UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

 

ý                                  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2004

 

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 Rd.

 

 

Las Vegas, Nevada

 

89119

(Address of principal executive offices)

 

(Zip Code)

 

Registrant’s telephone number: (702) 270-7600

Registrant’s internet:  www.alliancegaming.com

 

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

Yes  ý   No  o

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

ý  Yes   o  No

 

The number of shares of Common Stock, $0.10 par value, outstanding as of January 31, 2005, according to the records of the registrant’s registrar and transfer agent was 51,088,700.

 

 



 

INDEX

 

PART I.

FINANCIAL INFORMATION

 

 

 

 

 

 

 

Item 1.

Unaudited Financial Statements

 

 

 

 

 

 

 

 

Unaudited Condensed Consolidated Balance Sheets as of December 31, 2004 and June 30, 2004

 

3

 

 

 

 

 

 

Unaudited Condensed Consolidated Statements of Operations for the Three Months Ended December 31, 2004 and 2003

 

4

 

 

 

 

 

 

Unaudited Condensed Consolidated Statements of Operations for the Six Months Ended December 31, 2004 and 2003

 

4

 

 

 

 

 

 

Unaudited Condensed Consolidated Statement of Stockholders’ Equity for the Six Months Ended December 31, 2004

 

5

 

 

 

 

 

 

Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months Ended December 31, 2004 and 2003

 

6

 

 

 

 

 

 

Notes to Unaudited Condensed Consolidated Financial Statements

 

7

 

 

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

26

 

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

35

 

 

 

 

 

Item 4.

Controls and Procedures

 

36

 

 

 

 

 

PART II.

OTHER INFORMATION

 

 

 

 

 

 

 

Item 1.

Legal Proceedings

 

37

 

 

 

 

 

Item 4.

Submission of Matters to a Vote of Security Holders

 

37

 

 

 

 

 

Item 6.

Exhibits

 

38

 

 

 

 

 

SIGNATURES

 

 

39

 

2



 

PART I

ALLIANCE GAMING CORPORATION

 UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

($ In 000’s except share and per share data)

 

 

 

As of

 

 

 

December 31,
2004

 

June 30,
2004

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

27,964

 

$

172,726

 

Accounts and notes receivable, net of allowance for doubtful accounts of $14,399 and $9,722

 

103,601

 

129,779

 

Inventories

 

72,462

 

61,135

 

Deferred tax assets, net

 

19,982

 

20,054

 

Other current assets

 

19,580

 

12,420

 

Total current assets

 

243,589

 

396,114

 

Long-term investments (restricted)

 

8,542

 

2,528

 

Long-term receivables, net of allowance of $12 and $12

 

8,757

 

12,518

 

Net investment in leases

 

12,626

 

5,614

 

Leased gaming equipment, net of accumulated depreciation of $40,814 and $31,105

 

44,273

 

46,634

 

Property, plant and equipment, net of accumulated depreciation and amortization of $30,164 and $23,127

 

76,654

 

75,838

 

Goodwill, net

 

177,961

 

136,989

 

Intangible assets, net of accumulated amortization of $14,968 and $12,489

 

59,474

 

63,623

 

Assets of discontinued operations held for sale

 

 

4,442

 

Other assets, net

 

15,286

 

6,354

 

Total assets

 

$

647,162

 

$

750,654

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities

 

 

 

 

 

Accounts payable

 

$

30,478

 

$

37,515

 

Accrued liabilities

 

60,991

 

51,469

 

Jackpot liabilities

 

10,076

 

12,075

 

Income taxes payable

 

 

7,233

 

Current maturities of long-term debt

 

5,040

 

5,866

 

Liabilities of discontinued operations held for sale

 

 

4,337

 

Total current liabilities

 

106,585

 

118,495

 

Long-term debt, net of current maturities

 

348,540

 

423,089

 

Deferred tax liabilities

 

90

 

849

 

Other liabilities

 

6,985

 

6,092

 

Minority interest

 

1,163

 

1,326

 

Total liabilities

 

463,363

 

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; 51,552,000 and 51,426,000 shares issued

 

5,158

 

5,145

 

Treasury stock at cost, 526,600 and 513,000 shares

 

(665

)

(501

)

Deferred compensation

 

(7,858

)

(6,500

)

Additional paid-in capital

 

196,872

 

194,040

 

Accumulated other comprehensive income

 

1,518

 

1,524

 

Retained earnings (accumulated deficit)

 

(11,238

)

7,083

 

Total stockholders’ equity

 

183,799

 

200,803

 

Total liabilities and stockholders’ equity

 

$

647,162

 

$

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, except share and per share amounts)

 

 

 

Three Months Ended
December 31,

 

Six Months Ended
December 31,

 

 

 

2004

 

2003

 

2004

 

2003

 

Revenues:

 

 

 

 

 

 

 

 

 

Gaming equipment and systems

 

$

100,933

 

$

96,319

 

$

205,010

 

$

184,787

 

Casino operations

 

12,769

 

12,312

 

25,605

 

25,067

 

 

 

113,702

 

108,631

 

230,615

 

209,854

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

Cost of gaming equipment and systems

 

53,337

 

38,780

 

104,173

 

72,017

 

Cost of casino operations

 

4,589

 

4,884

 

9,391

 

9,887

 

Selling, general and administrative

 

41,051

 

21,548

 

84,706

 

50,613

 

Research and development

 

10,358

 

9,440

 

22,130

 

15,403

 

Restructuring charge

 

 

 

1,435

 

 

Depreciation and amortization

 

12,020

 

6,445

 

22,861

 

12,467

 

 

 

121,355

 

81,097

 

244,696

 

160,387

 

Operating income (loss)

 

(7,653

)

27,534

 

(14,081

)

49,467

 

Other income (expense)

 

 

 

 

 

 

 

 

 

Interest income

 

318

 

83

 

798

 

126

 

Interest expense

 

(3,750

)

(3,869

)

(7,712

)

(9,598

)

Minority interest

 

(1,145

)

(541

)

(1,644

)

(1,027

)

Refinancing / bank amendment charges

 

(564

)

 

(564

)

(12,293

)

Other, net

 

375

 

(545

)

528

 

(899

)

Income (loss) from continuing operations before income taxes

 

(12,419

)

22,662

 

(22,675

)

25,776

 

Income tax expense (benefit)

 

(4,879

)

8,444

 

(8,730

)

9,710

 

Income (loss) from continuing operations

 

(7,540

)

14,218

 

(13,945

)

16,066

 

Income (loss) from discontinued operations

 

15

 

4,526

 

(4,376

)

8,706

 

Net income (loss)

 

$

(7,525

)

$

18,744

 

$

(18,321

)

$

24,772

 

 

 

 

 

 

 

 

 

 

 

Basic earnings (loss) per share:

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

(0.15

)

$

0.29

 

$

(0.27

)

$

0.32

 

Discontinued operations

 

 

0.09

 

(0.09

)

0.18

 

Total

 

$

(0.15

)

$

0.38

 

$

(0.36

)

$

0.50

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings (loss) per share:

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

(0.15

)

$

0.28

 

$

(0.27

)

$

0.32

 

Discontinued operations

 

 

0.09

 

(0.09

)

0.17

 

Total

 

$

(0.15

)

$

0.37

 

$

(0.36

)

$

0.49

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

51,010

 

49,741

 

50,988

 

49,660

 

 

 

 

 

 

 

 

 

 

 

Weighted average diluted common and common share equivalents outstanding

 

51,010

 

50,930

 

50,988

 

50,814

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

4



 

ALLIANCE GAMING CORPORATION AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

($ In 000s)

 

 

 

Common Stock

 

Series E
Special

 

Treasury

 

Deferred
Compen-

 

Additional
Paid-In

 

Accum-
ulated
Other
Compre-
hensive
Income

 

Retained
Earnings
(Accum-
ulated

 

Total
Stock-
holders’

 

 

 

Shares

 

Dollars

 

Stock

 

Stock

 

sation

 

Capital

 

(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

 

 

 

 

 

 

 

 

(18,321

)

(18,321

)

Foreign currency translation adjustment

 

 

 

 

 

 

 

(6

)

 

(6

)

Total comprehensive income

 

 

 

 

 

 

 

 

 

(18,327

)

Restricted stock units issued

 

 

 

 

 

(1,900

)

1,900

 

 

 

 

Restricted stock units amortization

 

 

 

 

 

542

 

 

 

 

542

 

Repurchase of common stock for treasury

 

 

 

 

(164

)

 

 

 

 

(164

)

Shares issued upon exercise of stock options

 

126

 

13

 

 

 

 

696

 

 

 

709

 

Tax benefit of employee stock option exercises

 

 

 

 

 

 

236

 

 

 

236

 

Balances at December 31, 2004

 

51,552

 

$

5,158

 

$

12

 

$

(665

)

$

(7,858

)

$

196,872

 

$

1,518

 

$

(11,238

)

$

183,799

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

5



 

ALLIANCE GAMING CORPORATION AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

($ In 000s)

 

 

 

Six Months Ended
December 31,

 

 

 

2004

 

2003

 

 

 

 

 

 

 

Cash flows from operating activities of continuing operations:

 

 

 

 

 

Net income (loss)

 

$

(18,321

)

$

24,772

 

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

 

 

 

 

 

(Income) loss from discontinued operations

 

4,376

 

(8,706

)

Depreciation and amortization

 

22,861

 

12,467

 

Stock-based compensation

 

542

 

 

Refinancing / bank amendment charges

 

564

 

12,293

 

Deferred income taxes

 

(687

)

10,433

 

Provision for losses on receivables

 

5,154

 

526

 

Inventory and other discontinued asset write-downs

 

14,088

 

 

Other

 

(11,605

)

(1,099

)

Change in operating assets and liabilities, net of effects of business acquired:

 

 

 

 

 

Accounts and notes receivable

 

17,138

 

(2,019

)

Inventories

 

(17,456

)

(2,493

)

Other current assets

 

(4,336

)

(1,023

)

Accounts payable

 

(7,169

)

(2,072

)

Accrued liabilities and jackpot liabilities

 

(12,853

)

(2,924

)

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

 

(7,704

)

40,155

 

Cash flows from investing activities of continuing operations:

 

 

 

 

 

Advances of notes receivable due from Sierra Design Group

 

 

(61,025

)

Additions to property, plant and equipment

 

(5,531

)

(3,815

)

Additions to leased gaming equipment

 

(18,183

)

(15,957

)

Additions to other long-term assets

 

(1,521

)

(10,414

)

Acquisitions, net of cash acquired

 

(12,000

)

(3,879

)

Proceeds from sale of net assets of discontinued operations

 

1,911

 

16,500

 

Net cash used in investing activities of continuing operations

 

(35,324

)

(78,590

)

Cash flows from financing activities of continuing operations:

 

 

 

 

 

Capitalized debt issuance costs

 

(1,038

)

(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

 

(2,050

)

(1,349

)

Re-purchase of treasury shares

 

(164

)

 

Proceeds from exercise of stock options

 

945

 

2,907

 

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

 

(103,925

)

71,580

 

 

 

 

 

 

 

Effect of exchange rates changes on cash

 

487

 

130

 

 

 

 

 

 

 

Cash provided by discontinued operations

 

1,704

 

95

 

 

 

 

 

 

 

Cash and cash equivalents:

 

 

 

 

 

Increase for the period

 

(144,762

)

33,370

 

Balance, beginning of period

 

172,726

 

38,884

 

Balance, end of period

 

$

27,964

 

$

72,254

 

 

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.

 

For Video Services, Inc. (“VSI”), the Company owned 100% of the voting stock and was entitled to receive 71% of dividends declared by VSI, if any, at such time that dividends were declared. The sale of VSI was completed during the quarter ended December 31, 2004 for a realized gain of $0.8 million, net of tax (included in discontinued operations).

 

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 as discontinued operations for all periods presented.

 

Recently Issue 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 reporting periods 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 which revised 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 equals or exceeds 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 amends FASB No. 123 to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of FASB No. 123 and APB Opinion No. 28 “Interim Financial Reporting” to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-

 

7



 

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

 

 

 

Three Months Ended
December 31,

 

Six Months Ended
December 31,

 

 

 

2004

 

2003

 

2004

 

2003

 

Net income (loss)

 

 

 

 

 

 

 

 

 

As reported

 

$

(7,525

)

$

18,744

 

$

(18,321

)

$

24,772

 

Stock-based compensation under FASB No. 123, net of tax

 

(1,701

)

(1,021

)

(3,263

)

(1,893

)

Pro forma net income (loss)

 

$

(9,226

)

$

17,723

 

$

(21,584

)

$

22,879

 

 

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

 

 

Basic– As reported

 

$

(0.15

)

$

0.38

 

$

(0.36

)

$

0.50

 

Basic– Pro forma

 

$

(0.18

)

$

0.36

 

$

(0.42

)

$

0.46

 

Diluted– As reported

 

$

(0.15

)

$

0.37

 

$

(0.36

)

$

0.49

 

Diluted– Pro forma

 

$

(0.18

)

$

0.35

 

$

(0.42

)

$

0.45

 

 

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
December 31,

 

Six Months Ended
December 31,

 

 

 

2004

 

2003

 

2004

 

2003

 

Risk-fee interest rate (weighted average)

 

3.5

%

3.5

%

3.5

%

3.5

%

Expected volatility

 

0.35

 

0.26

 

0. 35

 

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 $4.39 and $3.14 per share for the quarter ended December 31, 2004 and December 31, 2003, respectively and were $5.06 and $3.10 for the six months ended December 31, 2004 and 2003, respectively.

 

3.              DISCONTINUED OPERATIONS

 

The Company has completed several divestitures in accordance with our plan to sell our “non-core” businesses, which was a strategy announced in July 2003. In July 2003, we completed the sale of Bally Wulff to a private equity investor.  Since the net assets of Bally Wulff were written down to the estimated sale price in June 2003, no additional gain or loss was recorded upon the closing of the sale. In May 2004, we completed the sale of Rail City Casino to The Sands Resort. 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 VSI to Churchill Downs Incorporated and received proceeds of approximately $2.0 million and realized a gain of $0.8 million, net of tax.

 

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 three and six month periods ended December 31, 2004 include VSI, while the results for the three and six month periods ended December 31, 2003 include UCMC, VSI, and Rail City.  Summary operating results are as follows (in 000s):

 

 

 

Three Months Ended
December 31,

 

Six Months Ended
December 31,

 

 

 

2004

 

2003

 

2004

 

2003

 

Net revenues

 

$

559

 

$

64,179

 

$

4,514

 

$

123,533

 

 

 

 

 

 

 

 

 

 

 

Operating income (loss)

 

(129

)

7,947

 

358

 

14,746

 

Income tax expense (benefit)

 

(38

)

2,437

 

(2,516

)

4,724

 

Income (loss) from discontinued operations

 

$

15

 

$

4,526

 

$

(4,376

)

$

8,706

 

 

4.              OTHER CURRENT ASSETS

 

Other current assets consist of the following (in 000s):

 

 

 

December 31,
2004

 

June 30,
2004

 

Prepaid taxes

 

$

3,889

 

$

814

 

Prepaid royalty

 

3,126

 

2,623

 

Refundable deposits

 

1,883

 

3,229

 

Games on trial

 

3,088

 

2,608

 

Deferred cost of revenue

 

3,974

 

208

 

Prepaid licensing and intellectual fees

 

685

 

1,090

 

Prepaid insurance

 

1,122

 

592

 

Prepaid other expense

 

1,813

 

1,256

 

Total current assets

 

$

19,580

 

$

12,420

 

 

The decrease in refundable deposits of $1.3 million is a result of units purchased from other manufacturers for which the deposit has now been applied to the account payable.  The increase in deferred costs of $3.7 million is due to shipments of games, primarily to the European market with F.O.B. destination terms, which will not be recognized as revenue until the third quarter of fiscal year 2005.

 

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):

 

 

 

December 31,
2004

 

June 30,
2004

 

Raw materials

 

$

24,377

 

$

26,050

 

Work-in-process

 

4,956

 

3,324

 

Finished goods

 

43,129

 

31,761

 

Total

 

$

72,462

 

$

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 our 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 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 the quarter ended September 30, 2004, the Company decided that its legacy V7 video platform would no longer be supported,

 

9



 

and the remaining used game inventory for such products was targeted for immediate disposal, resulting in a write down of $3.0 million.  The inventory of new games for this product line was targeted for sale at reduced prices, which were still above the carrying value less cost to sell and therefore were not written down.

 

During the quarter ended December 31, 2004, management completed a three year business planning process.  In accordance with this plan, significant development efforts were redirected to the Alpha-based video platform and products.  The Company also made its existing EVO video games upgradeable to Alpha when approved in each market. The remaining used EVO inventory has been targeted for sale primarily in non-domestic markets, which traditionally have lower price points for used games and have higher importation and delivery costs, resulting in significantly lower net realizable values.  The capitalized regulatory approval costs for the EVO and legacy video platform were determined to no longer be recoverable, and were also written off.

 

During the quarter ended December 31, 2004, the Company consolidated several warehouses into one central warehouse, with the intent to reduce warehouse rental costs.  As part of this consolidation, certain used games and related ancillary equipment including signs, were identified for immediate destruction, scrap, or salvage and this process has continued into the March 2005 period.

 

As a result of the decision to move to the new video platform, the targeting of used equipment for non-domestic markets, and the consolidation of warehouses leading to accelerated disposals, the Company wrote down its inventory and related assets by a total of $11.1 million during the quarter ended December 31, 2004, and such write downs for the six months ended December 31, 2004 totaled $14.1 million. These charges are included in the cost of gaming equipment and systems in the statement of operations.

 

The Company continues to take certain used games on trade as part of new game sales, and therefore additional write-downs may be necessary in future periods depending on a number of factors impacting the future demand for such used products and the ultimate net values realized.

 

6.              PROPERTY, PLANT AND EQUIPMENT AND LEASED GAMING EQUIPMENT

 

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 estimated useful life ranging from 3-4 years.

 

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):

 

 

 

December 31,
2004

 

June 30,
2004

 

Land and land improvements

 

$

12,827

 

$

19,086

 

Buildings and leasehold improvements

 

37,735

 

29,937

 

Gaming equipment

 

33,160

 

29,121

 

Furniture, fixtures and equipment

 

23,096

 

20,821

 

Less accumulated depreciation and amortization

 

(30,164

)

(23,127

)

Total property, plant and equipment, net

 

$

76,654

 

$

75,838

 

 

 

 

 

 

 

Leased gaming equipment

 

$

85,087

 

$

77,739

 

Less accumulated depreciation

 

(40,814

)

(31,105

)

Total leased gaming equipment, net

 

$

44,273

 

$

46,634

 

 

10



 

7.              INTANGIBLE ASSETS AND GOODWILL

 

In July 2001, the Company adopted FASB No. 142 “Goodwill and Other Intangible Assets”, which requires companies to cease amortizing goodwill and certain intangible assets with indefinite useful lives.  Instead, goodwill and intangible assets deemed to have indefinite useful lives are to be reviewed for impairment annually at the reporting unit level (Gaming equipment and systems, and casino operations).  There was no impairment of goodwill upon adoption of FASB No. 142.   There was no impairment charged to goodwill in the six months ended December 31, 2004 or 2003.

 

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.  Impairment is measured as the difference between the carrying amount and the fair value of the intangible assets and is recognized as a component of income from operations.

 

Intangibles

 

Intangible assets excluding discontinued operations consist of the following (in 000s):

 

 

 

 

 

December 31, 2004

 

June 30, 2004

 

 

 

Wt. Avg.
Useful
life
(Years)

 

Gross
Carrying
Amount

 

Accum-
ulated
Amortization

 

Net
Carrying
Amount

 

Gross
Carrying
Amount

 

Accum-
ulated
Amortization

 

Net
Carrying
Amount

 

Computer software

 

3

 

$

8,996

 

$

(2,622

)

$

6,374

 

$

8,963

 

$

(1,498

)

$

7,465

 

Computer software from acquisitions

 

9

 

11,700

 

(4,030

)

7,670

 

11,700

 

(3,380

)

8,320

 

License rights

 

3-5

 

1,774

 

(777

)

997

 

2,745

 

(1,979

)

766

 

Capitalized regulatory approval costs

 

3

 

3,638

 

(1,043

)

2,595

 

4,767

 

(833

)

3,934

 

CRM project

 

5

 

3,290

 

(1,237

)

2,053

 

3,039

 

(1,046

)

1,993

 

PLM project

 

5

 

1,843

 

(102

)

1,741

 

1,585

 

 

1,585

 

Trademarks

 

5

 

6,688

 

(431

)

6,257

 

6,688

 

(288

)

6,400

 

Patents

 

13

 

9,470

 

(608

)

8,862

 

9,470

 

(243

)

9,227

 

Non-compete agreements

 

6

 

275

 

(38

)

237

 

275

 

(15

)

260

 

Customer relationships

 

5

 

740

 

(123

)

617

 

740

 

(49

)

691

 

Core technology

 

8

 

5,445

 

(567

)

4,878

 

5,445

 

(227

)

5,218

 

Deferred financing costs

 

6

 

7,385

 

(1,656

)

5,729

 

6,910

 

(1,017

)

5,893

 

Contracts

 

10

 

12,100

 

(1,016

)

11,084

 

12,100

 

(411

)

11,689

 

Other intangibles

 

7

 

1,098

 

(718

)

380

 

1,685

 

(1,503

)

182

 

Total

 

 

 

$

74,442

 

$

(14,968

)

$

59,474

 

$

76,112

 

$

(12,489

)

$

63,623

 

 

Amortization expense totaled $2.6 million and $1.4 million for the three months ended December 31, 2004 and 2003, respectively.  Amortization expense totaled $4.6 million and $2.7 million for the six months ended December 31, 2004 and 2003, respectively.  Computer software amortization expense totaled $1.1 million and $0.8 million for the three months ended December 31, 2004 and 2003, respectively.  Computer software amortization totaled $1.6 million and $1.4 million for the six months ended December 31, 2004 and 2003, respectively.

