**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**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 thequarterly period ended September 30, 2004**

 

**OR**

 
|   | o      | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE** |
|--------|--------|--------------------------------------------------------------|
|   |   | **SECURITIES EXCHANGE ACT OF 1934**                          |

** **

**For the transition periodfrom       to**

 

**Commission File Number 0-4281**

 

**ALLIANCE GAMING CORPORATION**

(Exact name of registrant as specified in itscharter)

 

| **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

 

 

Indicateby check mark whether the registrant is an accelerated filer (as defined inRule 12B-2 of the Exchange Act).  Yes ý No **o**

 

Indicateby check mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.

ý Yes   o No

 

The number of shares of Common Stock, $0.10 par value,outstanding as of October 1, 2004, according to the records of the registrant’sregistrar and transfer agent was 51,044,000.

 

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**I N DE X**

 
| PART I.    | FINANCIAL INFORMATION                                                                                                   | ** ** |
|------------|-------------------------------------------------------------------------------------------------------------------------|------------|
| Item 1.    | Unaudited Financial Statements                                                                                          |       |
|       | Unaudited  Condensed Consolidated Balance Sheets as of September 30, 2004 and June 30,  2004                            |       |
|       | Unaudited  Condensed Consolidated Statements of Operations for the Three Months Ended  September 30, 2004 and 2003      |       |
|       | Unaudited Condensed  Consolidated Statement of Stockholders’ Equity for the Three Months Ended  September 30, 2004 |       |
|       | Unaudited Condensed Consolidated Statements  of Cash Flows for the Three Months Ended September 30, 2004 and 2003       |       |
|       | Notes  to Unaudited Condensed Consolidated Financial Statements                                                         |       |
| Item  2.   | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                             |       |
| Item  3.   | Quantitative  and Qualitative Disclosures About Market Risk                                                             |       |
| Item 4.    | Disclosure  Controls and Procedures                                                                                     |       |
| PART II.   | OTHER INFORMATION                                                                                                       | ** ** |
| Item 1.    | Legal Proceedings                                                                                                       |       |
| Item 6.    | Exhibits                                                                                                                |       |
| SIGNATURES |                                                                                                                    |

 

 

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**PART I**

**ALLIANCE GAMING CORPORATION ANDSUBSIDIARIES**

**UNAUDITEDCONDENSED CONSOLIDATED BALANCE SHEETS**

(In 000sexcept share amounts)

 
| ** **                                                                                                                       | ** ** | **September 30, 2004** | ** ** | **June 30,**

