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 September 30, 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 October 31, 2003, according to the records of the registrant’s registrar and transfer agent was 50,248,000.

 

 



 

ALLIANCE GAMING CORPORATION

FORM 10-Q

 

For the Quarter Ended September 30, 2003

 

INDEX

 

PART I.

FINANCIAL INFORMATION

 

 

Item 1.

Unaudited Financial Statements

 

 

 

Unaudited Condensed Consolidated Balance Sheets as of June 30, 2003 and September 30, 2003

 

 

 

Unaudited Condensed Consolidated Statements of Operations for the three months ended September 30, 2002 and 2003

 

 

 

Unaudited Condensed Consolidated Statement of Stockholders’ Equity for the three months ended September 30, 2003

 

 

 

Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended September 30, 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 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

 

September 30,
2003

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

40,158

 

$

44,588

 

Accounts and notes receivable, net of allowance for doubtful accounts of $6,993 and $7,857

 

98,408

 

102,274

 

Inventories, net of reserves of $6,503 and $5,994

 

32,172

 

38,231

 

Deferred tax assets, net

 

44,821

 

45,854

 

Other current assets

 

8,516

 

8,978

 

Total current assets

 

224,075

 

239,925

 

 

 

 

 

 

 

Long-term investments (restricted)

 

864

 

2,585

 

Long-term receivables, net of allowance for doubtful accounts of $15 and $9

 

14,865

 

15,159

 

Leased gaming equipment, net of accumulated depreciation of $15,703 and $17,813

 

25,792

 

26,282

 

Property, plant and equipment, net of accumulated depreciation and amortization of $26,850 and $28,139

 

66,530

 

67,470

 

Goodwill, net of accumulated amortization of $6,620 and $6,620

 

64,794

 

64,540

 

Intangible assets, net of accumulated amortization of $12,267 and $6,840

 

26,890

 

25,631

 

Assets of discontinued operations held for sale

 

100,775

 

86,353

 

Other assets, net of reserves of $1,788 and $1,788

 

580

 

6,228

 

Total assets

 

$

525,165

 

$

534,173

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

22,912

 

$

25,502

 

Accrued liabilities

 

30,913

 

20,389

 

Jackpot liabilities

 

10,604

 

11,320

 

Current maturities of long-term debt

 

3,537

 

2,288

 

Liabilities of discontinued operations held for sale

 

13,494

 

12,060

 

Total current liabilities

 

81,460

 

71,559

 

Long-term debt, net

 

341,678

 

350,054

 

Deferred tax liabilities

 

5,680

 

6,957

 

Other liabilities

 

3,387

 

5,048

 

Minority interest

 

1,330

 

1,157

 

Total liabilities

 

433,535

 

434,775

 

 

 

 

 

 

 

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 50,165,000 shares issued

 

4,996

 

5,019

 

Treasury stock at cost, 513,000 shares

 

(501

)

(501

)

Additional paid-in capital

 

163,267

 

165,737

 

Accumulated other comprehensive income

 

1,287

 

534

 

Accumulated deficit

 

(77,431

)

(71,403

)

Total stockholders’ equity

 

91,630

 

99,398

 

Total liabilities and stockholders’ equity

 

$

525,165

 

$

534,173

 

 

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 September 30,

 

 

 

2002

 

2003

 

Revenues:

 

 

 

 

 

Gaming equipment and systems

 

$

63,539

 

$

88,468

 

Casino operations

 

17,790

 

18,136

 

 

 

81,329

 

106,604

 

Costs and expenses:

 

 

 

 

 

Cost of gaming equipment and systems

 

26,258

 

33,237

 

Cost of casino operations

 

8,188

 

7,976

 

Selling, general and administrative

 

20,987

 

30,015

 

Research and development costs

 

3,975

 

5,963

 

Depreciation and amortization

 

4,550

 

6,348

 

 

 

63,958

 

83,539

 

 

 

 

 

 

 

Operating income

 

17,371

 

23,065

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

Interest income

 

48

 

43

 

Interest expense

 

(6,641

)

(5,729

)

Minority interest

 

(445

)

(486

)

Refinancing charge

 

 

(12,293

)

Other, net

 

101

 

(351

)

 

 

 

 

 

 

Income from continuing operations before income taxes

 

10,434

 

4,249

 

Income tax expense

 

4,195

 

1,663

 

Net income from continuing operations

 

6,239

 

2,586

 

 

 

 

 

 

 

Discontinued operations:

 

 

 

 

 

Loss from discontinued operations of wall machines and amusement games business unit, net

 

(1,620

)

 

Income from discontinued operations of Nevada Route, net

 

1,364

 

3,132

 

Income from discontinued operations of Louisiana Route, net

 

275

 

310

 

Income from discontinued operations

 

19

 

3,442

 

Net income

 

$

6,258

 

$

6,028

 

 

 

 

 

 

 

Basic earnings per share:

 

 

 

 

 

Continuing operations

 

$

0.13

 

$

0.05

 

Discontinued operations

 

 

0.07

 

 

 

$

0.13

 

$

0.12

 

Diluted earnings per share:

 

 

 

 

 

Continuing operations

 

$

0.13

 

$

0.05

 

Discontinued operations

 

 

0.07

 

 

 

$

0.13

 

$

0.12

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

48,740

 

49,579

 

 

 

 

 

 

 

Weighted average common and common share equivalents outstanding

 

49,821

 

50,687

 

 

See notes to unaudited condensed consolidated financial statements.

 

4



 

ALLIANCE GAMING CORPORATION AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

Three Months Ended September 30, 2003

(In 000’s)

 

 

 






Common Stock

 

Series E
Special Stock

 

Treasury
Stock

 

Additional
Paid-in
Capital

 

Accumulated
Other
Comprehensive
Income (loss)

 

Accum.
Deficit

 

Total
Stock-
holders’
Equity

 

 

 

Shares

 

Dollars

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at June 30, 2003

 

49,933

 

$

4,996

 

$

12

 

$

(501

)

$

163,267

 

$

1,287

 

$

(77,431

)

$

91,630

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

6,028

 

6,028

 

Foreign currency translation adjustment

 

 

 

 

 

 

(753

)

 

(753

)

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5,275

 

Shares issued upon exercise of options

 

232

 

23

 

 

 

1,437

 

 

 

1,460

 

Tax benefit of employee stock option exercises

 

 

 

 

 

1,033

 

 

 

1,033

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at September 30, 2003

 

50,165

 

$

5,019

 

$

12

 

$

(501

)

$

165,737

 

$

534

 

$

(71,403

)

$

99,398

 

 

See notes to unaudited condensed consolidated financial statements.

