       11,097       19             27,606  
   
Other current assets
    506       13,465       1,259             15,230  
   
 
   
     
     
     
     
 
       
Total current assets
    39,605       162,395       82,586       (8,894 )     275,692  
   
 
   
     
     
     
     
 
Long-term notes receivable, net
    156,691       83,634       199       (223,018 )     17,506  
Leased equipment, net
          23,332       7,064             30,396  
Property, plant and equipment, net
    83       55,366       35,962             91,411  
Goodwill, net
    (4,706 )     53,509       4,781             53,584  
Intangible assets, net
    7,635       33,892       112             41,639  
Investment in subsidiaries
    396,577       91,932             (488,509 )      
Deferred tax assets, net
    7,354             832       (4,770 )     3,416  
Other assets, net
    (170,958 )     190,083       (15,058 )     (10 )     4,057  
   
 
   
     
     
     
     
 
 
  $ 432,281     $ 694,143     $ 116,478     $ (725,201 )   $ 517,701  
   
 
   
     
     
     
     
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
                                       
Current liabilities:
                                       
 
Accounts payable
  $ 552     $ 21,096     $ 2,316     $     $ 23,964  
 
Accrued liabilities
    3,174       27,890       14,729       (1,458 )     44,335  
 
Jackpot liabilities
          8,173       128             8,301  
 
Current maturities of long-term debt
    2,895       1,519       7,370       (7,359 )     4,425  
   
 
   
     
     
     
     
 
       
Total current liabilities
    6,621       58,678       24,543       (8,817 )     81,025  
   
 
   
     
     
     
     
 
Long term debt, net
    335,843       232,820       3       (222,758 )     345,908  
Deferred tax liabilities, net
          4,770             (4,770 )      
Other liabilities
    2,624       951                   3,575  
   
 
   
     
     
     
     
 
       
Total liabilities
    345,088       297,219       24,546       (236,345 )     430,508  
   
 
   
     
     
     
     
 
Minority interest
    1,424                         1,424  
Commitments and contingencies
                                       
Stockholders’ equity:
                                       
   
Series E Special Stock
    12                         12  
   
Common Stock
    4,985       478       17,832       (18,310 )     4,985  
   
Treasury stock
    (501 )                       (501 )
   
Additional paid-in capital
    161,922       190,449       70,418       (260,867 )     161,922  
   
Accum. other comprehensive income (loss)
    (14,586 )     (14,583 )     (14,606 )     29,189       (14,586 )
   
Retained earnings (accumulated deficit)
    (66,063 )     220,580       18,288       (238,868 )     (66,063 )
   
 
   
     
     
     
     
 
     
Total stockholders’ equity
    85,769       396,924       91,932       (488,856 )     85,769  
   
 
   
     
     
     
     
 
 
  $ 432,281     $ 694,143     $ 116,478     $ (725,201 )   $ 517,701  
   
 
   
     
     
     
     
 

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 March 31, 2002
(In 000s)

                                           
                                      Alliance
                                      Gaming
                      Non-           Corporation
              Guaranteeing   Guaranteeing   Elimina-   and
      Parent   Subsidiaries   Subsidiaries   tions   Subsidiaries
     
 
 
 
 
Revenues:
                                       
 
Gaming equipment and systems
  $     $ 56,155     $ 5,088     $ (3,514 )   $ 57,729  
 
Wall machines and amusement games
                20,531             20,531  
 
Route operations
          53,581       4,200             57,781  
 
Casino operations
          5,714       15,637       (2,350 )     19,001  
 
 
   
     
     
     
     
 
 
          115,450       45,456       (5,864 )     155,042  
Costs and expenses:
                                       
 
Cost of gaming equipment and systems
          24,907       2,871       (3,499 )     24,279  
 
Cost of wall machines and amusement games
                9,608             9,608  
 
Cost of route operations
          44,550       2,720             47,270  
 
Cost of casino operations
          2,843       5,261             8,104  
 
Selling, general and administrative
    2,674       15,947       12,523       (2,365 )     28,779  
 
Research and development costs
          3,588       639             4,227  
 
Depreciation and amortization
    549       5,968       1,743       (190 )     8,070  
 
 
   
     
     
     
     
 
 
    3,223       97,803       35,365       (6,054 )     130,337  
 
 
   
     
     
     
     
 
Operating income (loss)
    (3,223 )     17,647       10,091       190       24,705  
Earnings in consolidated subsidiaries
    21,669       7,119             (28,788 )      
Other income (expense):
                                       
 
Interest income
    3,084       1,439       191       (4,432 )     282  
 
Interest expense
    (6,802 )     (4,154 )     (296 )     4,432       (6,820 )
 
Rainbow royalty
    1,739             (1,739 )            
 
Minority interest
    (609 )                       (609 )
 
Other, net
    (155 )     (239 )     (363 )           (757 )
 
 
   
     
     
     
     
 
Income before income taxes
    15,703       21,812       7,884       (28,598 )     16,801  
Income tax provision
    196       (333 )     (765 )           (902 )
 
 
   
     
     
     
     
 
Net income
  $ 15,899     $ 21,479     $ 7,119     $ (28,598 )   $ 15,899  
 
 
   
     
     
     
     
 

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 March 31, 2003
(In 000s)

                                           
                                      Alliance
                                      Gaming
                      Non-           Corporation
              Guaranteeing   Guaranteeing   Elimina-   and
      Parent   Subsidiaries   Subsidiaries   tions   Subsidiaries
     
 
 
 
 
Revenues:
                                       
 
Gaming equipment and systems
  $     $ 80,227     $ 11,044     $ (8,930 )   $ 82,341  
 
Wall machines and amusement games
                18,974             18,974  
 
Route operations
          50,873       3,910             54,783  
 
Casino operations
          6,119       15,545       (2,307 )     19,357  
 
 
   
     
     
     
     
 
 
          137,219       49,473       (11,237 )     175,455  
Costs and expenses:
                                       
 
Cost of gaming equipment and systems
          35,554       7,746       (9,051 )     34,249  
 
Cost of wall machines and amusement games
              9,427             9,427  
 
Cost of route operations
          43,192       2,614             45,806  
 
Cost of casino operations
          2,825       5,531             8,356  
 
Selling, general and administrative
    2,896       22,360       12,425       (2,325 )     35,356  
 
Research and development costs
          4,436       2,077             6,513  
 
Depreciation and amortization
    600       8,449       1,421             10,470  
 
 
   
     
     
     
     
 
 
    3,496       116,816       41,241       (11,376 )     150,177  
 
 
   
     
     
     
     
 
Operating income (loss)
    (3,496 )     20,403       8,232       139       25,278  
Earnings in consolidated subsidiaries
    23,320       5,894             (29,214 )      
Other income (expense):
                                       
 
Interest income
    3,233       1,762       232       (4,934 )     293  
 
Interest expense
    (6,220 )     (4,800 )     (186 )     4,934       (6,272 )
 
Rainbow royalty
    1,742             (1,742 )            
 
Minority interest
    (729 )                       (729 )
 
Other, net
    433       (421 )     (229 )           (217 )
 
 
   
     
     
     
     
 
Income before income taxes
    18,283       22,838       6,307       (29,075 )     18,353  
Income tax provision
    (5,503 )     343       (413 )           (5,573 )
 
 
   
     
     
     
     
 
Net income
  $ 12,780     $ 23,181     $ 5,894     $ (29,075 )   $ 12,780  
 
 
   
     
     
     
     
 

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

Nine Months Ended March 31, 2002
(In 000s)

                                           
                                      Alliance
                                      Gaming
                      Non-           Corporation
              Guaranteeing   Guaranteeing   Elimina-   and
      Parent   Subsidiaries   Subsidiaries   tions   Subsidiaries
     
 
 
 
 
Revenues:
                                       
 
Gaming equipment and systems
  $     $ 149,488     $ 17,139     $ (11,800 )   $ 154,827  
 
Wall machines and amusement games
                58,654             58,654  
 
Route operations
          156,135       11,210             167,345  
 
Casino operations
          16,747       44,613       (6,573 )     54,787  
 
 
   
     
     
     
     
 
 
          322,370       131,616       (18,373 )     435,613  
Costs and expenses:
                                       
 
Cost of gaming equipment and systems
          68,033       10,396       (11,755 )     66,674  
 
Cost of wall machines and amusement games
              30,221             30,221  
 
Cost of route operations
          130,422       7,320             137,742  
 
Cost of casino operations
          8,397       15,908             24,305  
 
Selling, general and administrative
    7,676       45,734       35,077       (6,618 )     81,869  
 
Research and development costs
          9,800       1,926             11,726  
 
Depreciation and amortization
    1,653       16,873       5,153       (569 )     23,110  
 
 
   
     
     
     
     
 
 
    9,329       279,259       106,001       (18,942 )     375,647  
 
 
   
     
     
     
     
 
Operating income (loss)
    (9,329 )     43,111       25,615       569       59,966  
Earnings in consolidated subsidiaries
    52,864       18,189             (71,053 )      
Other income (expense):
                                       
 
Interest income
    9,134       4,382       650       (13,120 )     1,046  
 
Interest expense
    (21,445 )     (12,218 )     (957 )     13,120       (21,500 )
 
Rainbow royalty
    4,974             (4,974 )            
 
Minority interest
    (1,477 )                       (1,477 )
 
Other, net
    1,091       (791 )     (1,069 )           (769 )
 
 
   
     
     
     
     
 
Income before income taxes
    35,812       52,673       19,265       (70,484 )     37,266  
Income tax provision
    331       (378 )     (1,076 )           (1,123 )
 
 
   
     
     
     
     
 
Net income
  $ 36,143     $ 52,295     $ 18,189     $ (70,484 )   $ 36,143  
 
 
   
     
     
     
     
 

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

Nine Months Ended March 31, 2003
(In 000s)

                                           
                                      Alliance
                                      Gaming
                      Non-           Corporation
              Guaranteeing   Guaranteeing   Elimina-   and
      Parent   Subsidiaries   Subsidiaries   tions   Subsidiaries
     
 
 
 
 
Revenues:
                                       
 
Gaming equipment and systems
  $     $ 226,753     $ 29,049     $ (23,295 )   $ 232,507  
 
Wall machines and amusement games
                46,440             46,440  
 
Route operations
          151,747       11,194             162,941  
 
Casino operations
          17,631       42,976       (6,682 )     53,925  
 
 
   
     
     
     
     
 
 
          396,131       129,659       (29,977 )     495,813  
Costs and expenses:
                                       
 
Cost of gaming equipment and systems
          103,192       20,333       (23,355 )     100,170  
 
Cost of wall machines and amusement games
                25,406             25,406  
 
Cost of route operations
          128,738       7,470             136,208  
 
Cost of casino operations
          8,555       16,051             24,606  
 
Selling, general and administrative
    7,754       59,039       35,842       (6,739 )     95,896  
 
Research and development costs
          11,778       5,407             17,185  
 
Depreciation and amortization
    1,686       22,563       3,141             27,390  
 
 
   
     
     
     
     
 
 
    9,440       333,865       113,650       (30,094 )     426,861  
 
 
   
     
     
     
     
 
Operating income (loss)
    (9,440 )     62,266       16,009       117       68,952  
Earnings in consolidated subsidiaries
    60,726       9,929             (70,655 )      
Other income (expense):
                                       
 
Interest income
    9,806       5,036       785       (14,601 )     1,026  
 
Interest expense
    (19,339 )     (14,100 )     (636 )     14,601       (19,474 )
 
Rainbow royalty
    4,786             (4,786 )            
 
Minority interest
    (1,483 )                       (1,483 )
 
Other, net
    1,199       (1,770 )     551             (20 )
 
 
   
     
     
     
     
 
Income before income taxes
    46,255       61,361       11,923       (70,538 )     49,001  
Income tax provision
    (15,364 )     (752 )     (1,994 )           (18,110 )
 
 
   
     
     
     
     
 
Net income
  $ 30,891     $ 60,609     $ 9,929     $ (70,538 )   $ 30,891  
 
 
   
     
     
     
     
 

See accompanying unaudited note.

20


Table of Contents

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

CONSOLIDATING STATEMENTS OF CASH FLOWS

Nine Months Ended March 31, 2002
(In 000s)

                                                 
                                            Alliance
                                            Gaming
                            Non-           Corporation
                    Guaranteeing   Guaranteeing   Elimina-   and
            Parent   Subsidiaries   Subsidiaries   tions   Subsidiaries
           
 
 
 
 
Net cash provided by (used in) operating activities
  $ (25,749 )   $ 46,500     $ 12,692     $ (3,251 )   $ 30,192  
 
   
     
     
     
     
 
Cash flows from investing activities:
                                       
   
Additions to property, plant and equipment
    (37 )     (9,115 )     (3,066 )           (12,218 )
   
Additions to leased gaming equipment
          (12,498 )                 (12,498 )
   
Additions to other long term assets
          (4,328 )     27             (4,301 )
   
Acquisitions, net of cash acquired
    4,000       (19,333 )                 (15,333 )
 
   
     
     
     
     
 
       
Net cash used in investing activities
    3,963       (45,274 )     (3,039 )           (44,350 )
 
   
     
     
     
     
 
Cash flows from financing activities:
                                       