**2004** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|------------------------|------------|
| ASSETS                                                                                                                           |       |                   |       |                   |       |
| Current assets:                                                                                                                  |       |                   |       |                   |       |
| Cash and cash equivalents                                                                                                        |       | $                      | 43,229     |                   | $          | 172,726 |   |
| Accounts and notes receivable, net of allowance for doubtful accounts  of $12,342 and $9,722                                     |       | 110,100                |       | 129,779                |       |
| Inventories, net of reserves of $7,086 and $4,914                                                                                |       | 81,466                 |       | 61,135                 |       |
| Deferred tax assets, net                                                                                                         |       | 20,053                 |       | 20,054                 |       |
| Other current assets                                                                                                             |       | 22,264                 |       | 12,420                 |       |
| Total current assets                                                                                                             |       | 277,112                |       | 396,114                |       |
| Long-term investments (restricted)                                                                                               |       | 4,676                  |       | 2,528                  |       |
| Long-term receivables, net                                                                                                       |       | 21,340                 |       | 12,518                 |       |
| Net investment in leases                                                                                                         |       | 8,308                  |       | 5,614                  |       |
| Leased gaming equipment, net of accumulated depreciation of $36,081  and $31,105                                                 |       | 47,138                 |       | 46,634                 |       |
| Property, plant and equipment, net of accumulated depreciation and  amortization of $27,371 and $23,127                          |       | 76,694                 |       | 75,838                 |       |
| Goodwill, net                                                                                                                    |       | 136,764                |       | 136,989                |       |
| Intangible assets, net of accumulated amortization of $14,532 and  $12,489                                                       |       | 61,990                 |       | 63,623                 |       |
| Assets of discontinued operations held for sale                                                                                  |       | 4,432                  |       | 4,442                  |       |
| Other assets, net                                                                                                                |       | 6,365                  |       | 6,354                  |       |
| Total assets                                                                                                                     |       | $                      | 644,819    |                   | $          | 750,654 |   |
|                                                                                                                             |       |                   |       |                   |       |
| LIABILITIES AND  STOCKHOLDERS’ EQUITY                                                                                       |       |                   |       |                   |       |
| Current liabilities:                                                                                                             |       |                   |       |                   |       |
| Accounts payable                                                                                                                 |       | $                      | 46,654     |                   | $          | 37,515 |   |
| Accrued liabilities                                                                                                              |       | 61,487                 |       | 51,469                 |       |
| Jackpot liabilities                                                                                                              |       | 9,447                  |       | 12,075                 |       |
| Income taxes payable                                                                                                             |       | 420                    |       | 7,233                  |       |
| Current maturities of long-term debt                                                                                             |       | 14,662                 |       | 5,866                  |       |
| Liabilities of discontinued operations held for sale                                                                             |       | 1,229                  |       | 4,337                  |       |
| Total current liabilities                                                                                                        |       | 133,899                |       | 118,495                |       |
| Long-term debt, net                                                                                                              |       | 311,195                |       | 423,089                |       |
| Deferred tax liabilities                                                                                                         |       | 850                    |       | 849                    |       |
| Other liabilities                                                                                                                |       | 7,029                  |       | 6,092                  |       |
| Minority interest                                                                                                                |       | 1,298                  |       | 1,326                  |       |
| Total liabilities                                                                                                                |       | 454,271                |       | 549,851                |       |
| Commitments and contingencies                                                                                                    |       |                   |       |                   |       |
| Stockholders’ equity:                                                                                                       |       |                   |       |                   |       |
| Special stock, 10,000,000 shares authorized: Series E, $100  liquidation value; 115 shares and 115 shares issued and outstanding |       | 12                     |       | 12                     |       |
| Common stock, $.10 par value; 100,000,000 shares authorized;  51,530,000 and 51,426,000 shares issued                            |       | 5,156                  |       | 5,145                  |       |
| Treasury stock at cost, 536,900 and 525,000 shares                                                                               |       | (665                   | )          | (501                   | )          |
| Deferred compensation (restricted stock units)                                                                                   |       | (6,500                 | )          | (6,500                 | )          |
| Additional paid-in capital                                                                                                       |       | 194,902                |       | 194,040                |       |
| Accumulated other comprehensive income                                                                                           |       | 1,356                  |       | 1,524                  |       |
| Retained earnings (accumulated deficit)                                                                                          |       | (3,713                 | )          | 7,083                  |       |
| Total stockholders’ equity                                                                                                  |       | 190,548                |       | 200,803                |       |
| Total liabilities and stockholders’ equity                                                                                  |       | $                      | 644,819    |                   | $          | 750,654 |   |
|                                                                                                                                  |            |                        |            |                        |            |  |  |  |

 

Seeaccompanying notes to unaudited condensed consolidated financial statements.

 

 

3

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**ALLIANCEGAMING CORPORATION AND SUBSIDIARIES**

**UNAUDITEDCONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

(In000s, except per share amounts)

 
| ** **                                                       | ** ** | **Three Months Ended September 30,** | ** ** |
|------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                       | ** ** | **2004**                             | ** ** | **2003** | ** ** |
| Revenues:                                                        |       |                                 |       |   |   |
| Gaming equipment and systems                                     |       | $                                    | 104,077    |   | $ | 88,468 |   |
| Casino operations                                                |       | 12,836                               |       | 12,755 |   |
|                                                             |       | 116,913                              |       | 101,223 |   |
| Costs and expenses:                                              |       |                                 |       |   |   |
| Cost of gaming equipment and systems                             |       | 50,836                               |       | 33,237 |   |
| