UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

 

ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2003
OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from            to           

 

Commission File Number 0-4281

 

ALLIANCE GAMING CORPORATION

(Exact name of registrant as specified in its charter)

 

NEVADA		88-0104066
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
6601 S. Bermuda Rd. Las Vegas, Nevada  89119
(Address of principal executive offices)     (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).  Yes  ý    No  o

 

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.

ý  Yes    o  No

 

The number of shares of Common Stock, $0.10 par value, outstanding as of February 2, 2003, according to the records of the registrant’s registrar and transfer agent was 50,482,000.

 

 

ALLIANCE GAMING CORPORATION

FORM 10-Q

 

For the Quarter Ended December 31, 2003

 

INDEX

 

PART I.						FINANCIAL INFORMATION
Item 1.				Unaudited Financial Statements
				Unaudited Condensed Consolidated Balance Sheets as of June 30, 2003 and December 31, 2003
				Unaudited Condensed Consolidated Statements of Operations for the three months ended December 31, 2002 and 2003
				Unaudited Condensed Consolidated Statements of Operations for the six months ended December 31, 2002 and 2003
				Unaudited Condensed Consolidated Statement of Stockholders’ Equity for the six months ended December 31, 2003
				Unaudited Condensed Consolidated Statements of Cash Flows for the six months ended December 31, 2002 and 2003
				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.						OTHER INFORMATION
Item 1.			Legal Proceedings
Item 4.			Submission of matters to a vote of Security Holders
Item 6.			Exhibits and Reports on Form 8-K
SIGNATURES

 

2

 

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

(In 000’s, except share data)

 

		June 30, 2003			December 31, 2003
ASSETS
Current assets:
Cash and cash equivalents		$	38,884		$	72,254
Accounts and notes receivable, net of allowance for doubtful accounts of $6,962 and $7,427		98,368			106,731
Inventories, net of reserves of $6,503 and $6,498		32,102			39,274
Deferred tax assets, net		44,821			38,061
Other current assets		8,010			9,383
Total current assets		222,185			265,703
Long-term investments (restricted)		864			2,611
Long-term receivables, net of allowance for doubtful accounts of $15 and $10		14,865			7,173
Notes receivable from Sierra Design Group  (Note 8)		—			61,025
Leased gaming equipment, net of accumulated depreciation of $15,703 and $19,647		25,792			30,221
Property, plant and equipment, net of accumulated depreciation and amortization of $20,495 and $23,737		56,894			59,876
Goodwill, net of accumulated amortization of $5,941 and $5,941		63,040			66,225
Intangible assets, net of accumulated amortization of $12,109 and $8,152		26,631			29,083
Assets of discontinued operations held for sale		114,314			106,886
Other assets, net of reserves of $1,788 and $1,788		580			6,235
Total assets		$	525,165		$	635,038
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	22,726		$	20,633
Accrued liabilities		30,183			23,868
Jackpot liabilities		10,588			12,785
Current maturities of long-term debt		3,537			3,069
Liabilities of discontinued operations held for sale		16,186			16,647
Total current liabilities		83,220			77,002
Long-term debt, net		341,678			422,217
Deferred tax liabilities		3,920			6,006
Other liabilities		3,387			5,048
Minority interest		1,330			1,216
Total liabilities		433,535			511,489
Commitments and contingencies
Stockholders’ equity:
Special Stock, 10,000,000 shares authorized: Series E, $100 liquidation value; 115 shares issued and outstanding		12			12
Common Stock, $.10 par value; 100,000,000 shares authorized; 49,933,000 and 50,295,000 shares issued		4,996			5,033
Treasury stock at cost, 513,000 shares		(501		)	(501		)
Additional paid-in capital		163,267			167,724
Accumulated other comprehensive income		1,287			3,940
Accumulated deficit		(77,431		)	(52,659		)
Total stockholders’ equity		91,630			123,549
Total liabilities and stockholders’ equity		$	525,165		$	635,038

 

See notes to unaudited condensed consolidated financial statements.

 

3

 

ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In 000’s, except per share data)

 

		Three Months Ended December 31,
		2002			2003
Revenues:
Gaming equipment and systems		$	86,627		$	96,319
Casino operations		11,600			12,312
		98,227			108,631
Costs and expenses:
Cost of gaming equipment and systems		39,663			38,780
Cost of casino operations		5,223			4,884
Selling, general and administrative		22,095			24,248
Research and development costs		5,158			6,740
Depreciation and amortization		4,847			6,445
		76,986			81,097
Operating income		21,241			27,534
Other income (expense):
Interest income		79			83
Interest expense		(6,554		)	(3,869		)
Minority interest		(309		)	(541		)
Other, net		266			(545		)
Income from continuing operations before income taxes		14,723			22,662
Income tax expense		6,147			8,444
Net income from continuing operations		8,576			14,218
Discontinued operations:
Income from discontinued operations of wall machines and amusement games business unit, net		895			—
Income from discontinued operations of Nevada Route, net		1,325			3,077
Income from discontinued operations of Louisiana Route, net		284			420
Income from discontinued operations of Rail City Casino		773			1,029
Income from discontinued operations		3,277			4,526
Net income		$	11,853		$	18,744
Basic earnings per share:
Continuing operations		$	0.17		$	0.29
Discontinued operations		0.07			0.09
		$	0.24		$	0.38
Diluted earnings per share:
Continuing operations		$	0.17		$	0.28
Discontinued operations		0.07			0.09
		$	0.24		$	0.37
Weighted average common shares outstanding		49,208			49,741
Weighted average common and common share equivalents outstanding		50,316			50,930

 

See notes to unaudited condensed consolidated financial statements.

 

4

 

ALLIANCE GAMING CORPORATION AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In 000’s, except per share data)

 

		Six Months Ended December 31,
		2002			2003
Revenues:
Gaming equipment and systems		$	150,166		$	184,787
Casino operations		24,267			25,067
		174,433			209,854
Costs and expenses:
Cost of gaming equipment and systems		65,921			72,017
Cost of casino operations		10,520			9,887
Selling, general and administrative		42,195			53,313
Research and development costs		9,133			12,703
Depreciation and amortization		9,153			12,467
		136,922			160,387
Operating income		37,511			49,467
Other income (expense):
Interest income		127			126
Interest expense		(13,195		)	(9,598		)
Minority interest		(754		)	(1,027		)
Refinancing charge		—			(12,293		)
Other, net		366			(899		)
Income from continuing operations before income taxes		24,055			25,776
Income tax expense		9,956			9,710
Net income from continuing operations		14,099			16,066
Discontinued operations:
Loss from discontinued operations of wall machines and amusement games business unit, net		(726		)	—
Income from discontinued operations of Nevada Route, net		2,690			6,209
Income from discontinued operations of Louisiana Route, net		559			730
Income from discontinued operations of Rail City Casino		1,489			1,767
Income from discontinued operations		4,012			8,706
Net income		$	18,111		$	24,772
Basic earnings per share:
Continuing operations		$	0.29		$	0.32
Discontinued operations		0.08			0.18
		$	0.37		$	0.50
Diluted earnings per share:
Continuing operations		$	0.29		$	0.32
Discontinued operations		0.08			0.17
		$	0.37		$	0.49
Weighted average common shares outstanding		48,461			49,660
Weighted average common and common share equivalents outstanding		49,560			50,814

 

See notes to unaudited condensed consolidated financial statements.

 

5

 

ALLIANCE GAMING CORPORATION AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

Six Months Ended December 31, 2003

(In 000’s)

 

							Series E Special Stock			Treasury Stock			Additional Paid-in Capital			Accumulated Other Comprehensive Income			Accum. Deficit			Total Stock- holders’ Equity
		Common Stock
		Shares		Dollars
Balances at June 30, 2003		49,933		$	4,996		$	12		$	(501	)	$	163,267		$	1,287		$	(77,431	)	$	91,630
Net income		—		—			—			—			—			—			24,772			24,772
Foreign currency translation adjustment		—		—			—			—			—			2,653			—			2,653
Total comprehensive income																						27,425
Shares issued upon exercise of options		362		37			—			—			2,870			—			—			2,907
Tax benefit of employee stock option exercises		—		—			—			—			1,587			—			—			1,587
Balances at December 31, 2003		50,295		$	5,033		$	12		$	(501	)	$	167,724		$	3,940		$	(52,659	)	$	123,549

 

See notes to unaudited condensed consolidated financial statements.

 

6

 

ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In 000’s)

 

		Six Months Ended December 31,
		2002			2003
Cash flows from operating activities of continuing operations:
Net income		$	18,111		$	24,772
Adjustments to reconcile net income to net cash provided by operating activities of continuing operations:
Income from discontinued operations		(4,012		)	(8,706		)
Depreciation and amortization		9,153			12,467
Refinancing charge		—			12,293
Deferred income taxes		7,507			10,433
Provision for losses on receivables		628			526
Other		531			(1,099		)
Change in operating assets and liabilities:
Accounts and notes receivable		(32,540		)	(2,019		)
Inventories		(847		)	(2,493		)
Other current assets		(800		)	(1,023		)
Accounts payable		1,806			(2,072		)
Accrued liabilities and jackpot liabilities		4,647			(2,924		)
Net cash provided by operating activities of continuing operations		4,184			40,155
Cash flows from investing activities of continuing operations:
Advances and notes receivable due from Sierra Design Group		—			(61,025		)
Additions to property, plant and equipment		(4,901		)	(3,815		)
Additions to leased gaming equipment		(10,010		)	(15,957		)
Additions to other long-term assets		(1,879		)	(10,414		)
Acquisitions, net of cash acquired		(3,038		)	(3,879		)
Proceeds from sale of assets of discontinued operations		—			16,500
Net cash used in investing activities of continuing operations		(19,828		)	(78,590		)
Cash flows from financing activities of continuing operations:
Debt issuance costs		—			(6,954		)
Premium and consent fees paid on redemption of subordinated notes		—			(5,399		)
Proceeds from issuance of long-term debt		—			350,000
Net change in revolving credit facility		—			70,000
Payoff of debt from refinancing		—			(337,625		)
Reduction of long-term debt		(1,991		)	(1,349		)
Proceeds from exercise of stock options		1,792			2,907
Net cash (used in) provided by financing activities of continuing operations		(199		)	71,580
Effect of exchange rate changes on cash		93			130
Cash and cash equivalents provided by discontinued operations		8,444			95
Cash and cash equivalents:
(Decrease) increase for the period		(7,306		)	33,370
Balance, beginning of period		31,800			38,884
Balance, end of period		$	24,494		$	72,254

 

See notes to unaudited condensed consolidated financial statements.

 

7

 

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

 

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, 2003.

 

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.

 

The Company records minority interest expense to reflect the portion of earnings of VSI and RCVP attributable to the minority shareholders.

 

During the fiscal year ended June 30, 2003, the Company acquired 100 percent of the stock of three companies: Casino Management Systems Software Company (“CMS”) on November 13, 2002, Micro Clever Consulting Systems Company (“MCC”) on April 9, 2003 and Honeyframe Systems Company (“HSC”) on May 28, 2003.

 

On December 31, 2003, the Company acquired 100% of the assets of U.K. based Crown Gaming from Crown Leisure Limited (“Crown”). The total purchase price in cash was $3.9 million of which approximately $1.0 million was allocated to goodwill. The acquisition, which includes Crown’s distributorship agreements for a wide variety of automated table games and video bingo machines, strategically builds on the Company’s focus towards future growth projected in England.

 

All significant intercompany accounts and transactions have been eliminated. Certain reclassifications have been made to prior year financial statements to conform to the current year presentation.

 

Revenue recognition

 

Revenue from sales of gaming machines is generally recognized at the time products are shipped and title has passed to the customer. Games placed with customers on a trial basis are not recognized as revenue until the trial period ends and the customer accepts the games. The Company sells gaming equipment on normal credit terms (generally 2%, net 30) and 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

 

8

 

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 fair values. Post-contract customer support revenues are recognized over the period of the support agreement (generally one year).

 

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, the Company recognizes gaming revenues in its 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.  The Company recognizes, total net win from gaming machines as revenues for route operations, which the Company operates pursuant to revenue-sharing arrangements, and revenue-sharing payments (either fixed or variable) as a cost of route operations.

 

The Company continuously monitors its exposure for credit losses and maintains allowances for anticipated losses.

 

Capitalized Costs

 

During fiscal year 2004, Bally Gaming and Systems has experienced an almost four fold increase in the volume of product submissions to the various domestic regulatory bodies, each of which charge fees for testing and approval of each product. Product testing costs are capitalized once technological feasibility has been established and are amortized, generally over three year period once the product is placed in service. Product testing costs related to projects that are discontinued are expensed when such determination is made. The year to date fees incurred for such regulatory approvals exceeded $5.1 million. Of these amounts incurred, for the quarter ended December 31, 2003, the Company capitalized a total of $2.4 million that was directly attributable to products that have been approved.

 

Recently Issue Accounting Pronouncements

 

In December 2003, the FASB published FASB Interpretation No. 46, Consolidation of Variable Interest Entities (revised December 2003) (“FIN46-R”), clarifying FIN 46 and exempting certain entities from the provisions of FIN 46. Generally, application of FIN 46-R is required in financial statements of public entities that have interests in structures commonly referred to as special-purpose entities for periods ending after December 15, 2003, and, for other types of VIEs, for periods ending after March 15, 2004.  The Company has reviewed this pronouncement and determined it is not applicable.

 

In December 2003, the FASB issued Statement of Financial Accounting Standard No. 132-R “Employers’ Disclosures about Pensions and Other Postretirement Benefits – an amendment of FASB Statements No. 87,88, and 106.”  This statement revises employers’ disclosures about pension plans and other postretirement benefit plans.  The Company has reviewed this pronouncement and determined it is not applicable.

 

9

 

2.     EARNINGS PER SHARE

 

The following computation of basic and diluted earnings per share and weighted average common and common share equivalents outstanding, are as follows (in 000’s except per share amounts):

 

		Three Months Ended December 31,						Six Months Ended December 31,
		2002			2003			2002			2003
Net income from continuing operations		$	8,576		$	14,218		$	14,099		$	16,066
Net income from discontinued operations		3,277			4,526			4,012			8,706
Net income		$	11,853		$	18,744		$	18,111		$	24,772
Weighted average common shares outstanding		49,208			49,741			48,461			49,660
Effect of dilutive securities		1,108			1,189			1,099			1,154
Weighted average common and common share equivalents outstanding		50,316			50,930			49,560			50,814
Earnings per basic share:
Income from continued operations		$	0.17		$	0.29		$	0.29		$	0.32
Income from discontinued operations		0.07			0.09			0.08			0.18
		$	0.24		$	0.38		$	0.37		$	0.50
Earnings per diluted share:
Income from continued operations		$	0.17		$	0.28		$	0.29		$	0.32
Income from discontinued operations		0.07			0.09			0.08			0.17
		$	0.24		$	0.37		$	0.37		$	0.49

 

Diluted earnings per share represent the potential dilution that could occur if all dilutive securities outstanding were exercised. Certain securities do not have a dilutive effect because their exercise price exceeds the average fair market value of the underlying stock during the respective period. Such securities are excluded from the diluted earnings per share calculation and consist of the following (in 000’s):

 

		Three Months Ended December 31,				Six Months Ended December 31,
		2002		2003		2002		2003
Stock options		486		3		572		56

 

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 of the underlying stock on the 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 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 FASB No.148, “Accounting for Stock-Based Compensation-Transition and Disclosure”. This Statement amends FASB 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 FASB 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

 

10

 

accounting for stock-based employee compensation and the effect of the method used on reported results.  Under the fair value method, compensation costs are measured using an options pricing model and amortized over the estimated 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 are 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 000’s, except per share data):

 

		Three Months Ended December 31,						Six Months Ended December 31,
		2002			2003			2002			2003
Net income
As reported		$	11,853		$	18,744		$	18,111		$	24,772
Stock-based compensation under FASB No. 123		(1,032		)	(1,021		)	(1,649		)	(1,893		)
Pro forma net income		$	10,821		$	17,723		$	16,462		$	22,879
Earnings per share:
Basic – As reported		0.24			0.38			$	0.37		$	0.50
Basic – Pro forma		0.22			0.36			$	0.34		$	0.46
Diluted – As reported		0.24			0.37			$	0.37		$	0.49
Diluted – Pro forma		0.22			0.35			$	0.33		$	0.45

 

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 December 31,				Six Months Ended December 31,
		2002		2003		2002		2003
Risk-fee interest rate		3.5	%	3.5	%	3.5	%	3.5	%
Expected volatility		0.28		0.26		0.28		0.26
Expected dividend yield		0		0		0		0
Expected life		3-10 years		3-10 years		3-10 years		3-10 years

 

The resulting fair values applied to the options granted were $2.84 and $3.14 per share for the quarter ended December 31, 2002 and 2003 and were $2.73 and $3.10 per share for the six month periods ended December 31, 2002 and 2003, respectively.

 

3.     DISCONTINUED OPERATIONS

 

In July 2003 the Company announced it had entered into definitive sale agreements for of its route operations segment consisting of United Coin Machine Co. (“UCMC”) and Video Services, Inc. (“VSI”) and its German wall machine and amusement games segment (Alliance Automaten GmbH & Co. KG dba Bally Wulff).

 

On June 30, 2003 the Company entered into a definitive agreement for the sale of Bally Wulff to a third party equity investor. The sale was consummated on July 18, 2003, at which time the Company received $16.5 million in cash consideration.  Pursuant to the sale agreement, the Company used $5.6 million of the sale proceeds to purchase a 5 million Euro certificate of deposit as collateral for a tax claim currently being negotiated with the German tax authorities, for which the Company has indemnified the buyer.  The certificate of deposit is included in Other Assets in the accompanying unaudited financial statements.

 

The Company has entered into a definitive agreement for the sale of UCMC to the privately held Century Gaming, Inc. based in Montana.  The sales price is based on a multiple of EBITDA (as defined in the sale agreement). The closing of this transaction is subject to customary closing conditions including that the business achieve a minimum EBITDA of $21.0 million during a defined period of time prior to closing and that the buyer obtain the necessary gaming licenses. This transaction is expected to close in fiscal 2004.

 

Through a wholly owned subsidiary, Alliance owns 100 percent of the class B voting shares of VSI.  Alliance and the owners of the class A shares have entered into a definitive agreement to sell 100 percent of VSI’s stock to

 

11

 

Gentilly Gaming, LLC. The all-cash transaction is subject to customary closing conditions and is expected to close on June 30, 2004.  Concurrent with the sale agreement, VSI has entered into a 12-month operating agreement extension under terms and conditions that are the same as the existing agreement with the Fair Grounds Corporation.

 

On December 8, 2003 the Company announced that it had entered into an agreement for the sale of its Rail City Casino for consideration consisting of $35 million in cash and a $3.0 million note. The sale is expected to close in early to mid calendar 2004.

 

As a result of the transactions described above, each of the four businesses are treated as discontinued operations, and their results are presented net of applicable income taxes below income from continuing operations in the accompanying consolidated statements of operations. In accordance with generally accepted accounting principles, depreciation and amortization for these discontinued operations ceased as of July 1, 2003 for UCMC and VSI and as of December 8, 2003 for Rail City Casino as a result of their designation as assets held for sale. The assets and liabilities of the businesses are now classified as held for sale in the accompanying consolidated balance sheets. The prior year results have been reclassified to conform to the current year presentation.

 

Summary operating results for the discontinued operations for UCMC, VSI, Bally Wulff and Rail City Casino are as follows (in 000’s):

 

		Three Months Ended December 31,						Six Months Ended December 31,
		2002			2003			2002			2003
Net revenues		$	75,399		$	64,179		$	145,925		$	123,533
Operating income		4,212			7,947			6,163			14,746
Income tax expense		1,299			2,437			2,581			4,724
Income from discontinued operations		$	3,277		$	4,526		$	4,012		$	8,706

 

The following net assets held for sale are included in the accompanying consolidated balance sheets (in 000’s):

 

				June 30, 2003			December 31, 2003
Cash and cash equivalents				$	28,918		$	32,081
Accounts and contracts receivable				21,627			6,042
Other current assets				5,200			4,146
Property, plant and equipment				33,316			40,623
Intangible assets				21,695			20,295
Other				3,558			3,699
Total assets				114,314			106,886
Current liabilities				11,913			12,346
Long-term liabilities				4,273			4,301
Total liabilities				16,186			16,647
Net assets of discontinued operations				$	98,128		$	90,239

 

12

 

4.      INVENTORIES

 

Inventories are stated at the lower of cost, determined on a first-in, first-out basis, or market. Cost elements included for work-in-process and finished goods include raw materials, freight, direct labor and manufacturing overhead.

 

Inventories, net of reserves, consist of the following (in 000’s):

 

		June 30, 2003			December 31, 2003
Raw materials		$	13,720		$	19,446
Work-in-process		789			1,348
Finished goods		17,593			18,480
Total		$	32,102		$	39,274

 

5.      DEBT

 

Long-term debt and lines of credit consisted of the following (in 000’s):

 

		June 30, 2003			December 31, 2003
Term loan facility		$	187,625		$	350,000
Revolving credit facility		—			70,000
10% Sr. Subordinated Notes, net of unamortized discount		149,663			—
Other subordinated debt		495			—
Other, secured by related equipment		7,432			5,286
		345,215			425,286
Less current maturities		3,537			3,069
Long-term debt, net of current maturities		$	341,678		$	422,217

 

The Company’s debt structure at June 30, 2003 consisted primarily of a $190 million term loan facility and a $23.7 million undrawn revolving credit facility and $150 million 10% Senior Subordinated Notes (“Subordinated Notes”). The term loan had an interest rate of LIBOR plus 3.25% (or 4.45% as of June 30, 2003).

 

On September 5, 2003, the Company completed a senior bank debt refinancing transaction (the “Refinancing”) whereby the Company entered into a new $275 million term loan facility and a $125 million revolving credit facility. Proceeds from the new loans were used to repay the existing bank term loans totaling approximately $188 million, repay the Subordinated Notes, and to pay transaction fees and expenses.  The new term loan has an interest rate of LIBOR plus 2.75% (or 3.96% as of December 31, 2003), has a 1% per year mandatory principal amortization after the first year, and a 6-year maturity.  The revolving credit facility has an interest rate of LIBOR plus 2.50% (or 3.71% as of December 31, 2003), and the commitment decreases ratably over its 5-year term to a 60% balloon.  As of September 5, 2003, the initial outstanding on the revolving credit facility totaled $70.0 million.

 

On August 13, 2003, the Company initiated a tender offer and consent solicitation for all of the outstanding Subordinated Notes at a price of 103.33% plus a .25% tender premium which was contingent on the closing of the new bank facility.  On September 10, 2003, the tender offer period expired, with $78.6 million of the notes having been tendered.  On September 11, 2003, the Company initiated redemption of the remaining Notes at a price of 103.33%, which was completed on September 16, 2003, at which time the Subordinated Notes were fully redeemed.

 

13

 

As a result of the Refinancing described above, the Company recorded a pre-tax charge in the quarter ended September 30, 2003 of $12.3 million, which includes a $5.0 million charge for the early extinguishment of the Subordinated Notes, $7.0 million for the non-cash write off of deferred financing costs, and $0.3 million in fees and expenses.

 

During the December 2003 quarter the Company increased the Term Loan by $75 million, to a total of $350 million outstanding.  The proceeds were used primarily to fund loans made to Sierra Design Group (“SDG”) of $61.0 million in advance of the previously announced acquisition of SDG that is anticipated to close in the first half of calendar 2004 (See Note 8).  As a result the Company incurred additional $1.3 million in debt issuance costs, which have been capitalized and will be amortized over the remaining term of the loan.

 

The new bank facility is collateralized by substantially all domestic property and is guaranteed by each domestic subsidiary of the Company, other than the entity that holds the Company’s interest in its Louisiana and Mississippi operations, and is secured by a Pledge Agreement. 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 and issue preferred stock, pay dividends or make other distributions, enter into certain acquisitions, repurchase equity interests or subordinated indebtedness, issue or sell equity interests of the Company’s subsidiaries, engage in mergers or acquisitions, or engage in certain transactions with subsidiaries and affiliates, and that otherwise restrict corporate activities.  As of December 31, 2003, the Company is in compliance with these covenants.

 

6.     SEGMENTS AND GEOGRAPHICAL INFORMATION

 

The Company currently operates in two business segments (exclusive of the two business segments included in discontinued operations): (i) Gaming Equipment and Systems which designs, manufactures and distributes gaming machines and computerized monitoring systems for gaming machines, and (ii) Casino Operations which owns and operates one regional casino. The accounting policies of these segments are consistent with Company’s policies for the Consolidated Financial Statements.

 

The table below presents information as to the Company’s revenues, intersegment revenues and operating income by segment (in 000’s):

 

		Three Months Ended December 31,						Six Months Ended December 31,
		2002			2003			2002			2003
Revenues:
Gaming Equipment and Systems		$	86,627		$	96,319		$	150,166		$	184,787
Casino Operations		11,600			12,312			24,267			25,067
Total revenues		$	98,227		$	108,631		$	174,433		$	209,854
Intersegment revenues:
Gaming Equipment and Systems		$	265		$	212		$	1,223		$	341
Operating income (loss):
Gaming Equipment and Systems		$	21,775		$	27,217		$	36,910		$	48,575
Casino Operations		2,631			3,814			6,545			7,828
Corporate/other		(3,165		)	(3,497		)	(5,944		)	(6,936		)
Total operating income		$	21,241		$	27,534		$	37,511		$	49,467

 

The Company has operations based primarily in the United States with a significant sales and distribution office based in Germany.

 

14

 

The table below presents information as to the Company’s revenues and operating income by geographic region (in 000’s):

 

		Three Months Ended December 31,						Six Months Ended December 31,
		2002			2003			2002			2003
Revenues:
United States		$	85,946		$	97,728		$	156,467		$	190,340
Germany		10,031			5,762			14,417			11,794
Other foreign		2,250			5,141			3,549			7,720
Total revenues		$	98,227		$	108,631		$	174,433		$	209,854
Operating income:
United States		$	20,333		$	25,819		$	35,926		$	46,978
Germany		773			926			1,567			1,950
Other foreign		135			789			18			539
Total operating income		$	21,241		$	27,534		$	37,511		$	49,467

 

7.     SUPPLEMENTAL CASH FLOW INFORMATION

 

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

 

		Six Months Ended December 31,
		2002			2003
Cash paid for interest		$	13,157		$	15,227
Cash paid for income taxes		925			1,638
Non-cash transactions:
Reclassify property, plant and equipment to inventory		$	1,402		$	2,517
(Favorable) unfavorable translation rate adjustment		(2,786		)	(2,524		)
Notes payable issued in acquisition		3,000			—

 

8.     COMMITMENTS AND CONTINGENCIES

 

The Company is a party to various lawsuits relating to routine matters incidental to its business.  Management does not believe that the outcome of such litigation, in the aggregate, will have a material adverse effect on the Company.

 

On November 11, 2003, the Company announced an agreement to purchase 100 percent of the outstanding shares of Sierra Design Group (“SDG”) for approximately $45 million of consideration consisting of $27 million of cash and 736,000 shares of Alliance Gaming Common Stock (valued at $18 million) to be paid at closing and up to $95 million of contingent consideration payable in equal portions of cash and stock payable over the three years following the acquisition upon SDG achieving certain financial objectives. In addition, the Company has made loan commitments to SDG totaling $74 million, of which $61 million has been advanced as of December 31, 2003, which has been used by SDG to repay existing creditors.  The acquisition, which is subject to regulatory approvals and certain other customary closing conditions, is expected to close in the first half of calendar 2004.

 

15

 

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 new bank credit agreement. 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., the Rainbow Casino Vicksburg Partnership, L.P. (dba Rainbow Casino) and the Company’s non-domestic subsidiaries (together the “Non-Guaranteeing Subsidiaries”). The notes to the unaudited consolidating financial statements should be read in conjunction with these unaudited consolidating financial statements.

 

16

 

UNAUDITED CONSOLIDATING BALANCE SHEETS

June 30, 2003
(In 000’s)

 

		Parent			Guaranteeing Subsidiaries			Non- Guaranteeing Subsidiaries			Reclas- sifications and Elimina- tions			Alliance Gaming Corporation and Subsidiaries
ASSETS
Current assets:
Cash and cash equivalents		$	12,730		$	18,036		$	8,118		$	—		$	38,884
Accounts and notes receivable, net		738			70,880			27,496			(746		)	98,368
Inventories, net		—			29,801			2,518			(217		)	32,102
Deferred tax assets, net		33,182			11,639			—			—			44,821
Other current assets		404			7,110			496			—			8,010
Total current assets		47,054			137,466			38,628			(963		)	222,185
Long-term investments (restricted)		—			864			—			—			864
Long-term receivables, net		159,723			15,113			12			(159,983		)	14,865
Leased gaming equipment, net		—			25,792			—			—			25,792
Property, plant and equipment, net		74			20,394			36,426			—			56,894
Goodwill, net		(900		)	48,293			15,647			—			63,040
Intangible assets, net		7,049			14,550			5,032			—			26,631
Investments in subsidiaries		294,513			74,990			—			(369,503		)	—
Deferred tax assets, net		3,394			—			—			(3,394		)	—
Assets of discontinued operations held for sale		16,539			93,672			4,103			—			114,314
Other assets, net		(84,406		)	99,918			(14,933		)	1			580
		$	443,040		$	531,052		$	84,915		$	(533,842	)	$	525,165
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	1,295		$	19,507		$	1,924		$	—		$	22,726
Accrued liabilities		7,378			18,188			5,368			(751		)	30,183
Jackpot liabilities		—			10,446			142			—			10,588
Current maturities of long-term debt		2,395			1,124			18			—			3,537
Liabilities of disc. operations held for sale		1,000			14,358			828			—			16,186
Total current liabilities		12,068			63,623			8,280			(751		)	83,220
Long term debt, net		335,388			166,013			—			(159,723		)	341,678
Deferred tax liabilites		—			5,679			1,635			(3,394		)	3,920
Other liabilities		2,624			753			10			—			3,387
Minority interest		1,330			—			—			—			1,330
Total liabilities		351,410			236,068			9,925			(163,868		)	433,535
Commitments and contingencies
Stockholders’ equity:
Special Stock Series E		12			—			—			—			12
Common Stock		4,996			478			1,027			(1,505		)	4,996
Treasury stock		(501		)	—			—			—			(501		)
Additional paid-in capital		163,267			190,449			33,415			(223,864		)	163,267
Accumulated other comprehensive income (loss)		1,287			1,290			1,267			(2,557		)	1,287
Retained earnings (accumulated deficit)		(77,431		)	102,767			39,281			(142,048		)	(77,431		)
Total stockholders’ equity		91,630			294,984			74,990			(369,974		)	91,630
		$	443,040		$	531,052		$	84,915		$	(533,842	)	$	525,165

 

See accompanying unaudited notes.

 

17

 

UNAUDITED CONSOLIDATING BALANCE SHEETS

December 31, 2003

(In 000’s)

 

		Parent			Guaranteeing Subsidiaries			Non- Guaranteeing Subsidiaries			Reclas- sifications and Elimina- tions			Alliance Gaming Corporation and Subsidiaries
ASSETS
Current assets:
Cash and cash equivalents		$	44,883		$	18,897		$	8,474		$	—		$	72,254
Accounts and notes receivable, net		674			80,005			26,705			(653		)	106,731
Inventories, net		—			34,473			5,195			(394		)	39,274
Deferred tax assets, net		26,423			11,638			—			—			38,061
Other current assets		844			7,367			1,172			—			9,383
Total current assets		72,824			152,380			41,546			(1,047		)	265,703
Long-term investments (restricted)		—			2,611			—			—			2,611
Long-term receivables, net		167,287			5,933			—			(166,047		)	7,173
Notes receivables from Sierra Design Group		61,025			—			—			—			61,025
Leased gaming equipment, net		—			30,221			—			—			30,221
Property, plant and equipment, net		73			22,480			37,323			—			59,876
Goodwill, net		(900		)	48,333			18,792			—			66,225
Intangible assets, net		6,923			17,416			4,744			—			29,083
Investments in subsidiaries		346,011			77,724			—			(423,735		)	—
Deferred tax assets, net		1,309			—			—			(1,309		)	—
Assets of discontinued operations held for sale		39			102,866			3,981			—			106,886
Other assets, net		(106,940		)	130,181			(16,980		)	(26		)	6,235
		$	547,651		$	590,145		$	89,406		$	(592,164	)	$	635,038
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	260		$	18,162		$	2,211		$	—		$	20,633
Accrued liabilities		1			17,903			6,655			(691		)	23,868
Jackpot liabilities		—			12,614			171			—			12,785
Current maturities of long-term debt		1,563			1,500			6			—			3,069
Liabilities of disc operations held for sale		—			15,638			1,009			—			16,647
Total current liabilities		1,824			65,817			10,052			(691		)	77,002
Long term debt, net		418,438			169,566			—			(165,787		)	422,217
Deferred tax liabilites		—			5,680			1,635			(1,309		)	6,006
Other liabilities		2,624			2,424			—			—			5,048
Minority interest		1,216			—			—			—			1,216
Total liabilities		424,102			243,487			11,687			(167,787		)	511,489
Commitments and contingencies
Stockholders’ equity:
Special Stock Series E		12			—			—			—			12
Common Stock		5,033			478			1,027			(1,505		)	5,033
Treasury stock		(501		)	—			—			—			(501		)
Additional paid-in capital		167,724			190,449			33,415			(223,864		)	167,724
Accumulated other comprehensive income (loss)		3,940			3,944			3,921			(7,865		)	3,940
Retained earnings (accumulated deficit)		(52,659		)	151,787			39,356			(191,143		)	(52,659		)
Total stockholders’ equity		123,549			346,658			77,719			(424,377		)	123,549
		$	547,651		$	590,145		$	89,406		$	(592,164	)	$	635,038

 

See accompanying unaudited notes.

 

18

 

UNAUDITED CONSOLIDATING STATEMENTS OF OPERATIONS

Three months ended December 31, 2002

(In 000’s)

 

		Parent			Guaranteeing Subsidiaries			Non- Guaranteeing Subsidiaries			Reclas- sifications and Elimina- tions			Alliance Gaming Corporation and Subsidiaries
Revenues:
Gaming equipment and systems		$	—		$	83,616		$	12,304		$	(9,293	)	$	86,627
Casino operations		—			—			13,186			(1,586		)	11,600
		—			83,616			25,490			(10,879		)	98,227
Costs and expenses:
Cost of gaming equipment and systems		—			39,835			9,076			(9,248		)	39,663
Cost of casino operations		—			—			5,223			—			5,223
Selling, general and administrative		2,623			15,440			5,641			(1,609		)	22,095
Research and development costs		—			4,159			999			—			5,158
Depreciation and amortization		542			3,766			539			—			4,847
		3,165			63,200			21,478			(10,857		)	76,986
Operating income (loss)		(3,165		)	20,416			4,012			(22		)	21,241
Earnings in consolidated subsidiaries		17,590			954			—			(18,544		)	—
Other income (expense):
Interest income		3,099			—			11			(3,031		)	79
Interest expense		(6,501		)	(3,064		)	(20		)	3,031			(6,554		)
Rainbow royalty		1,458			—			(1,458		)	—			—
Minority interest		(309		)	—			—			—			(309		)
Other, net		665			(58		)	(341		)	—			266
Income (loss) from continuing operations before income taxes		12,837			18,248			2,204			(18,566		)	14,723
Income tax expense		4,261			636			1,250			—			6,147
Net income (loss) from continuing operations		8,576			17,612			954			(18,566		)	8,576
Discontinued operations:
Income (loss) from discontinued operations of wall machines and amusement games business unit, net		175			(1,210		)	1,930			—			895
Income from disc. ops. of Nevada Route, net		—			1,325			—			—			1,325
Income from disc. ops. of Louisiana Route, net		—			—			284			—			284
Income from disc. ops. of Rail City Casino, net		—			773			—			—			773
Earnings from consolidated discontinued operations		3,102			2,214			—			(5,316		)	—
Income (loss) from discontinued operations		3,277			3,102			2,214			(5,316		)	3,277
Net income (loss)		$	11,853		$	20,714		$	3,168		$	(23,882	)	$	11,853

 

See accompanying unaudited notes.

 

19

 

UNAUDITED CONSOLIDATING STATEMENTS OF OPERATIONS
Three months ended December 31, 2003
(In 000’s)

 

		Parent			Guaranteeing Subsidiaries			Non- Guaranteeing Subsidiaries			Reclas- sifications and Elimina- tions			Alliance Gaming Corporation and Subsidiaries
Revenues:
Gaming equipment and systems		$	—		$	92,361		$	10,902		$	(6,944	)	$	96,319
Casino operations		—			—			13,758			(1,446		)	12,312
		—			92,361			24,660			(8,390		)	108,631
Costs and expenses:
Cost of gaming equipment and systems		—			39,293			6,371			(6,884		)	38,780
Cost of casino operations		—			—			4,884			—			4,884
Selling, general and administrative		3,124			15,723			6,847			(1,446		)	24,248
Research and development costs		—			6,587			153			—			6,740
Depreciation and amortization		373			5,196			876			—			6,445
		3,497			66,799			19,131			(8,330		)	81,097
Operating income (loss)		(3,497		)	25,562			5,529			(60		)	27,534
Earnings in consolidated subsidiaries		25,005			3,156			—			(28,161		)	—
Other income (expense):
Interest income		3,107			5			3			(3,032		)	83
Interest expense		(3,805		)	(3,081		)	(15		)	3,032			(3,869		)
Rainbow royalty		1,541			—			(1,541		)	—			—
Minority interest		(541		)	—			—			—			(541		)
Other, net		126			(190		)	(481		)	—			(545		)
Income (loss) from continuing operations before income taxes		21,936			25,452			3,495			(28,221		)	22,662
Income tax expense		7,718			387			339			—			8,444
Net income (loss) from continuing operations		14,218			25,065			3,156			(28,221		)	14,218
Discontinued operations:
Income from disc. ops. of Nevada Route, net		—			3,077			—			—			3,077
Income from disc. ops. of Louisiana Route, net		—			—			420			—			420
Income from disc. ops. of Rail City Casino, net		—			1,029			—			—			1,029
Earnings from consolidated discontinued operations		4,526			420			—			(4,946		)	—
Income (loss) from discontinued operations		4,526			4,526			420			(4,946		)	4,526
Net income (loss)		$	18,744		$	29,591		$	3,576		$	(33,167	)	$	18,744

 

See accompanying unaudited notes.