 

Future amortization of intangible assets is scheduled as follows (in 000s):

 

Period Ending
December 31,

 

Amount

 

2005

 

$

5,197

 

2006

 

10,463

 

2007

 

8,919

 

2008

 

6,600

 

2009

 

5,887

 

Thereafter

 

22,408

 

Total

 

$

59,474

 

 

11



 

Goodwill

 

The changes in the carrying amount of goodwill are as follows (in 000s):

 

Balance as of June 30, 2004

 

$

136,989

 

Acquired goodwill

 

40,558

 

Foreign currency translation adjustment

 

414

 

Balance as of December 31, 2004

 

$

177,961

 

 

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 earnout”) which could have totaled $95 million (payable in cash and stock) depending on the achievement of certain SDG financial performance targets.  The consideration for the termination of the earnout consisted of a one-time cash payment of $12 million paid to the group of former SDG stakeholders and the delivery of a $28 million unsecured promissory note to that same group of individuals, payable over five years with interest at LIBOR + 2%.  The $40 million of total consideration paid to terminate the 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 (“earnouts”) to be paid to its former principals, as more fully described in footnote 14. 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 this earnout.

 

8.              ACCRUED LIABILITIES AND JACKPOT LIABILITIES

 

Accrued liabilities consist of the following (in 000s):

 

 

 

December 31,
2004

 

June 30,
2004

 

Payroll and related costs

 

$

9,754

 

$

11,905

 

Interest

 

1,713

 

1,265

 

Professional and consulting fees

 

4,281

 

3,102

 

Deferred revenues, sales and use taxes

 

10,942

 

5,113

 

Regulatory approval cost accruals

 

1,389

 

652

 

Royalties, rebates, direct mail coupons

 

8,541

 

7,390

 

Customer deposits

 

5,748

 

9,896

 

Acquisition related accruals

 

3,906

 

3,806

 

Divestiture related accruals

 

561

 

4,377

 

Litigation accruals

 

9,360

 

 

Severance accruals

 

637

 

 

Other

 

4,159

 

3,963

 

Subtotal

 

60,991

 

51,469

 

Jackpots accrued not yet awarded

 

10,076

 

12,075

 

Total accrued liabilities

 

$

71,067

 

$

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.

 

12



 

The increase in litigation accruals of $9.4 million is primarily a result of the patent litigation discussed in the Commitments and Contingencies section of this report.

 

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 $12.8 million at December 31, 2004 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 consolidated balance sheets, and totaled $8.5 million and $2.5 million as of December 31, 2004 and June 30, 2004, respectively.

 

10.       LONG-TERM DEBT

 

Long-term debt consisted of the following (in 000s):

 

 

 

December 31,
2004

 

June 30,
2004

 

Term Loan facility

 

$

317,507

 

$

350,000

 

Revolving credit facility

 

 

70,000

 

Other, generally unsecured

 

36,073

 

8,955

 

 

 

353,580

 

428,955

 

Less current maturities

 

5,040

 

5,866

 

Long-term debt, less current maturities

 

$

348,540

 

$

423,089

 

 

In December 2004, the Company amended its senior loan agreement.  The amendment provides for an increase in the maximum allowable leverage ratio (currently 4.25x), a reduction in the revolver from $125 million to $75 million which is currently unborrowed, and an increase in the term loan interest rate to LIBOR + 3.00%.  The LIBOR rate at December 31, 2004 was 2.65%.  The fee incurred for the amendment totaled approximately $1.0 million, which has been capitalized and will be amortized over the life of the amended loan agreement, and the Company recorded a pre-tax charge of $0.6 million to write-off a portion of the previously deferred financing costs.

 

The Company’s bank credit agreement, as amended, contains several financial covenants including maximum leverage ratio, minimum cash flow (as that term is defined in the agreement) and fixed charge coverage ratio.  The credit agreement also contains a number of maintenance covenants and other significant covenants that, among other things, restrict the ability of the Company and certain of its subsidiaries to dispose of assets, incur additional indebtedness and issue preferred stock, pay dividends or make other distributions, enter into certain acquisitions, repurchase equity interests or subordinated indebtedness, issue or sell equity interests of the Company’s subsidiaries, engage in mergers or acquisitions, or engage in certain transactions with subsidiaries and affiliates, and that otherwise restrict corporate activities.  As of December 31, 2004, the Company is in compliance with the covenants, including the leverage ratio which is currently 3.9x.  Pursuant to the recent amendment, the leverage ratio maximum is scheduled to increase to 4.50x and to 4.75x as of March 31, 2005 and June 30, 2005, respectively.

 

The other debt totaling approximately $36.1 million as of December 31, 2004, 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 plus 2% (5.7% as of December 31, 2004) and 6%, and are generally unsecured.

 

13



 

In September 2003, the Company refinanced its senior bank debt credit facility and recorded a pre-tax charge totaling $12.3 million.  This charge includes a $5.0 million charge for the early extinguishment of the Company’s subordinated notes, $7.0 million for the non-cash write-off of deferred financing costs and $0.3 million in fees and expenses.

 

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
December 31,

 

Six Months Ended
December 31,

 

 

 

2004

 

2003

 

2004

 

2003

 

Net income (loss) from continuing operations

 

$

(7,540

)

$

14,218

 

$

(13,945

)

$

16,066

 

Net income (loss) from discontinued operations

 

15

 

4,526

 

(4,376

)

8,706

 

Net income (loss)

 

$

(7,525

)

$

18,744

 

$

(18,321

)

$

24,772

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

51,010

 

49,741

 

50,988

 

49,660

 

Effect of dilutive securities

 

 

1,189

 

 

1,154

 

Weighted average common and dilutive shares outstanding

 

51,010

 

50,930

 

50,988

 

50,814

 

 

 

 

 

 

 

 

 

 

 

Earnings (loss) per basic share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continued operations

 

$

(0.15

)

$

0.29

 

$

(0.27

)

$

0.32

 

Income (loss) from discontinued operation

 

0.00

 

0.09

 

(0.09

)

0.18

 

 

 

$

(0.15

)

$

0.38

 

$

(0.36

)

$

0.50

 

Earnings (loss) per diluted share:

 

 

 

 

 

 

 

 

 

Income (loss) from continued operations

 

$

(0.15

)

$

0.28

 

$

(0.27

)

0.32

 

Income (loss) from discontinued operation

 

0.00

 

0.09

 

(0.09

)

0.17

 

 

 

$

(0.15

)

$

0.37

 

$

(0.36

)

$

0.49

 

 

Diluted earnings per share represent the potential dilution that could occur if all dilutive securities outstanding were exercised. Certain securities do not have a dilutive effect because their exercise price exceeds the 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
December 31,

 

Six Months Ended
December 31,

 

 

 

2004

 

2003

 

2004

 

2003

 

Stock options

 

3,519

 

3

 

3,378

 

56

 

 

 

 

 

 

 

 

 

 

 

Warrants

 

100

 

 

100

 

 

 

 

3,619

 

3

 

3,478

 

56

 

 

For the three and six month periods ended December 31, 2004, a total of 1.2 million in-the-money options and 0.5 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.

 

During the quarter ended December 31, 2004 the Company granted an additional 156,507 restricted stock units valued at $1.9 million.  The restricted stock units vest on October 1, 2010; however, vesting could be accelerated under certain circumstances.  The $1.9 million has been deferred, and will be amortized as compensation expense over three years.

 

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 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):

 

14



 

 

 

Three Months Ended
December 31,

 

Six Months Ended
December 31,

 

 

 

2004

 

2003

 

2004

 

2003

 

 

 

 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

 

 

 

Gaming Equipment and Systems

 

$

100,933

 

$

96,319

 

$

205,010

 

$

184,787

 

Casino Operations

 

12,769

 

12,312

 

25,605

 

25,067

 

Total revenues

 

$

113,702

 

$

108,631

 

$

230,615

 

209,854

 

Intersegment revenues:

 

 

 

 

 

 

 

 

 

Gaming Equipment and Systems

 

$

84

 

$

212

 

$

256

 

$

341

 

 

 

 

 

 

 

 

 

 

 

Operating income (loss):

 

 

 

 

 

 

 

 

 

Gaming Equipment and Systems

 

$

(6,840

)

$

27,217

 

$

(11,327

)

$

48,575

 

Casino Operations

 

4,082

 

3,814

 

7,878

 

7,828

 

Corporate/other

 

(4,895

)

(3,497

)

(10,632

)

(6,936

)

Total operating income (loss)

 

$

(7,653

)

$

27,534

 

$

(14,081

)

$

49,467

 

 

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, operating income, identifiable assets, capital expenditures and depreciation and amortization by geographic region (in 000s):

 

 

 

Three Months Ended
December 31,

 

Six Months Ended
December 31,

 

 

 

2004

 

2003

 

2004

 

2003

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

 

 

 

 

 

 

 

 

United States

 

$

106,589

 

$

97,728

 

$

218,271

 

$

190,340

 

Germany

 

1,482

 

5,762

 

2,658

 

11,794

 

Other foreign

 

5,631

 

5,141

 

9,686

 

7,720

 

Total revenues

 

$

113,702

 

$

108,631

 

$

230,615

 

$

209,854

 

 

 

 

 

 

 

 

 

 

 

Operating income (loss)

 

 

 

 

 

 

 

 

 

United States

 

$

(5,772

)

$

25,814

 

$

(13,168

)

$

48,693

 

Germany

 

(924

)

926

 

(401

)

1,024

 

Other foreign

 

(957

)

794

 

(512

)

(250

)

Total operating income (loss)

 

$

(7,653

)

$

27,534

 

$

(14,081

)

$

49,467

 

 

13.       SUPPLEMENTAL CASH FLOW INFORMATION

 

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

 

 

 

Six Months Ended
December 31,

 

 

 

2004

 

2003

 

Cash paid for interest

 

$

7,271

 

$

15,227

 

Cash paid for income taxes

 

3,057

 

1,638

 

 

 

 

 

 

 

Non-cash investing and financing transactions:

 

 

 

 

 

Reclassify property, plant and equipment to inventory

 

$

3,423

 

$

2,517

 

Unfavorable translation rate adjustment

 

$

493

 

$

(2,524

)

Note payable issued in acquisition

 

$

28,000

 

$

 

 

15



14. RESTRUCTURING CHARGE

 

The Company undertook an extensive review of its operations and accordingly reduced its workforce which resulted in a restructuring charge and related accrued liability totaling $1.4 million as of and for the quarter ended September 30, 2004.  As of December 31, 2004, no additional restructuring charges have been incurred; however, additional staff reductions made subsequent to December 31, 2004 are intended to further this expense reduction effort and will result in an additional restructuring charge to be reported in the subsequent quarter.  The balance of the accrued liability for unpaid severance costs totaled $0.6 million as of December 31, 2004.

 

15.       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 are pending and are customary in such cases.  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 complaint has been filed.  The defendants’ motions to dismiss or to stay were heard in January 2005 and taken under submission by the court.

 

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 pleadings 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 had 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 $7.4 million to stay payment of the judgment 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 limited availability under the revolving credit facility will provide the Company with sufficient capital resources and liquidity.  At December 31, 2004 the Company had no significant material purchase commitments for capital expenditures.

 

16.       UNAUDITED CONSOLIDATING FINANCIAL STATEMENTS

 

The following unaudited condensed consolidating financial statements are presented to provide certain financial information regarding guaranteeing and non-guaranteeing subsidiaries in relation to the Company’s bank credit agreement. The financial information presented includes Alliance Gaming Corporation (the “Parent”), its wholly-owned guaranteeing subsidiaries (“Guaranteeing Subsidiaries”), and the non-guaranteeing subsidiaries the Rainbow Casino Vicksburg Partnership, L.P. (dba Rainbow Casino) and the Company’s non-domestic subsidiaries (together the “Non-Guaranteeing Subsidiaries”). The notes to the unaudited consolidating financial statements should be read in conjunction with these unaudited consolidating financial statements.

 

16



 

UNAUDITED CONSOLIDATING BALANCE SHEETS

December 31, 2004

(In 000s)

 

 

 

Parent

 

Guaranteeing
Subsidiaries

 

Non-
Guaranteeing
Subsidiaries

 

Reclass-
ifications
and
Eliminations

 

Alliance Gaming
Corporation
and
Subsidiaries

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

18,992

 

$

1,196

 

$

7,776

 

$

 

$

27,964

 

Accounts and notes receivable, net

 

1,730

 

85,649

 

16,901

 

(679

)

103,601

 

Inventories, net

 

 

63,789

 

8,787

 

(114

)

72,462

 

Deferred tax assets, net

 

1,461

 

18,521

 

 

 

19,982

 

Other current assets

 

4,063

 

14,297

 

1,220

 

 

19,580

 

Total current assets

 

26,246

 

183,452

 

34,684

 

(793

)

243,589

 

Long-term investment (restricted)

 

 

8,542

 

 

 

8,542

 

Long-term receivables, net

 

263,626

 

6,449

 

22

 

(261,340

)

8,757

 

Net investment in leases

 

 

12,626

 

 

 

12,626

 

Leased gaming equipment, net

 

 

48,216

 

(3,943

)

 

44,273

 

Property, plant and equipment, net

 

74

 

33,508

 

43,072

 

 

76,654

 

Goodwill, net

 

(900

)

160,273

 

18,588

 

 

177,961

 

Intangible assets, net

 

5,732

 

49,279

 

4,463

 

 

59,474

 

Investments in subsidiaries

 

362,983

 

69,363

 

 

(432,346

)

 

Deferred tax assets, net

 

6,102

 

 

 

(6,102

)

 

Other assets, net

 

(109,868

)

144,035

 

(18,850

)

(31

)

15,286

 

 

 

$

553,995

 

$

715,743

 

$

78,036

 

$

(700,612

)

$

647,162

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

1,101

 

$

28,042

 

$

1,335

 

$

 

$

30,478

 

Accrued liabilities

 

16,560

 

39,570

 

5,582

 

(721

)

60,991

 

Jackpot liabilities

 

 

9,950

 

126

 

 

10,076

 

Current maturities of long-term debt

 

3,175

 

1,865

 

 

 

5,040

 

Total current liabilities

 

20,836

 

79,427

 

7,043

 

(721

)

106,585

 

 

 

 

 

 

 

 

 

 

 

 

 

Long term debt, net

 

346,332

 

263,548

 

 

(261,340

)

348,540

 

Deferred tax liabilities

 

 

4,557

 

1,635

 

(6,102

)

90

 

Other liabilities

 

2,574

 

4,411

 

 

 

6,985

 

Minority interest

 

454

 

709

 

 

 

1,163

 

Total liabilities

 

370,196

 

352,652

 

8,678

 

(268,163

)

463,363

 

 

 

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

 

 

 

Special stock Series E

 

12

 

 

 

 

12

 

Common stock

 

5,158

 

109

 

1,027

 

(1,136

)

5,158

 

Treasury stock

 

(665

)

 

 

 

(665

)

Deferred compensation

 

(7,858

)

 

 

 

(7,858

)

Additional paid-in capital

 

196,872

 

299,667

 

31,959

 

(331,626

)

196,872

 

Accumulated other comprehensive income (loss)

 

1,518

 

1,521

 

3,448

 

(4,969

)

1,518

 

Retained earnings (accumulated deficit)

 

(11,238

)

61,794

 

32,924

 

(94,718

)

(11,238

)

Total stockholders’ equity

 

183,799

 

363,091

 

69,358

 

(432,449

)

183,799

 

 

 

$

553,995

 

$

715,743

 

$

78,036

 

$

(700,612

)

$

647,162

 

 

See accompanying unaudited note.

 

17



 

UNAUDITED CONSOLIDATING BALANCE SHEETS

June 30, 2004

(In 000s)

 

 

 

Parent

 

Guaranteeing
Subsidiaries

 

Non-
Guaranteeing
Subsidiaries

 

Reclass-
ifications
and
Eliminations

 

Alliance Gaming
Corporation
and
Subsidiaries

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

155,347

 

$

7,742

 

$

9,637

 

 

$

172,726

 

Accounts and notes receivable, net

 

1,806

 

110,693

 

17,984

 

(704

)

129,779

 

Inventories, net

 

 

55,125

 

6,161

 

(151

)

61,135

 

Deferred tax assets, net

 

1,461

 

18,593

 

 

 

20,054

 

Other current assets

 

744

 

10,531

 

1,145

 

 

12,420

 

Total current assets

 

159,358

 

202,684

 

34,927

 

(855

)

396,114

 

Long-term investment (restricted)

 

 

2,528

 

 

 

2,528

 

Long-term receivables, net

 

254,862

 

9,789

 

22

 

(252,155

)

12,518

 

Net investment in leases

 

 

5,614

 

 

 

5,614

 

Leased gaming equipment, net

 

 

50,664

 

(4,030

)

 

46,634

 

Property, plant and equipment, net

 

70

 

33,299

 

42,469

 

 

75,838

 

Goodwill, net

 

(900

)

119,715

 

18,174

 

 

136,989

 

Intangible assets, net

 

5,899

 

52,958

 

4,766

 

 

63,623

 

Investments in subsidiaries

 

345,560

 

74,234

 

 

(419,794

)

 

Deferred tax assets, net

 

5,342

 

 

 

(5,342

)

 

Assets of discontinued operations held for sale

 

39

 

 

4,403

 

 

4,442

 

Other assets, net

 

(122,036

)

143,833

 

(15,443

)

 

6,354

 

 

 

$

648,194

 

$

695,318

 

$

85,288

 

$

(678,146

)

$

750,654

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

974

 

$

34,017

 

$

2,524

 

 

$

37,515

 

Accrued liabilities

 

9,744

 

37,391

 

5,052

 

(718

)

51,469

 

Jackpot liabilities

 

 

11,934

 

141

 

 

12,075

 

Income taxes payable

 

5,538

 

1,140

 

555

 

 

7,233

 

Current maturities of long-term debt

 

3,313

 

2,553

 

 

 

5,866

 

Liabilities of discontinued operations held for sale

 

3,185

 

 

1,152

 

 

4,337

 

Total current liabilities

 

22,754

 

87,035

 

9,424

 

(718

)

118,495

 

Long term debt, net

 

420,687

 

254,391

 

 

(251,989

)

423,089

 

Deferred tax liabilities

 

 

4,556

 

1,635

 

(5,342

)

849

 

Other liabilities

 

2,624

 

3,468

 

 

 

6,092

 

Minority interest

 

1,326

 

 

 

 

1,326

 

Total liabilities

 

447,391

 

349,450

 

11,059

 

(258,049

)

549,851

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

 

 

 

Special stock Series E

 

12

 

 

 

 

12

 

Common stock

 

5,145

 

109

 

1,027

 

(1,136

)

5,145

 

Treasury stock

 

(501

)

 

 

 

(501

)

Deferred compensation

 

(6,500

)

 

 

 

(6,500

)

Additional paid-in capital

 

194,040

 

260,813

 

33,415

 

(294,228

)

194,040

 

Accum . other comprehensive inc (loss)

 

1,524

 

1,527

 

2,713

 

(4,240

)

1,524

 

Retained earnings (accumulated deficit)

 

7,083

 

83,419

 

37,074

 

(120,493

)

7,083

 

Total stockholders’ equity

 

200,803

 

345,868

 

74,229

 

(420,097

)

200,803

 

 

 

$

648,194

 

$

695,318

 

$

85,288

 

$

(678,146

)

$

750,654

 

 

See accompanying unaudited note.

 

18



 

UNAUDITED CONSOLIDATING STATEMENTS OF OPERATIONS

Three Months Ended December 31, 2004

(In 000s)

 

 

 

Parent

 

Guaranteeing
Subsidiaries

 

Non-
Guaranteeing
Subsidiaries

 

Reclass-
ifications
And
Eliminations

 

Alliance
Gaming
Corporation
and
Subsidiaries

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

Gaming equipment and systems

 

$

 

$

98,324

 

$

7,113

 

$

(4,504

)

$

100,933

 

Casino operations

 

 

 

13,955

 

(1,186

)

12,769

 

 

 

 

98,324

 

21,068

 

(5,690

)

113,702

 

 

 

 

 

 

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

Cost of gaming equipment and systems

 

 

52,896

 

5,169

 

(4,728

)

53,337

 

Cost of casino operations

 

 

 

4,589

 

 

4,589

 

Selling, general and administrative

 

4,564

 

29,738

 

7,934

 

(1,185

)

41,051

 

Research and development costs

 

 

10,269

 

89

 

 

10,358

 

Depreciation and amortization

 

330

 

10,603

 

1,087

 

 

12,020

 

 

 

4,894

 

103,506

 

18,868

 

(5,913

)

121,355

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income (loss)

 

(4,894

)

(5,182

)

2,200

 

223

 

(7,653

)

 

 

 

 

 

 

 

 

 

 

 

 

Earnings in consolidated subsidiaries

 

(8,512

)

879

 

 

7,633

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

4,875

 

66

 

69

 

(4,692

)

318

 

Interest expense

 

(3,672

)

(4,767

)

(3

)

4,692

 

(3,750

)

Rainbow royalty

 

1,592

 

 

(1,592

)

 

 

Minority interest

 

(430

)

(715

)

 

 

(1,145

)

Refinancing / bank amendment charges

 

(564

)

 

 

 

(564

)

Other, net

 

533

 

20

 

(178

)

 

375

 

Income (loss) from cont oper before income taxes

 

(11,072

)

(9,699

)

496

 

7,856

 

(12,419

)

Income tax expense (benefit)

 

(3,532

)

(963

)

(384

)

 

(4,879

)

Net income (loss) from continuing operations

 

(7,540

)

(8,736

)

880

 

7,856

 

(7,540

)

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from discontinued operations

 

15

 

(310

)

(49

)

359

 

15

 

Net income (loss)

 

$

(7,525

)

$

(9,046

)

$

831

 

$

8,215

 

$

(7,525

)

 

See accompanying unaudited note.

 

19



 

UNAUDITED CONSOLIDATING STATEMENTS OF OPERATIONS

Three Months Ended December 31, 2003

(In 000s)

 

 

 

Parent

 

Guaranteeing
Subsidiaries

 

Non-
Guaranteeing
Subsidiaries

 

Reclass-
ifications
and
Eliminations

 

Alliance
Gaming
Corporation
and
Subsidiaries

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

Gaming equipment and systems

 

$

 

$

92,361

 

$

10,902

 

$

(6,944

)

$

96,319

 

Casino operations

 

 

 

13,758

 

(1,446

)

12,312

 

 

 

 

92,361

 

24,660

 

(8,390

)

108,631

 

 

 

 

 

 

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

Cost of gaming equipment and systems

 

 

39,293

 

6,371

 

(6,884

)

38,780

 

Cost of casino operations

 

 

 

4,884

 

 

4,884

 

Selling, general and administrative

 

3,124

 

13,023

 

6,847

 

(1,446

)

21,548

 

Research and development costs

 

 

9,287

 

153

 

 

9,440

 

Depreciation and amortization

 

373

 

5,196

 

876

 

 

6,445

 

 

 

3,497

 

66,799

 

19,131

 

(8,330

)

81,097

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income (loss)

 

(3,497

)

25,562

 

5,529

 

(60

)

27,534

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings in consolidated subsidiaries

 

25,005

 

3,156

 

 

(28,161

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

3,107

 

5

 

3

 

(3,032

)

83

 

Interest expense

 

(3,805

)

(3,081

)

(15

)

3,032

 

(3,869

)

Rainbow royalty

 

1,541

 

 

(1,541

)

 

 

Minority interest

 

(541

)

 

 

 

(541

)

Other, net

 

126

 

(190

)

(481

)

 

(545

)

Income (loss) from cont oper before income taxes

 

21,936

 

25,452

 

3,495

 

(28,221

)

22,662

 

Income tax expense (benefit)

 

7,718

 

387

 

339

 

 

8,444

 

Net income (loss) from continuing operations

 

14,218

 

25,065

 

3,156

 

(28,221

)

14,218

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from discontinued operations

 

4,526

 

4,526

 

420

 

(4,946

)

4,526

 

Net income (loss)

 

$

18,744

 

$

29,591

 

$

3,576

 

$

(33,167

)

$

18,744

 

 

See accompanying unaudited note.

 

20



 

UNAUDITED CONSOLIDATING STATEMENTS OF OPERATIONS

Six Months Ended December 31, 2004

(In 000s)

 

 

 

Parent

 

Guaranteeing
Subsidiaries

 

Non-
Guaranteeing
Subsidiaries

 

Reclass-
ifications
and
Eliminations

 

Alliance
Gaming
Corporation
and
Subsidiaries

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

Gaming equipment and systems

 

$

 

$

201,418

 

$

12,344

 

$

(8,752

)

$

205,010

 

Casino operations

 

 

 

28,213

 

(2,608

)

25,605

 

 

 

 

201,418

 

40,557

 

(11,360

)

230,615

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

Cost of gaming equipment and systems

 

 

105,098

 

7,862

 

(8,787

)

104,173

 

Cost of casino operations

 

 

 

9,391

 

 

9,391

 

Selling, general and administrative

 

8,544

 

62,877

 

15,893

 

(2,608

)

84,706

 

Research and development costs

 

 

21,938

 

192

 

 

22,130

 

Restructuring charge

 

1,435

 

 

 

 

1,435

 

Depreciation and amortization

 

653

 

20,072

 

2,136

 

 

22,861

 

 

 

10,632

 

209,985

 

35,474

 

(11,395

)

244,696

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income (loss)

 

(10,632

)

(8,567

)

5,083

 

35

 

(14,081

)

 

 

 

 

 

 

 

 

 

 

 

 

Earnings in consolidated subsidiaries

 

(15,112

)

2,328

 

 

12,784

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

9,882

 

74

 

193

 

(9,351

)

798

 

Interest expense

 

(7,557

)

(9,500

)

(6

)

9,351

 

(7,712

)

Rainbow royalty

 

3,205

 

 

(3,205

)

 

 

Minority interest

 

(929

)

(715

)

 

 

(1,644

)

Refinancing / bank amendment charge

 

(564

)

 

 

 

(564

)

Other, net

 

673

 

(24

)

(121

)

 

528

 

Income (loss) from continuing operations before income taxes

 

(21,034

)

(16,404

)

1,944

 

12,819

 

(22,675

)

Income tax expense (benefit)

 

(7,089

)

(1,257

)

(384

)

 

(8,730

)

Net income (loss) from continuing operations

 

(13,945

)

(15,147

)

2,328

 

12,819

 

(13,945

)

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from discontinued operations

 

(4,376

)

261

 

261

 

(522

)

(4,376

)

Net income (loss)

 

$

(18,321

)

$

(14,886

)

$

2,589

 

$

12,297

 

$

(18,321

)

 

See accompanying unaudited note.

 

21



 

UNAUDITED CONSOLIDATING STATEMENTS OF OPERATIONS

Six Months Ended December 31, 2003

(In 000s)

 

 

 

Parent

 

Guaranteeing
Subsidiaries

 

Non-
Guaranteeing
Subsidiaries

 

Reclass-
ifications
and
Eliminations

 

Alliance
Gaming
Corporation
and
Subsidiaries

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

Gaming equipment and systems

 

$

 

$

177,370

 

$

19,514

 

$

(12,097

)

$

184,787

 

Casino operations

 

 

 

27,997

 

(2,930

)

25,067

 

 

 

 

177,370

 

47,511

 

(15,027

)

209,854

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

Cost of gaming equipment and systems

 

 

71,981

 

11,956

 

(11,920

)

72,017

 

Cost of casino operations

 

 

 

9,887

 

 

9,887

 

Selling, general and administrative

 

6,057

 

34,235

 

13,251

 

(2,930

)

50,613

 

Research and development costs

 

 

15,028

 

375

 

 

15,403

 

Depreciation and amortization

 

879

 

9,865

 

1,723

 

 

12,467

 

 

 

6,936

 

131,109

 

37,192

 

(14,850

)

160,387

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income (loss)

 

(6,936

)

46,261

 

10,319

 

(177

)

49,467

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings in consolidated subsidiaries

 

44,757

 

5,725

 

 

(50,482

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

6,177

 

5

 

8

 

(6,064

)

126

 

Interest expense

 

(9,466

)

(6,165

)

(31

)

6,064

 

(9,598

)

Rainbow royalty

 

3,134

 

 

(3,134

)

 

 

Minority interest

 

(1,027

)

 

 

 

(1,027

)

Refinancing / bank amendment charges

 

(12,293

)

 

 

 

(12,293

)

Other, net

 

235

 

(387

)

(747

)

 

(899

)

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations before income taxes

 

24,581

 

45,439

 

6,415

 

(50,659

)

25,776

 

Income tax expense (benefit)

 

8,515

 

505

 

690

 

 

9,710

 

Net income (loss) from continuing operations

 

16,066

 

44,934

 

5,725

 

(50,659

)

16,066

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from discontinued operations

 

8,706

 

8,706

 

730

 

(9,436

)

8,706

 

Net income (loss)

 

$

24,772

 

$

53,640

 

$

6,455

 

$

(60,095

)

$

24,772

 

 

See accompanying unaudited note.

 

22



 

UNAUDITED CONSOLIDATING STATEMENTS OF CASH FLOWS

Six Months Ended December 31, 2004

(000s)

 

 

 

Parent

 

Guaranteeing
Subsidiaries

 

Non-
Guaranteeing
Subsidiaries

 

Reclass-
ifications
and
Elimi-
nations

 

Alliance
Gaming
Corporation
and
Subsidiaries

 

Cash flows from operating activities of continuing operations:

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(18,321

)

$

(14,886

)

$

2,589

 

$

12,297

 

$

(18,321

)

Adjustments to reconcile net income (loss) to net cash provided By (used in) operating activities of continuing operations:

 

 

 

 

 

 

 

 

 

 

 

(Income) loss from discontinued operations

 

4,376

 

(261

)

(261

)

522

 

4,376

 

Depreciation and amortization

 

653

 

20,072

 

2,136

 

 

22,861

 

Stock–based compensation

 

542

 

 

 

 

542

 

Refinancing / bank amendment charges

 

564

 

 

 

 

564

 

Deferred income taxes

 

(760

)

73

 

 

 

(687

)

Provision for losses on receivables

 

 

5,028

 

126

 

 

5,154

 

Inventory and other discontinued assets write-downs

 

 

14,088

 

 

 

14,088

 

Other

 

(9,699

)

(1,203

)

(703

)

 

(11,605

)

 

 

 

 

 

 

 

 

 

 

 

 

Change in operating assets and liabilities, net of effects of business acquired:

 

 

 

 

 

 

 

 

 

 

 

Accounts and notes receivable

 

665

 

15,647

 

1,017

 

(191

)

17,138

 

Intercompany accounts

 

(8,369

)

17,550

 

3,407

 

(12,588

)

 

Inventories

 

 

(14,826

)

(2,593

)

(37

)

(17,456

)

Other current assets

 

(430

)

(3,833

)

(73

)

 

(4,336

)

Accounts payable

 

125

 

(6,105

)

(1,189

)

 

(7,169

)

Accrued liabilities and jackpot liabilities

 

(4,846

)

(7,967

)

(37

)

(3

)

(12,853

)

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

 

(35,500

)

23,377

 

4,419

 

 

(7,704

)

 

 

 

 

 

 

 

 

 

 

 

 

Cash flows from investing activities of continuing operations:

 

 

 

 

 

 

 

 

 

 

 

Additions to property, plant and equipment

 

(16

)

(3,426

)

(2,089

)

 

(5,531

)

Additions to leased gaming equipment

 

 

(18,183

)

 

 

(18,183

)

Additions to other long-term assets

 

 

(1,526

)

5

 

 

(1,521

)

Acquisitions, net of cash acquired

 

 

(12,000

)

 

 

(12,000

)

Proceeds from sale of net assets of discontinued operations

 

1,911

 

 

 

 

1,911

 

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

 

1,895

 

(35,135

)

(2,084

)

 

(35,324

)

 

 

 

 

 

 

 

 

 

 

 

 

Cash flows from financing activities of continuing operations:

 

 

 

 

 

 

 

 

 

 

 

Capitalized debt issuance costs

 

(1,038

)

 

 

 

(1,038

)

Payoff of debt due to sale of net assets of discontinued operations

 

(101,618

)

 

 

 

(101,618

)

Reduction of long-term debt

 

(875

)

(1,175

)

 

 

(2,050

)

Re-purchase of treasury shares

 

(164

)

 

 

 

(164

)

Proceeds from exercise of stock options and warrants

 

945

 

 

 

 

945

 

Dividends received (paid)

 

 

4,837

 

(4,837

)

 

 

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

 

(102,750

)

3,662

 

(4,837

)

 

(103,925

)

 

 

 

 

 

 

 

 

 

 

 

 

Effect of exchange rate changes on cash

 

 

 

487

 

 

487

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash provided by discontinued operations

 

 

1,550

 

154

 

 

1,704

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

Increase for the period

 

(136,355

)

(6,546

)

(1,861

)

 

(144,762

)

Balance, beginning of period

 

155,347

 

7,742

 

9,637

 

 

172,726

 

Balance, end of period

 

$

18,992

 

$

1,196

 

$

7,776

 

$

 

$

27,964

 

 

See accompanying unaudited note.

 

23



 

UNAUDITED CONSOLIDATING STATEMENTS OF CASH FLOWS

Six Months Ended December 31, 2003

(000s)

 

 

 

Parent

 

Guaranteeing
Subsidiaries

 

Non-
Guaranteeing
Subsidiaries

 

Reclass-
ifications
and
Elimi-
nations

 

Alliance
Gaming
Corporation
and
Subsidiaries

 

Cash flows from operating activities of continuing operations:

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

24,772

 

$

53,640

 

$

6,455

 

$

(60,095

)

$

24,772

 

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

 

 

 

 

 

 

 

 

 

 

 

(Income) loss from discontinued operations

 

(8,706

)

(8,706

)

(730

)

9,436

 

(8,706

)

Depreciation and amortization

 

879

 

9,865

 

1,723

 

 

12,467

 

Refinancing charge

 

12,293

 

 

 

 

12,293

 

Deferred income taxes

 

8,671

 

1,762

 

 

 

10,433

 

Provision for losses on receivables

 

 

505

 

21

 

 

526

 

Other

 

(99

)

(1,006

)

6

 

 

(1,099

)

 

 

 

 

 

 

 

 

 

 

 

 

Change in operating assets and liabilities, net of effects of business acquired:

 

 

 

 

 

 

 

 

 

 

 

Accounts and notes receivable

 

(1,436

)

(492

)

2

 

(93

)

(2,019

)

Intercompany accounts

 

(16,285

)

(35,946

)

1,716

 

50,515

 

 

Inventories

 

 

(2,155

)

(515

)

177

 

(2,493

)

Other current assets

 

(440

)

(588

)

5

 

 

(1,023

)

Accounts payable

 

(1,035

)

(1,345

)

308

 

 

(2,072

)

Accrued liabilities and jackpot liabilities

 

(8,377

)

4,556

 

837

 

60

 

(2,924

)

Net cash provided by operating activities of continuing operations

 

10,237

 

20,090

 

9,828

 

 

40,155

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash flows from investing activities of continuing operations:

 

 

 

 

 

 

 

 

 

 

 

Advances of notes receivable due from Sierra Design Group

 

(61,025

)

 

 

 

(61,025

)

Additions to property, plant and equipment

 

(19

)

(1,365

)

(2,431

)

 

(3,815

)

Additions to leased gaming equipment

 

 

(14,081

)

(1,876

)

 

(15,957

)

Additions to other long-term assets

 

(5,974

)

(4,504

)

64

 

 

(10,414

)

Acquisitions, net of cash acquired

 

 

(3,879

)

 

 

(3,879

)

Proceeds from sale of net assets of discontinued operations

 

16,500

 

 

 

 

16,500

 

Net cash used in investing activities of continuing operations

 

(50,518

)

(23,829

)

(4,243

)

 

(78,590

)

 

 

 

 

 

 

 

 

 

 

 

 

Cash flows from financing activities of continuing operations:

 

 

 

 

 

 

 

 

 

 

 

Capitalized debt issuance costs

 

(6,954

)

 

 

 

(6,954

)

Premium paid on early redemption of debt

 

(5,399

)

 

 

 

(5,399

)

Proceeds from issuance of long-term debt

 

350,000

 

 

 

 

350,000

 

Net change of revolving credit facility

 

70,000

 

 

 

 

70,000

 

Payoff of debt due to sale of net assets of discontinued operations

 

(337,625

)

 

 

 

(337,625

)

Reduction of long-term debt

 

(495

)

(842

)

(12

)

 

(1,349

)

Proceeds from exercise of stock options and warrants

 

2,907

 

 

 

 

2,907

 

Dividends received (paid)

 

 

6,380

 

(6,380

)

 

 

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

 

72,434

 

5,538

 

(6,392

)

 

71,580

 

 

 

 

 

 

 

 

 

 

 

 

 

Effect of exchange rate changes on cash

 

 

 

130

 

 

130

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash provided by discontinued operations

 

 

(938

)

1,033

 

 

95

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

Increase for the period

 

32,153

 

861

 

356

 

 

33,370

 

Balance, beginning of period

 

12,730

 

18,036

 

8,118

 

 

38,884

 

Balance, end of period

 

$

44,883

 

$

18,897

 

$

8,474

 

$

 

$

72,254

 

 

See accompanying unaudited note.

 

24



 

Debt and Revolving Credit Facility

 

Long-term debt and lines of credit at December 31, 2004 consist of the following (in 000s):

 

 

 

Parent

 

Guaranteeing
Subsidiaries

 

Reclass-
ifications
and
Eliminations

 

Alliance
Gaming
Corporation
and
Subsidiaries

 

 

 

 

 

 

 

 

 

 

 

Term Loan Facility

 

$

317,507

 

$

 

$

 

$

317,507

 

Intercompany notes payable

 

 

261,340

 

(261,340

)

 

Other, generally unsecured

 

32,000

 

4,073

 

 

36,073

 

 

 

349,507

 

265,413

 

(261,340

)

353,580

 

Less current maturities

 

3,175

 

1,865

 

 

5,040

 

Long-term debt, less current maturities

 

$

346,332

 

$

263,548

 

$

(261,340

)

$

348,540

 

 

Long-term debt and lines of credit at June 30, 2004 consist of the following (in 000s):

 

 

 

Parent

 

Guaranteeing
Subsidiaries

 

Reclass-
ifications
and
Eliminations

 

Alliance
Gaming
Corporation
and
Subsidiaries

 

 

 

 

 

 

 

 

 

 

 

Term Loan Facility

 

$

350,000

 

 

 

 

 

$

350,000

 

Revolving credit facility

 

70,000

 

 

 

 

 

70,000

 

Intercompany notes payable

 

 

 

251,989

 

(251,989

)

 

 

Other, generally unsecured

 

4,000

 

4,955

 

 

 

8,955

 

 

 

424,000

 

256,944

 

(251,989

)

428,955

 

Less current maturities

 

3,313

 

2,553

 

 

5,866

 

Long-term debt, less current maturities

 

$

420,687

 

$

254,391

 

$

(251,989

)

$

423,089

 

 

25



 

ALLIANCE GAMING CORPORATION

FORM 10-Q

 

December 31, 2004

 

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

 

Forward-Looking Statements

 

Certain matters in this Form 10-Q and our other filings with the Securities and Exchange Commission, including, without limitation, certain matters discussed in this Management’s Discussion and Analysis of Financial Condition and Results of Operations and in Quantitative and Qualitative Disclosures about Market Risk, constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and are subject to the safe harbor created thereby.  Those statements reflect the intent, belief or current expectations of the Company, its directors or its officers with respect to, among other things, future events and financial trends affecting the Company.

 

Forward-looking statements are typically identified by the words “believes,” “expects,” “anticipates,” and similar expressions.  In addition, any statements that refer to expectations or other characterizations of future events or circumstances are forward-looking statements.  Readers are cautioned that any such forward-looking statements are not guarantees of future performance and that matters referred to in such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements.  Such factors include, among other things, the impact of competition and uncertainties concerning such matters as the Company’s ability to service debt, product development, customer financing, sales to non-traditional gaming markets, foreign operations, dependence on key personnel, the ability to integrate future acquisitions, strict regulation by gaming authorities, the outcome of pending litigation matters including the pending securities class actions, gaming taxes, currency fluctuations and market risk.  The Company undertakes no obligation to publicly update or revise these forward-looking statements because of new information, future events or otherwise.

 

Introduction

 

Operating under the name Bally Gaming and Systems, the Company is a worldwide leader of designing, manufacturing and distributing traditional and nontraditional gaming machines, having marketed over 100,000 gaming machines during the past five years, and computerized monitoring systems for gaming facilities.  The Bally Gaming and Systems business unit consists of three divisions: Game sales, System sales and Gaming operations. The Company also owns and operates a dockside casino in Vicksburg, Mississippi, which has approximately 12 table games and approximately 930 gaming devices (“Casino Operations”). Further information about our business units is contained in the notes to the Consolidated Financial Statements (“Segments and Geographical Information”) and in our annual report filed on Form 10-K.

 

The Company recognizes revenue from the following sources:  sales of gaming machines, operation of wide-area progressive systems and lease of gaming machines, sales of computerized monitoring systems and related recurring hardware and software maintenance revenue, and from casino operations.  The Company often accepts used machines as trade-ins toward the purchase of new gaming equipment. These trade-ins are negotiated at the time of sale for that transaction only, and there are no provisions for rights to future trade-ins contained in the purchase agreement for the new gaming equipment.  The traded-in gaming machine is accounted for as a discount to the contracted selling price of a new gaming machine.

 

Our most significant expenses are (1) cost of sales, (2) research and development expenses, (3) advertising and promotional expenses and (4) administrative expenses.  The Company strives to control these expenses by working closely with division unit leaders and by centralizing functions such as finance, accounting, legal, human resources and management information systems.  The Company also uses its market presence and purchasing power to negotiate favorable rates with vendors and suppliers.

 

Our research and development costs are driven by the development cycle for hardware which varies between a few months for minor revisions to more than a year for major design changes or for changes made by various slot

 

26



 

manufacturers with which our product must communicate and be physically integrated. Software development results in (i) periodic product releases that include new features that extend and enhance casino enterprise systems; (ii) periodic maintenance releases that enable casino operators to correct problems or improve the usability of the system; and (iii) documentation needed to install and use the system.

 

Depreciation and amortization expense for tangible and intangible assets have historically been significant factors in determining our overall profitability.  Based on intangible assets currently held by us and the allocation of the aggregate purchase price of acquisitions completed during the year ended June 30, 2004, the Company expects the total amortization expense incurred will increase in fiscal year 2005 compared to fiscal year 2004.

 

Basis of Presentation

 

Our results include the accounts of Alliance Gaming Corporation, and its wholly-owned and partially-owned, controlled subsidiaries.

 

Results of Operations

 

Bally Gaming and Systems

Summary financial results and operating statistics (dollars in millions):

 

 

 

Three Months
Ended
December 31,

 

Increase/

 

%

 

Six Months
Ended
December 31,

 

Increase/

 

%

 

 

 

2004

 

2003

 

(Decrease)

 

Change

 

2004

 

2003

 

(Decrease)

 

Change

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Game sales

 

$

46.1

 

$

49.6

 

$

(3.5

)

(7

)%

$

97.5

 

$

92.3

 

$

5.2

 

6

%

System sales

 

24.2

 

30.7

 

(6.5

)

(21

)%

43.6

 

60.7

 

(17.1

)

(28

)%

Gaming operations

 

30.6

 

16.0

 

14.6

 

91

%

63.9

 

31.8

 

32.1

 

101

%

Total revenues

 

$

100.9

 

$

96.3

 

$

4.6

 

5

%

$

205.0

 

$

184.8

 

$

20.2

 

11

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross Margin

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Game sales

 

$

4.2

 

$

23.2

 

$

(19.0

)

(82

)%

$

17.1

 

$

42.9

 

$

(25.8

)

(60

)%

System sales

 

18.9

 

22.9

 

(4.0

)

(17

)%

34.7

 

46.7

 

(12.0

)

(26

)%

Gaming operations

 

24.6

 

11.4

 

13.2

 

115

%

49.0

 

23.2

 

25.8

 

111

%

Total gross margin

 

$

47.7

 

$

57.5

 

$

(9.8

)

(17

)%

$

100.8

 

$

112.8

 

$

(12.0

)

(11

)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

33.2

 

15.5

 

17.7

 

114

%

69.4

 

38.6

 

30.8

 

80

%

Research and development costs

 

10.4

 

9.4

 

1.0

 

11

%

22.1

 

15.4

 

6.7

 

44

%

Depreciation and amortization

 

10.9

 

5.4

 

5.5

 

102

%

20.6

 

10.2

 

10.4

 

102

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating inc (loss)

 

$

(6.8

)

$

27.2

 

$

(34.0

)

(125

)%

$

(11.3

)

$

48.6

 

$

(59.9

)

(123

)%

 

27



 

 

 

 

Three months
Ended
December 31,

 

Increase/

 

%

 

Six months
Ended
December 31,

 

Increase/

 

%

 

 

 

2004

 

2003

 

(Decrease)

 

Change

 

2004

 

2003

 

(Decrease)

 

Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Statistics:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

New Gaming Devices Sold

 

3,123

 

4,359

 

(1,236

)

(28

)%

5,863

 

7,689

 

(1,826

)

(24

)%

Original Equipment Mfg. (“OEM”) Units Sold

 

34

 

242

 

(208

)

(86

)%

1,954

 

2,105

 

(151

)

(7

)%

New Unit average selling price - (Excluding OEM)

 

$

10,682

 

$

9,050

 

$

1,632

 

18

%

$

10,547

 

$

8,782

 

$

1,765

 

20

%

Game monitoring units installed base

 

281,000

 

244,000

 

37,000

 

15

%

 

 

 

 

 

 

 

 

Casino management systems-installed base

 

220

 

199

 

21

 

11

%

 

 

 

 

 

 

 

 

System managed cashless games

 

109,000

 

44,000

 

65,000

 

148

%

 

 

 

 

 

 

 

 

End of period installed base:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Wide-area progressive

 

1,746

 

1,840

 

(94

)

(5

)%

 

 

 

 

 

 

 

 

Daily-fee games

 

8,768

 

3,103

 

5,665

 

183

%

 

 

 

 

 

 

 

 

Centrally determined games

 

17,725

 

 

17,725

 

100

%

 

 

 

 

 

 

 

 

 

Segment revenues increased, and gross margin decreased, in the second quarter and the first six months of fiscal year 2005 as a result of the following:

 

                  Bally Game Sales revenue decreased as a result of the following:

                  Total unit sales declined due to a general slow down of the traditional Class III replacement cycle for casinos and the lack of new casino openings in the current quarter as well as a declining demand for our video game products. The decline in games sales was partially offset by an increase in average selling price to $10,682 which reflects the sale of higher priced Class II and centrally determined games.

 

                  Bally Systems revenue decreased primarily as a result of:

                  Decreased hardware and software sales due to the lack of new property openings in the current quarter.

                  Recurring hardware and software maintenance revenues increased resulting from the larger base of installed units, which now stands at approximately 281,000 in 220 casinos world-wide.  Service revenue also increased due to demand for system implementation and promotions services.

 

                  Gaming Operations revenues increased as a result of:

                  Growth in our installed base of daily fee games primarily driven by the placements to the New York and Rhode Island Lotteries, as well as the growth in our Class II and centrally determined games.

                  Inclusion of the installed base of units as part of the SDG acquisition.

 

                  Gross margin decreased as a result of the following:

                  Game sales gross margin declined primarily due to inventory and related asset write-downs of $3.0 million and $11.1 million for the first and second quarters of fiscal 2005, respectively. (See discussion listed Inventory write-down which follows later in this section.)  Without these charges the gross margin was 33% and 31%, for the three and six month periods ended December 31, 2004 respectively, which reflects the lower margin received on certain Class II and central determination games in exchange for a recurring link fee.  Additionally, the lower volume of sales has resulted in the poor absorption of factory overhead.  The Company believes that if unit sales and placements increase, the gross margin will be positively impacted and could

 

28



 

return to 35% to 40% level or above in the future, but there can be no assurances that this level will be achieved.

                  Systems gross margin improvement is reflective of the higher proportion of high margin software maintenance and service revenues.

                  Gaming operations gross margin increased as a result of a higher mix of daily fee games and the decline in the frequency of WAP jackpots awarded during the current quarter.

 

                  Selling, general and administrative expenses increased in the second quarter and the first six months of fiscal 2005 as a result of the following:

                  The addition of the Class II and central determination operations.

                  Increased legal expense as a result of higher patent and litigation costs.

                  Higher field service related costs due to our increase in the base of installed games under gaming operations.

                  Increase in the provision for doubtful accounts receivable of $2.6 million and $4.4 million for the three and six month periods ended December 31, 2004, respectively.  This increase includes a charge for a large customer who recently declared bankruptcy, as well as an increase in the accounts receivable reserve as the receivable base has aged slightly compared to a year ago.

 

                  Research and development costs increased as a result of the increased investment in the development of the Alpha game platform and related game content, and sustaining development of multiple existing game platforms and systems.

 

                  Depreciation and amortization increased as a result of the following:

                  Increase in acquisition-related intangible assets.

                  Increase in the base of installed recurring revenue games from 4,943 units in the prior year to 10,514 units.

                  Increase in operating capital expenditures relative to new technology initiatives.

 

 

Rainbow Casino Operations

 

Summary financial results and operating statistics (dollars in millions):

 

 

 

Three months ended
December 31,

 

Increase/

 

%

 

Six months
ended
December 31,

 

Increase/

 

%

 

 

 

2004

 

2003

 

(Decrease)

 

Change

 

2004

 

2003

 

(Decrease)

 

Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

12.8

 

$

12.3

 

$

0.5

 

4

%

$

25.6

 

$

25.1

 

$

0.5

 

2

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross Margin

 

$

8.2

 

$

7.4

 

$

0.8

 

10

%

$

16.2

 

$

15.2

 

$

1.0

 

7

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

3.3

 

2.9

 

0.4

 

14

%

6.7

 

6.0

 

0.7

 

12

%

Depreciation and amortization

 

0.8

 

0.7

 

0.1

 

14

%

1.6

 

1.4

 

0.2

 

14

%

Operating income

 

$

4.1

 

$

3.8

 

$

0.3

 

8

%

$

7.9

 

$

7.8

 

$

0.1

 

1

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Statistics:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average No. - Gaming Devices

 

930

 

910

 

20

 

2

%

 

 

 

 

 

 

 

 

Average No. - Table Games

 

12

 

12

 

 

%

 

 

 

 

 

 

 

 

 

29



 

                  Rainbow Casino revenues have increased at a pace slightly better than the market due to enhanced marketing programs.

                  Gross margin increased as a result of decreases in certain operating costs.  Cost of casino revenue includes gaming taxes, rental costs and direct labor including payroll taxes and benefits.

                  The overall selling, general and administrative expenses increased as a result of increases in casino promotional expenses.

 

Parent Company and other unallocated income (expense)

Summary financial results (dollars in millions):

 

 

 

Three Months Ended
December 31,

 

Increase/

 

%

 

Six Months Ended
December 31,

 

Increase/

 

%

 

 

 

2004

 

2003

 

(Decrease)

 

Change

 

2004

 

2003

 

(Decrease)

 

Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

General and administrative

 

$

4.6

 

$

3.1

 

$

1.5

 

48

%

$

10.0

 

$

6.0

 

$

4.0

 

65

%

Depreciation and amortization

 

0.3

 

0.4

 

(0.1

)

(25

)%

0.6

 

0.9

 

(0.3

)

(27

)%

Total Parent company expense

 

$

4.9

 

$

3.5

 

$

1.4

 

40

%

$

10.6

 

$

6.9

 

$

3.7

 

53

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

$

0.3

 

$

0.1

 

$

0.2

 

200

%

$

0.8

 

$

0.1

 

$

0.7

 

700

%

Interest expense

 

(3.8

)

(3.9

)

(0.1

)

(3

)%

(7.7

)

(9.6

)

(1.9

)

(20

)%

Minority interest

 

(1.1

)

(0.5

)

0.6

 

112

%

(1.6

)

(1.0

)

0.6

 

60

%

Refinancing / bank amendment charges

 

(0.6

)

 

(0.6

)

 

(0.6

)

(12.3

)

11.7

 

95

%

Other, net

 

0.4

 

(0.6

)

1.0

 

168

%

0.5

 

(0.9

)

1.4

 

(159

)%

Total other income (expense)

 

$

(4.8

)

$

(4.9

)

$

(0.1

)

(2

)%

$

(8.6

)

$

(23.7

)

$

15.1

 

(64

)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income tax expense (benefit)

 

$

(4.9

)

$

8.4

 

$

(13.3

)

(158

)%

$

(8.7

)

$

9.7

 

$

(18.4

)

(190

)%

 

General and administrative expenses increased primarily as a result of:

                  Increase in payroll and related expense primarily due to restricted stock units granted and severance benefits offset by reallocation of corporate employees to Bally Gaming and Systems business segment.

                  Increase in litigation and general legal costs of approximately $0.8 million relative to protection of our patents and class action law suits.

                  Increase in professional fees relative to Sarbanes-Oxley implementations.  The Company expects these additional costs to continue through fiscal 2005 and 2006.

                  Increase in general liability and director and officer insurance costs.  Such increases in insurance costs are expected to continue in fiscal 2005.

 

                  Other income (expense) decreased as a result of the prior year refinancing, which resulted in a charge of $12.3 million (consisting of a $5.0 million charge for the early extinguishment of the Company’s subordinated notes, $7.0 million for the non-cash write off of deferred financing costs, and $0.3 million in fees and expenses).

                  Our effective income tax rate for the six month period ended December 31, 2004 was 39% compared to 38% in the prior year period.

 

30



 

Discontinued Operations

 

On October 15, 2004, the Company completed the sale of our interest in VSI to Churchill Downs Incorporated. The net proceeds received totaled approximately $2.0 million, resulting in a gain of $0.8 million, net of tax,  and is included in discontinued operations on the statement of operations.  During the quarter ended December 31, 2004, the Company accrued $2.0 million for various contingencies related to the sale of its discontinued operations.

 

Inventory write-down

 

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 our 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 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 the quarter ended September 30, 2004, the Company decided that its legacy V7 video platform would no longer be supported and the remaining used game inventory for such products was targeted for immediate disposal, resulting in a write-down of $3.0 million. The remaining inventory of new games for this product line was targeted for sale at reduced prices, which were still above the carrying value less costs to sell and therefore were not written down.

 

During the quarter ended December 31, 2004, management completed a three year business planning process. In accordance with this plan, significant development efforts were redirected to the Alpha-based video platform and products. The Company also made its existing EVO video games upgradeable to Alpha when approved in each market. The remaining used EVO inventory has been targeted for sale primarily in non-domestic markets, which traditionally have lower price points for used games and have higher importation and delivery costs, resulting in significantly lower net realizable values. The capitalized regulatory approval costs for the EVO and legacy video platform were determined to no longer be recoverable, and were also written off.

 

During the quarter ended December 31, 2004, the Company also consolidated several warehouses into one central warehouse, with the intent to reduce warehouse rental costs. As part of this consolidation, certain used games and related ancillary equipment including signs, were identified for immediate destruction, scrap, or salvage, and this process continued into the March 2005 period.

 

As a result of the decision to move to the new video platform, the targeting of used equipment for non-domestic markets, and the consolidation of warehouses leading to accelerated disposals, the Company wrote down its inventory and related assets by a total of $11.1 million during the quarter ended December 31, 2004, and such write downs for the six months ended December 31, 2004 totaled $14.1 million. The Company continues to take certain used games on trade as part of new game sales, and therefore additional write downs may be necessary in future periods depending on a number of factors impacting the future demand for such products and the ultimate net values realized.

 

Liquidity and Capital Resources

 

As of December 31, 2004, cash and cash equivalents totaled $28.0 million.  In addition net working capital was approximately $137 million (excluding assets and liabilities of discontinued operations), a decrease of approximately $145 million from June 30, 2004, which is explained in the working capital section below.  Consolidated cash and cash equivalents at December 31, 2004 include approximately $2.7 million of cash utilized in our Casino Operations that is held in vaults, cages or change banks. Additionally, 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 $12.8 million at December 31, 2004.  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 consolidated balance sheets, and totaled $8.5 million and $2.5 million as of December 31, 2004 and June 30, 2004, respectively.

 

31



 

The sale of Rail City was completed in May 2004 and the sale of UCMC was completed in June 2004. As a result of the sale of these assets, the terms of our bank loan agreement (the “Loan Agreement”) required the use of approximately 50% of the net proceeds (as defined in the agreement) to reduce the term loan and revolver principal balances on a pro rata basis. Accordingly, in August 2004 the Company made an initial reduction in our term loan of $31.6 million and the revolver was paid down from $70.0 million to zero.

 

During December 2004, the Company amended its Loan Agreement.  The amendment provides for an increase in the maximum allowable leverage ratio (currently 4.25x the trailing four quarter’s EBITDA, as defined in the Loan Agreement), a reduction in the revolver from $125 million to $75 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).  As of December 31, 2004, the Company’s leverage ratio was 3.9x.  Pursuant to the recent amendment, the leverage ratio maximum is scheduled to increase to 4.50x and to 4.75x as of March 31, 2005 and June 30, 2005, respectively.

 

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.  Given the current leverage ratio, the Company had approximately $18 million of availability on its revolving credit facility as of December 31, 2004, which increased to approximately $40 million beginning on January 1, 2005, resulting from the 25 basis point increase in the maximum leverage ratio referred to above.  Continued access to the revolving credit facility will require the Company to increase its EBITDA (as defined in the Loan Agreement) to levels in excess of those generated in the six-month period ended December 31, 2004.  At December 31, 2004, there were no material commitments for capital expenditures.

 

Working Capital

 

The following table presents the components of consolidated working capital at December 31, 2004 and June 30, 2004, excluding assets and liabilities of discontinued operations (dollars in 000s):

 

 

 

December 31,
2004

 

June 30,
2004

 

Change

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

27,964

 

$

172,726

 

$

(144,762

)

Accounts and notes receivable

 

103,601

 

129,779

 

(26,178

)

Inventories

 

72,462

 

61,135

 

11,327

 

Deferred tax assets

 

19,982

 

20,054

 

(72

)

Other current assets

 

19,580

 

12,420

 

7,160

 

Total current assets

 

243,589

 

396,114

 

(152,525

)

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

 

30,478

 

37,515

 

(7,037

)

Jackpot liabilities

 

10,076

 

12,075

 

(1,999

)

Accrued liabilities

 

60,991

 

51,469

 

9,522

 

Taxes payable

 

 

7,233

 

(7,233

)

Current maturities of long-term debt

 

5,040

 

5,866

 

(826

)

Total current liabilities

 

106,585

 

114,158

 

(7,573

)

Net working capital

 

$

137,004

 

$

281,956

 

$

(144,952

)

 

For the six month period ended December 31, 2004, working capital, excluding cash, changed less than $0.2 million on a net basis.  The decrease in cash of $144.7 million was driven by the $101.6 million of sale proceeds used to pay down our term loans in accordance with the Loan Agreement, as well as cash used to deploy wide-area and daily-fee gaming devices.

 

The other fluctuations contributing to changes in working capital were:

 

32



 

                  A net decrease in accounts and notes receivable resulting from the overall reduction in game and systems sales.

 

                  An increase in inventory due to the acquisition of games for the central determination markets, as well as inventory for the new line of video products.

 

                  An increase in other assets as a result of the following:

                                    Increase in deferred costs due to shipments of games to the European market that will not be installed until the second quarter of 2005.

                                    Increase in prepaid taxes and prepaid royalties.

 

                  An increase in accrued liabilities primarily as a result of the following:

                                    An accrual of $7.4 million for damages awarded to Action Gaming and IGT for patent infringement.

 

Cash Flow

 

During the six months ended December 31, 2004, cash flows used in operating activities totaled $8.2 million as a result of:

                  Reported net loss of $(18.2) million, which includes certain non-cash charges.

                  Increases in inventory of $17.5 million.

                  Timing of receivables collections.

                  Timing of payments made for accounts payable and jackpot liabilities.

 

During the six months ended December 31, 2004, cash flows used in investing activities totaled $35.3 million due to the following:

                  Capital expenditures of $5.5 million.

                  Costs incurred to produce participation games totaling $18.2 million.

                  Additions to other long-term assets of $1.5 million.

                  SDG earnout buyout of $12 million.

 

During the six months ended December 31, 2004, $103.4 million of cash was used in financing activities of continuing operations resulting from:

                  Pay down on the term loan and revolver of $101.6 million.

                  Principal payments on other long term debt totaling $2.1 million.

                  Cash provided from exercise of stock options of $0.9 million.

                  Cash used for the Loan Agreement amendment fees totaling $1.0 million.

 

Contractual Commitments

 

A description of the Company’s contractual commitments can be found in Item 7 of the Company’s Annual Report on Form 10-K for the year ended June 30, 2004.  For a more extensive discussion of the Company’s contractual commitments, see note 15 “Commitments and Contingencies” in the Notes to the Consolidated Financial Statements in the Company’s 2004 Annual Report on Form 10-K for the year ended June 30, 2004.

 

Critical Accounting Policies and Estimates

 

The Consolidated Financial Statements were prepared in conformity with accounting principles generally accepted in the United States of America. Certain of our accounting policies, including valuations utilized in asset impairment tests, acquisitions accounting, revenue recognition, allowance for doubtful accounts, capitalized costs, reserves for inventory,

 

33



 

and deferred tax reserves require the Company to apply significant judgment in defining the appropriate assumptions for calculating financial estimates. These judgments are subject to an inherent degree of uncertainty. There can be no assurance that the actual results will not differ from our estimates.

 

A description of the Company’s critical accounting policies and estimates can be found in Item 7 of the Company’s Annual Report on Form 10-K for the year ended June 30, 2004.  For a more extensive discussion of the Company’s accounting policies, see Note 1, “Summary of Significant Accounting Policies,” in the Notes to the Consolidated Financial Statements in the Company’s 2004 Annual Report on Form 10-K for the year ended June 30, 2004.

 

34



 

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Currency Rate Fluctuations

 

Revenues and results of operations derived from our non-U.S. subsidiaries are denominated in their local currencies and are affected by changes in the relative values of non-U.S. currencies and the U.S. dollar.  Most of the currencies in countries in which we have foreign operations were strengthened versus the U.S. dollar, which resulted in assets and liabilities denominated in local currencies being translated into more dollars.  The Company does not currently utilize hedging instruments.

 

Market risks

 

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

 

The Company has performed a sensitivity analysis of its financial instruments, which consists of cash and cash equivalents and debt. The Company has no derivative financial instruments. In performing the sensitivity analysis, the Company defined risk of loss as the hypothetical impact on earnings of changes in the market interest rates or currency exchange rates.

 

The results of the sensitivity analysis at December 31, 2004, are as follows:

 

Interest Rate Risk:

 

The Company had total debt of approximately $353.6 million, consisting primarily of the new $317.5 million outstanding term loan, the SDG earnout buyout of $28.0 million and other debt of approximately $8.1 million.  The bank facility borrowings each have a term of six months at which time the interest rate is subject to adjustment to the then current rate. If the LIBOR rates were to increase or decrease by 100 basis points, with all other factors remaining constant, earnings would decrease or increase by approximately $3.5 million annually on a pre-tax basis.

 

Foreign Currency Exchange Rate Risk:

 

Our foreign subsidiaries generally use their domestic currency as their functional currency. A 10% fluctuation in the exchange rates of these currencies against the U.S. dollar would result in a corresponding change in annual earnings reported in the consolidated group of approximately $0.2 million net of tax.

 

Estimates:

 

Our financial statements are prepared using estimates and assumptions that affect the reported amounts of assets and liabilities. Actual results may differ from these estimates either favorably or unfavorably, which may impact future results.

 

35



 

ITEM 4.                             CONTROLS AND PROCEDURES

 

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

 

36



 

PART II

 

ITEM 1.     Legal Proceedings

 

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 had 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 to stay payment of the judgment pending post-trial motions and appeal.

 

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 are pending and are customary in such cases.  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 complaint has been filed.  The defendants’ motions to dismiss or to stay were heard in January 2005 and taken under submission by court.

 

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 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 of Nevada, is in the pleadings phase.  The Company is vigorously defending both lawsuits.

 

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

 

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

 

On December 8, 2004, the Company held its annual shareholders meeting at which the shareholders were asked to vote on the election of two directors and the approval of an amendment to the Company’s Amended and Restated 2001 Long Term Incentive Plan  (the “Plan”) to increase the number of shares that can be issued under the Plan.  Of the 51,003,578 shares outstanding, 38,324,440 were voted for and 5,774,287 withheld from Mr. Jacques Andre: and 40,497,293 were voted for and 3,601,434 withheld from Mr. Richard Hadrill.  With respect to the approval of the amendment to the Plan, 16,873,536 shares were voted for, 9,562,696 shares against, 979,187 shares abstained and there were 16,683,308 broker non-votes resulting in the approval of the amendment to the Plan.  Additionally, the shareholders ratified the Board of Director’s appointment of Deloitte and Touche LLP to act as independent public accountants of the Company for the fiscal year ending June 30, 2005.

 

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ITEM 6.                  Exhibits

a.                                       Exhibits

 

2.7

 

Amendment dated December 30, 2004, to the Amended and Restated Stock Purchase Agreement by and among Alliance Gaming Corporation, Sierra Design Group, and Robert Luciano, as Trustee for the Robert Luciano Family Trust, dated March 2, 2004.

 

 

 

10.40

 

Amendment as of December 22, 2004, to the Employment Agreement between the Company and Richard Haddrill, entered into as of June 30, 2004.

 

 

 

10.41

 

Alliance Gaming Corporation Amended and Restated 2001 Long-Term Incentive Plan including Amendment #1 (incorporated by reference to Form S-8 filed January 14, 2005, Registration Number 333-122064).

 

 

 

31.1

 

Certification of Chief Executive Officer, pursuant to Rule 13a-14(a) of the Securities Act of 1934, as amended.

 

 

 

31.2

 

Certification of Chief Financial Officer, pursuant to Rule 13a-14(a) of the Securities Act of 1934, as amended.

 

 

 

32.1

 

Certification of Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2004.

 

 

 

32.2

 

Certification of Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2004.

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934 the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto authorized.

 

 

ALLIANCE GAMING CORPORATION

 

Date: February 9, 2005

(Registrant)

 

 

 

 

 

 

By

/s/ Richard Haddrill

 

 

 

Richard Haddrill

 

 

President and Chief Executive Officer

 

 

(Principal Executive Officer)

 

 

 

 

 

 

 

By

/s/ Robert L. Saxton

 

 

 

Robert L. Saxton

 

 

Executive Vice President, Treasurer and Chief Financial

 

 

Officer (Principal Financial and Accounting Officer)

 

 

39