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 March 31, 2005
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 |
|
(I.R.S. Employer |
|
incorporation or organization) |
|
Identification No.) |
|
|
|
|
|
6601 S. Bermuda Road |
|
|
|
Las Vegas, Nevada |
|
89119 |
|
(Address of principal executive offices) |
|
(Zip Code) |
Registrant’s telephone number: (702) 270-7600
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 May 6, 2005, according to the records of the registrant’s registrar and transfer agent was 51,098,955.
I N D E X
2
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(In 000s)
|
|
|
As of |
|
||||
|
|
|
March 31, |
|
June 30, |
|
||
|
|
|
2005 |
|
2004 |
|
||
|
ASSETS |
|
|
|
|
|
||
|
|
|
|
|
|
|
||
|
Current assets: |
|
|
|
|
|
||
|
Cash and cash equivalents |
|
$ |
31,414 |
|
$ |
172,726 |
|
|
Accounts and notes receivable, net of allowances for doubtful accounts of $13,381 and $9,722 |
|
105,781 |
|
129,779 |
|
||
|
Inventories, net |
|
58,319 |
|
61,135 |
|
||
|
Deferred tax assets, net |
|
19,982 |
|
20,054 |
|
||
|
Other current assets |
|
16,952 |
|
12,420 |
|
||
|
Total current assets |
|
232,448 |
|
396,114 |
|
||
|
Long-term investments (restricted) |
|
9,622 |
|
2,528 |
|
||
|
Long-term receivables, net |
|
5,120 |
|
12,518 |
|
||
|
Net investment in leases |
|
10,917 |
|
5,614 |
|
||
|
Leased gaming equipment, net of accumulated depreciation of $46,138 and $31,105 |
|
46,205 |
|
46,634 |
|
||
|
Property, plant and equipment, net of accumulated depreciation of $31,616 and $23,127 |
|
74,986 |
|
75,838 |
|
||
|
Goodwill |
|
175,077 |
|
136,989 |
|
||
|
Intangible assets, net of accumulated amortization of $17,152 and $12,489 |
|
57,185 |
|
63,623 |
|
||
|
Deferred tax assets, net |
|
14,895 |
|
— |
|
||
|
Assets of discontinued operations held for sale |
|
— |
|
4,442 |
|
||
|
Other assets, net |
|
14,935 |
|
6,354 |
|
||
|
Total assets |
|
$ |
641,390 |
|
$ |
750,654 |
|
|
|
|
|
|
|
|
||
|
LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
|
|
|
|
||
|
|
|
|
|
|
|
||
|
Current liabilities: |
|
|
|
|
|
||
|
Accounts payable |
|
$ |
24,856 |
|
$ |
37,515 |
|
|
Accrued liabilities |
|
61,301 |
|
51,469 |
|
||
|
Jackpot liabilities |
|
12,576 |
|
12,075 |
|
||
|
Income taxes payable |
|
6,353 |
|
7,233 |
|
||
|
Current maturities of long-term debt |
|
4,768 |
|
5,866 |
|
||
|
Liabilities of discontinued operations held for sale |
|
— |
|
4,337 |
|
||
|
Total current liabilities |
|
109,854 |
|
118,495 |
|
||
|
Long-term debt, net of current maturities |
|
345,442 |
|
423,089 |
|
||
|
Deferred tax liabilities |
|
799 |
|
849 |
|
||
|
Other liabilities |
|
7,019 |
|
6,092 |
|
||
|
Minority interest |
|
521 |
|
1,326 |
|
||
|
Total liabilities |
|
463,635 |
|
549,851 |
|
||
|
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; 51,590,000 and 51,426,000 shares issued and outstanding |
|
5,162 |
|
5,145 |
|
||
|
Treasury stock at cost, 526,000 and 525,000 shares |
|
(665 |
) |
(501 |
) |
||
|
Deferred compensation (restricted stock units) |
|
(7,271 |
) |
(6,500 |
) |
||
|
Additional paid-in capital |
|
197,217 |
|
194,040 |
|
||
|
Accumulated other comprehensive income |
|
1,382 |
|
1,524 |
|
||
|
Accumulated (deficit) retained earnings |
|
(18,082 |
) |
7,083 |
|
||
|
Total stockholders’ equity |
|
177,755 |
|
200,803 |
|
||
|
Total liabilities and stockholders’ equity |
|
$ |
641,390 |
|
$ |
750,654 |
|
See accompanying notes to unaudited condensed consolidated financial statements.
3
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In 000s)
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
||||||||
|
|
|
March 31, |
|
March 31, |
|
||||||||
|
|
|
2005 |
|
2004 |
|
2005 |
|
2004 |
|
||||
|
Revenues: |
|
|
|
|
|
|
|
|
|
||||
|
Gaming equipment and systems |
|
$ |
111,678 |
|
$ |
101,977 |
|
$ |
316,688 |
|
$ |
286,764 |
|
|
Casino operations |
|
13,734 |
|
14,262 |
|
39,339 |
|
39,329 |
|
||||
|
|
|
125,412 |
|
116,239 |
|
356,027 |
|
326,093 |
|
||||
|
Cost and expenses: |
|
|
|
|
|
|
|
|
|
||||
|
Cost of gaming equipment and systems |
|
57,453 |
|
41,378 |
|
161,626 |
|
113,395 |
|
||||
|
Cost of casino operations |
|
4,857 |
|
5,324 |
|
14,248 |
|
15,211 |
|
||||
|
Selling, general and administrative |
|
36,510 |
|
30,198 |
|
121,216 |
|
80,812 |
|
||||
|
Research and development costs |
|
10,589 |
|
9,059 |
|
32,719 |
|
24,462 |
|
||||
|
Restructuring charge |
|
2,219 |
|
— |
|
3,654 |
|
— |
|
||||
|
Impairment charge |
|
3,599 |
|
— |
|
3,599 |
|
— |
|
||||
|
Depreciation and amortization |
|
12,373 |
|
8,128 |
|
35,234 |
|
20,595 |
|
||||
|
|
|
127,600 |
|
94,087 |
|
372,296 |
|
254,475 |
|
||||
|
Operating income (loss) |
|
(2,188 |
) |
22,152 |
|
(16,269 |
) |
71,618 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
||||
|
Interest income |
|
215 |
|
1,817 |
|
1,013 |
|
1,943 |
|
||||
|
Interest expense |
|
(5,073 |
) |
(4,590 |
) |
(12,785 |
) |
(14,188 |
) |
||||
|
Minority interest |
|
(907 |
) |
(722 |
) |
(2,551 |
) |
(1,749 |
) |
||||
|
Refinancing/ bank amendment charges |
|
— |
|
— |
|
(564 |
) |
(12,293 |
) |
||||
|
Other, net |
|
24 |
|
(182 |
) |
552 |
|
(1,081 |
) |
||||
|
Income (loss) from continuing operations before income taxes |
|
(7,929 |
) |
18,475 |
|
(30,604 |
) |
44,250 |
|
||||
|
Income tax expense (benefit) |
|
(1,480 |
) |
6,234 |
|
(10,210 |
) |
15,944 |
|
||||
|
Income (loss) from continuing operations |
|
(6,449 |
) |
12,241 |
|
(20,394 |
) |
28,306 |
|
||||
|
Income (loss) from discontinued operations |
|
(395 |
) |
1,593 |
|
(4,771 |
) |
10,299 |
|
||||
|
Net income (loss) |
|
$ |
(6,844 |
) |
$ |
13,834 |
|
$ |
(25,165 |
) |
$ |
38,605 |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Basic earnings (loss) per share: |
|
|
|
|
|
|
|
|
|
||||
|
Continuing operations |
|
$ |
(0.13 |
) |
$ |
0.25 |
|
$ |
(0.41 |
) |
$ |
0.57 |
|
|
Discontinued operations |
|
(0.01 |
) |
0.03 |
|
(0.09 |
) |
0.21 |
|
||||
|
Total |
|
$ |
(0.14 |
) |
$ |
0.28 |
|
$ |
(0.50 |
) |
$ |
0.78 |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Diluted earnings (loss) per share: |
|
|
|
|
|
|
|
|
|
||||
|
Continuing operations |
|
$ |
(0.13 |
) |
$ |
0.24 |
|
$ |
(0.41 |
) |
$ |
0.56 |
|
|
Discontinued operations |
|
(0.01 |
) |
0.03 |
|
(0.09 |
) |
0.20 |
|
||||
|
Total |
|
$ |
(0.14 |
) |
$ |
0.27 |
|
$ |
(0.50 |
) |
$ |
0.76 |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Weighted average common shares outstanding |
|
51,057 |
|
50,221 |
|
50,485 |
|
49,334 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Weighted average common and common share equivalents outstanding |
|
51,057 |
|
51,449 |
|
50,485 |
|
50,522 |
|
||||
See accompanying notes to unaudited condensed consolidated financial statements.
4
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In 000s)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
Retained |
|
|
|
||||||||
|
|
|
|
|
|
|
Series E |
|
|
|
|
|
Additional |
|
Other |
|
Earnings |
|
Total |
|
||||||||
|
|
|
Common Stock |
|
Special |
|
Treasury |
|
Deferred |
|
Paid-in |
|
Comprehensive |
|
(Accumulated |
|
Stockholders’ |
|
||||||||||
|
|
|
Shares |
|
Dollars |
|
Stock |
|
Stock |
|
Compensation |
|
Capital |
|
Income (loss) |
|
Deficit) |
|
Equity |
|
||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
|
Balances at June 30, 2004 |
|
51,426 |
|
$ |
5,145 |
|
$ |
12 |
|
$ |
(501 |
) |
$ |
(6,500 |
) |
$ |
194,040 |
|
$ |
1,524 |
|
$ |
7,083 |
|
$ |
200,803 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
|
Net loss |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
(25,165 |
) |
(25,165 |
) |
||||||||
|
Foreign currency translation adjustment |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
(142 |
) |
— |
|
(142 |
) |
||||||||
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(25,307 |
) |
||||||||
|
Restricted stock units issued |
|
— |
|
— |
|
— |
|
— |
|
(2,127 |
) |
2,127 |
|
— |
|
— |
|
— |
|
||||||||
|
Restricted stock units amortization |
|
— |
|
— |
|
— |
|
— |
|
1,356 |
|
— |
|
— |
|
— |
|
1,356 |
|
||||||||
|
Repurchase of common stock for treasury |
|
— |
|
— |
|
— |
|
(164 |
) |
— |
|
— |
|
— |
|
— |
|
(164 |
) |
||||||||
|
Shares issued upon exercise of stock options |
|
164 |
|
17 |
|
— |
|
— |
|
— |
|
814 |
|
— |
|
— |
|
831 |
|
||||||||
|
Tax benefit of employee stock option exercise |
|
— |
|
— |
|
— |
|
— |
|
— |
|
236 |
|
— |
|
— |
|
236 |
|
||||||||
|
Balances at March 31, 2005 |
|
51,590 |
|
$ |
5,162 |
|
$ |
12 |
|
$ |
(665 |
) |
$ |
(7,271 |
) |
$ |
197,217 |
|
$ |
1,382 |
|
$ |
(18,082 |
) |
$ |
177,755 |
|
See accompanying notes to unaudited condensed consolidated financial statements.
5
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In 000s)
|
|
|
Nine Months Ended |
|
||||
|
|
|
March 31, |
|
||||
|
|
|
2005 |
|
2004 |
|
||
|
Cash flows from operating activities of continuing operations: |
|
|
|
|
|
||
|
Net income (loss) |
|
$ |
(25,165 |
) |
$ |
38,605 |
|
|
Adjustments to reconcile net income (loss) to net cash provided by operating activities of continuing operations: |
|
|
|
|
|
||
|
(Income) loss from discontinued operations |
|
4,771 |
|
(10,299 |
) |
||
|
Depreciation and amortization |
|
35,234 |
|
20,595 |
|
||
|
Stock-based compensation |
|
1,356 |
|
— |
|
||
|
Refinancing / bank amendment charges |
|
564 |
|
12,293 |
|
||
|
Deferred income taxes |
|
(3,996 |
) |
(6,257 |
) |
||
|
Provision for losses on receivables |
|
5,700 |
|
755 |
|
||
|
Inventory and other discontinued asset write-downs |
|
25,565 |
|
— |
|
||
|
Other |
|
(1,207 |
) |
(1,354 |
) |
||
|
|
|
|
|
|
|
||
|
Change in operating assets and liabilities, net of effects of business acquired: |
|
|
|
|
|
||
|
Purchase of appeal bond |
|
(7,600 |
) |
— |
|
||
|
Accounts and notes receivable |
|
18,458 |
|
(8,725 |
) |
||
|
Inventories |
|
(8,347 |
) |
(3,080 |
) |
||
|
Other current assets |
|
(4,955 |
) |
(627 |
) |
||
|
Accounts payable |
|
(12,814 |
) |
9,893 |
|
||
|
Accrued liabilities and jackpot liabilities |
|
(12,449 |
) |
16,255 |
|
||
|
Net cash provided by operating activities of continuing operations |
|
15,115 |
|
68,054 |
|
||
|
|
|
|
|
|
|
||
|
Cash flows from investing activities of continuing operations: |
|
|
|
|
|
||
|
Advances of notes receivable due from Sierra Design Group |
|
— |
|
(72,820 |
) |
||
|
Additions to property, plant and equipment |
|
(9,124 |
) |
(9,556 |
) |
||
|
Additions to leased gaming equipment |
|
(30,076 |
) |
(26,372 |
) |
||
|
Additions to other long-term assets |
|
(2,177 |
) |
(12,825 |
) |
||
|
Acquisitions, net of cash acquired |
|
(12,000 |
) |
(50,675 |
) |
||
|
Proceeds from sale of net assets of discontinued operations |
|
1,911 |
|
16,500 |
|
||
|
Net cash used in investing activities of continuing operations |
|
(51,466 |
) |
(155,748 |
) |
||
|
|
|
|
|
|
|
||
|
Cash flows from financing activities of continuing operations: |
|
|
|
|
|
||
|
Capitalized debt issuance costs |
|
(1,053 |
) |
(6,954 |
) |
||
|
Premium paid on early redemption of debt |
|
— |
|
(5,399 |
) |
||
|
Proceeds from the issuance of long-term debt |
|
— |
|
350,000 |
|
||
|
Net change in revolving credit facility |
|
— |
|
70,000 |
|
||
|
Payoff of debt due to sale of net assets of discontinued operations |
|
(101,618 |
) |
(337,625 |
) |
||
|
Reduction of long-term debt |
|
(5,283 |
) |
(2,986 |
) |
||
|
Re-purchase of treasury shares |
|
(164 |
) |
— |
|
||
|
Proceeds from exercise of stock options and warrants |
|
1,068 |
|
6,623 |
|
||
|
Net cash (used in) provided by financing activities of continuing operations |
|
(107,050 |
) |
73,659 |
|
||
|
|
|
|
|
|
|
||
|
Effect of exchange rate changes on cash |
|
385 |
|
100 |
|
||
|
|
|
|
|
|
|
||
|
Discontinued operations: |
|
|
|
|
|
||
|
Cash provided by discontinued operations |
|
1,704 |
|
7,557 |
|
||
|
|
|
|
|
|
|
||
|
Cash and cash equivalents: |
|
|
|
|
|
||
|
Decrease for the period |
|
(141,312 |
) |
(6,378 |
) |
||
|
Balance, beginning of period |
|
172,726 |
|
38,884 |
|
||
|
Balance, end of period |
|
$ |
31,414 |
|
$ |
32,506 |
|
See accompanying 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 presentation and 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 and its subsidiaries (“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 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, 2004.