 

5



 

ALLIANCE GAMING CORPORATION AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In 000’s)

 

 

Three Months Ended September 30,

 

 

 

2002

 

2003

 

Cash flows from operating activities of continuing operations:

 

 

 

 

 

Net income

 

$

6,258

 

$

6,028

 

Adjustments to reconcile net income to net cash provided by operating activities of continuing operations:

 

 

 

 

 

Income from discontinued operations

 

(19

)

(3,442

)

Depreciation and amortization

 

4,550

 

6,348

 

Refinancing charge

 

 

12,293

 

Deferred income taxes

 

3,802

 

1,277

 

Provision for losses on receivables

 

(278

)

938

 

Other

 

(47

)

(1,577

)

Change in operating assets and liabilities:

 

 

 

 

 

Accounts and notes receivable

 

(377

)

(5,564

)

Inventories

 

(2,854

)

(5,307

)

Other current assets

 

1,600

 

(466

)

Accounts payable

 

1,404

 

2,590

 

Accrued liabilities and jackpot liabilities

 

(6,730

)

(8,165

)

Net cash provided by operating activities of continuing operations

 

7,309

 

4,953

 

 

 

 

 

 

 

Cash flows from investing activities of continuing operations:

 

 

 

 

 

Additions to property, plant and equipment

 

(2,679

)

(2,400

)

Additions to leased gaming equipment

 

(4,750

)

(5,004

)

Additions to other long-term assets

 

(1,559

)

(6,399

)

Proceeds from sale of assets of discontinued operations

 

 

16,500

 

Net cash (used in) provided by investing activities of continuing operations

 

(8,988

)

2,697

 

 

 

 

 

 

 

Cash flows from financing activities of continuing operations:

 

 

 

 

 

Debt issuance costs

 

 

(5,686

)

Premium and consent fees paid on redemption of subordinated notes

 

 

(5,399

)

Proceeds from issuance of long-term debt

 

 

275,000

 

Net change in revolving credit facility

 

 

70,000

 

Payoff of debt from refinancing

 

 

(337,625

)

Reduction of long-term debt

 

(993

)

(879

)

Proceeds from exercise of stock options

 

575

 

1,460

 

Net cash used in financing activities of continuing operations

 

(418

)

(3,129

)

 

 

 

 

 

 

Effect of exchange rate changes on cash

 

2

 

(21

)

 

 

 

 

 

 

Cash and cash equivalents provided by (used in) discontinued operations

 

5,887

 

(70

)

 

 

 

 

 

 

Cash and cash equivalents:

 

 

 

 

 

Increase for period

 

3,792

 

4,430

 

Balance, beginning of period

 

33,240

 

40,158

 

Balance, end of period

 

$

37,032

 

$

44,588

 

 

See notes to unaudited condensed consolidated financial statements.

 

6



 

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.  These acquisitions reinforce the Company’s position as the leading system provider to the gaming industry.

 

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 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 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.

 

7



 

In accordance with industry practice, the Company recognize gaming revenues in it’s 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 recognize 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 constantly monitors its exposure for credit losses and maintains allowances for anticipated losses.

 

Recently issued accounting pronouncements

 

In May 2003, the FASB issued Statement of Financial Accounting Standard No. 150 “Accounting for Certain Financial Instruments With Characteristics of Both Liability and Equity” (“FASB No. 150”).  FASB No. 150 establishes standards for how companies classify and measure certain financial instruments with characteristics of both liabilities and equity.  In July 2003, the Company adopted FASB No. 150, and which did not have any significant impact on its results of operations or financial position.

 

In November 2002, the Emerging Issues Task Force (“EITF”) reached a consensus on Issue No. 00-21, Revenue Arrangements with Multiple Deliverables (“EITF 00-21”).  EITF 00-21 provides guidance on how to account for arrangements that involve the delivery or performance of multiple products, services and/or rights to use assets.  The provisions of EITF 00-21 were applied to revenue arrangements entered into after July 1, 2003.

 

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
September 30,

 

 

 

2002

 

2003

 

 

 

 

 

 

 

Net  income from continuing operations

 

$

6,239

 

$

2,586

 

Net income from discontinued operations

 

19

 

3,442

 

Net Income

 

$

6,258

 

$

6,028

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

48,740

 

49,579

 

Effect of dilutive securities

 

1,081

 

1,108

 

Weighted average common and common share equivalents outstanding

 

49,821

 

50,687

 

 

 

 

 

 

 

Earnings per basic share:

 

 

 

 

 

Income from continued operations

 

$

0.13

 

$

0.05

 

Income from discontinued operations

 

 

0.07

 

 

 

$

0.13

 

$

0.12

 

 

 

 

 

 

 

Earnings per diluted share:

 

 

 

 

 

Income from continued operations

 

$

0.13

 

$

0.05

 

Income  from discontinued operations

 

 

0.07

 

 

 

$

0.13

 

$

0.12

 

 

8



 

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
September 30,

 

 

 

2002

 

2003

 

 

 

 

 

 

 

Stock options

 

754

 

672

 

 

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 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 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
September 30,

 

 

 

2002

 

2003

 

Net income

 

 

 

 

 

As reported

 

6,258

 

$

6,028

 

Stock-based compensation under FASB No. 123

 

(736

)

(1,837

)

Pro forma net income

 

$

5,522

 

$

4,191

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

Basic – As reported

 

$

0.13

 

$

0.12

 

Basic – Pro forma

 

$

0.11

 

$

0.08

 

Diluted – As reported

 

$

0.13

 

$

0.12

 

Diluted – Pro forma

 

$

0.11

 

$

0.08

 

9



 

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
September 30,

 

 

 

2002

 

2003

 

 

 

 

 

 

 

Risk-fee interest rate

 

3.5

%

3.5

%

Expected volatility

 

0.28

 

0.26

 

Expected dividend yield

 

0

 

0

 

Expected life

 

3-10 years

 

3-10 years

 

 

The resulting fair values applied to the options granted were $2.27 and $3.09 per share for the three month periods ended September 30, 2002 and 2003, respectively.

 

3.                                      DISCONTINUED OPERATIONS

 

In July 2003 the Company announced it had entered into definitive sale 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) and is currently estimated at $127 million, consisting of $103 million in cash, $18 million in 10% Pay-In-Kind preferred stock and $6 million in assumed liabilities. 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 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.

 

As a result of the transactions described above, each of the three 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 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.

 

10



 

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

 

 

 

Three Months Ended
September 30,

 

 

 

2002

 

2003

 

 

 

 

 

 

 

Net revenues

 

$

65,403

 

$

53,973

 

Operating income

 

850

 

5,667

 

Income tax expense

 

897

 

1,890

 

Income from discontinued operations

 

$

19

 

$

3,442

 

 

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

 

 

 

June 30,
2003

 

Sept. 30
2003

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

27,644

 

$

27,787

 

Accounts and contracts receivable

 

21,587

 

4,374

 

Other current assets

 

4,624

 

4,435

 

Property, plant and equipment

 

23,680

 

27,227

 

Intangible assets

 

19,682

 

18,728

 

Other

 

3,558

 

3,802

 

Total assets

 

100,775

 

86,353

 

 

 

 

 

 

 

Current liabilities

 

9,221

 

7,646

 

Long-term liabilities

 

4,273

 

4,414

 

Total liabilities

 

13,494

 

12,060

 

Net assets of discontinued operations

 

$

87,281

 

$

74,293

 

 

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

 

September 30,
2003

 

 

 

 

 

 

 

Raw materials

 

$

13,720

 

$

17,620

 

Work-in-process

 

789

 

3,864

 

Finished goods

 

17,663

 

16,747

 

Total

 

$

32,172

 

$

38,231

 

 

11



 

5.                                      DEBT

 

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

 

 

 

June 30,
2003

 

September 30,
2003

 

 

 

 

 

 

 

Term Loan facility

 

$

187,625

 

$

275,000

 

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

 

7,342

 

 

 

345,215

 

352,342

 

Less current maturities

 

3,537

 

2,288

 

Long-term debt, less current maturities

 

$

341,678

 

$

350,054

 

 

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 (which can be increased by up to $75.0 million upon the consent of the bank group). 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 September 30, 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 September 30, 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.

 

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.

 

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 September 30, 2003, the Company is in compliance with these covenants.

 

12



 

6.                                      INCOME TAXES

 

The Company recognizes 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.

 

7.                                      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 two regional casinos. 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 and operating income by segment (in 000’s):

 

 

 

Three Months Ended
September 30,

 

 

 

2002

 

2003

 

Revenues:

 

 

 

 

 

Gaming Equipment and Systems

 

$

63,539

 

$

88,468

 

Casino Operations

 

17,790

 

18,136

 

Total revenues

 

$

81,329

 

$

106,604

 

 

 

 

 

 

 

Intersegment revenues:

 

 

 

 

 

Gaming Equipment and Systems

 

$

958

 

$

129

 

 

 

 

 

 

 

Operating income (loss):

 

 

 

 

 

Gaming Equipment and Systems

 

$

15,135

 

$

21,358

 

Casino Operations

 

5,015

 

5,146

 

Corporate/other

 

(2,779

)

(3,439

)

Total operating income

 

$

17,371

 

$

23,065

 

 

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

 

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

 

 

 

Three Months Ended
September 30,

 

 

 

2002

 

2003

 

Revenues:

 

 

 

 

 

United States

 

$

75,644

 

$

97,993

 

Germany

 

4,386

 

6,032

 

Other foreign

 

1,299

 

2,579

 

Total revenues

 

$

81,329

 

$

106,604

 

 

 

 

 

 

 

Operating income (loss):

 

 

 

 

 

United States

 

$

17,166

 

$

22,291

 

Germany

 

322

 

1,024

 

Other foreign

 

(117

)

(250

)

Total operating income

 

$

17,371

 

$

23,065

 

 

13



 

8.             SUPPLEMENTAL CASH FLOW INFORMATION

 

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

 

 

 

Three Months Ended
September 30,

 

 

 

2002

 

2003

 

 

 

 

 

 

 

Cash paid for interest

 

$

10,317

 

$

11,695

 

Cash paid for income taxes

 

486

 

1,239

 

 

 

 

 

 

 

Non-cash transactions:

 

 

 

 

 

Reclassify property, plant and equipment to inventory

 

$

283

 

$

799

 

(Favorable) unfavorable translation rate adjustment

 

(27

)

732

 

 

9.             COMMITMENTS AND CONTINGENCIES

 

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

 

10.          SUBSEQUENT EVENT

 

As of 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) 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 closing upon SDG achieving certain financial objectives. 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.

 

11.          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.

 

14



 

ALLIANCE GAMING CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

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

 

$

19,310

 

$

8,118

 

$

 

$

40,158

 

Accounts and notes receivable, net

 

738

 

70,920

 

27,496

 

(746

)

98,408

 

Inventories, net

 

 

29,871

 

2,518

 

(217

)

32,172

 

Deferred tax assets, net

 

33,182

 

11,639

 

 

 

44,821

 

Other current assets

 

404

 

7,616

 

496

 

 

8,516

 

Total current assets

 

47,054

 

139,356

 

38,628

 

(963

)

224,075

 

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

 

30,030

 

36,426

 

 

66,530

 

Goodwill, net

 

(900

)

50,047

 

15,647

 

 

64,794

 

Intangible assets, net

 

7,049

 

14,809

 

5,032

 

 

26,890

 

Investments in subsidiaries

 

296,273

 

74,990

 

 

(371,263

)

 

Deferred tax assets, net

 

1,634

 

 

 

(1,634

)

 

Assets of discontinued operations held for sale

 

16,539

 

80,133

 

4,103

 

 

100,775

 

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

 

$

19,693

 

$

1,924

 

$

 

$

22,912

 

Accrued liabilities

 

7,378

 

18,918

 

5,368

 

(751

)

30,913

 

Jackpot liabilities

 

 

10,462

 

142

 

 

10,604

 

Current maturities of long-term debt

 

2,395

 

1,124

 

18

 

 

3,537

 

Liabilities of discontinued operations held for sale

 

1,000

 

11,666

 

828

 

 

13,494

 

Total current liabilities

 

12,068

 

61,863

 

8,280

 

(751

)

81,460

 

Long term debt, net

 

335,388

 

166,013

 

 

(159,723

)

341,678

 

Deferred tax liabilites

 

 

5,679

 

1,635

 

(1,634

)

5,680

 

Other liabilities

 

2,624

 

753

 

10

 

 

3,387

 

Minority interest

 

1,330

 

 

 

 

1,330

 

Total liabilities

 

351,410

 

234,308

 

9,925

 

(162,108

)

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

)

104,527

 

39,281

 

(143,808

)

(77,431

)

Total stockholders’ equity

 

91,630

 

296,744

 

74,990

 

(371,734

)

91,630

 

 

 

$

443,040

 

$

531,052

 

$

84,915

 

$

(533,842

)

$

525,165

 

 

See accompanying unaudited note.

