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)

 

 

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):

 

 

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):

 

 

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):

 

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:

 

 

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):

 

 

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

 

 

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):

 

 

11

 

5.                                      DEBT

 

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

 

 

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):

 

 

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):

 

 

13

 

8.             SUPPLEMENTAL CASH FLOW INFORMATION

 

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

 

 

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: