UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

 

 

Commission File Number 0-4281

 

ALLIANCE GAMING CORPORATION

(Exact name of registrant as specified in its charter)

 

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12B-2 of the Exchange Act).  Yes    ý    Noo  

 

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 May 3, 2004, according to the records of the registrant’s registrar and transfer agent was 51,422,947.

 

 

ALLIANCE GAMING CORPORATION

FORM 10-Q

 

For the Quarter Ended March 31, 2004

 

I N D E X

 

PART I.			FINANCIAL INFORMATION
Item 1.	Unaudited Financial Statements
	Unaudited Condensed Consolidated Balance Sheets as of June 30, 2003 and March 31, 2004
	Unaudited Condensed Consolidated Statements of Operations for the three months ended March 31, 2003 and 2004
	Unaudited Condensed Consolidated Statements of Operations for the nine months ended March 31, 2003 and 2004
	Unaudited Condensed Consolidated Statement of Stockholders’ Equity for the nine months ended March 31, 2004
	Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended March 31, 2003 and 2004
	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			March 31, 2004
ASSETS
Current assets:
Cash and cash equivalents		$	38,884		$	32,506
Accounts and notes receivable, net of allowance for doubtful accounts of $6,962 and $8,191		98,368			114,844
Inventories, net of reserves of $6,503 and $5,694		32,102			53,236
Deferred tax assets, net		44,821			56,331
Other current assets		8,010			12,004
Total current assets		222,185			268,921
Long-term investments (restricted)		864			2,638
Long-term receivables, net of allowance for doubtful accounts of $15 and $18		14,865			12,020
Net investment in sales type leases		—			8,269
Leased gaming equipment, net of accumulated depreciation of $15,703 and $22,324		25,792			54,983
Property, plant and equipment, net of accumulated depreciation and amortization of $20,495 and $25,948		56,894			65,542
Goodwill, net of accumulated amortization of $5,941 and $5,941		63,040			135,128
Intangible assets, net of accumulated amortization of $12,109 and $10,383		26,631			64,837
Assets of discontinued operations held for sale		114,314			109,340
Other assets, net of reserves of $1,788 and $1,788		580			6,277
Total assets		$	525,165		$	727,955
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	22,726		$	38,729
Accrued liabilities		30,183			53,849
Jackpot liabilities		10,588			14,239
Current maturities of long-term debt		3,537			5,446
Liabilities of discontinued operations held for sale		16,186			24,970
Total current liabilities		83,220			137,233
Long-term debt, net		341,678			424,015
Deferred tax liabilities		3,920			6,676
Other liabilities		3,387			5,048
Minority interest		1,330			1,447
Total liabilities		433,535			574,419
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 51,266,000 shares issued		4,996			5,129
Treasury stock at cost, 513,000 shares		(501		)	(501		)
Additional paid-in capital		163,267			185,638
Accumulated other comprehensive income		1,287			2,084
Accumulated deficit		(77,431		)	(38,826		)
Total stockholders’ equity		91,630			153,536
Total liabilities and stockholders’ equity		$	525,165		$	727,955

 

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 March 31,
		2003			2004
Revenues:
Gaming equipment and systems		$	82,341		$	101,977
Casino operations		13,891			14,262
		96,232			116,239
Costs and expenses:
Cost of gaming equipment and systems		34,249			41,378
Cost of casino operations		5,531			5,324
Selling, general and administrative		24,930			30,198
Research and development costs		5,592			9,059
Depreciation and amortization		5,527			8,128
		75,829			94,087
Operating income		20,403			22,152
Other income (expense):
Interest income		54			1,817
Interest expense		(6,269		)	(4,590		)
Minority interest		(729		)	(722		)
Other, net		121			(182		)
Income from continuing operations before income taxes		13,580			18,475
Income tax expense		4,653			6,234
Net income from continuing operations		8,927			12,241
Discontinued operations:
Income from discontinued operations of wall machines and amusement games business unit, net		2,178			—
Income (loss) from discontinued operations of Nevada Route, net		425			(274		)
Income from discontinued operations of Louisiana Route, net		381			586
Income from discontinued operations of Rail City Casino, net		869			1,281
Income from discontinued operations		3,853			1,593
Net income		$	12,780		$	13,834
Basic earnings per share:
Continuing operations		$	0.18		$	0.25
Discontinued operations		0.08			0.03
		$	0.26		$	0.28
Diluted earnings per share:
Continuing operations		$	0.18		$	0.24
Discontinued operations		0.07			0.03
		$	0.25		$	0.27
Weighted average common shares outstanding		49,294			50,221
Weighted average common and common share equivalents outstanding		50,162			51,449

 

See notes to unaudited condensed consolidated financial statements.

 

4

 

ALLIANCE GAMING CORPORATION AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In 000’s, except per share data)

 

		Nine Months Ended March 31,
		2003			2004
Revenues:
Gaming equipment and systems		$	232,507		$	286,764
Casino operations		38,158			39,329
		270,665			326,093
Costs and expenses:
Cost of gaming equipment and systems		100,170			113,395
Cost of casino operations		16,051			15,211
Selling, general and administrative		67,125			80,812
Research and development costs		14,725			24,462
Depreciation and amortization		14,680			20,595
		212,751			254,475
Operating income		57,914			71,618
Other income (expense):
Interest income		181			1,943
Interest expense		(19,464		)	(14,188		)
Minority interest		(1,483		)	(1,749		)
Refinancing charge		—			(12,293		)
Other, net		487			(1,081		)
Income from continuing operations before income taxes		37,635			44,250
Income tax expense		14,609			15,944
Net income from continuing operations		23,026			28,306
Discontinued operations:
Income from discontinued operations of wall machines and amusement games business unit, net		1,453			—
Income from discontinued operations of Nevada Route, net		3,115			5,936
Income from discontinued operations of Louisiana Route, net		940			1,316
Income from discontinued operations of Rail City Casino, net		2,357			3,047
Income from discontinued operations		7,865			10,299
Net income		$	30,891		$	38,605
Basic earnings per share:
Continuing operations		$	0.47		$	0.57
Discontinued operations		0.17			0.21
		$	0.64		$	0.78
Diluted earnings per share:
Continuing operations		$	0.46		$	0.56
Discontinued operations		0.16			0.20
		$	0.62		$	0.76
Weighted average common shares outstanding		48,567			49,334
Weighted average common and common share equivalents outstanding		49,581			50,522

 

See notes to unaudited condensed consolidated financial statements.

 

5

 

ALLIANCE GAMING CORPORATION AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

Nine Months Ended March 31, 2004

(In 000’s)

 

		Common Stock					Series E			Treasury			Additional Paid-in			Accumulated Other Comprehensive			Accum.			Total Stock- holders’
		Shares		Dollars			Special Stock			Stock			Capital			Income			Deficit			Equity
Balances at June 30, 2003		49,933		$	4,996		$	12		$	(501	)	$	163,267		$	1,287		$	(77,431	)	$	91,630
Net income		—		—			—			—			—			—			38,605			38,605
Foreign currency translation adjustment		—		—			—			—			—			797			—			797
Total comprehensive income																						39,402
Common shares issued upon acquisition of SDG		662		66			—			—			11,883									11,949
Additional Paid in Capital upon issuance of warrants (MindPlay)		—		—			—			—			886			—			—			886
Shares issued upon exercise of options		671		67			—			—			6,556			—			—			6,623
Tax benefit of employee stock option exercises		—		—			—			—			3,046			—			—			3,046
Balances at March 31, 2004		51,266		$	5,129		$	12		$	(501	)	$	185,638		$	2,084		$	(38,826	)	$	153,536

 

See notes to unaudited condensed consolidated financial statements.

 

6

 

ALLIANCE GAMING CORPORATION AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In 000’s)

 

		Nine Months Ended March 31,
		2003			2004
Cash flows from operating activities of continuing operations:
Net income		$	30,891		$	38,605
Adjustments to reconcile net income to net cash provided by operating activities of continuing operations:
Income from discontinued operations		(7,865		)	(10,299		)
Depreciation and amortization		14,680			20,595
Refinancing charge		—			12,293
Deferred income taxes		14,886			(6,257		)
Provision for losses on receivables		1,224			755
Other		1,565			(1,354		)
Change in operating assets and liabilities:
Accounts and notes receivable		(35,712		)	(8,725		)
Inventories		(823		)	(3,080		)
Other current assets		(2,791		)	(627		)
Accounts payable		9,634			9,893
Accrued liabilities and jackpot liabilities		(674		)	16,255
Net cash provided by operating activities of continuing operations		25,015			68,054
Cash flows from investing activities of continuing operations:
Additions to property, plant and equipment		(7,462		)	(9,556		)
Additions to leased gaming equipment		(14,794		)	(26,372		)
Additions to other long-term assets		(2,628		)	(12,825		)
Advances of notes receivable due from Sierra Design Group		—			(72,820		)
Acquisitions, net of cash acquired		(3,038		)	(50,675		)
Proceeds from sale of assets of discontinued operations		—			16,500
Net cash used in investing activities of continuing operations		(27,922		)	(155,748		)
Cash flows from financing activities of continuing operations:
Debt issuance costs		—			(6,954		)
Premium and consent fees paid on redemption of subordinated notes		—			(5,399		)
Proceeds from issuance of long-term debt		—			350,000
Net change in revolving credit facility		—			70,000
Payoff of debt from refinancing		—			(337,625		)
Reduction of long-term debt		(3,364		)	(2,986		)
Proceeds from exercise of stock options		1,961			6,623
Net cash (used in) provided by financing activities of continuing operations		(1,403		)	73,659
Effect of exchange rate changes on cash and cash equivalents		905			100
Cash and cash equivalents provided by discontinued operations		8,740			7,557
Cash and cash equivalents:
Increase (decrease) for the period		5,335			(6,378		)
Balance, beginning of period		31,800			38,884
Balance, end of period		$	37,135		$	32,506

 

See notes to unaudited condensed consolidated financial statements.

 

7

 

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

 

1.                                      BASIS OF PRESENTATION

 

Principles of consolidation

 

The accompanying unaudited 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 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 unaudited condensed consolidated financial statements include the accounts of Alliance, and its wholly owned and partially owned, controlled subsidiaries. In the case of Video Services, Inc. (“VSI”), the Company owns 100% of the voting stock. The Company is entitled to receive 71% of dividends declared by VSI, if any, at such time that dividends are declared.

 

The Company, through a wholly-owned subsidiary, is the general partner of Rainbow Casino Vicksburg Partnership, L.P. (“RCVP”), the limited partnership that operates the Rainbow Casino. The limited partner, Rainbow Corporation, an independent third party, is entitled to receive 10% of the net available cash flows after debt service and other items, as defined (which amount increases to 20% of such amount for the proportional revenues above $35.0 million) each year through December 31, 2010. The Company holds the remaining economic interest in the partnership and consolidates the partnership.

 

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

 

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

 

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

 

During the quarter ended March 31, 2004, the Company completed the acquisition of substantially all of the assets and liabilities of MindPlay LLC (“MindPlay”), a leading developer of advanced table game technologies and completed the acquisition of Sierra Design Group (“SDG”), a leading supplier of Class II and Class III gaming devices, systems and technology, details of which are included in Note 9.

 

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.

 

8

 

Revenue recognition

 

Revenue from sales of gaming machines is generally recognized at the time products are shipped and title has passed to the customer. Games placed with customers on a trial basis are not recognized as revenue until the trial period ends and the customer accepts the games. The Company sells gaming equipment on normal credit terms (generally 2%, net 30) and offers financing to qualified customers for periods generally between 6 and 48 months.

 

Revenue from sales of computerized monitoring systems is recognized in accordance with the AICPA’s Statement of Position 97-2 (“SOP 97-2”) “Software Revenue Recognition.”  In accordance with the provisions of SOP 97-2, the contracts for the sales of computerized monitoring units are considered to have “multiple elements” because they include hardware, software, installation, supervision, training, and post-contract customer support. Accordingly, revenues from the sale of systems are deferred and begin to be recognized at the point when the system is deemed to be functionally operational, and the residual method is used to recognize revenue for the remaining elements as they are delivered, each having vendor-specific objective evidence of relative fair values. Post-contract customer support revenues are recognized over the period of the support agreement (generally one year).

 

Our Bally Gaming and Systems business unit earns revenues from recurring revenue sources that consist of the operations of the wide-area progressive jackpot systems and revenues from gaming machines placed in a casino on a daily lease or rental basis. Revenue from these sources is recognized based on the contractual terms of the participation or rental agreements and is generally based on a share of money wagered, a share of the net winnings, or on a fixed daily rental rate basis.

 

In accordance with industry practice, the Company recognizes gaming revenues in its route and casino operations as the net win from gaming machine operations, which is the difference between coins and currency deposited into the machines and payments to customers and, for other games, the difference between gaming wins and losses.  The Company recognizes total net win from gaming machines as revenues for route operations, which the Company operates pursuant to revenue-sharing arrangements and revenue-sharing payments (either fixed or variable) as a cost of route operations.

 

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

 

Capitalized Costs

 

During fiscal year 2004, Bally Gaming and Systems has experienced an almost four fold increase in the volume of product submissions to the various domestic regulatory bodies, each of which charges fees for the testing and approval of each product. Product testing costs are capitalized once technological feasibility has been established and are amortized, generally over a three year period once the product is placed in service. Product testing costs related to projects that are discontinued are expensed when such determination is made. The year to date fees incurred for such regulatory approvals totaled approximately $4.0 million. Of these amounts incurred, for the quarter ended March 31, 2004, the Company capitalized a total of $1.6 million that was directly attributable to products that have been approved and amortization expenses totaled $0.3 million.

 

Recently Issued Accounting Pronouncements

 

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

 

9

 

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

 

2.                                      EARNINGS PER SHARE

 

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

 

		Three Months Ended March 31,						Nine Months Ended March 31,
		2003			2004			2003			2004
Net income from continuing operations		$	8,927		$	12,241		$	23,026		$	28,306
Net income from discontinued operations		3,853			1,593			7,865			10,299
Net income		$	12,780		$	13,834		$	30,891		$	38,605
Weighted average common shares outstanding		49,294			50,221			48,567			49,334
Effect of dilutive securities		868			1,228			1,014			1,188
Weighted average common and common share equivalents outstanding		50,162			51,449			49,581			50,522
Earnings per basic share:
Income from continuing operations		$	0.18		$	0.25		$	0.47		$	0.57
Income from discontinued operations		0.08			0.03			0.17			0.21
		$	0.26		$	0.28		$	0.64		$	0.78
Earnings per diluted share:
Income from continuing operations		$	0.18		$	0.24		$	0.46		$	0.56
Income from discontinued operations		0.07			0.03			0.16			0.20
		$	0.25		$	0.27		$	0.62		$	0.76

 

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 March 31,				Nine Months Ended March 31,
		2003		2004		2003		2004
Stock options		716		2		716		1,435

 

The Company accounts for its stock-based employee compensation awards in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”). Under APB 25, because the exercise price of the Company’s employee stock options equals or exceeds the market price of the underlying stock on the date of grant, no compensation expense is recognized.

 

In 1998, the Company adopted SFAS No. 123 “Accounting for Stock-Based Compensation” (“SFAS No. 123”). Under SFAS 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 SFAS No. 123.

 

10

 

In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure”. This Statement amends SFAS 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 SFAS 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 March 31,						Nine Months Ended March 31,
		2003			2004			2003			2004
Net income
As reported		$	12,780		$	13,834		$	30,891		$	38,605
Stock-based compensation under FASB No. 123		(617		)	(1,483		)	(2,266		)	(3,377		)
Pro forma net income		$	12,163		$	12,351		$	28,625		$	35,228
Earnings per share:
Basic – As reported		$	0.26		$	0.28		$	0.64		$	0.78
Basic - Pro forma		$	0.25		$	0.25		$	0.59		$	0.71
Diluted – As reported		$	0.25		$	0.27		$	0.62		$	0.76
Diluted – Pro forma		$	0.24		$	0.24		$	0.58		$	0.70

 

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 March 31,				Nine Months Ended March 31,
		2003		2004		2003		2004
Risk-fee interest rate		3.5	%	3.5	%	3.5	%	3.5	%
Expected volatility		0.28		0.26		0.28		0.26
Expected dividend yield		0		0		0		0
Expected life		3-10 years		3-10 years		3-10 years		3-10 years

 

The resulting fair values applied to the options granted were $5.51 and $9.18 per share for the quarter ended March 31, 2003 and 2004 and were $6.21 and $9.24 per share for the nine month periods ended March 31, 2003 and 2004, respectively.

 

3.                                      DISCONTINUED OPERATIONS

 

In July 2003 the Company announced it had entered into definitive sale agreements for each component 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).

 

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

 

The Company has entered into a definitive agreement for the sale of UCMC to the privately held Century Gaming, Inc. based in Montana.  The sales price is based on a multiple of EBITDA (as defined in the sale agreement).  The

 

11

 

closing of this transaction is subject to customary closing conditions, including that the buyer obtain the necessary gaming licenses. This transaction is expected to close in June 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.

 

On December 8, 2003 the Company announced that it had entered into an agreement for the sale of its Rail City Casino.  The sale was completed on May 3, 2004 and Alliance received cash of $37.9 million.

 

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

 

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

 

		Three Months Ended March 31,						Nine Months Ended March 31,
		2003			2004			2003			2004
Net revenues		$	79,223		$	68,797		$	225,148		$	192,330
Operating income		4,875			8,716			11,038			23,462
Income tax expense		920			7,023			3,501			11,747
Income from discontinued operations		$	3,853		$	1,593		$	7,865		$	10,299

 

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

 

		June 30, 2003			March 31, 2004
Cash and cash equivalents		$	28,918		$	31,054
Accounts and contracts receivable		21,627			6,203
Other current assets		5,200			3,756
Property, plant and equipment		33,316			44,485
Intangible assets		21,695			20,180
Other		3,558			3,662
Total assets		114,314			109,340
Current liabilities		11,913			20,639
Long-term liabilities		4,273			4,331
Total liabilities		16,186			24,970
Net assets of discontinued operations		$	98,128		$	84,370

 

12

 

4.                                      INVENTORIES

 

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

 

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

 

		June 30, 2003			March 31, 2004
Raw materials		$	13,720		$	19,479
Work-in-process		789			2,871
Finished goods		17,593			30,886
Total		$	32,102		$	53,236

 

5.                                      DEBT

 

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

 

		June 30, 2003			March 31, 2004
Term loan facility		$	187,625		$	350,000
Revolving credit facility		—			70,000
10% Sr. Subordinated Notes, net of unamortized discount		149,663			—
Other subordinated debt		495			—
Other, generally secured by related equipment		7,432			9,461
		345,215			429,461
Less current maturities		3,537			5,446
Long-term debt, net of current maturities		$	341,678		$	424,015

 

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

 

On September 5, 2003, the Company completed a senior bank debt refinancing transaction (the “Refinancing”) whereby the Company entered into a new $275 million term loan facility and a $125 million revolving credit facility. Proceeds from the new loans were used to repay the existing bank term loans totaling approximately $188 million, repay the Subordinated Notes, and to pay transaction fees and expenses.  The new term loan had an interest rate of LIBOR plus 2.75%, which was later reduced to LIBOR + 2.50% (or 3.79% as of March 31, 2004), 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 3.79% as March 31, 2004), and the commitment decreases ratably over its 5-year term to a 60% balloon.  During the December 2003 quarter the Company increased the term loan by $75 million, to a total of $350 million outstanding.  The proceeds were used primarily to fund the acquisition SDG.  As a result the Company incurred an additional $1.3 million in debt issuance costs, which have been capitalized and will be amortized over the remaining term of the loan.

 

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 Subordinated Notes having been tendered.  On September 11, 2003, the Company initiated redemption of the remaining Subordinated Notes at a price of 103.33%, which was completed on September 16, 2003, at which time the Subordinated Notes were fully redeemed.

 

13

 

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

 

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 March 31, 2004, the Company is in compliance with these covenants.

 

6.                                      SEGMENTS AND GEOGRAPHICAL INFORMATION

 

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

 

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

 

		Three Months Ended March 31,						Nine Months Ended March 31,
		2003			2004			2003			2004
Revenues:
Gaming Equipment and Systems		$	82,341		$	101,977		$	232,507		$	286,764
Casino Operations		13,891			14,262			38,158			39,329
Total revenues		$	96,232		$	116,239		$	270,665		$	326,093
Intersegment revenues:
Gaming Equipment and Systems		$	60		$	106		$	1,378		$	447
Operating income (loss):
Gaming Equipment and Systems		$	19,056		$	20,096		$	55,966		$	68,670
Casino Operations		4,843			5,157			11,388			12,985
Corporate/other		(3,496		)	(3,101		)	(9,440		)	(10,037		)
Total operating income		$	20,403		$	22,152		$	57,914		$	71,618

 

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

 

14

 

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

 

		Three Months Ended March 31,						Nine Months Ended March 31,
		2003			2004			2003			2004
Revenues:
United States		$	85,206		$	109,809		$	241,673		$	300,149
Germany		7,309			2,901			21,726			14,695
Other foreign		3,717			3,529			7,266			11,249
Total revenues		$	96,232		$	116,239		$	270,665		$	326,093
Operating income:
United States		$	19,589		$	22,516		$	55,515		$	69,488
Germany		535			695			2,102			2,645
Other foreign		279			(1,059		)	297			(515		)
Total operating income		$	20,403		$	22,152		$	57,914		$	71,618

 

7.                                      SUPPLEMENTAL CASH FLOW INFORMATION

 

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

 

		Nine Months Ended March 31,
		2003			2004
Cash paid for interest		$	23,126		$	19,779
Cash paid for income taxes		1,609			3,425
Non-cash transactions:
Reclassify property, plant and equipment to inventory		$	2,777		$	3,793
Favorable translation rate adjustment		3,873			697
Notes payable issued in acquisition		3,000			4,000

 

See Note 9 for assets and liabilities assumed in acquisitions.

 

8.                                      COMMITMENTS AND CONTINGENCIES

 

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

 

On February 19, 2004, the Company completed the acquisition of MindPlay. The Company purchased substantially all of the assets and liabilities of MindPlay for consideration of $11.0 million in cash, a promissory note in the amount of $4.0 million and a warrant to purchase 100,000 shares of Alliance Common Stock, plus transaction fees and expense resulting in total consideration of $15.9 million.  Additional consideration may become payable in cash over the next 13 years upon the MindPlay business unit achieving certain significant revenue and gross margin targets.

 

Additionally, on March 2, 2004, the Company completed the acquisition of SDG. The Company purchased 100 percent of the outstanding shares of SDG for consideration of approximately $29.8 million in cash and 662,000 shares of Alliance Common Stock. In addition, the Company assumed approximately $80 million of debt (including approximately $72 million of loans payable to Alliance which now has been forgiven), plus transaction fees and expenses, resulting in total initial consideration of $126.4 million. Additional contingent consideration of up to $95.6 million may become payable, in equal portions of cash and stock, over the next three fiscal years upon the SDG business unit achieving certain significant revenue and EBITDA targets.

 

15

 

9.                                      ACQUISITIONS

 

Under the purchase method of accounting, the total purchase price is allocated to the net tangible and intangible assets based upon their estimated fair market values as of the date of the acquisitions. The allocation of the purchase price to goodwill and intangibles is subject to change based on final valuation of net assets (including inventory and property, plant and equipment) and is based upon independent third-party valuations and management’s estimates.

 

SIERRA DESIGN GROUP

 

On March 2, 2004, Alliance completed the acquisition of 100% of the shares of privately held SDG.  Consideration totaled $126.4 million, and additional contingent consideration of up to $95.6 million may become payable over the next three years upon the SDG business unit achieving certain revenues and EBITDA targets.

 

 

The fair values preliminarily assigned to the SDG assets and liabilities were as follows (in 000’s):

 

Tangible Assets:
Cash		$	1,189
Accounts receivable		6,949
Inventories		12,088
Deposits		1,576
Other current assets		2,233
Investment in Sales-type leases		8,241
Property, Plant and Equipment		22,205
Other Assets		103
Deferred Tax Assets		9,921
Notes Receivable		678
		65,183
Liabilities:
Customer deposits		4,973
Accounts payable		6,110
Accrued liabilities		10,687
Notes Payable		3,704
		25,474
Net tangible assets acquired		39,709
Intangible assets acquired:
Contracts		12,320
Patents/core technology		5,445
Trade name/ Trademark		5,708
		23,473
Goodwill		63,211
Total Purchase Price		$	126,393

 

The purchase price paid for SDG consists of the following (in thousands):

 

Cash paid to SDG stockholders		$	29,846
Fair value of restricted Alliance Gaming common stock issued		11,950
Deferred consideration		1,350
Transaction fees and expenses		4,739
Subtotal		$	47,885
SDG loans to third parties		5,688
Pre-acquisition loans from Alliance to SDG forgiven		72,820
Acquisition cost		$	126,393

 

16

 

The following intangible assets of SDG are being amortized with the following lives:

 

		Lives
Contracts		10
Patents/core technology		8
Trade name/trademark		5

 

The value assigned to the restricted stock totaled $11.9 million, and was determined by an independent third-party, and resulted in a 30% discount to the stock price two days before and after the announcement of the acquisition.  Pursuant to a loan agreement between Alliance and SDG, Alliance committed to loan SDG up to $74 million during the pre-acquisition period.  As of December 31, 2003, Alliance had advanced $61.0 million, and as of the acquisition date the loan balance totaled $72.8 million, which was forgiven as of the acquisition date.  Including the loan advances of $72.8 million, the cash paid for SDG totaled $108.6 million.

 

The following unaudited proforma financial information is presented as if the SDG acquisition had been completed at the beginning of the relative period (in 000’s, except per share information).

 

		Nine months ended
		March 31, 2003			March 31, 2004
Total revenue		$	346,560		$	392,811
Income from continuing operations before taxes		40,523			28,177
Income from continuing operations		24,817			18,341
Earnings per share from continuing operations
Basic		$	0.50		$	0.37
Diluted		$	0.49		$	0.36

 

MINDPLAY

 

On February 19, 2004, Alliance completed the acquisition of substantially all of the assets and liabilities of MindPlay LLC.  The consideration consisted of $9 million in cash, a note payable totaling $4.0 million, assumption of $2.0 million of long-term debt, and warrants to purchase 100,000 Alliance common stock valued at $1.0 million. Additional contingent consideration is payable over the next 13 years based on certain MindPlay product revenues and gross margin targets.

 

The fair values preliminarily assigned to the MindPlay assets and liabilities are as follows (in 000’s):

 

Tangible Assets:
Cash		$	22
Accounts receivable		41
Inventories		110
Property, plant and equipment		143
Other Assets		43
		359
Liabilities:
Customer deposits		467
Net tangible assets acquired		(108		)
Intangible assets acquired:
Patents		11,255
Goodwill		5,644
Total Purchase Price		$	16,791

 

The acquired patents, which are classified as intangible assets, are being amortized over the remaining life of the patents, which is approximately 15 years.

 

17

 

10.                               UNAUDITED CONDENSED 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 (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 Parent’s non-domestic subsidiaries (together the “Non-Guaranteeing Subsidiaries”). The notes to the unaudited condensed consolidating financial statements should be read in conjunction with these unaudited condensed consolidating financial statements.

 

18

 

UNAUDITED CONDENSED CONSOLIDATING BALANCE SHEETS

June 30, 2003

(In 000’s)

 

ASSETS

 

		Parent			Guaranteeing Subsidiaries			Non- Guaranteeing Subsidiaries			Reclas- sifications and Elimina- tions			Alliance Gaming Corporation and Subsidiaries
Current assets:
Cash and cash equivalents		$	12,730		$	18,036		$	8,118		$	—		$	38,884
Accounts and notes receivable, net		738			70,880			27,496			(746		)	98,368
Inventories, net		—			29,801			2,518			(217		)	32,102
Deferred tax assets, net		33,182			11,639			—			—			44,821
Other current assets		404			7,110			496			—			8,010
Total current assets		47,054			137,466			38,628			(963		)	222,185
Long-term investments (restricted)		—			864			—			—			864
Long-term receivables, net		159,723			15,113			12			(159,983		)	14,865
Leased gaming equipment, net		—			25,792			—			—			25,792
Property, plant and equipment, net		74			20,394			36,426			—			56,894
Goodwill, net		(900		)	48,293			15,647			—			63,040
Intangible assets, net		7,049			14,550			5,032			—			26,631
Investments in subsidiaries		294,513			74,990			—			(369,503		)	—
Deferred tax assets, net		3,394			—			—			(3,394		)	—
Assets of discontinued operations held for sale		16,539			93,672			4,103			—			114,314
Other assets, net		(84,406		)	99,918			(14,933		)	1			580
		$	443,040		$	531,052		$	84,915		$	(533,842	)	$	525,165

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

Current liabilities:
Accounts payable		$	1,295		$	19,507		$	1,924		$	—		$	22,726
Accrued liabilities		7,378			18,188			5,368			(751		)	30,183
Jackpot liabilities		—			10,446			142			—			10,588
Current maturities of long-term debt		2,395			1,124			18			—			3,537
Liabilities of disc. operations held for sale		1,000			14,358			828			—			16,186
Total current liabilities		12,068			63,623			8,280			(751		)	83,220
Long term debt, net		335,388			166,013			—			(159,723		)	341,678
Deferred tax liabilites		—			5,679			1,635			(3,394		)	3,920
Other liabilities		2,624			753			10			—			3,387
Minority interest		1,330			—			—			—			1,330
Total liabilities		351,410			236,068			9,925			(163,868		)	433,535
Commitments and contingencies
Stockholders’ equity:
Special Stock Series E		12			—			—			—			12
Common Stock		4,996			478			1,027			(1,505		)	4,996
Treasury stock		(501		)	—			—			—			(501		)
Additional paid-in capital		163,267			190,449			33,415			(223,864		)	163,267
Accumulated other comprehensive income (loss)		1,287			1,290			1,267			(2,557		)	1,287
Retained earnings (accumulated deficit)		(77,431		)	102,767			39,281			(142,048		)	(77,431		)
Total stockholders’ equity		91,630			294,984			74,990			(369,974		)	91,630
		$	443,040		$	531,052		$	84,915		$	(533,842	)	$	525,165