 

15



 

UNAUDITED CONSOLIDATING BALANCE SHEETS

September 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

 

$

15,305

 

$

20,434

 

$

8,849

 

$

 

$

44,588

 

Accounts and notes receivable, net

 

804

 

77,847

 

24,502

 

(879

)

102,274

 

Inventories, net

 

 

36,017

 

2,549

 

(335

)

38,231

 

Deferred tax assets, net

 

34,216

 

11,638

 

 

 

45,854

 

Other current assets

 

751

 

7,731

 

496

 

 

8,978

 

Total current assets

 

51,076

 

153,667

 

36,396

 

(1,214

)

239,925

 

Long-term investments (restricted)

 

 

2,585

 

 

 

2,585

 

Long-term receivables, net

 

164,255

 

13,906

 

13

 

(163,015

)

15,159

 

Leased gaming equipment, net

 

 

26,282

 

 

 

26,282

 

Property, plant and equipment, net

 

71

 

31,668

 

35,731

 

 

67,470

 

Goodwill, net

 

(900

)

50,048

 

15,392

 

 

64,540

 

Intangible assets, net

 

5,679

 

15,042

 

4,910

 

 

25,631

 

Investments in subsidiaries

 

316,617

 

73,886

 

 

(390,503

)

 

Deferred tax assets, net

 

358

 

 

 

(358

)

 

Assets of discontinued operations held for sale

 

39

 

82,724

 

3,590

 

 

86,353

 

Other assets, net

 

(88,211

)

107,180

 

(12,728

)

(13

)

6,228

 

 

 

$

448,984

 

$

556,988

 

$

83,304

 

$

(555,103

)

$

534,173

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

755

 

$

22,975

 

$

1,772

 

$

 

$

25,502

 

Accrued liabilities

 

(95

)

16,347

 

5,040

 

(903

)

20,389

 

Jackpot liabilities

 

 

11,154

 

166

 

 

11,320

 

Current maturities of long-term debt

 

688

 

1,591

 

9

 

 

2,288

 

Liabilities of discontinued operations held for sale

 

144

 

11,117

 

799

 

 

12,060

 

Total current liabilities

 

1,492

 

63,184

 

7,786

 

(903

)

71,559

 

Long term debt, net

 

344,313

 

168,496

 

 

(162,755

)

350,054

 

Deferred tax liabilites

 

 

5,680

 

1,635

 

(358

)

6,957

 

Other liabilities

 

2,624

 

2,424

 

 

 

5,048

 

Minority interest

 

1,157

 

 

 

 

1,157

 

Total liabilities

 

349,586

 

239,784

 

9,421

 

(164,016

)

434,775

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

 

 

 

Special Stock Series E

 

12

 

 

 

 

12

 

Common Stock

 

5,019

 

478

 

1,027

 

(1,505

)

5,019

 

Treasury stock

 

(501

)

 

 

 

(501

)

Additional paid-in capital

 

165,737

 

190,449

 

33,415

 

(223,864

)

165,737

 

Accumulated other comprehensive income (loss)

 

534

 

537

 

514

 

(1,051

)

534

 

Retained earnings (accumulated deficit)

 

(71,403

)

125,740

 

38,927

 

(164,667

)

(71,403

)

Total stockholders’ equity

 

99,398

 

317,204

 

73,883

 

(391,087

)

99,398

 

 

 

$

448,984

 

$

556,988

 

$

83,304

 

$

(555,103

)

$

534,173

 

 

See accompanying unaudited note.

 

16



 

UNAUDITED CONSOLIDATING STATEMENTS OF OPERATIONS

Three months ended September 30, 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

 

$

 

$

62,910

 

$

5,701

 

$

(5,072

)

$

63,539

 

Casino operations

 

 

5,712

 

14,245

 

(2,167

)

17,790

 

 

 

 

68,622

 

19,946

 

(7,239

)

81,329

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

Cost of gaming equipment and systems

 

 

27,803

 

3,511

 

(5,056

)

26,258

 

Cost of casino operations

 

 

2,891

 

5,297

 

 

8,188

 

Selling, general and administrative

 

2,235

 

15,213

 

5,722

 

(2,183

)

20,987

 

Research and development costs

 

 

3,183

 

792

 

 

3,975

 

Depreciation and amortization

 

544

 

3,501

 

505

 

 

4,550

 

 

 

2,779

 

52,591

 

15,827

 

(7,239

)

63,958

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income (loss)

 

(2,779

)

16,031

 

4,119

 

 

17,371

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings in consolidated subsidiaries

 

15,064

 

2,445

 

 

(17,509

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

3,066

 

 

14

 

(3,032

)

48

 

Interest expense

 

(6,618

)

(3,035

)

(20

)

3,032

 

(6,641

)

Rainbow royalty

 

1,586

 

 

(1,586

)

 

 

Minority interest

 

(445

)

 

 

 

(445

)

Other, net

 

101

 

82

 

(82

)

 

101

 

Income (loss) from continuing operations before income taxes

 

9,975

 

15,523

 

2,445

 

(17,509

)

10,434

 

Income tax expense

 

3,736

 

459

 

 

 

4,195

 

Net income (loss) from continuing operations

 

6,239

 

15,064

 

2,445

 

(17,509

)

6,239

 

 

 

 

 

 

 

 

 

 

 

 

 

Discontinued Operations:

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from discontinued operations of wall machines and amusement games business unit, net

 

233

 

 

(1,853

)

 

(1,620

)

Income from disc. ops. of Nevada Route, net

 

 

1,364

 

 

 

1,364

 

Income from disc. ops. of Louisiana Route, net

 

 

 

275

 

 

275

 

Earnings from consolidated discontinued operations

 

(214

)

 

 

214

 

 

Income (loss) from discontinued operations

 

19

 

1,364

 

(1,578

)

214

 

19

 

Net income (loss)

 

$

6,258

 

$

16,428

 

$

867

 

$

(17,295

)

$

6,258

 

 

See accompanying unaudited note.

 

17



 

UNAUDITED CONSOLIDATING STATEMENTS OF OPERATIONS

Three months ended September 30, 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

 

$

 

$

85,009

 

$

8,612

 

$

(5,153

)

$

88,468

 

Casino operations

 

 

6,039

 

14,239

 

(2,142

)

18,136

 

 

 

 

91,048

 

22,851

 

(7,295

)

106,604

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

Cost of gaming equipment and systems

 

 

32,688

 

5,585

 

(5,036

)

33,237

 

Cost of casino operations

 

 

2,973

 

5,003

 

 

7,976

 

Selling, general and administrative

 

2,933

 

22,820

 

6,404

 

(2,142

)

30,015

 

Research and development costs

 

 

5,741

 

222

 

 

5,963

 

Depreciation and amortization

 

506

 

4,995

 

847

 

 

6,348

 

 

 

3,439

 

69,217

 

18,061

 

(7,178

)

83,539

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income (loss)

 

(3,439

)

21,831

 

4,790

 

(117

)

23,065

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings in consolidated subsidiaries

 

20,887

 

2,569

 

 

(23,456

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

3,070

 

 

5

 

(3,032

)

43

 

Interest expense

 

(5,661

)

(3,084

)

(16

)

3,032

 

(5,729

)

Rainbow royalty

 

1,593

 

 

(1,593

)

 

 

Minority interest

 

(486

)

 

 

 

(486

)

Refinancing charge

 

(12,293

)

 

 

 

(12,293

)

Other, net

 

109

 

(194

)

(266

)

 

(351

)

Income (loss) from continuing operations before income taxes

 

3,780

 

21,122

 

2,920

 

(23,573

)

4,249

 

Income tax expense

 

1,194

 

118

 

351

 

 

1,663

 

Net income (loss) from continuing operations

 

2,586

 

21,004

 

2,569

 

(23,573

)

2,586

 

 

 

 

 

 

 

 

 

 

 

 

 

Discontinued Operations:

 

 

 

 

 

 

 

 

 

 

 

Income from disc. ops. of Nevada Route, net

 

 

3,132

 

 

 

3,132

 

Income from disc. ops. of Louisiana Route, net

 

 

 

310

 

 

310

 

Earnings from consolidated discontinued operations

 

3,442

 

310

 

 

(3,752

)

 

Income (loss) from discontinued operations

 

3,442

 

3,442

 

310

 

(3,752

)

3,442

 

Net income (loss)

 

$

6,028

 

$

24,446

 

$

2,879

 

$

(27,325

)

$

6,028

 

 

See accompanying unaudited note.

 

18



 

UNAUDITED CONSOLIDATING STATEMENTS OF CASH FLOWS

Three Months Ended September 30, 2002

(000’s)

 

 

 

Parent

 

Guaranteeing
Subsidiaries

 

Non-
Guaranteeing
Subsidiaries

 

Reclas-
sifications
and
Elimina-
tions

 

Alliance
Gaming
Corporation
and
Subsidiaries

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

6,258

 

$

16,428

 

$

867

 

$

(17,295

)

$

6,258

 

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

 

 

 

 

 

 

 

 

 

 

 

(Income) loss from discontinued operations

 

(19

)

(1,364

)

1,578

 

(214

)

(19

)

Depreciation and amortization

 

544

 

3,501

 

505

 

 

4,550

 

Deferred income taxes

 

3,800

 

2

 

 

 

3,802

 

Provision for losses on receivables

 

 

(284

)

6

 

 

(278

)

Other

 

(113

)

66

 

 

 

(47

)

Change in operating assets and liabilities:

 

 

 

 

 

 

 

 

 

 

 

Accounts and notes receivable

 

(326

)

(1,246

)

1,099

 

96

 

(377

)

Intercompany accounts

 

4,432

 

(22,886

)

904

 

17,550

 

 

Inventories

 

 

(2,557

)

(297

)

 

(2,854

)

Other current assets

 

(319

)

1,838

 

81

 

 

1,600

 

Accounts payable

 

724

 

521

 

159

 

 

1,404

 

Accrued liabilities and jackpot liabilities

 

(7,103

)

542

 

(68

)

(101

)

(6,730

)

Net cash provided by (used in) operating activities

 

7,878

 

(5,439

)

4,834

 

36

 

7,309

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

 

 

 

Additions to property, plant and equipment

 

 

(1,489

)

(1,190

)

 

(2,679

)

Additions to leased gaming equipment

 

 

(4,750

)

 

 

(4,750

)

Additions to other long-term assets

 

 

(1,558

)

(1

)

 

(1,559

)

Net cash used in investing activities

 

 

(7,797

)

(1,191

)

 

(8,988

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

 

 

 

Reduction of long-term debt

 

(975

)

(15

)

(3

)

 

(993

)

Bally Austria APIC

 

 

 

36

 

(36

)

 

Net change in revolving credit facility

 

 

 

 

 

 

Proceeds from exercise of stock options

 

575

 

 

 

 

575

 

Dividends received (paid)

 

 

344

 

(344

)

 

 

Net cash provided by (used in) financing activities

 

(400

)

329

 

(311

)

(36

)

(418

)

Effect of exchange rate changes on cash

 

 

 

2

 

 

2

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents provided by (used in) discontinued operations

 

 

5,648

 

239

 

 

5,887

 

 

 

 

 

 

 

 

 

 

 

 

 

Increase (decrease) for the period

 

7,478

 

(7,259

)

3,573

 

 

3,792

 

Balance, beginning of period

 

8,121

 

18,854

 

6,265

 

 

33,240

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, end of period

 

$

15,599

 

$

11,595

 

$

9,838

 

$

 

$

37,032

 

 

See accompanying unaudited note.

 

19



 

UNAUDITED CONSOLIDATING STATEMENTS OF CASH FLOWS

Three Months Ended September 30, 2003

(000’s)

 

 

 

Parent

 

Guaranteeing
Subsidiaries

 

Non-
Guaranteeing
Subsidiaries

 

Reclas-
sifications
and
Elimina-
tions

 

Alliance
Gaming
Corporation
and
Subsidiaries

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

6,028

 

$

24,446

 

$

2,879

 

$

(27,325

)

$

6,028

 

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

 

 

 

 

 

 

 

 

 

 

 

(Income) loss from discontinued operations

 

(3,442

)

(3,442

)

(310

)

3,752

 

(3,442

)

Refinancing charge

 

12,293

 

 

 

 

12,293

 

Depreciation and amortization

 

506

 

4,995

 

847

 

 

6,348

 

Deferred income taxes

 

1,275

 

2

 

 

 

1,277

 

Provision for losses on receivables

 

 

920

 

18

 

 

938

 

Other

 

(159

)

(1,424

)

6

 

 

(1,577

)

Change in operating assets and liabilities:

 

 

 

 

 

 

 

 

 

 

 

Accounts and notes receivable

 

(1,566

)

(6,641

)

2,510

 

133

 

(5,564

)

Intercompany accounts

 

(11,259

)

(10,010

)

(2,205

)

23,474

 

 

Inventories

 

 

(5,347

)

(78

)

118

 

(5,307

)

Other current assets

 

(347

)

(115

)

(4

)

 

(466

)

Accounts payable

 

(540

)

3,282

 

(152

)

 

2,590

 

Accrued liabilities and jackpot liabilities

 

(8,329

)

648

 

(332

)

(152

)

(8,165

)

Net cash provided by (used in) operating activities

 

(5,540

)

7,314

 

3,179

 

 

4,953

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

 

 

 

Additions to property, plant and equipment

 

(7

)

(2,287

)

(106

)

 

(2,400

)

Additions to leased gaming equipment

 

 

(5,004

)

 

 

(5,004

)

Proceeds from sale of assets of discontinued operations

 

16,500

 

 

 

 

16,500

 

Additions to other long-term assets

 

(5,633

)

(893

)

127

 

 

(6,399

)

Net cash provided by (used in) investing activities

 

10,860

 

(8,184

)

21

 

 

2,697

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

 

 

 

Debt issuance costs

 

(5,686

)

 

 

 

(5,686

)

Proceeds from issuance of long-term debt

 

275,000

 

 

 

 

275,000

 

Payoff of debt from refinancing

 

(337,625

)

 

 

 

(337,625

)

Reduction of long-term debt

 

(495

)

(375

)

(9

)

 

(879

)

Net change in revolving credit facility

 

70,000

 

 

 

 

70,000

 

Premium and consents fees paid on redemption of subordinated notes

 

(5,399

)

 

 

 

(5,399

)

Proceeds from exercise of stock options

 

1,460

 

 

 

 

1,460

 

Dividends received (paid)

 

 

3,233

 

(3,233

)

 

 

Net cash provided by (used in) financing activities

 

(2,745

)

2,858

 

(3,242

)

 

(3,129

)

Effect of exchange rate changes on cash

 

 

 

(21

)

 

(21

)

Cash and cash equivalents provided by (used in) discontinued operations

 

 

(864

)

794

 

 

(70

)

Increase (decrease) for the period

 

2,575

 

1,124

 

731

 

 

4,430

 

Balance, beginning of period

 

12,730

 

19,310

 

8,118

 

 

40,158

 

Balance, end of period

 

$

15,305

 

$

20,434

 

$

8,849

 

$

 

$

44,588

 

 

See accompanying unaudited note.

 

20



 

Debt and Revolving Credit Facility

 

Long-term debt and lines of credit at June 30, 2003 consisted 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, less current maturities

 

$

335,388

 

$

166,013

 

$

 

$

(159,723

)

$

341,678

 

 

 

Long-term debt and lines of credit at September 30, 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

 

$

275,000

 

$

 

$

 

$

 

$

275,000

 

Revolving credit facility

 

70,000

 

 

 

 

70,000

 

Intercompany notes payable

 

 

162,755

 

 

(162,755

)

 

Other

 

1

 

7,332

 

9

 

 

7,342

 

 

 

345,001

 

170,087

 

9

 

(162,755

)

352,342

 

Less current maturities

 

688

 

1,591

 

9

 

 

2,288

 

Long-term debt, less current maturities

 

$

344,313

 

$

168,496

 

$

 

$

(162,755

)

$

350,054

 

 

21



 

ALLIANCE GAMING CORPORATION

FORM 10-Q

 

September 30, 2003

 

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

 

Liquidity and Capital Resources

 

As of September 30, 2003, we had $44.6 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 $180.4 million at September 30, 2003, compared to $156.1 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 September 30, 2003 includes approximately $3.7 million of cash which is utilized in Casino Operations held in vaults, cages or change banks, as well as $13.4 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 are held 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 September 30, 2003, we had no material commitments for capital expenditures.

 

As of 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) 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 closing upon SDG achieving certain financial objectives. 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. This acquisition reinforces the Company’s position as the leading gaming provider to the gaming industry.

 

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.

 

Cash Flow

 

During the three months ended September 30, 2003, we generated $5.0 million of cash flows from operating activities, was down compared to $7.3 million in the prior year period.

 

During the three months ended September 30, 2003, cash flow from investing activities 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 capital expenditures totaling $2.4 million, and costs incurred to produce participation games totaling $5.0 million.

 

During the three months ended September 30, 2003, we used $3.1 million of cash in financing activities resulting from $345.0 million proceeds from issuance of long-term debt and $1.5 million of cash provided from the exercise of stock options, offset by $337.6 million payoff of debt from refinancing, $5.7 of refinancing cost, $5.4 million of premium paid on early redemption of the subordinated notes bonds and principal payments on long-term debt totaling $0.9 million.