The accompanying consolidated financial statements include the accounts of Alliance Gaming Corporation and its wholly owned and partially owned, controlled subsidiaries. The Company consolidates Rainbow Casino Vicksburg Partnership (“RCVP”) and records minority interest expense to reflect the portion of the earnings of RCVP attributable to the minority shareholders. The Company is the general partner of RCVP, the partnership that operates the Rainbow Casino. Pursuant to transactions consummated in March 1995, the Rainbow Corporation, which was the former general partner of RCVP, became a limited partner entitled to receive 10% (which amount increases to 20% of such amount when annual revenues exceed $35.0 million but only on such incremental amount) of the net available cash flows after debt service and other items, as defined, payable quarterly through December 31, 2010. The Company holds the remaining economic interest in the partnership.
All significant intercompany accounts and transactions have been eliminated in consolidation. Certain reclassifications have been made to prior year financial statements to conform to the current year presentation, and to present Rail City Casino sold in May 2004, as discontinued operations for all periods presented.
Recently Issued Accounting Pronouncements
In December 2004, the FASB issued Statement 123(R) which revised FASB No. 123. Statement 123(R) requires all entities to recognize compensation expense in an amount equal to the fair value of share-based payments granted to employees for fiscal years beginning after June 15, 2005. The first reporting period for the Company will be the quarter ended September 30, 2005, and the Company is currently evaluating the impact of the adoption, however the pro forma impact is reflected in footnote 2.
In November 2004, the FASB issued Statement 151 revising ARB 43, Chapter 4, which clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs, wasted material (spoilage). This Statement is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The Company does not believe this accounting pronouncement will have a material impact on its financial condition or results of operations.
2. STOCK-BASED COMPENSATION
The Company accounts for its stock-based employee compensation awards in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”). Under APB 25, because the exercise price of the Company’s employee stock options is not less than the market price on the date of grant, no compensation expense is recognized.
As provided under Financial Accounting Standards Board No. 123 “Accounting for Stock-Based Compensation” (“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 amended 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
7
Statement amended 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 option pricing model and are amortized over the estimated life of the option, 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 000s, except per share data):
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
||||||||
|
|
|
March 31, |
|
March 31, |
|
||||||||
|
|
|
2005 |
|
2004 |
|
2005 |
|
2004 |
|
||||
|
Net income (loss) |
|
|
|
|
|
|
|
|
|
||||
|
As reported |
|
$ |
(6,844 |
) |
$ |
13,834 |
|
$ |
(25,165 |
) |
$ |
38,605 |
|
|
Stock-based compensation under FASB No. 123, net of tax |
|
(2,081 |
) |
(1,490 |
) |
(5,344 |
) |
(3,390 |
) |
||||
|
Pro forma net income (loss) |
|
$ |
(8,925 |
) |
$ |
12,344 |
|
$ |
(30,509 |
) |
$ |
35,215 |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Earnings (loss) per share: |
|
|
|
|
|
|
|
|
|
||||
|
Basic – as reported |
|
$ |
(0.14 |
) |
$ |
0.28 |
|
$ |
(0.50 |
) |
$ |
0.78 |
|
|
Basic – pro forma |
|
$ |
(0.18 |
) |
$ |
0.25 |
|
$ |
(0.60 |
) |
$ |
0.71 |
|
|
Diluted – as reported |
|
$ |
(0.14 |
) |
$ |
0.27 |
|
$ |
(0.50 |
) |
$ |
0.76 |
|
|
Diluted – pro forma |
|
$ |
(0.18 |
) |
$ |
0.24 |
|
$ |
(0.60 |
) |
$ |
0.70 |
|
On the date of grant using the Black-Scholes option-pricing model, the following assumptions were used to estimate the grant date fair value of the options in the periods indicated:
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
||||
|
|
|
March 31, |
|
March 31, |
|
||||
|
|
|
2005 |
|
2004 |
|
2005 |
|
2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk-fee interest rate (weighted average) |
|
3.0 |
% |
3.5 |
% |
2.8 |
% |
3.5 |
% |
|
Expected volatility |
|
0.35 |
|
0.26 |
|
0.35 |
|
0.26 |
|
|
Expected dividend yield |
|
0 |
% |
0 |
% |
0 |
% |
0 |
% |
|
Expected life |
|
5 years |
|
3-10 years |
|
5-10 years |
|
3-10 years |
|
Based on the assumptions shown in the table above, the resulting fair values applied to the options granted were $4.00 and $9.18 per share for the quarter ended March 31, 2005 and 2004, respectively, and were $4.39 and $9.26 for the nine months ended March 31, 2005 and 2004, respectively.
During the three months ended March 31, 2005, we issued 20,000 restricted stock units with an aggregate fair value of $226,000. The total value of each unit, based on the fair market value of the stock on the date of grant, is initially reported as deferred compensation under shareholders’ equity. This deferred compensation is then amortized to compensation expense over the related vesting period. Pre-tax income, as reported, reflects $0.8 million and $1.4 million of amortization of restricted stock compensation for the three and nine month periods ended March 31, 2005, respectively.
3. DISCONTINUED OPERATIONS
The Company has completed several divestitures in accordance with its plan to sell “non-core” businesses, which was a strategy announced in July 2003. In July 2003, the Company completed the sale of its Bally Wulff subsidiary. On June 30, 2004, the Company completed the sale of United Coin Machine Co. (“UCMC”). On October 15, 2004, the Company completed the sale of its interest in Video Services Inc. (“VSI”) to Churchill Downs Incorporated and received proceeds of approximately $2.0 million and realized a gain of $0.8 million, net of tax. During the quarter ended December 31, 2004, the Company accrued $2.0 million for various contingencies related to the sale of its discontinued operations.
The results of these discontinued operations are presented net of applicable income taxes in discontinued operations in the accompanying consolidated statements of operations.
8
Operating results for the discontinued operations for the nine month period ended March 31, 2005 consist primarily of VSI, as well as translation gains and losses on a certificate of deposit denominated in Euros which collateralizes certain tax claims. The results for the three and nine month periods ended March 31, 2004 include UCMC, VSI, and Rail City.
Summary operating results are as follows (in 000s):
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
||||||||
|
|
|
March 31, |
|
March 31, |
|
||||||||
|
|
|
2005 |
|
2004 |
|
2005 |
|
2004 |
|
||||
|
Net revenues |
|
$ |
— |
|
$ |
68,797 |
|
$ |
4,514 |
|
$ |
192,330 |
|
|
Operating income |
|
$ |
— |
|
$ |
8,716 |
|
$ |
358 |
|
$ |
23,462 |
|
|
Income tax expense (benefit) |
|
$ |
31 |
|
$ |
7,023 |
|
$ |
(2,485 |
) |
$ |
11,747 |
|
|
Income (loss) from discontinued operations |
|
$ |
(395 |
) |
$ |
1,593 |
|
$ |
(4,771 |
) |
$ |
10,299 |
|
4. OTHER CURRENT ASSETS
Other current assets consist of the following (in 000s):
|
|
|
March 31, |
|
June 30, |
|
||
|
|
|
2005 |
|
2004 |
|
||
|
Prepaid taxes |
|
$ |
168 |
|
$ |
814 |
|
|
Prepaid royalty |
|
2,947 |
|
2,623 |
|
||
|
Refundable deposits |
|
1,845 |
|
3,229 |
|
||
|
Games on trial |
|
2,982 |
|
2,608 |
|
||
|
Deferred cost of revenue |
|
4,640 |
|
208 |
|
||
|
Prepaid licensing and intellectual fees |
|
86 |
|
1,090 |
|
||
|
Prepaid insurance |
|
1,370 |
|
592 |
|
||
|
Prepaid other expense |
|
2,914 |
|
1,256 |
|
||
|
Total current assets |
|
$ |
16,952 |
|
$ |
12,420 |
|
The decrease in refundable deposits of $1.4 million is a result of product purchases for which the deposit has been applied to the accounts payable. Deferred costs increased $4.4 million, of which $2.2 million is due to games sold to a European market, which will not be recognized as revenue until the games are accepted by the customers and $2.0 million is due to Systems installations in various casinos that are not fully installed.
During the quarter ended March 31, 2005, the Company performed a review of its intellectual property rights for various video games used on certain legacy platforms. This review was triggered by the declining sales of these legacy games during fiscal 2005. The Company evaluated the carrying value of certain intellectual property assets and determined that several were no longer recoverable and were therefore deemed to be impaired. The impairment charge totaled $1.3 million, of which $0.4 million related to assets included in long-term intangible assets on the accompanying balance sheet.
5. 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 consist of the following (in 000s):
|
|
|
March 31, |
|
June 30, |
|
||
|
|
|
2005 |
|
2004 |
|
||
|
Raw materials |
|
$ |
25,972 |
|
$ |
26,050 |
|
|
Work-in-process |
|
3,084 |
|
3,324 |
|
||
|
Finished goods |
|
29,263 |
|
31,761 |
|
||
|
Total |
|
$ |
58,319 |
|
$ |
61,135 |
|
The Company performs detailed inventory valuation procedures at least quarterly. This process includes examining the carrying values of new and used gaming devices, parts and ancillary equipment in comparison to the current fair market values for such equipment (less costs to sell or dispose). Some of the factors involved in this analysis include the overall levels of inventories, the current and projected sales levels for such products, the projected markets for such products both domestically and internationally, the costs required to sell the products including
9
refurbishment costs and importation costs for international shipments, and the overall projected demand for products once the next generation of products are scheduled for release.
The Company has faced declining demand for its video products during fiscal year 2005, and therefore has performed ongoing assessments of the net realizable value of this portion of its inventories. In October 2004, the Company made the strategic decision to move to its new Alpha video platform, which has resulted in higher than normal obsolescence in the legacy products.
The decision to move to the new video platform, the targeting of used equipment for non-domestic markets, and the previously disclosed consolidation of certain warehouses, all led to accelerated disposals of legacy products. This process has required continual updating of estimates for the net realizable value of inventories due to the subjectivity involved in projecting sales volumes, used game sales values, refurbishment costs, and customer demand in non-domestic jurisdictions. As a result of its ongoing analysis of inventory valuations, the Company has taken a series of inventory write downs totaling $7.9 million and $22.0 million, during the three and nine month periods ended March 31, 2005, respectively. While the Company believes that its visibility on used game sales has improved, there can be no assurances that further write downs will not be necessary in subsequent periods.
Property, plant and equipment is stated at cost and depreciated over the estimated useful lives or lease term, if less, using the straight line method as follows: buildings and improvements, 28-40 years; gaming equipment, 4-7 years; furniture, fixtures and equipment, 3-7 years; and leasehold improvements, 5-10 years. Leased gaming equipment is stated at cost and depreciated over its estimated useful life ranging from 2-4 years.
During the quarter ended March 31, 2005, the Company evaluated the useful lives and salvage values for its leased gaming equipment. Based on recent historical data indicating a shortening of the average length such games were deployed, the Company decided to reduce the depreciable life for certain video products to 2 years, and increase the salvage value from $1,000 to $2,000 based on current used game sales estimates. The change in the useful life resulted in an impairment charge of $0.8 million to write off the undepreciated portion of the game values (down to the salvage value) for games at the end of their 2-year life, and will increase deprecation expense by approximately $0.5 million per quarter.
Significant replacements and improvements are capitalized; other maintenance and repairs are expensed. The cost and accumulated depreciation of assets retired or otherwise disposed of are eliminated from the accounts and any resulting gain or loss is credited or charged to income as appropriate.
Property, plant and equipment consist of the following (in 000s):
|
|
|
March 31, |
|
June 30, |
|
||
|
|
|
2005 |
|
2004 |
|
||
|
Land and land improvements |
|
$ |
12,827 |
|
$ |
19,086 |
|
|
Buildings and leasehold improvements |
|
39,626 |
|
29,937 |
|
||
|
Casino and central site equipment |
|
30,424 |
|
29,121 |
|
||
|
Furniture, fixtures and equipment |
|
23,725 |
|
20,821 |
|
||
|
Less accumulated depreciation |
|
(31,616 |
) |
(23,127 |
) |
||
|
Total property, plant and equipment, net |
|
$ |
74,986 |
|
$ |
75,838 |
|
|
|
|
|
|
|
|
||
|
Leased gaming equipment |
|
$ |
92,343 |
|
$ |
77,739 |
|
|
Less accumulated depreciation |
|
(46,138 |
) |
(31,105 |
) |
||
|
Total leased gaming equipment, net |
|
$ |
46,205 |
|
$ |
46,634 |
|
10
7. INTANGIBLE ASSETS AND GOODWILL
The Company evaluates the carrying value of goodwill for impairment annually during the fourth quarter or whenever events or changes in circumstances indicate that the carrying value of goodwill may not be recoverable. Indicators that could trigger an impairment review include changes in legal, regulatory, or economic factors, market conditions or operational performance. There were no impairment charges to goodwill in the nine months ended March 31, 2005 or during fiscal 2004.
Intangibles
Intangible assets excluding discontinued operations consist of the following (in 000s):
|
|
|
|
|
March 31, 2005 |
|
June 30, 2004 |
|
||||||||||||||
|
|
|
Wt. Avg. |
|
Gross |
|
|
|
Net |
|
Gross |
|
|
|
Net |
|
||||||
|
|
|
Useful Life |
|
Carrying |
|
Accumulated |
|
Carrying |
|
Carrying |
|
Accumulated |
|
Carrying |
|
||||||
|
|
|
(Years) |
|
Amount |
|
Amortization |
|
Amount |
|
Amount |
|
Amortization |
|
Amount |
|
||||||
|
Computer software |
|
3 |
|
$ |
9,006 |
|
$ |
(2,909 |
) |
$ |
6,097 |
|
$ |
8,963 |
|
$ |
(1,498 |
) |
$ |
7,465 |
|
|
Computer software from acquisitions |
|
9 |
|
11,700 |
|
(4,355 |
) |
7,345 |
|
11,700 |
|
(3,380 |
) |
8,320 |
|
||||||
|
License rights |
|
3-5 |
|
1,262 |
|
(524 |
) |
738 |
|
2,745 |
|
(1,979 |
) |
766 |
|
||||||
|
Capitalized regulatory approval costs |
|
3 |
|
4,062 |
|
(1,358 |
) |
2,704 |
|
4,767 |
|
(833 |
) |
3,934 |
|
||||||
|
CRM software systems |
|
5 |
|
3,290 |
|
(1,511 |
) |
1,779 |
|
3,039 |
|
(1,046 |
) |
1,993 |
|
||||||
|
PLM software systems |
|
5 |
|
1,843 |
|
(256 |
) |
1,587 |
|
1,585 |
|
— |
|
1,585 |
|
||||||
|
Trademarks |
|
5 |
|
6,688 |
|
(503 |
) |
6,185 |
|
6,688 |
|
(288 |
) |
6,400 |
|
||||||
|
Patents |
|
13 |
|
9,470 |
|
(789 |
) |
8,681 |
|
9,470 |
|
(243 |
) |
9,227 |
|
||||||
|
Non-compete agreements |
|
6 |
|
275 |
|
(50 |
) |
225 |
|
275 |
|
(15 |
) |
260 |
|
||||||
|
Customer relationships |
|
5 |
|
740 |
|
(160 |
) |
580 |
|
740 |
|
(49 |
) |
691 |
|
||||||
|
Core technology |
|
8 |
|
5,445 |
|
(737 |
) |
4,708 |
|
5,445 |
|
(227 |
) |
5,218 |
|
||||||
|
Deferred financing costs |
|
6 |
|
7,400 |
|
(1,994 |
) |
5,406 |
|
6,910 |
|
(1,017 |
) |
5,893 |
|
||||||
|
Contracts |
|
10 |
|
12,100 |
|
(1,318 |
) |
10,782 |
|
12,100 |
|
(411 |
) |
11,689 |
|
||||||
|
Other intangibles |
|
7 |
|
1,056 |
|
(688 |
) |
368 |
|
1,685 |
|
(1,503 |
) |
182 |
|
||||||
|
Total |
|
|
|
$ |
74,337 |
|
$ |
(17,152 |
) |
$ |
57,185 |
|
$ |
76,112 |
|
$ |
(12,489 |
) |
$ |
63,623 |
|
Amortization expense totaled $2.5 million and $1.6 million for the three months ended March 31, 2005 and 2004, respectively. Amortization expense totaled $7.1 million and $4.2 million for the nine months ended March 31, 2005 and 2004, respectively. Computer software amortization expense totaled $1.1 million and $0.9 million for the three months ended March 31, 2005 and 2004, respectively. Computer software amortization totaled $2.7 million and $2.3 million for the nine months ended March 31, 2005 and 2004, respectively.
Future amortization of intangible assets is scheduled as follows (in 000s):
|
Period Ending |
|
|
|
|
|
June 30, |
|
Amount |
|
|
|
2005 (3 months) |
|
$ |
2,611 |
|
|
2006 |
|
10,667 |
|
|
|
2007 |
|
9,215 |
|
|
|
2008 |
|
6,890 |
|
|
|
2009 |
|
5,995 |
|
|
|
Thereafter |
|
21,807 |
|
|
|
Total |
|
$ |
57,185 |
|
Goodwill
The changes in the carrying amount of goodwill are as follows (in 000s):
|
Balance as of June 30, 2004 |
|
$ |
136,989 |
|
|
Acquired goodwill |
|
40,879 |
|
|
|
Goodwill adjustments |
|
(3,143 |
) |
|
|
Foreign currency translation adjustments |
|
352 |
|
|
|
Balance as of March 31, 2005 |
|
$ |
175,077 |
|
11
On December 30, 2004, the Company amended the Sierra Design Group (“SDG”) stock purchase agreement originally dated March 3, 2004. The amendment terminates the contingent consideration payable over the next three years (the SDG earnout) which could have totaled $95.0 million (payable in cash and stock) depending on the achievement of certain SDG financial performance targets. The consideration for the termination of the SDG earnout consisted of a one-time cash payment of $12.0 million paid to the group of former SDG stakeholders (most of whom are now employed by the Company) and the delivery of a $28.0 million unsecured promissory note to that same group of individuals, payable over five years with interest at LIBOR + 2%. The $40.0 million of total consideration paid to terminate the SDG earnout, and related expenses has been treated as additional consideration paid for the stock of SDG, and therefore has been recorded as goodwill.
The purchase agreement for MindPlay LLC calls for future contingent consideration (“the MindPlay earnouts”) to be paid to its former principals, as more fully described in footnote 16. The MindPlay earnout is payable based on future revenues and gross margins from the sale of MindPlay products. No amounts have yet been paid pursuant to the MindPlay earnout.
During the quarter ended March 31, 2005 the Company determined that certain valuation allowances against deferred tax assets recorded as part of the SDG acquisition were no longer required as the deferred tax assets were now deemed to be recoverable through the use of qualified tax planning strategies. The deferred tax valuation allowance of $2.5 million was therefore reclassified as a reduction of the goodwill created in the SDG acquisition. In addition, certain other carrying values for purchased assets and liabilities were adjusted to goodwill totaling $0.6 million.
8. ACCRUED LIABILITIES AND JACKPOT LIABILITIES
Accrued liabilities consist of the following (in 000s):
|
|
|
March 31, |
|
June 30, |
|
||
|
|
|
2005 |
|
2004 |
|
||
|
Payroll and related costs |
|
$ |
11,406 |
|
$ |
11,905 |
|
|
Interest |
|
1,601 |
|
1,265 |
|
||
|
Professional and consulting fees |
|
2,572 |
|
3,102 |
|
||
|
Deferred revenues, sales and use taxes |
|
12,199 |
|
5,113 |
|
||
|
Regulatory approval cost accruals |
|
819 |
|
652 |
|
||
|
Royalties, rebates, direct mail coupons |
|
7,281 |
|
7,390 |
|
||
|
Customer deposits |
|
6,511 |
|
9,896 |
|
||
|
Acquisition related accruals |
|
2,257 |
|
3,806 |
|
||
|
Divestiture related accruals |
|
498 |
|
4,377 |
|
||
|
Litigation accruals |
|
9,360 |
|
— |
|
||
|
Severance accruals (See Note 14) |
|
1,784 |
|
— |
|
||
|
Other |
|
5,013 |
|
3,963 |
|
||
|
Subtotal |
|
61,301 |
|
51,469 |
|
||
|
Jackpots accrued not yet awarded |
|
12,576 |
|
12,075 |
|
||
|
Total accrued liabilities |
|
$ |
73,877 |
|
$ |
63,544 |
|
The Company recognizes liability for jackpot expense for the cost to fund these jackpots in the future. Generally winners may elect to receive a single lump sum payment or may opt to receive payments in equal installments over a specified period of time. The most recent history pattern indicates that approximately 85% of winners will elect the single payment option.
The Company funds jackpot installment payments through qualifying U.S. government or agency securities. The present value of the outstanding progressive jackpot liabilities is computed based upon the payment stream discounted at the applicable discount rate.
The increase in litigation accruals of $9.4 million is primarily a result of the patent litigation discussed in Note 16 and the Commitments and Contingencies section of this report.
12
9. LONG-TERM INVESTMENTS (RESTRICTED)
Pursuant to various state gaming regulations, certain cash accounts are maintained to ensure availability of funds to pay wide-area progressive jackpot awards, which totaled approximately $13.3 million at March 31, 2005 and which are included in cash and cash equivalents in the accompanying balance sheets. In addition, the Company purchases U.S. Treasury Strip securities for the benefit of jackpot winners who elect to receive annual or weekly installment payments. These securities are presented as restricted investments in the accompanying unaudited condensed consolidated balance sheets, and totaled $9.6 million and $2.5 million as of March 31, 2005 and June 30, 2004, respectively.
10. LONG-TERM DEBT
Long-term debt consisted of the following (in 000s):
|
|
|
March 31, |
|
June 30, |
|
||
|
|
|
2005 |
|
2004 |
|
||
|
Term loan facility |
|
$ |
315,757 |
|
$ |
350,000 |
|
|
Revolving credit facility |
|
— |
|
70,000 |
|
||
|
SDG earnout |
|
28,000 |
|
— |
|
||
|
Other, generally unsecured |
|
6,453 |
|
8,955 |
|
||
|
|
|
350,210 |
|
428,955 |
|
||
|
Less current maturities |
|
4,768 |
|
5,866 |
|
||
|
Long-term debt, less current maturities |
|
$ |
345,442 |
|
$ |
423,089 |
|
During December 2004, the Company amended its senior loan agreement (the “Loan Agreement”). The amendment provides for an increase in the maximum allowable leverage ratio, a reduction in the revolver from $125.0 million to $75.0 million, and an increase in the term loan interest rate to LIBOR + 3.00%. The fee incurred for the amendment totaled approximately $1.0 million. The Company is currently in compliance with its covenants consisting of leverage ratio, fixed charges coverage ratio, and minimum EBITDA (as that term is defined in the Loan Agreement). The leverage ratio is computed as total average debt outstanding during the quarter divided by the trailing 12 months EBITDA excluding certain cash and non-cash charges, and is further adjusted to remove EBITDA from discontinued operations at the time those operations are sold. As of March 31, 2005, the computed leverage ratio was 4.1 times versus an amended covenant maximum of 4.5 times. The maximum leverage ratio increase to 4.75 times for the trailing 12 month period ended June 30, 2005.
The other debt totaling approximately $34.5 million as of March 31, 2005 consists primarily of the debt owed to the former principals of SDG, Micro Clever Consulting, and MindPlay, totaling $28.0 million, $1.3 million and $4.0 million, respectively. The loans are due at various dates between 2005 and 2009 and bear rates of interest between LIBOR + 2% (5.7% as of March 31, 2005) and 6%, and are generally unsecured. Interest expense for these debts totaled $0.3 million, $0.1 million, and $0.2 million, respectively for the nine month ended March 31, 2005.
13
11. EARNINGS PER SHARE
The following computation of basic and diluted earnings (loss) per share from continuing operations, and income (loss) applicable to common shares are as follows (in 000s except per share amounts):
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
||||||||
|
|
|
March 31, |
|
March 31, |
|
||||||||
|
|
|
2005 |
|
2004 |
|
2005 |
|
2004 |
|
||||
|
Net income (loss) from continuing operations |
|
$ |
(6,449 |
) |
$ |
12,241 |
|
$ |
(20,394 |
) |
$ |
28,306 |
|
|
Net income (loss) from discontinued operations |
|
(395 |
) |
1,593 |
|
(4,771 |
) |
10,299 |
|
||||
|
Net income (loss) |
|
$ |
(6,844 |
) |
$ |
13,834 |
|
$ |
(25,165 |
) |
$ |
38,605 |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Weighted average common shares outstanding |
|
51,057 |
|
50,221 |
|
50,485 |
|
49,334 |
|
||||
|
Effect of dilutive securities |
|
— |
|
1,228 |
|
— |
|
1,188 |
|
||||
|
Weighted average common and dilutive shares outstanding |
|
51,057 |
|
51,449 |
|
50,485 |
|
50,522 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Earnings (loss) per basic share: |
|
|
|
|
|
|
|
|
|
||||
|
Income (loss) from continued operations |
|
$ |
(0.13 |
) |
$ |
0.25 |
|
$ |
(0.41 |
) |
$ |
0.57 |
|
|
Income (loss) from discontinued operations |
|
(0.01 |
) |
0.03 |
|
(0.09 |
) |
0.21 |
|
||||
|
|
|
$ |
(0.14 |
) |
$ |
0.28 |
|
$ |
(0.50 |
) |
$ |
0.78 |
|
|
Earnings (loss) per diluted share: |
|
|
|
|
|
|
|
|
|
||||
|
Income (loss) from continued operations |
|
$ |
(0.13 |
) |
$ |
0.24 |
|
$ |
(0.41 |
) |
$ |
0.56 |
|
|
Income (loss) from discontinued operations |
|
(0.01 |
) |
0.03 |
|
(0.09 |
) |
0.20 |
|
||||
|
|
|
$ |
(0.14 |
) |
$ |
0.27 |
|
$ |
(0.50 |
) |
$ |
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 fair market value of the underlying stock. Such securities are excluded from the diluted earnings per share calculation and consist of the following (in 000s):
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
||||
|
|
|
March 31, |
|
March 31, |
|
||||
|
|
|
2005 |
|
2004 |
|
2005 |
|
2004 |
|
|
Stock options |
|
5,588 |
|
2 |
|
5,588 |
|
1,435 |
|
|
Warrants |
|
100 |
|
— |
|
100 |
|
— |
|
|
|
|
5,688 |
|
2 |
|
5,688 |
|
1,435 |
|
For the three and nine month periods ended March 31, 2005, a total of 1.2 million in-the-money options and 0.6 million restricted stock units were also excluded from the dilutive earnings per share calculation as they are antidilutive given the reported net loss for these periods.
14
12. SEGMENTS AND GEOGRAPHICAL INFORMATION
The Company currently operates in two business segments (exclusive of the 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 currently owns and operates a casino in Vicksburg, Mississippi. The accounting policies of these segments are consistent with the 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 000s):
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
||||||||
|
|
|
March 31, |
|
March 31, |
|
||||||||
|
|
|
2005 |
|
2004 |
|
2005 |
|
2004 |
|
||||
|
Revenues: |
|
|
|
|
|
|
|
|
|
||||
|
Gaming Equipment and Systems |
|
$ |
111,678 |
|
$ |
101,977 |
|
$ |
316,688 |
|
$ |
286,764 |
|
|
Casino Operations |
|
13,734 |
|
14,262 |
|
39,339 |
|
39,329 |
|
||||
|
Total revenues |
|
$ |
125,412 |
|
$ |
116,239 |
|
$ |
356,027 |
|
$ |
326,093 |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Inter-segment revenues: |
|
|
|
|
|
|
|
|
|
||||
|
Gaming Equipment and Systems |
|
$ |
84 |
|
$ |
106 |
|
$ |
396 |
|
$ |
447 |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Operating income (loss): |
|
|
|
|
|
|
|
|
|
||||
|
Gaming Equipment and Systems |
|
$ |
(2,575 |
) |
$ |
20,096 |
|
$ |
(13,902 |
) |
$ |
68,670 |
|
|
Casino Operations |
|
4,812 |
|
5,157 |
|
12,690 |
|
12,985 |
|
||||
|
Corporate/other |
|
(4,425 |
) |
(3,101 |
) |
(15,057 |
) |
(10,037 |
) |
||||
|
Total operating income (loss) |
|
$ |
(2,188 |
) |
$ |
22,152 |
|
$ |
(16,269 |
) |
$ |
71,618 |
|
Total assets of the operating segments was consistent with amount disclosed within the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2004, with exception of goodwill which increased approximately $38.0 million as a result of the SDG earnout buyout. The majority of the Company’s goodwill is recorded in the Gaming Equipment and Systems segment.
The Company has operations based primarily in the United States with sales and distribution offices in Europe and South America.
The table below presents information as to the Company’s revenues and operating income (loss) by geographic region (in 000s):
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
||||||||
|
|
|
March 31, |
|
March 31, |
|
||||||||
|
|
|
2005 |
|
2004 |
|
2005 |
|
2004 |
|
||||
|
Revenues: |
|
|
|
|
|
|
|
|
|
||||
|
United States |
|
$ |
116,595 |
|
$ |
109,809 |
|
$ |
334,866 |
|
$ |
300,149 |
|
|
Germany |
|
1,595 |
|
2,901 |
|
4,253 |
|
14,695 |
|
||||
|
Other foreign |
|
7,222 |
|
3,529 |
|
16,908 |
|
11,249 |
|
||||
|
Total revenues |
|
$ |
125,412 |
|
$ |
116,239 |
|
$ |
356,027 |
|
$ |
326,093 |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Operating income (loss): |
|
|
|
|
|
|
|
|
|
||||
|
United States |
|
$ |
(770 |
) |
$ |
22,032 |
|
$ |
(12,836 |
) |
$ |
69,004 |
|
|
Germany |
|
(1,045 |
) |
695 |
|
(2,370 |
) |
2,645 |
|
||||
|
Other foreign |
|
(373 |
) |
(575 |
) |
(1,063 |
) |
(31 |
) |
||||
|
Total operating income (loss) |
|
$ |
(2,188 |
) |
$ |
22,152 |
|
$ |
(16,269 |
) |
$ |
71,618 |
|
15
13. SUPPLEMENTAL CASH FLOW INFORMATION
The following supplemental information is related to the consolidated statements of cash flows (in 000s).
|
|
|
Nine Months Ended |
|
||||
|
|
|
March 31, |
|
||||
|
|
|
2005 |
|
2004 |
|
||
|
Cash paid for interest |
|
$ |
12,448 |
|
$ |
19,779 |
|
|
Cash paid for income taxes |
|
$ |
3,077 |
|
$ |
3,425 |
|
|
|
|
|
|
|
|
||
|
Non-cash investing and financing transactions: |
|
|
|
|
|
||
|
Reclassify property, plant and equipment to inventory |
|
$ |
5,728 |
|
$ |
3,793 |
|
|
Unfavorable translation rate adjustment |
|
$ |
527 |
|
$ |
697 |
|
|
Note payable issued in acquisition |
|
$ |
28,000 |
|
$ |
4,000 |
|
14. RESTRUCTURING CHARGES
During fiscal year 2005, the Company has undertaken an extensive review of its operations and reduced its workforce during the September 2004 quarter and the March 2005 quarter. As a result of these reductions in force, the Company incurred charges totaling $2.2 million and $3.7 million for the three and nine month periods ended March 31, 2005, respectively which is primarily related to the Gaming and Systems segment. The balance of the accrued liability for unpaid severance costs is as follows:
|
Beginning balance at June 30, 2004 |
|
$ |
— |
|
|
Additions to the accrual |
|
3,657 |
|
|
|
Amounts paid |
|
(1,873 |
) |
|
|
Ending balance at March 31, 2005 |
|
$ |
1,784 |
|
The restructuring completed in the March 2005 quarter included the relocation of the Company’s European distribution operations. The Company has accrued a tax liability of $1.4 million (included in tax expense in the accompanying statement of operations) for the estimated tax obligation resulting from this restructuring.
15. IMPAIRMENT CHARGE FOR DEVELOPMENT LOAN
During fiscal year 2004, the Company entered into an agreement to provide a development loan to a Native American tribe to further their pursuit of developing a gaming facility. The amounts advanced under the terms of the loan totaled $1.5 million, and the Company is not obligated for any additional advances. During the quarter ended March 31, 2005, the tribe received an adverse court ruling which the Company believes materially impairs the tribe’s ability to pay the loan and therefore the Company recorded an impairment charge for the full amount of the loan.
16. COMMITMENTS AND CONTINGENCIES
On February 19, 2004, the Company completed the acquisition of MindPlay LLC. 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. The additional consideration that may become payable will be recorded as an additional cost of the acquired entity.
In June and July 2004, purported class actions were filed against Alliance Gaming Corporation and its officers, Robert Miodunski (the Company’s former Chief Executive Officer), Robert Saxton, Mark Lerner, and Steven Des Champs, in the Federal District Court for the District of Nevada. The nearly identical complaints allege violations of the Securities Exchange Act of 1934 stemming from the revision of earnings guidance and declines in the stock price. The plaintiffs’ motions to consolidate the cases and appoint lead plaintiff counsel customary in such cases, were granted in February 2005. The next step will be for the plaintiffs to file a consolidated complaint. The Company believes the lawsuits are without merit and intends to vigorously defend the action. In addition, in July 2004 two derivative lawsuits were filed in Nevada state court against the members of the board of directors and the officers listed above. The Company is named as a nominal defendant in the derivative lawsuits as the claims are purportedly asserted for the benefit of the Company. These lawsuits assert claims for breach of fiduciary duty and waste of corporate assets arising out of the same events as those giving rise to the class actions described above. These two cases have also been consolidated, and a consolidated
16
complaint has been filed. The defendants’ motions to dismiss or to stay were heard in January 2005, and the court granted the motions to dismiss in February 2005. The plaintiff’s motion to alter or amend the judgment is pending.
In February 2005, the Securities and Exchange Commission (the “SEC”) requested documents and information regarding matters related to the allegations in the class actions and similar matters. Management is cooperating fully with the SEC in this matter.
A lawsuit filed against the Company in August 2004 by Shuffle Master, Inc. in the U.S. District Court, District of Nevada, alleging infringement of various patents is in the discovery phase. A patent infringement lawsuit filed against the Company in December 2004 by IGT in the U.S. District Court, District of Nevada, is in the discovery phase. The Company is vigorously defending both lawsuits.
In September 2004, a federal district court jury entered a $7.4 million verdict against the Company in a suit filed by Action Gaming, Inc. and IGT. The suit alleged that the multi-hand video poker game deployed by the Company’s former subsidiary, United Coin Machine Co., infringed the plaintiffs’ patents. The district court ruled on summary judgment that the game does not infringe the patents. However, the court left to the jury the question whether the use of “autohold,” a specific, optional feature of the game, caused it to infringe under the “doctrine of equivalents,” a doctrine of patent law. After a two-week trial, the jury determined that the game with the autohold option enabled did infringe under the doctrine of equivalents and awarded damages accordingly. The feature has been disabled on all affected games in the field, and the decision permits continued deployment of the game as long as the autohold feature is not included. The Company is pursuing various remedies and has posted a cash bond totaling $7.6 million to stay payment of the judgment (and accrued interest) pending post-trial motions and appeal. The cash bond is included in other non-current assets and the accrued liability is included in accrued liabilities in the accompanying balance sheet. The expense for this charge is included in discontinued operations in the accompanying statement of operations.
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, in the aggregate, will have a material adverse effect on the Company’s financial position or results of operations.
Management believes that cash flows from current operating activities and the availability under the revolving credit facility will provide the Company with sufficient capital resources and liquidity. At March 31, 2005, the Company had no significant material purchase commitments for capital expenditures.
17. 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 Loan Agreement. The financial information presented includes Alliance Gaming Corporation (the “Parent”), its wholly-owned guaranteeing subsidiaries (“Guaranteeing Subsidiaries”), and 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 condensed consolidating financial statements.
17
UNAUDITED CONDENSED CONSOLIDATING BALANCE SHEETS
March 31, 2005
(In 000s)
|
|
|
|
|
|
|
|
|
|
|
Alliance |
|
|||||
|
|
|
|
|
|
|
Non- |
|
Reclassifications |
|
Gaming |
|
|||||
|
|
|
|
|
Guaranteeing |
|
Guaranteeing |
|
and |
|
Corp. and |
|
|||||
|
|
|
Parent |
|
Subsidiaries |
|
Subsidiaries |
|
Eliminations |
|
Subsidiaries |
|
|||||
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Current assets: |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Cash and cash equivalents |
|
$ |
10,374 |
|
$ |
12,719 |
|
$ |
8,321 |
|
$ |
— |
|
$ |
31,414 |
|
|
Accounts and notes receivable, net |
|
1,736 |
|
86,998 |
|
17,900 |
|
(853 |
) |
105,781 |
|
|||||
|
Inventories, net |
|
— |
|
50,154 |
|
8,339 |
|
(174 |
) |
58,319 |
|
|||||
|
Deferred tax assets, net |
|
1,461 |
|
18,521 |
|
— |
|
— |
|
19,982 |
|
|||||
|
Other current assets |
|
1,574 |
|
13,870 |
|
1,508 |
|
— |
|
16,952 |
|
|||||
|
Total current assets |
|
15,145 |
|
182,262 |
|
36,068 |
|
(1,027 |
) |
232,448 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Long-term investment (restricted) |
|
— |
|
9,622 |
|
— |
|
— |
|
9,622 |
|
|||||
|
Long-term receivables, net |
|
267,344 |
|
3,782 |
|
22 |
|
(266,028 |
) |
5,120 |
|
|||||
|
Net investment in leases |
|
— |
|
10,917 |
|
— |
|
— |
|
10,917 |
|
|||||
|
Leased gaming equipment, net |
|
— |
|
50,390 |
|
(4,185 |
) |
— |
|
46,205 |
|
|||||
|
Property, plant and equipment, net |
|
68 |
|
31,024 |
|
43,894 |
|
— |
|
74,986 |
|
|||||
|
Goodwill, net |
|
(900 |
) |
157,731 |
|
18,246 |
|
— |
|
175,077 |
|
|||||
|
Intangible assets, net |
|
5,408 |
|
47,322 |
|
4,455 |
|
— |
|
57,185 |
|
|||||
|
Investments in subsidiaries |
|
354,467 |
|
68,040 |
|
— |
|
(422,507 |
) |
— |
|
|||||
|
Deferred tax assets, net |
|
19,549 |
|
— |
|
— |
|
(4,654 |
) |
14,895 |
|
|||||
|
Other assets, net |
|
(112,366 |
) |
149,162 |
|
(21,988 |
) |
127 |
|
14,935 |
|
|||||
|
|
|
$ |
548,715 |
|
$ |
710,252 |
|
$ |
76,512 |
|
$ |
(694,089 |
) |
$ |
641,390 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Current liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Accounts payable |
|
$ |
807 |
|
$ |
22,665 |
|
$ |
1,384 |
|
$ |
— |
|
$ |
24,856 |
|
|
Accrued liabilities |
|
14,779 |
|
42,422 |
|
4,837 |
|
(737 |
) |
61,301 |
|
|||||
|
Jackpot liabilities |
|
— |
|
12,446 |
|
130 |
|
— |
|
12,576 |
|
|||||
|
Income taxes payable |
|
4,522 |
|
504 |
|
1,327 |
|
— |
|
6,353 |
|
|||||
|
Current maturities of long-term debt |
|
3,158 |
|
1,610 |
|
— |
|
— |
|
4,768 |
|
|||||
|
Total current liabilities |
|
23,266 |
|
79,647 |
|
7,678 |
|
(737 |
) |
109,854 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Long term debt, net |
|
344,599 |
|
266,871 |
|
— |
|
(266,028 |
) |
345,442 |
|
|||||
|
Deferred tax liabilities |
|
— |
|
4,654 |
|
799 |
|
(4,654 |
) |
799 |
|
|||||
|
Other liabilities |
|
2,574 |
|
4,445 |
|
— |
|
— |
|
7,019 |
|
|||||
|
Minority interest |
|
521 |
|
— |
|
— |
|
— |
|
521 |
|
|||||
|
Total liabilities |
|
370,960 |
|
355,617 |
|
8,477 |
|
(271,419 |
) |
463,635 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Stockholders’ equity: |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Special stock Series E |
|
12 |
|
— |
|
— |
|
— |
|
12 |
|
|||||
|
Common stock |
|
5,162 |
|
109 |
|
1,027 |
|
(1,136 |
) |
5,162 |
|
|||||
|
Treasury stock |
|
(665 |
) |
— |
|
— |
|
— |
|
(665 |
) |
|||||
|
Deferred compensation |
|
(7,271 |
) |
— |
|
— |
|
— |
|
(7,271 |
) |
|||||
|
Additional paid-in capital |
|
197,217 |
|
|||||||||||||