   
Reduction of long-term debt
    (1,005 )     (20 )     (3,602 )     3,251       (1,376 )
   
Capitalized debt issuance costs
    (660 )                       (660 )
   
Proceeds from exercise of stock options
    6,529                         6,529  
   
Dividends received (paid)
          8,057       (8,057 )            
 
   
     
     
     
     
 
     
Net cash provided by (used in) financing activities
    4,864       8,037       (11,659 )     3,251       4,493  
 
   
     
     
     
     
 
Effect of exchange rate changes on cash
                2,914             2,914  
Cash and cash equivalents:
                                       
   
Increase (decrease) for period
    (16,922 )     9,263       908             (6,751 )
   
Balance, beginning of period
    18,237       23,265       13,343             54,845  
 
   
     
     
     
     
 
   
Balance, end of period
  $ 1,315     $ 32,528     $ 14,251     $     $ 48,094  
 
   
     
     
     
     
 

See accompanying unaudited note.

21


Table of Contents

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

CONSOLIDATING STATEMENTS OF CASH FLOWS

Nine Months Ended March 31, 2003
(In 000s)

                                               
                                          Alliance
                                          Gaming
                          Non-           Corporation
                  Guaranteeing   Guaranteeing   Elimina-   and
          Parent   Subsidiaries   Subsidiaries   tions   Subsidiaries
         
 
 
 
 
Net cash provided by (used in) operating activities
  $ 6,893     $ 23,533     $ 16,210     $ (5,421 )   $ 41,215  
 
   
     
     
     
     
 
Cash flows from investing activities:
                                       
   
Additions to property, plant and equipment
    (2 )     (8,579 )     (4,891 )           (13,472 )
   
Additions to leased gaming equipment
          (14,794 )                 (14,794 )
   
Additions to other long term assets
    (240 )     (5,462 )     (140 )           (5,842 )
   
Acquisitions, net of cash acquired
          (3,038 )                 (3,038 )
 
   
     
     
     
     
 
   
Net cash used in investing activities
    (242 )     (31,873 )     (5,031 )           (37,146 )
 
   
     
     
     
     
 
Cash flows from financing activities:
                                       
   
Reduction of long-term debt
    (2,925 )     (537 )     (5,591 )     5,457       (3,596 )
   
Proceeds from exercise of stock options
    1,961                         1,961  
   
Dividends received (paid)
          4,665       (4,665 )            
   
Other
                36       (36 )      
 
   
     
     
     
     
 
     
Net cash provided by (used in) financing activities
    (964 )     4,128       (10,220 )     5,421       (1,635 )
 
   
     
     
     
     
 
Effect of exchange rate changes on cash
                905             905  
Cash and cash equivalents:
                                       
   
Increase (decrease) for period
    5,687       (4,212 )     1,864             3,339  
   
Balance, beginning of period
    8,121       38,362       16,025             62,508  
 
   
     
     
     
     
 
   
Balance, end of period
  $ 13,808     $ 34,150     $ 17,889     $     $ 65,847  
 
   
     
     
     
     
 

See accompanying unaudited note.

22


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 000s):

                                         
                                    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 March 31, 2003, consisted of the following (in 000s):

                                         
                                    Alliance
                                    Gaming
                    Non-           Corporation
            Guaranteeing   Guaranteeing   Elimina-   and
    Parent   Subsidiaries   Subsidiaries   tions   Subsidiaries
   
 
 
 
 
Term loan facility
  $ 188,100     $     $     $     $ 188,100  
10% Senior Subordinated Notes due 2007, net of unamortized discount
    149,643                         149,643  
Other subordinated note
    995                         995  
Intercompany notes payable
          222,758       7,359       (230,117 )      
Other
          11,581       14             11,595  
 
   
     
     
     
     
 
 
    338,738       234,339       7,373       (230,117 )     350,333  
Less current maturities
    2,895       1,519       7,370       (7,359 )     4,425  
 
   
     
     
     
     
 
Long-term debt, less current maturities
  $ 335,843     $ 232,820     $ 3     $ (222,758 )   $ 345,908  
 
   
     
     
     
     
 

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ALLIANCE GAMING CORPORATION
FORM 10-Q

March 31, 2003

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

Liquidity and Capital Resources

As of March 31, 2003, the Company had $65.8 million in cash and cash equivalents, and $24.3 million in unborrowed availability on its revolving credit facility. In addition we had net working capital of approximately $194.7 million at March 31, 2003, compared to $173.0 million 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 March 31, 2003, includes approximately $21.2 million of cash which is utilized in Casino and Route Operations held in vaults, cages or change banks, as well as $9.5 million held in jackpot reserve accounts 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 $0.9 million at March 31, 2003.

Management believes that cash flows from operating activities, cash and cash equivalents held and the a $24.3 million revolving credit facility commitment (which can be increased by $15 million at the Company’s discretion) will provide the Company with sufficient capital resources and liquidity. At March 31, 2003, we had no material commitments for capital expenditures.

Cash Flow

During the nine months ended March 31, 2003, we generated $41.2 million of cash flows from operating activities, which was an increase compared to $30.2 million in the prior period. The current period operating cash flow included cash used by increases in both accounts and notes receivable of $39.5 million and inventories of $7.2 million, offset by increases in accrued liabilities and accounts payable of $10.0 million. The increase in accounts and notes receivable resulted primarily from the increase in sales at our Bally Gaming and Systems business unit and included the financing of two significant product sales to Native American casinos during the quarter ended December 31, 2002. No such financings occurred in the quarter ended March 31, 2003.

During the nine months ended March 31, 2003, we used $37.1 million of cash in investing activities resulting from capital expenditures totaling $13.5 million, costs incurred to produce participation games totaling $14.8 million, and payments for gaming rights totaling $3.5 million.

During the nine months ended March 31, 2003, we used $1.6 million cash of cash in financing activities resulting from $2.0 million of cash provided from the exercise of stock options, offset by principal payments on long term debt totaling $3.6 million.

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ALLIANCE GAMING CORPORATION
FORM 10-Q

March 31, 2003

Results of Operations for each Business Unit:

Bally Gaming and Systems

                                     
        Three Months Ending March 31,   Nine Months Ending March 31,
        2002   2003   2002   2003
       
 
 
 
Revenues
                               
 
Game sales
  $ 24,516     $ 46,750     $ 72,399     $ 130,954  
 
System sales
    19,124       21,602       44,048       59,918  
 
Gaming operations
    14,089       13,989       38,380       41,635  
 
 
   
     
     
     
 
   
Total revenues
    57,729       82,341       154,827       232,507  
Gross Margin
                               
 
Game sales
    8,989       20,890       29,416       58,436  
 
System sales
    14,553       16,452       33,219       45,491  
 
Gaming operations
    9,908       10,750       25,518       28,410  
 
 
   
     
     
     
 
   
Total gross margin
    33,450       48,092       88,153       132,337  
Selling, general and administrative
    13,422       19,094       37,624       50,255  
Research and development costs
    3,588       5,592       9,800       14,725  
Depreciation and amortization
    2,802       4,350       7,152       11,391  
 
 
   
     
     
     
 
Operating income
  $ 13,638     $ 19,056     $ 33,577     $ 55,966  
 
 
   
     
     
     
 
Operating Statistics:
                               
New Gaming Devices Sold
    3,025       4,550       8,770       13,980  
Game Monitoring Units Sold
    13,675       10,075       31,250       25,110  
WAP and daily-fee games
     
 
End of period installed base
    3,740       4,050       3,740       4,050  
 
Average installed base
    3,700       3,980       3,550       3,860  

Our Bally Gaming and Systems business unit reported an overall increase in revenues of 43% for the quarter and 50% for the year-to-date period. Bally game sales division reported an increase in revenues of 91% for the quarter and 81% for the year-to-date period. New units sold increased 50% during the quarter and 59% for the year-to-date period. The average new-unit selling price (excluding OEM games) increased 26% for the quarter and 23% for the year-to-date period. Bally Systems reported an increase in revenues of 13% for the quarter and 36% for the year-to-date period. Bally Systems reported a 26% decrease in sales of game monitoring units for the quarter, and a 20% 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 a larger proportion of software revenues, as well as an increase in recurring hardware and software support revenues to $4.5 million, resulting from the larger base of installed units, which now stands at approximately 225,000. Gaming Operations reported a decrease of 1% in revenues for the quarter and an increase of 8% 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 March 31, 2003, the overall gross margin percentage for Bally Gaming and Systems remained constant at 58% and at 57% for the year-to-date.

The overall selling, general and administrative expenses increased 42% for the quarter and 34% for the year-to-date period, resulting from the additional headcount added from acquisitions. Selling, general and administrative costs as a percentage of this business unit’s revenue declined to 22% in the current year-to-date period compared to 24% for the prior year-to-date

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ALLIANCE GAMING CORPORATION
FORM 10-Q

March 31, 2003

period. Research and development costs increased 56% for the quarter and 50% for the year-to-date period, resulting from the increase in hardware and software engineers added during the current year. Total depreciation expense increased 55% for the quarter and 59% for the year-to-date period, driven by the increase in the installed base of wide-area progressive and daily fee games, which have displaced certain fully depreciated games in the field.

Wall Machines and Amusement Games

                                 
    Three Months Ending March 31,   Nine Months Ending March 31,
    2002   2003   2002   2003
   
 
 
 
Revenues
  $ 20,531     $ 18,974     $ 58,654     $ 46,440  
Gross Margin
    10,923       9,547       28,433       21,034  
Selling, general and administrative
    5,812       5,844       16,342       16,419  
Research and development costs
    639       921       1,926       2,460  
Depreciation and amortization
    1,265       807       3,825       1,441  
 
   
     
     
     
 
Operating income
  $ 3,207     $ 1,975     $ 6,340     $ 714  
 
   
     
     
     
 
Operating Statistics:
                               
Number of New Wall Machines Sold
    2,320       2,375       8,130       4,845  
Number of New Wall Machines Leased
    1,760       1,630       4,370       3,950  
Installed Base of Leased Machines
    7,620       6,860       7,620       6,860  

Wall Machines and Amusement Games reported a decrease in revenues of 8% for the quarter and 21% for the year-to-date period. For the quarter, the decrease in revenues was a result of a 7% decrease in number of leased games offset by a 5% increase in the average selling price and a 2% increase in new units sold. For the year-to-date period, the decrease in revenues is a result of a 40% decrease in new units sold and a 10% decrease in number of leased games, offset by a 16% increase in the average selling price. 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 continues to experience a significant slowdown that is tied to the overall slowness in the German economy.

For the quarter ended March 31, 2003, the gross margin percentage for Wall Machines and Amusement Games decreased to 50% compared to 53% 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 45% from 48% for the same reason.

The selling, general and administrative expenses decreased 1% 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 44% for the quarter and 28% for the year-to-date period as a result of the increase in new product development efforts. Total depreciation expense decreased 36% for the quarter and 62% 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

March 31, 2003

Route Operations

                                     
        Three Months Ending March 31,   Nine Months Ending March 31,
        2002   2003   2002   2003
       
 
 
 
Revenues
                               
 
Nevada
  $ 53,581     $ 50,873     $ 156,135     $ 151,747  
 
Louisiana
    4,200       3,910       11,210       11,194  
 
 
   
     
     
     
 
   
Total revenues
    57,781       54,783       167,345       162,941  
Gross Margin
                               
 
Nevada
    9,031       7,681       25,713       23,009  
 
Louisiana
    1,480       1,296       3,890       3,724  
 
 
   
     
     
     
 
   
Total gross margin
    10,511       8,977       29,603       26,733  
Selling, general and administrative
    2,958       3,597       8,814       9,595  
Depreciation and amortization
    2,905       3,817       8,997       10,442  
 
 
   
     
     
     
 
Operating income
                               
 
Nevada
    3,955       962       10,186       5,188  
 
Louisiana
    693       601       1,606       1,508  
 
 
   
     
     
     
 
   
Total operating income
  $ 4,648     $ 1,563     $ 11,792     $ 6,696  
 
 
   
     
     
     
 
Operating Statistics:
                               
Average Number of Gaming Devices
                               
 
Nevada
    8,240       7,985       8,260       8,155  
 
Louisiana
    730       725       690       715  
 
 
   
     
     
     
 
   
Total Gaming Devices
    8,970       8,710       8,950       8,870  

Revenues from the Nevada route operations decreased 5% for the quarter and 3% 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 $69.00 from $70.50 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 $66.65 from $68.00 and a 1% decrease in the weighted average number of games. During the quarter an additional eight former Raley’s locations that had closed in the December 2002 quarter, were re-opened as Food-4-Less locations. However, play at those locations is currently substantially lower than the historical norms as the Food-4-Less stores build their customer base and the expectation in the future is that Food-4-Less locations will continue to earn much lower figures given the customer(s) marketed for these locations. We have completed the acquisition of the remaining economic interest in the route contract for the Longs Drug Stores as well as an extension in that contract for an additional five years through 2012. Longs will be opening an additional two locations in Southern Nevada in the coming months. Gamblers’ Bonus, a cardless players club and player tracking system, continued to have a favorable impact on the net win per day. As of March 31, 2003, the Gamblers’ Bonus product was installed in over 4,160 gaming machines at approximately 415 locations statewide or 52% of the installed base of gaming machines.

Revenues from route operations in Louisiana reported a decrease of 7% for the quarter and for year-to-date period remained relatively flat. For the quarter the decrease was primarily the result of a 5% decrease in the net win per gaming machine per day to $60.50 from $63.40, and a slight decline in the number of gaming units deployed. For the year-to-date period the revenue remained relatively unchanged, resulting from a 4% increase in the number of gaming units deployed, offset by a 4% decline in the net win per gaming machine per day.

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ALLIANCE GAMING CORPORATION
FORM 10-Q

March 31, 2003

For both the quarter and year-to-date ended March 31, 2003, the overall gross margin percentage for the Route Operations decreased slightly to 16% compared to 18% 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 increased 22% for the quarter and increased 9% for the year-to-date period. Selling, general and administrative costs as a percentage of revenue increased to 6% compared to 5% for the year-to-date period. Total depreciation expense increased 31% for the quarter and 16% 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.

Casino Operations

                                     
        Three Months Ending March 31,   Nine Months Ending March 31,
        2002   2003   2002   2003
       
 
 
 
Revenues
                               
 
Rainbow Casino
  $ 13,947     $ 13,891     $ 39,770     $ 38,158  
 
Rail City Casino
    5,054       5,466       15,017       15,767  
 
 
   
     
     
     
 
   
Total revenues
    19,001       19,357       54,787       53,925  
Gross Margin
                               
 
Rainbow Casino
    8,686       8,360       23,862       22,107  
 
Rail City Casino
    2,211       2,641       6,620       7,212  
 
 
   
     
     
     
 
   
Total gross margin
    10,897       11,001       30,482       29,319  
Selling, general and administrative
    3,913       3,925       11,413       11,873  
Depreciation and amortization
    549       896       1,483       2,430  
 
 
   
     
     
     
 
Operating income
                               
 
Rainbow Casino
    5,184       4,843       13,897       11,388  
 
Rail City Casino
    1,251       1,337       3,689       3,628  
 
 
   
     
     
     
 
   
Total operating income
  $ 6,435     $ 6,180     $ 17,586     $ 15,016  
 
 
   
     
     
     
 
Operating Statistics:
                               
Average Number of Gaming Devices
                               
 
Rainbow Casino
    975       950       945       940  
 
Rail City Casino
    530       560       525       550  
 
 
   
     
     
     
 
   
Total Gaming Devices
    1,505       1,510       1,470       1,490  
Average Number of Table Games
    24       24       24       24  

Rainbow Casino revenues remained relatively unchanged compared with the same quarter in fiscal 2002 and decreased 4% for the year-to-date period. The quarter results reverses several consecutive quarters of declines and is a direct result of the recently completed interior remodeling projects and increases in promotional programs. The Vicksburg gaming market declined approximately 2% in the March 31, 2003, quarter compared to the prior year 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 8% for the quarter and 5% for the year-to-date period. The revenue improvement at the Rail City Casino was attributable to a 6% increase in the average number of gaming machines.

The cost of revenues for Casino Operations as a percentage of revenues remained flat at 43% for the quarter and increased to 46% for the year-to-date period. This increase was a result of the decrease in revenues, with incremental increases in

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Table of Contents

ALLIANCE GAMING CORPORATION
FORM 10-Q

March 31, 2003

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 remained constant for the quarter and increased 4% for the year-to-date period, as a result of an increase in advertising and promotional expenses. Selling, general and administrative costs as a percentage of revenue increased to 22% compared to 21% for the year-to-date-period. Total depreciation expense increased 63% 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.

Parent Company and other unallocated other income (expense)

                                     
        Three Months Ending March 31,   Nine Months Ending March 31,
        2002   2003   2002   2003
       
 
 
 
General and administrative
  $ 2,674     $ 2,896     $ 7,676     $ 7,754  
Depreciation and amortization
    549       600       1,653       1,686  
 
   
     
     
     
 
 
Total Parent company expense
  $ 3,223     $ 3,496     $ 9,329     $ 9,440  
 
   
     
     
     
 
Other income (expense):
                               
 
Interest income
  $ 282     $ 293     $ 1,046     $ 1,026  
 
Interest expense
    (6,820 )     (6,272 )     (21,500 )     (19,474 )
 
Minority interest
    (609 )     (729 )     (1,477 )     (1,483 )
 
Other, net
    (757 )     (217 )     (769 )     (20 )
 
   
     
     
     
 
   
Total other income (expense)
  $ (7,904 )   $ (6,925 )   $ (22,700 )   $ (19,951 )
 
   
     
     
     
 
Income tax provision
  $ (902 )   $ (5,573 )   $ (1,123 )   $ (18,110 )
 
   
     
     
     
 

The general and administrative expenses increased 8% for the quarter and 1% 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 increased 9% for the quarter and 2% for the year-to-date period.

Interest expense (net of interest income) decreased 9% 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. The income generated in Germany was offset against German NOLs. For the prior year quarter ended March 31, 2002, 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 March 31, 2002, from approximately $5.7 million to approximately $902,000.

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ALLIANCE GAMING CORPORATION
FORM 10-Q

March 31, 2003

Other Supplemental Information:

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 000s):

                                     
        Three Months Ending March 31,   Nine Months Ending March 31,
        2002   2003   2002   2003
       
 
 
 
Operating Income (Expense):
                               
 
Bally Gaming and Systems
  $ 13,638     $ 19,056     $ 33,577     $ 55,966  
 
Wall Machines and Amusement Games
    3,207       1,975       6,340       714  
 
Route Operations
    4,648       1,563       11,792       6,696  
 
Casino Operations
    6,435       6,180       17,586       15,016  
 
Corporate Administrative Expenses
    (3,223 )     (3,496 )     (9,329 )     (9,440 )
 
   
     
     
     
 
   
Total Operating Income
  $ 24,705     $ 25,278     $ 59,966     $ 68,952  
 
   
     
     
     
 
Add back depreciation:
                               
 
Bally Gaming and Systems
  $ 2,802     $ 4,350     $ 7,152     $ 11,391  
 
Wall Machines and Amusement Games
    1,265       807       3,825       1,441  
 
Route Operations
    2,905       3,817       8,997       10,442  
 
Casino Operations
    549       896       1,483       2,430  
 
Corporate Administrative Expenses
    549       600       1,653       1,686  
 
   
     
     
     
 
   
Depreciation and Amortization Expenses
  $ 8,070     $ 10,470     $ 23,110     $ 27,390  
 
   
     
     
     
 
EBITDA by Business Unit:
                               
 
Bally Gaming and Systems
  $ 16,440     $ 23,406     $ 40,729     $ 67,357  
 
Wall Machines and Amusement Games
    4,472       2,782       10,165       2,155  
 
Route Operations
    7,553       5,380       20,789       17,138  
 
Casino Operations
    6,984       7,076       19,069       17,446  
 
Corporate Administrative Expenses
    (2,674 )     (2,896 )     (7,676 )     (7,754 )
 
   
     
     
     
 
   
EBITDA
  $ 32,775     $ 35,748     $ 83,076     $ 96,342  
 
   
     
     
     
 

We believe that the analysis of EBITDA is a useful adjunct to operating income, net income, cash flow and other GAAP based measures. However, EBITDA should not be construed as an alternative to net income (loss) or cash flows generated by (or used in) operating, investing and financing activities determined in accordance with GAAP or as a measure of liquidity. EBITDA may not be comparable to similarly titled measures reported by other companies. We disclose EBITDA primarily because it is one of several performance measures used by industry analysts, rating agencies and our business units. Management uses EBITDA and operating income in evaluating potential asset acquisitions/dispositions and in assessing management’s performance.

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ALLIANCE GAMING CORPORATION
FORM 10-Q

March 31, 2003

* * * * *

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

March 31, 2003

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 2002 and 2003, 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 March 31, 2003, are as follows:

Interest Rate Risk:

We had total debt as of March 31, 2003, of $350.3 million, of which $188.1 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 $2.0 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 a corresponding change in earnings reported in the consolidated group of approximately $0.2 million. 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 $4.3 million, all other factors remaining constant.

     
ITEM 4.   DISCLOSURE CONTROLS AND PROCEDURES

     (a)  Evaluation of disclosure controls and procedures. Within the ninety 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 -on that evaluation, the Company’s President and Chief

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ALLIANCE GAMING CORPORATION
FORM 10-Q

March 31, 2003

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 6.   Exhibits and Reports on Form 8-K

  a.   Exhibits - None
 
  b.   Reports on Form 8-K - None
 
  c.   Exhibits

    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

March 31, 2003

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
(Registrant)
  Date: May 12, 2003
     
  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

March 31, 2003

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: May 12, 2003

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

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ALLIANCE GAMING CORPORATION
FORM 10-Q

March 31, 2003

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: May 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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