 

22



 

Results of Operations for each Business Unit:

 

Bally Gaming and Systems

 

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

 

 

 

Three Months Ended September 30,

 

 

 

2002

 

2003

 

Revenues

 

 

 

 

 

Game sales

 

$

33,783

 

$

42,741

 

System sales

 

15,275

 

29,984

 

Gaming operations

 

14,481

 

15,743

 

Total revenues

 

63,539

 

88,468

 

 

 

 

 

 

 

Gross Margin

 

 

 

 

 

Game sales

 

15,925

 

19,608

 

System sales

 

11,933

 

23,864

 

Gaming operations

 

9,423

 

11,759

 

Total gross margin

 

37,281

 

55,231

 

 

 

 

 

 

 

Selling, general and administrative

 

14,907

 

23,082

 

Research and development costs

 

3,975

 

5,963

 

Depreciation and amortization

 

3,264

 

4,828

 

 

 

 

 

 

 

Operating income

 

$

15,135

 

$

21,358

 

 

 

 

 

 

 

Operating Statistics:

 

 

 

 

 

New Gaming Devices Sold

 

4,000

 

5,200

 

Game Monitoring Units Sold

 

6,100

 

11,360

 

WAP and daily-fee games

 

 

 

 

 

End of period installed base

 

3,780

 

4,790

 

Average installed base

 

3,695

 

4,670

 

 

Our Bally Gaming and Systems business unit reported an overall increase in revenues of 39% over the prior year’s quarter. Bally game sales division reported an increase in revenues of 27% for the quarter. New units sold increased 30% to 5,200 and the average new-unit selling price (excluding OEM games) increased 6% for the quarter to $8,400. Bally Systems revenues increased 96% over the prior year quarter driven by a 85% increase in game monitoring units shipped to 11,360, a 36% increase in the average selling price per unit to $1,800, and increased sales of software licenses for the single-wire TITO solution, eTICKET™, as well as its bonusing and promotions software. Bally Systems recurring hardware and software revenues increased to $4.9 million for the quarter, resulting from the larger base of installed systems, which now stands at approximately 240,000 and an increase in the Bally eSeries installed cashless software. Gaming Operations revenues increased 9% compared to the prior year quarter as a result of a 27% increase in the end of period installed base of wide-area progressive (WAP) and daily-fee games deployed, which now total 1,980 and 2,810, respectively. The current quarter placements included the continued roll out of the “Cash for Life” WAP game which went live in July in Atlantic City, and continued placement of daily fee games such as Playboy and the recently introduced Saturday Night Live series.

 

23



 

For the quarter ended September 30, 2003, the overall gross margin percentage for Bally Gaming and Systems increased to 62% compared to 59% in the prior year quarter, this improvement is primarily a result of an increase in higher margin systems revenues.

 

Selling, general and administrative expenses increased 54% over the prior year quarter, as a result of the additional headcount added from acquisitions.  In addition, increased submissions of our products to certain gaming jurisdictions for approval prior to commercialization resulted in an increase in regulatory expenses.  Selling, general and administrative costs as a percentage of this business unit’s revenue increased to 26% in the current year quarter compared to 23% for the prior year quarter. Research and development costs increased 50% for the quarter, resulting from the increase in hardware and software engineers added during the current quarter. Total depreciation expense increased 48% over the prior year quarter, driven by the increase in the installed base of wide-area progressive and daily fee games.

 

Casino Operations

 

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

 

 

 

Three Months Ended September 30,

 

 

 

2002

 

2003

 

 

 

 

 

 

 

Revenues

 

 

 

 

 

Rainbow Casino

 

$

12,667

 

$

12,755

 

Rail City Casino

 

5,123

 

5,381

 

Total revenues

 

17,790

 

18,136

 

Gross Margin

 

 

 

 

 

Rainbow Casino

 

7,370

 

7,752

 

Rail City Casino

 

2,232

 

2,408

 

Total gross margin

 

9,602

 

10,160

 

 

 

 

 

 

 

Selling, general and administrative

 

3,845

 

4,000

 

Depreciation and amortization

 

742

 

1,014

 

 

 

 

 

 

 

Operating income

 

 

 

 

 

Rainbow Casino

 

3,914

 

4,014

 

Rail City Casino

 

1,101

 

1,132

 

Total operating income

 

$

5,015

 

$

5,146

 

 

 

 

 

 

 

Operating Statistics:

 

 

 

 

 

Average Number of Gaming Devices

 

 

 

 

 

Rainbow Casino

 

980

 

905

 

Rail City Casino

 

540

 

570

 

Total Gaming Devices

 

1,520

 

1,475

 

Average Number of Table Games

 

24

 

19

 

 

Rainbow Casino revenues increased 1% over the prior year quarter, as a result of a 10% increase in net win per day per gaming machine to $148 offset by 7% decrease in the average number of gaming machines. Rail City Casino reported an increase in revenues of 5% for the quarter. The revenue improvement at the Rail City Casino was attributable to a 5% increase in the average number of gaming machines and 3% increase in net win per day per gaming machine to $86.

 

24



 

The gross margin for Casino Operations as a percentage of revenues increased to 56% for the 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 4% 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 revenue remained constant compared to prior year quarter. Total depreciation expense increased 37% over the prior year quarter as a result of the additional capital improvements made to the Rainbow Casino in the prior year.

 

Discontinued Operations

 

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

 

Route Operations

 

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

 

 

 

Three Months Ended September 30,

 

 

 

2002

 

2003

 

Revenues

 

 

 

 

 

Nevada

 

$

51,147

 

$

50,269

 

Louisiana

 

3,690

 

3,704

 

Total revenues

 

54,837

 

53,973

 

 

 

 

 

 

 

Gross Margin

 

 

 

 

 

Nevada

 

7,896

 

7,604

 

Louisiana

 

1,221

 

1,207

 

Total gross margin

 

9,117

 

8,811

 

 

 

 

 

 

 

Selling, general and administrative

 

3,142

 

3,144

 

Depreciation and amortization

 

3,310

 

 

 

 

 

 

 

 

Operating income

 

 

 

 

 

Nevada

 

2,209

 

5,194

 

Louisiana

 

456

 

473

 

Total operating income

 

$

2,665

 

$

5,667

 

 

 

 

 

 

 

Operating Statistics:

 

 

 

 

 

Average Number of Gaming Devices

 

 

 

 

 

Nevada

 

8,340

 

7,840

 

Louisiana

 

710

 

715

 

Total Gaming Devices

 

9,050

 

8,555

 

 

Revenues from the Nevada route operations decreased 2% over the prior year quarter. This decrease was attributable to a 6% decrease in the average number of gaming machines for the quarter, offset by an increase in the average net win per gaming machine per day of 3% to $68.55 from $66.60. Late in the quarter, the Nevada Route operations entered into an agreement to operate 750 games at a third party owned Las Vegas casino, and the full effect of the revenues and income will be realized in the coming quarter.  Gamblers’ Bonus, a cardless players club and player tracking system, continued to have a favorable impact

 

25



 

on the net win per day. As of September 30, 2003, the Gamblers’ Bonus product was installed in over 4,190 gaming machines at approximately 419 locations statewide or 55% of the installed base of gaming machines.

 

Revenues from route operations in Louisiana remained constant primarily as the result of a 1% decrease in the net win per gaming machine per day to $55.90 from $56.65 and the number of units deployed remained relatively flat compared to prior year quarter.