 

See accompanying unaudited notes.

 

19

 

UNAUDITED CONDENSED CONSOLIDATING BALANCE SHEETS

March 31, 2004

(In 000’s)

 

ASSETS

 

		Parent			Guaranteeing Subsidiaries			Non- Guaranteeing Subsidiaries			Reclas- sifications and Elimina- tions			Alliance Gaming Corporation and Subsidiaries
Current assets:
Cash and cash equivalents		$	11,511		$	13,124		$	7,871		$	—		$	32,506
Accounts and notes receivable, net		1,257			95,229			19,284			(926		)	114,844
Inventories, net		—			49,424			4,017			(205		)	53,236
Deferred tax assets, net		31,465			24,866			—			—			56,331
Other current assets		1,050			10,844			110			—			12,004
Total current assets		45,283			193,487			31,282			(1,131		)	268,921
Long-term investments (restricted)		—			2,638			—			—			2,638
Long-term receivables, net		245,400			10,665			22			(244,067		)	12,020
Lease Receivable		—			8,269			—			—			8,269
Leased gaming equipment, net		—			54,983			—			—			54,983
Property, plant and equipment, net		74			28,858			36,610			—			65,542
Goodwill, net		(900		)	117,167			18,861			—			135,128
Intangible assets, net		6,215			54,465			4,157			—			64,837
Investments in subsidiaries		427,895			74,900			—			(502,795		)	—
Deferred tax assets, net		1,999			—			—			(1,999		)	—
Assets of discontinued operations held for sale		39			104,794			4,507			—			109,340
Other assets, net		(132,181		)	150,082			(11,627		)	3			6,277
		$	593,824		$	800,308		$	83,812		$	(749,989	)	$	727,955

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

Current liabilities:
Accounts payable		$	2,052		$	35,532		$	1,145		$	—		$	38,729
Accrued liabilities		8,436			41,671			4,677			(935		)	53,849
Jackpot liabilities		—			14,050			189			—			14,239
Current maturities of long-term debt		2,438			3,005			3			—			5,446
Liabilities of disc. operations held for sale		1,729			21,973			1,268			—			24,970
Total current liabilities		14,655			116,231			7,282			(935		)	137,233
Long term debt, net		421,562			246,353			—			(243,900		)	424,015
Deferred tax liabilites		—			7,040			1,635			(1,999		)	6,676
Other liabilities		2,624			2,424			—			—			5,048
Minority interest		1,447			—			—			—			1,447
Total liabilities		440,288			372,048			8,917			(246,834		)	574,419
Commitments and contingencies
Stockholders’ equity:
Special Stock Series E		12			—			—			—			12
Common Stock		5,129			478			1,027			(1,505		)	5,129
Treasury stock		(501		)	—			—			—			(501		)
Additional paid-in capital		185,638			260,813			33,415			(294,228		)	185,638
Accumulated other comprehensive income (loss)		2,084			2,084			3,014			(5,098		)	2,084
Retained earnings (accumulated deficit)		(38,826		)	164,885			37,439			(202,324		)	(38,826		)
Total stockholders’ equity		153,536			428,260			74,895			(503,155		)	153,536
		$	593,824		$	800,308		$	83,812		$	(749,989	)	$	727,955

 

See accompanying unaudited notes.

 

20

 

UNAUDITED CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS

Three months ended March 31, 2003

(In 000’s)

 

		Parent			Guaranteeing Subsidiaries			Non- Guaranteeing Subsidiaries			Reclas- sifications and Elimina- tions			Alliance Gaming Corporation and Subsidiaries
Revenues:
Gaming equipment and systems		$	—		$	80,227		$	11,044		$	(8,930	)	$	82,341
Casino operations		—			—			15,545			(1,654		)	13,891
		—			80,227			26,589