 

20

 

UNAUDITED CONSOLIDATING STATEMENTS OF OPERATIONS

Six months ended December 31, 2002

(In 000’s)

 

		Parent			Guaranteeing Subsidiaries			Non- Guaranteeing Subsidiaries			Reclas- sifications and Elimina- tions			Alliance Gaming Corporation and Subsidiaries
Revenues:
Gaming equipment and systems		$	—		$	146,526		$	18,005		$	(14,365	)	$	150,166
Casino operations		—			—			27,431			(3,164		)	24,267
		—			146,526			45,436			(17,529		)	174,433
Costs and expenses:
Cost of gaming equipment and systems		—			67,638			12,587			(14,304		)	65,921
Cost of casino operations		—			—			10,520			—			10,520
Selling, general and administrative		4,858			29,177			11,363			(3,203		)	42,195
Research and development costs		—			7,342			1,791			—			9,133
Depreciation and amortization		1,086			7,023			1,044			—			9,153
		5,944			111,180			37,305			(17,507		)	136,922
Operating income (loss)		(5,944		)	35,346			8,131			(22		)	37,511
Earnings in consolidated subsidiaries		31,553			3,399			—			(34,952		)	—
Other income (expense):
Interest income		6,165			—			25			(6,063		)	127
Interest expense		(13,119		)	(6,099		)	(40		)	6,063			(13,195		)
Rainbow royalty		3,044			—			(3,044		)	—			—
Minority interest		(754		)	—			—			—			(754		)
Other, net		765			24			(423		)	—			366
Income (loss) from continuing operations before income taxes		21,710			32,670			4,649			(34,974		)	24,055
Income tax expense		7,611			1,095			1,250			—			9,956
Net income (loss) from continuing operations		14,099			31,575			3,399			(34,974		)	14,099
Discontinued operations:
Income (loss) from disc ops of wall machines and amusement games business unit		408			(1,211		)	77			—			(726		)
Income from disc. ops. of Nevada Route, net		—			2,690			—			—			2,690
Income from disc. ops. of Louisiana Route, net		—			—			559			—			559
Income from disc. ops. of Rail City Casino, net		—			1,489			—			—			1,489
Earnings from consolidated discontinued operations		3,604			636			—			(4,240		)	—
Income (loss) from discontinued operations		4,012			3,604			636			(4,240		)	4,012
Net income (loss)		$	18,111		$	35,179		$	4,035		$	(39,214	)	$	18,111

 

See accompanying unaudited notes.

 

21

 

UNAUDITED CONSOLIDATING STATEMENTS OF OPERATIONS

Six months ended December 31, 2003

(In 000’s)

 

		Parent			Guaranteeing Subsidiaries			Non- Guaranteeing Subsidiaries			Reclas- sifications and Elimina- tions			Alliance Gaming Corporation and Subsidiaries
Revenues:
Gaming equipment and systems		$	—		$	177,370		$	19,514		$	(12,097	)	$	184,787
Casino operations		—			—			27,997			(2,930		)	25,067
		—			177,370			47,511			(15,027		)	209,854
Costs and expenses:
Cost of gaming equipment and systems		—			71,981			11,956			(11,920		)	72,017
Cost of casino operations		—			—			9,887			—			9,887
Selling, general and administrative		6,057			36,935			13,251			(2,930		)	53,313
Research and development costs		—			12,328			375			—			12,703
Depreciation and amortization		879			9,865			1,723			—			12,467
		6,936			131,109			37,192			(14,850		)	160,387
Operating income (loss)		(6,936		)	46,261			10,319			(177		)	49,467
Earnings in consolidated subsidiaries		44,757			5,725			—			(50,482		)	—
Other income (expense):
Interest income		6,177			5			8			(6,064		)	126
Interest expense		(9,466		)	(6,165		)	(31		)	6,064			(9,598		)
Rainbow royalty		3,134			—			(3,134		)	—			—
Minority interest		(1,027		)	—			—			—			(1,027		)
Refinancing charge		(12,293		)	—			—			—			(12,293		)
Other, net		235			(387		)	(747		)	—			(899		)
Income (loss) from continuing operations before income taxes		24,581			45,439			6,415			(50,659		)	25,776
Income tax expense		8,515			505			690			—			9,710
Net income (loss) from continuing operations		16,066			44,934			5,725			(50,659		)	16,066
Discontinued operations:
Income from disc. ops. of Nevada Route, net		—			6,209			—			—			6,209
Income from disc. ops. of Louisiana Route, net		—			—			730			—			730
Income from disc. ops of Rail City Casino, net		—			1,767			—			—			1,767
Earnings from consolidated discontinued operations		8,706			730			—			(9,436		)	—
Income (loss) from discontinued operations		8,706			8,706			730			(9,436		)	8,706
Net income (loss)		$	24,772		$	53,640		$	6,455		$	(60,095	)	$	24,772

 

See accompanying unaudited notes.

 

22

 

UNAUDITED CONSOLIDATING STATEMENTS OF CASH FLOWS

Six Months Ended December 31, 2002

(000’s)

 

		Parent			Guaranteeing Subsidiaries			Non- Guaranteeing Subsidiaries			Reclas sifications and Elimina- tions			Alliance Gaming Corporation and Subsidiaries
Cash flows from operating activities of continuing operations:
Net income (loss)		$	18,111		$	35,179		$	4,035		$	(39,214	)	$	18,111
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
(Income) loss from discontinued operations		(4,012		)	(3,604		)	(636		)	4,240			(4,012		)
Depreciation and amortization		1,086			7,023			1,044			—			9,153
Deferred income taxes		7,519			(3		)	(9		)	—			7,507
Provision for losses on receivables		—			616			12			—			628
Other		(273		)	797			7			—			531
Change in operating assets and liabilities:
Accounts and notes receivable		(96		)	(28,867		)	(3,662		)	85			(32,540		)
Intercompany accounts		(15,232		)	(25,937		)	6,153			35,016			—
Inventories		—			(889		)	20			22			(847		)
Other current assets		(186		)	(753		)	139			—			(800		)
Accounts payable		2,100			(276		)	(18		)	—			1,806
Accrued liabilities and jackpot liabilities		(5,559		)	9,479			840			(113		)	4,647
Net cash provided by (used in) operating activities of continuing operations		3,458			(7,235		)	7,925			36			4,184
Cash flows from investing activities of continuing operations:
Additions to property, plant and equipment		(3		)	(2,423		)	(2,475		)	—			(4,901		)
Additions to leased gaming equipment		—			(10,010		)	—			—			(10,010		)
Additions to other long-term assets		—			(1,831		)	(48		)	—			(1,879		)
Acquisitions, net of cash acquired		—			(3,038		)	—			—			(3,038		)
Net cash used in investing activities of continuing operations		(3		)	(17,302		)	(2,523		)	—			(19,828		)
Cash flows from financing activities of continuing operations:
Reduction of long-term debt		(1,950		)	(35		)	(6		)	—			(1,991		)
Bally Austria APIC		—			—			36			(36		)	—
Proceeds from exercise of stock options		1,792			—			—			—			1,792
Dividends received (paid)		—			2,940			(2,940		)	—			—
Net cash provided by (used in) financing activities of continuing operations		(158		)	2,905			(2,910		)	(36		)	(199		)
Effect of exchange rate changes on cash		—			—			93			—			93
Cash and cash equivalents provided by (used in) discontinued operations		—			9,180			(736		)	—			8,444
Increase (decrease) for the period		3,297			(12,452		)	1,849			—			(7,306		)
Balance, beginning of period		8,121			17,414			6,265			—			31,800
Balance, end of period		$	11,418		$	4,962		$	8,114		$	—		$	24,494

 

See accompanying unaudited notes.

 

23

 

UNAUDITED CONSOLIDATING STATEMENTS OF CASH FLOWS

Six Months Ended December 31, 2003

(000’s)

 

		Parent			Guaranteeing Subsidiaries			Non- Guaranteeing Subsidiaries			Reclas sifications and Elimina- tions			Alliance Gaming Corporation and Subsidiaries
Cash flows from operating activities of continuing operations:
Net income (loss)		$	24,772		$	53,640		$	6,455		$	(60,095	)	$	24,772
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
(Income) loss from discontinued operations		(8,706		)	(8,706		)	(730		)	9,436			(8,706		)
Depreciation and amortization		879			9,865			1,723			—			12,467
Refinancing charge		12,293			—			—			—			12,293
Deferred income taxes		8,671			1,762			—			—			10,433
Provision for losses on receivables		—			505			21			—			526
Other		(99		)	(1,006		)	6			—			(1,099		)
Change in operating assets and liabilities:
Accounts and notes receivable		(1,436		)	(492		)	2			(93		)	(2,019		)
Intercompany accounts		(16,285		)	(35,946		)	1,716			50,515			—
Inventories		—			(2,155		)	(515		)	177			(2,493		)
Other current assets		(440		)	(588		)	5			—			(1,023		)
Accounts payable		(1,035		)	(1,345		)	308			—			(2,072		)
Accrued liabilities and jackpot liabilities		(8,377		)	4,556			837			60			(2,924		)
Net cash provided by operating activities of continuing operations		10,237			20,090			9,828			—			40,155
Cash flows from investing activities of continuing operations:
Advances and notes receivable due from Sierra Design Group		(61,025		)	—			—			—			(61,025		)
Additions to property, plant and equipment		(19		)	(1,365		)	(2,431		)	—			(3,815		)
Additions to leased gaming equipment		—			(14,081		)	(1,876		)	—			(15,957		)
Additions to other long-term assets		(5,974		)	(4,504		)	64			—			(10,414		)
Acquisitions, net of cash acquired		—			(3,879		)	—			—			(3,879		)
Proceeds from sale of assets of discontinued operations		16,500			—			—			—			16,500
Net cash used in investing activities of continuing operations		(50,518		)	(23,829		)	(4,243		)	—			(78,590		)
Cash flows from financing activities of continuing operations:
Debt issuance costs		(6,954		)	—			—			—			(6,954		)
Premium and consents fees paid on redemption of subordinated notes		(5,399		)	—			—			—			(5,399		)
Proceeds from issuance of long-term debt		350,000			—			—			—			350,000
Payoff of debt from refinancing		(337,625		)	—			—			—			(337,625		)
Reduction of long-term debt		(495		)	(842		)	(12		)	—			(1,349		)
Net change in revolving credit facility		70,000			—			—			—			70,000
Proceeds from exercise of stock options		2,907			—			—			—			2,907
Dividends received (paid)		—			6,380			(6,380		)	—			—
Net cash provided by (used in) financing activities of continuing operations		72,434			5,538			(6,392		)	—			71,580
Effect of exchange rate changes on cash		—			—			130			—			130
Cash and cash equivalents provided by (used in) discontinued operations		—			(938		)	1,033			—			95
Increase for the period		32,153			861			356			—			33,370
Balance, beginning of period		12,730			18,036			8,118			—			38,884
Balance, end of period		$	44,883		$	18,897		$	8,474		$	—		$	72,254

 

See accompanying unaudited notes.

 

24

 

Debt and Revolving Credit Facility

 

Long-term debt and lines of credit at June 30, 2003 consist of the following (in 000’s):

 

		Parent			Guaranteeing Subsidiaries			Non- Guaranteeing Subsidiaries			Reclas- sifications and Elimina- tions			Alliance Gaming Corporation and Subsidiaries
10% Senior Subordinated Notes, net of unamortized discount		$	149,663		$	—		$	—		$	—		$	149,663
Term loan facility		187,625			—			—			—			187,625
Other subordinated debt		495			—			—			—			495
Intercompany notes payable		—			159,723			—			(159,723		)	—
Other		—			7,414			18			—			7,432
		337,783			167,137			18			(159,723		)	345,215
Less current maturities		2,395			1,124			18			—			3,537
Long-term debt, net of current maturities		$	335,388		$	166,013		$	—		$	(159,723	)	$	341,678

 

Long-term debt and lines of credit at December 31, 2003, consisted of the following (in 000’s):

 

		Parent			Guaranteeing Subsidiaries			Non- Guaranteeing Subsidiaries			Reclas- sifications and Elimina- tions			Alliance Gaming Corporation and Subsidiaries
Term loan facility		$	350,000		$	—		$	—		$	—		$	350,000
Revolving credit facility		70,000			—			—			—			70,000
Intercompany notes payable		—			165,787			—			(165,787		)	—
Other		1			5,279			6			—			5,286
		420,001			171,066			6			(165,787		)	425,286
Less current maturities		1,563			1,500			6			—			3,069
Long-term debt net of current maturities		$	418,438		$	169,566		$	—		$	(165,787	)	$	422,217

 

25

 

ALLIANCE GAMING CORPORATION

FORM 10-Q

 

December 31, 2003

 

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

 

Overview and Summary

 

We are a diversified, worldwide gaming company that (i) designs, manufactures and distributes gaming machines and computerized monitoring systems for gaming machines; and (ii) owns and operates a casino. Operating under the name Bally Gaming and Systems, we are a worldwide leader in designing, manufacturing and distributing gaming machines, having marketed over 90,000 gaming machines during the past five years. We also design, integrate and sell highly specialized computerized monitoring systems that provide casinos with networked accounting and security services for their gaming machines with over 240,000 game monitoring units installed worldwide. Our dockside casino in Vicksburg, Mississippi offers 12 table games and approximately 930 gaming devices.

 

Several significant events should be highlighted. In July 2003, we announced our intention to transform our Company from a diversified gaming conglomerate to a technology provider to the gaming industry.  In July 2003, we entered into definitive agreements to sell route operations in Nevada and Louisiana, and our wall machine and amusement games business in Germany.  The German business has been sold and the sales of the Nevada and Louisiana route operations are expected to be completed during fiscal 2004.  In addition, on December 8, 2003, the Company announced that it had entered into an agreement for the sale of its Rail City Casino.  For purposes of financial reporting, each of these four businesses are now treated as discontinued operations and their results are presented net of applicable income taxes, below income from continuing operations.

 

On November 11, 2003, we announced an agreement to purchase 100 percent of the outstanding shares of Sierra Design Group (“SDG”), a leading supplier of Class II and Class III gaming devices, systems and technology.  Over the last several years we believed that the next significant expansion in gaming will be derived from the VLT and the Racino markets both domestically and internationally. SDG’s presence in both arenas and more importantly their technology supporting centrally determined gaming and Class II gaming will give us significant presence in these markets and significant head start in capitalizing on the expected growth in these markets. Finally, on December 31, 2003, we acquired England-based Crown Gaming from Crown Leisure Limited, one of the United Kingdom’s largest distributors of gaming and amusement machines.

 

Liquidity and Capital Resources

 

As of December 31, 2003, we had $72.3 million in cash and cash equivalents, and $55.0 million in unborrowed availability on our revolving credit facility. In addition, we had net working capital of approximately $205.3 million at December 31, 2003, compared to $155.2 million at June 30, 2003 excluding liabilities of discontinued operations.  The changes within working capital are more fully described in the cash flow section below. Consolidated cash and cash equivalents at December 31, 2003 includes approximately $2.7 million of cash which is utilized in Casino Operations held in vaults, cages or change banks, as well as $13.7 million which is held in jackpot reserve accounts we maintain to ensure availability of funds to pay wide-area progressive jackpot awards. In addition, long-term investments of $2.6 million include investments in Treasury Strips for the previous jackpot winners.

 

Management believes that cash flows from operating activities, cash and cash equivalents held and the $125 million revolving credit facility commitment will provide the Company with sufficient capital resources and liquidity. At December 31, 2003, we had no material commitments for capital expenditures.

 

The acquisition of SDG will be for consideration of approximately $45 million consisting of $27 million of cash and 736,000 shares of Alliance Gaming Common Stock (valued at $18 million) to be paid at closing and approximately $95 million of contingent consideration payable in equal portions of cash and stock payable over the three years following the acquisition upon SDG

 

26

 

achieving certain financial objectives. In addition, the Company has made loan commitments to SDG of $74 million with interest accruing at 8% of which $61 million has been advanced as of December 31, 2003.  Principal and interest on these loans is due in November 2004. The acquisition, which is subject to regulatory approvals and certain other customary closing conditions, is expected to close in the first half of calendar 2004.

 

From time to time we become aware of potential acquisition or development opportunities and we may at any time be negotiating to engage in transactions or developments both domestically and internationally. Additionally, we regularly evaluate all of our assets within our portfolio and will continue to consider disposition of assets that, in our opinion, do not represent the best use of our capital. If such transactions occur our capital resources and liquidity may be affected.

 

Cash Flow

 

During the six months ended December 31, 2003, we generated $40.2 million of cash flows from operating activities of continuing operations, compared to $4.2 million in the prior year period primarily as the result of favorable operating performance discussed earlier.

 

During the six months ended December 31, 2003, cash flow from investing activities of continuing operations included $10.9 million of cash provided from the sale of Bally Wulff (net of $5.6 million used to purchase a 5 million Euro certificate of deposit as collateral for a tax claim currently being negotiated with the German tax authorities, for which the Company has indemnified the buyer), offset by the issuance of $61.0 million in loan advance to SDG, net cash used in the in the acquisition of Crown for $3.9 million, capital expenditures totaling $3.8 million, and costs incurred to produce participation games totaling $16.0 million.

 

During the six months ended December 31, 2003, $71.6 million cash was provided by financing activities of continuing operations resulting from $70 million increase in term loans and $350.0 million proceeds from issuance of long-term debt and $2.9 million of cash provided from the exercise of stock options, offset by $337.6 million payoff of debt from refinancing, $7.0 of refinancing costs, $5.4 million of premium paid on early redemption of the subordinated notes bonds and principal payments on long term debt totaling $1.3 million.

 

Results of Operations for each Business Unit:

 

Bally Gaming and Systems

 

Summary financial results and operating statistics (dollars in 000’s):

 

		Three Months Ended December 31,						Six Months Ended December 31,
		2002			2003			2002			2003
Revenues
Game sales		$	50,421		$	49,577		$	84,204		$	92,318
System sales		23,041			30,749			38,316			60,733
Gaming operations		13,165			15,993			27,646			31,736
Total revenues		86,627			96,319			150,166			184,787
Gross Margin
Game sales		21,621			23,259			37,546			42,867
System sales		17,106			22,854			29,039			46,718
Gaming operations		8,237			11,426			17,660			23,185
Total gross margin		46,964			57,539			84,245			112,770
Selling, general and administrative		16,254			18,193			31,161			41,275
Research and development costs		5,158			6,740			9,133			12,703
Depreciation and amortization		3,777			5,389			7,041			10,217
Operating income		$	21,775		$	27,217		$	36,910		$	48,575

 

27

 

		Three Months Ended December 31,				Six Months Ended December 31,
		2002		2003		2002		2003
Operating Statistics:
New Gaming Devices Sold		5,430		4,600		9,430		9,795
Game Monitoring Units Sold		8,900		10,950		15,030		22,300
WAP and daily-fee games
End of period installed base		3,930		4,790		3,930		4,790
Average installed base		3,910		4,800		3,800		4,740

 

Our Bally Gaming and Systems business unit reported an overall increase in revenues of 11% for the quarter and 23% for the year-to-date period, when compared to the prior year periods. Bally game sales division reported a decrease in revenues of 2% for the quarter and an increase of 10% for the year-to-date period. New units sold decreased 15% during the quarter and increased 4% for the year-to-date period. The percentage decrease in new units sold for the quarter on a comparative basis reflects a comparison to the prior year quarter in which there were two significant new casino properties sales of which include approximately 1,600 units. The average new-unit selling price (excluding OEM games) increased 10% for the quarter and 8% for the year-to-date period.

 

Bally Systems division reported an increase in revenues of 33% for the quarter and 59% for the year-to-date period, when compared to the prior year periods driven by an increase in sales of game monitoring units for the quarter of 23% and an increase of 48% for the year-to-date period. For the current quarter and year-to-date period, Bally Systems experienced a continued increase in the average selling price per unit, increased sales of software licenses for eTICKET™, as well as sales of its bonusing and promotions software. Bally Systems recurring hardware and software revenues for the quarter increased to $5.1 million, resulting from the larger base of installed systems, which now stands at approximately 244,000.

 

The Gaming Operations division reported an increase of 21% in revenues for the quarter and an increase of 15% for the year-to-date period, when compared to the prior year periods driven by the 23% increase for the quarter and the 25% increase for the year-to-date-period in the average installed base of wide-area progressive (WAP) and daily-fee games deployed, which now total 1,840 and 2,950, respectively. The current quarter placements included the continued roll out of “Cash for Life” WAP games and the continued placement of daily fee games such as Playboy and the Saturday Night Live series, as well as the installation of an additional 130 games at Delaware race tracks.

 

For the quarter ended December 31, 2003, the overall gross margin percentage for Bally Gaming and Systems increased to 60% compared to 54% in the prior year quarter, primarily as a result of an increase in higher margin systems revenues.

 

Selling, general and administrative expenses increased 12% over the prior year quarter, as a result of an overall increase in regulatory fees, advertising and marketing expenses. Selling, general and administrative costs as a percentage of this business unit’s revenue remained constant at 19% in the current year quarter. Research and development costs increased 31% for the quarter, resulting from an increase in headcount and consulting fees during the current quarter. Total depreciation expense increased 43% over the prior year quarter, driven by the increase in the installed base of wide-area progressive and daily fee games.

 

During fiscal year 2004, Bally Gaming and Systems has experienced an almost four fold increase in the volume of product submissions to the various domestic regulatory bodies, each of which charge fees for testing and approval of each product. Product testing costs are capitalized once technological feasibility has been established and are amortized, generally over three year period once the product is placed in service. Product testing costs related to projects that are discontinued are expensed when such determinations is made. The year to date fees incurred for such regulatory approvals and classified as Research and Development costs, exceeded $5.1 million. Of these amounts incurred, for the quarter ended December 31, 2003, the Company capitalized a total of $2.4 million that was directly attributable to products that have been approved.

 

28

 

Rainbow Casino Operation

 

Summary financial results and operating statistics (dollars in 000’s):

 

		Three Months Ended December 31,						Six Months Ended December 31,
		2002			2003			2002			2003
Revenues		$	11,600		$	12,312		$	24,267		$	25,067
Gross Margin		6,377			7,428			13,747			15,180
Selling, general and administrative		3,218			2,931			6,176			5,981
Depreciation and amortization		528			683			1,026			1,371
Operating income		$	2,631		$	3,814		$	6,545		$	7,828
Operating Statistics:
Average Number of Gaming Devices		905			910			930			930
Average Number of Table Games		16			12			16			12

 

Rainbow Casino revenues increased 6% for the quarter and 3% for the year-to-date-period, when compared to the prior year periods.The revenue increase in the quarter is a result of a 5% increase in net win per day per gaming machine to $142 and 1% increase in the average number of gaming machines for the quarter.

 

The gross margin for Casino Operations as a percentage of revenues increased to 60% for the quarter as compared to 55% for the prior year quarter. This increase was a result of decreases in certain operating costs. Cost of casino revenues includes gaming taxes, rental costs and direct labor including payroll taxes and benefits.

 

The overall selling, general and administrative expenses decreased 9% over the prior year quarter, as a result of a decrease in advertising and promotional expenses. Selling, general and administrative costs as a percentage of this business unit’s revenue decreased to 24% in the current quarter compared to 28% in the prior year quarter. Total depreciation expense increased 28% over the prior year quarter as a result of the capital improvements made to the Rainbow Casino in the prior year.

 

29

 

Discontinued Operations

 

As previously discussed, we announced that we had entered into definitive agreements for the sale of our two route operations in July 2003 and the sale of our Rail City Casino in December 2003. For purposes of financial reporting, these three business units are now treated as discontinued operations.

 

Rail City Casino

 

Summary financial results and operating statistics are as follows (dollars in 000’s):

 

		Three Months Ended December 31,						Six Months Ended December 31,
		2002			2003			2002			2003
Revenues		$	5,178		$	5,866		$	10,301		$	11,247
Gross Margin		2,339			2,778			4,571			5,186
Selling, general and administrative		885			956			1,772			1,906
Depreciation and amortization		264			239			508			565
Operating income		$	1,190		$	1,583		$	2,291		$	2,715
Operating Statistics:
Average Number of Gaming Devices		545			580			545			575
Average Number of Table Games		8			7			8			7

 

Rail City Casino revenues increased 13% for the quarter and increased 9% for the year-to-date-period when compared to the prior year periods. The revenue improvement in the quarter at the Rail City Casino was attributable to a 6% increase in the average number of gaming machines and 12% increase in net win per day per gaming machine to $93.

 

The gross margin for Casino Operations as a percentage of revenues increased to 47% for the quarter from 45% in the prior year quarter. This increase was a result of decreases in certain operating costs. Cost of casino revenues includes gaming taxes, rental costs and direct labor including payroll taxes and benefits.

 

The overall selling, general and administrative expenses increased 8% over the prior year quarter, as a result of an increase in advertising and promotional expenses. Selling, general and administrative costs as a percentage of this business unit’s revenue decreased to 16% in the current quarter compared to 17% the prior year quarter. In accordance with generally accepted accounting principles, depreciation and amortization for these discontinued operation ceased as of December 8, 2003 as a result of their designation as assets held for sale. As a result, total depreciation expense decressed 9% over that recorded in the prior year quarter. Had depreciation and amortization expense been recorded for the current period, operating income for the discontinued operations would have decreased by $0.1 million compared to prior year quarter.

 

30

 

Route Operations

 

Summary financial results and operating statistics are as follows (dollars in 000’s):

 

		Three Months Ended December 31,						Six Months Ended December 31,
		2002			2003			2002			2003
Revenues
Nevada		$	49,727		$	54,127		$	100,874		$	104,396
Louisiana		3,594			4,186			7,284			7,890
Total revenues		53,321			58,313			108,158			112,286
Gross Margin
Nevada		7,432			8,319			15,328			15,923
Louisiana		1,207			1,421			2,428			2,628
Total gross margin		8,639			9,740			17,756			18,551
Selling, general and administrative		2,856			3,376			5,998			6,520
Depreciation and amortization		3,315			—			6,625			—
Operating income
Nevada		2,017			5,683			4,226			10,877
Louisiana		451			681			907			1,154
Total operating income		$	2,468		$	6,364		$	5,133		$	12,031
Operating Statistics:
Average Number of Gaming Devices
Nevada		8,130			8,425			8,235			8,130
Louisiana		710			745			710			730
Total Gaming Devices		8,840			9,170			8,945			8,860

 

Revenues from the Nevada route operations in the quarter increased 9% over the prior year quarter. This increase was attributable to a 4% increase in the average number of gaming machines for the quarter and an increase in the average net win per gaming machine per day of 4% to $68.80 from $65.85. Gamblers’ Bonus, a cardless players club and player tracking system, continued to have a favorable impact on the net win per day. As of December 31, 2003, the Gamblers’ Bonus product was installed in over 4,160 gaming machines at approximately 428 locations statewide or 50% of the installed base of gaming machines.

 

Revenues from route operations in Louisiana operations in the quarter increased 16% over the prior year quarter as the result of an 11% increase in the net win per gaming machine per day to $60.40 from $54.65 and a 5% increase the number of units deployed compared to prior year quarter.

 

For quarter ended December 31, 2003, the overall gross margin percentage for the Route Operations remained relatively constant at 16%. The overall selling, general and administrative expenses increased in the quarter 18% over the prior year quarter. Selling, general and administrative costs as a percentage of revenue remained at 6% compared to prior year quarter.

 

The results of the Nevada Route and Louisiana Route operations for the quarter and the six months ended December 31, 2002 include depreciation and amortization expense. In accordance with generally accepted accounting principles, depreciation and amortization for these discontinued operations ceased as of July 1, 2003 as a result of their designation as assets held for sale. Had depreciation and amortization expense been recorded for the current period, operating income for the discontinued operations would have decreased by $3.5 million to $2.9 million, an increase of 18% compared to prior year quarter.

 

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Parent Company and other unallocated income (expense)

 

Summary financial results (dollars in 000’s):

 

		Three Months Ended December 31,						Six Months Ended December 31,
		2002			2003			2002			2003
General and administrative		$	2,623		$	3,124		$	4,858		$	6,057
Depreciation and amortization		542			373			1,086			879
Total Parent company expense		$	3,165		$	3,497		$	5,944		$	6,936
Other income (expense):
Interest income		$	79		$	83		$	127		$	126
Interest expense		(6,554		)	(3,869		)	(13,195		)	(9,598		)
Minority interest		(309		)	(541		)	(754		)	(1,027		)
Refinancing charge		—			—			—			(12,293		)
Other, net		266			(545		)	366			(899		)
Total other expense		$	(6,518	)	$	(4,872	)	$	(13,456	)	$	(23,691	)
Income tax expense		$	6,147		$	8,444		$	9,956		$	9,710

 

The general and administrative expenses increased 19% over the prior year quarter. This increase was driven by higher corporate litigation and regulatory approval cost. Total depreciation expense decreased 31% for the quarter as a result of lower amortization expenses due to lower capitalized costs in the recent debt refinancing transaction.

 

Interest expense (net of interest income) for the current quarter totaled $3.8 million compared to $6.5 million in the prior year period. The lower interest expense in the current quarter reflects reduced interest rates post-refinancing.

 

For the six month ended December 31, 2003, reflect a $12.3 million refinancing charge recorded in the first quarter consisting primarily of a $5.0 million prepayment penalty for the redemption of our Subordinated Notes, a non-cash charge of $7.0 million to write off the deferred financing costs, and $0.3 million of fees and expenses. We recorded a tax benefit from these charges totaling approximately $4.8 million.

 

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 4% of domestic income.

 

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Results of Operations

 

The following table reconciles our earnings before interest, taxes, depreciation and amortization  (“EBITDA”) to our consolidated net income from continuing operations (in 000’s):

 

		Three Months Ended December 31,						Six Months Ended December 31,
		2002			2003			2002			2003
Net income from continuing operations		$	8,576		$	14,218		$	14,099		$	16,066
Income tax expense		6,147			8,444			9,956			9,710
Other expense, net		43			1,086			388			1,926
Interest expense, net		6,475			3,786			13,068			9,472
Refinancing charge		—			—			—			12,293
Operating income		21,241			27,534			37,511			49,467
Depreciation and amortization		4,847			6,445			9,153			12,467
EBITDA from continuing operations		$	26,088		$	33,979		$	46,664		$	61,934

 

The following tables reconcile operating income by business segment to EBITDA:

 

For the three months ended December 31, 2002 (from continuing operations) (in 000’s):

 

		Operating Income (Loss)			Depreciation and Amortization			EBITDA
Bally Gaming and Systems		$	21,775		$	3,777		$	25,552
Casino Operations		2,631			528			3,159
Corporate expenses		(3,165		)	542			(2,623		)
		$	21,241		$	4,847		$	26,088

 

For the three months ended December 31, 2003 (from continuing operations) (in 000’s):

 

		Operating Income (Loss)			Depreciation and Amortization			EBITDA
Bally Gaming and Systems		$	27,217		$	5,389		$	32,606
Casino Operations		3,814			683			4,497
Corporate expenses		(3,497		)	373			(3,124		)
		$	27,534		$	6,445		$	33,979

 

For the six months ended December 31, 2002 (from continuing operations) (in 000’s):

 

		Operating Income (Loss)			Depreciation and Amortization			EBITDA
Bally Gaming and Systems		$	36,910		$	7,041		$	43,951
Rainbow Casino		6,545			1,026			7,571
Corporate expenses		(5,944		)	1,086			(4,858		)
		$	37,511		$	9,153		$	46,664

 

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For the six months ended December 31, 2003 (from continuing operations) (in 000’s):

 

		Operating Income (Loss)			Depreciation and Amortization			EBITDA
Bally Gaming and Systems		$	48,575		$	10,217		$	58,792
Rainbow Casino		7,828			1,371			9,199
Corporate expenses		(6,936		)	879			(6,057		)
		$	49,467		$	12,467		$	61,934

 

The following table reconciles our earnings before interest, taxes, depreciation and amortization  (“EBITDA”) to our consolidated net income from our discontinued operations (in 000’s):

 

		Three Months Ended December 31,						Six Months Ended December 31,
		2002			2003			2002			2003
Net income from discontinued operations		$	3,277		$	4,526		$	4,012		$	8,706
Income tax expense		1,299			2,437			2,581			4,724
Other expense, net		(3		)	956			169			993
Interest (income) expense, net		(361		)	28			(599		)	323
Operating income		4,212			7,947			6,163			14,746
Depreciation and amortization		4,074			239			7,767			565
EBITDA from discontinued operations		$	8,286		$	8,186		$	13,930		$	15,311

 

For the three months ended December 31, 2002 (from discontinued operations) (in 000’s):

 

		Operating Income			Depreciation and Amortization			EBITDA
Route Operations		$	2,468		$	3,315		$	5,783
Wall Machines and Amusement Games		554			495			1,049
Rail City Casino		1,190			264			1,454
		$	4,212		$	4,074		$	8,286

 

For the three months ended December 31, 2003 (from discontinued operations) (in 000’s):

 

		Operating Income			Depreciation and Amortization			EBITDA
Route Operations		$	6,364		$	—		$	6,364
Rail City Casino		1,583			239			1,822
		$	7,947		$	239		$	8,186

 

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For the six months ended December 31, 2002 (from discontinued operations) (in 000’s):

 

		Operating Income (Loss)			Depreciation and Amortization			EBITDA
Route Operations		$	5,133		$	6,625		$	11,758
Wall Machines & Amusement Games		(1,261		)	634			(627		)
Rail City Casino		2,291			508			2,799
		$	6,163		$	7,767		$	13,930

 

For the six months ended December 31, 2003 (from discontinued operations) (in 000’s):

 

		Operating Income			Depreciation and Amortization			EBITDA
Route Operations		$	12,031		$	—		$	12,031
Rail City Casino		2,715			565			3,280
		$	14,746		$	565		$	15,311

 

We believe that the analysis of EBITDA is a useful adjunct to operating income, net income, cash flows and other GAAP-based measures. However, EBITDA should not be construed as an alternative to net income (loss) or cash flows from operating, investing and financing activities determined in accordance with GAAP or as a measure of liquidity. EBITDA is a common measure of performance in the gaming industry but may not be comparable to similarly titled measures reported by other companies. We disclose EBITDA primarily because it is a performance measure used by management in evaluating the performance of our business units and is one of several performance measures used in our management incentive plan.  Additionally, EBITDA is utilized as a performance measure in covenants for our bank credit agreement.

 

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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 less dollars. We do not currently utilize hedging instruments.

 

Market risks

 

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

 

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

 

The results of the sensitivity analysis at December 31, 2003, are as follows:

 

Interest Rate Risk:

 

As of December 2003, we had total debt of approximately $425.3 million, consisting primarily of the new $350 million term loan and the initial $70 million borrowing on the revolver. 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 $4.3 million on a pre-tax basis.

 

Foreign Currency Exchange Rate Risk:

 

Our foreign subsidiaries generally use their domestic currency as their functional currency. A 10% fluctuation in the exchange rates of these currencies against the U.S. dollar would result in a corresponding change in earnings reported in the consolidated group of approximately $137,000.

 

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ITEM 4.                  DISCLOSURE CONTROLS AND PROCEDURES

 

The Company’s management, including the Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of the design and operation of the company’s disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e) as described at the end of the period covered by this report.  Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that as of the end of the period covered by this report, the company’s disclosure controls and procedures were effective.  During the period covered by this report there have been no changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect the Company’s internal control over financial reporting.

 

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, 2003.

 

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

 

On December 3, 2003, the Company held its annual shareholders meeting at which the shareholders were asked to vote on the election of two directors and the approval of an amendment the Company’s Amended 2001 Long Term Incentive Plan (the “2001 Plan”) to increase the shares issuable under the 2001 Plan. Of the 49,933,687 shares of common stock outstanding, 40,796,307 shares were voted for and 2,097,152 withheld from Mr. Robert Miodunski and 36,202,328 shares were voted for and 6,691,131 withheld from Mr. David Robbins; and 27,228,492 shares were voted for and 7,916,948 shares against, 85,905 shares abstained and there were 7,662,114 broker non-votes, resulting in  the approval of the amendment to the 2001 Plan. Additionally, the shareholders ratified the Board of Director’s appointment of Deloitte & Touche LLP to act as independent public accountants of the Company for the fiscal year ending June 30, 2004.

 

ITEM 6.                  Exhibits and Reports on Form 8-K

 

a.             Exhibits

 

31.1		Certification of Chief Executive Officer, pursuant to Rule 15d-15(e) 4 of the Securities Act of 1934, as amended.
31.2		Certification of Chief Financial Officer, pursuant to Rule 15d-15(e) 4 of the Securities Act of 1934, as amended.
32.1		Certification of Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002.
32.2		Certification of Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002.

 

37

 

b.             Reports on Form 8-K

 

•		The Company filed a Form 8-K on October 15, 2003 announcing the financial results for the period ended September 30, 2003.
•		The Company filed a Form 8-K on November 11, 2003 announcing that the Company had signed a definitive agreement to acquire the privately held Sierra Design Group.

 

38

 

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: February 10, 2004
By	/s/ Robert L. Miodunski
	President and Chief Executive Officer
	(Principal Executive Officer)
By	/s/ Robert L. Saxton
	Executive Vice President, Chief Financial
	Officer and Treasurer (Principal
	Financial and Accounting Officer)

 

39