 

For quarter ended September 30, 2003, the overall gross margin percentage for the Route Operations remained constant.

 

The overall selling, general and administrative expenses remained constant compared to 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 ended September 30, 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 $3.8 million, an increase of 14% compared to prior year quarter.

 

Parent Company and other unallocated  income (expense)

 

Summary financial results (dollars in 000’s):

 

 

 

Three Months Ended September 30,

 

 

 

2002

 

2003

 

 

 

 

 

 

 

General and administrative

 

$

2,235

 

$

2,933

 

Depreciation and amortization

 

544

 

506

 

Total Parent company expense

 

$

2,779

 

$

3,439

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

Interest income

 

$

48

 

$

43

 

Interest expense

 

(6,641

)

(5,729

)

Minority interest

 

(445

)

(486

)

Refinancing charges

 

 

(12,293

)

Other, net

 

101

 

(351

)

Total other expense

 

$

(6,937

)

$

(18,816

)

 

 

 

 

 

 

Income tax expense

 

$

4,195

 

$

1,663

 

 

The general and administrative expenses increased 31% over the prior year quarter. This increase was driven by higher corporate litigation cost and higher accruals for certain elements of our incentive based compensation plan. Total depreciation expense decreased 7% for the quarter.

 

Interest expense (net of interest income) for the current quarter totaled $5.7 million compared to $6.6 million in the prior year period. The current quarter lower interest expense reflects only 25 days of interest post-refinancing.

 

We recorded a $12.3 million refinancing charge in the current 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

 

26



 

financing costs, and $0.3 million of fees and expenses. We recorded a tax benefit from these charges totaling approximately $4.8 million.

 

Management has considered certain tax planning strategies as permitted by Statement of Financial Accounting Standards No. 109 “Accounting for Income Taxes” (“FASB No. 109”).

 

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.

 

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 September 30,

 

 

 

2002

 

2003

 

 

 

 

 

 

 

Net income from continuing operations

 

$

6,239

 

$

2,586

 

Income tax expense

 

4,195

 

1,663

 

Other expense, net

 

344

 

837

 

Interest expense, net

 

6,593

 

5,686

 

Refinancing charge

 

 

12,293

 

Operating income

 

17,371

 

23,065

 

Depreciation and amortization

 

4,550

 

6,348

 

EBITDA from continuing operations

 

$

21,921

 

$

29,413

 

 

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

 

For the three months ended September 30, 2003 (from continuing operations) (in 000’s):

 

 

 

Operating
Income
(Loss)

 

Depreciation
and
Amortization

 

EBITDA

 

 

 

 

 

 

 

 

 

Bally Gaming and Systems

 

$

21,358

 

$

4,828

 

$

26,186

 

Casino Operations

 

5,146

 

1,014

 

6,160

 

Corporate expenses

 

(3,439

)

506

 

(2,933

)

 

 

$

23,065

 

$

6,348

 

$

29,413

 

 

For the three months ended September 30, 2002 (from continuing operations) (in 000’s):

 

 

 

Operating
Income
(Loss)

 

Depreciation
and
Amortization

 

EBITDA

 

 

 

 

 

 

 

 

 

Bally Gaming and Systems

 

$

15,135

 

$

3,264

 

$

18,399

 

Casino Operations

 

5,015

 

742

 

5,757

 

Corporate expenses

 

(2,779

)

544

 

(2,235

)

 

 

$

17,371

 

$

4,550

 

$

21,921

 

 

27



 

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 September 30,

 

 

 

2002

 

2003

 

 

 

 

 

 

 

Net income from discontinued operations

 

$

19

 

$

3,442

 

Income tax expense

 

897

 

1,890

 

Other expense

 

172

 

40

 

Interest (income) expense, net

 

(238

)

295

 

Operating income

 

850

 

5,667

 

Depreciation and amortization

 

3,449

 

 

EBITDA from discontinued operations

 

$

4,299

 

$

5,667

 

 

For the three months ended September 30, 2003 (from discontinued operations) (in 000’s):

 

 

 

Operating
Income

 

Depreciation
and
Amortization

 

EBITDA

 

 

 

 

 

 

 

 

 

Route Operations

 

$

5,667

 

$

 

$

5,667

 

 

For the three months ended September 30, 2002 (from discontinued operations) (in 000’s):

 

 

 

Operating
Income
(Loss)

 

Depreciation
and
Amortization

 

EBITDA

 

 

 

 

 

 

 

 

 

Route Operations

 

$

2,665

 

$

3,310

 

$

5,975

 

Wall Machines and Amusement Games

 

(1,815

)

139

 

(1,676

)

 

 

$

850

 

$

3,449

 

$

4,299

 

 

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.

 

28



 

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 September 30, 2003, are as follows:

 

Interest Rate Risk:

 

Upon completion of the Refinancing in September 2003, we had total debt of approximately $352.3 million, consisting primarily of the new $275 million term loan and the initial $70 million borrowing on the revolver. The bank facility 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 $3.6 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 $78,000.

 

29



 

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 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.

 

b.                                      Reports on Form 8-K

 

 

The Company filed a Form 8-K on July 2, 2003 announcing the definitive agreement for significant divestitures of non-core assets.

 

The Company filed a Form 8-K on July 18, 2003 announcing the completion of the sale of Bally Wulff 100% of the stock of its wholly-owned subsidiary and received the sale proceeds of $16.5 million.

 

The Company filed a Form 8-K on August 4, 2003, its press release for the financial results for the period ended June 30, 2003.

 

The Company filed a Form 8-K on August 13, 2003 announcing the tender offer and consent solicitation for the $150,000,00 aggregate principal amount of its 10% Senior Subordinated Notes due 2007.

 

The Company filed a Form 8-K on September 11, 2003 announcing the closing of the tender offer and consent solicitation for the $150,000,00 and the funding of a new $400 million bank loan.

 

30



 

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

Date: November 11, 2003

(Registrant)

 

 

 

 

 

 

 

By

/s/ Robert L. Miodunski

 

 

 

President and Chief Executive Officer

 

 

(Principal Executive Officer)

 

 

 

 

 

 

 

By

/s/ Robert L. Saxton

 

 

 

Sr. Vice President, Chief Financial

 

 

Officer and Treasurer (Principal

 

 

Financial  and Accounting Officer)

 

 

31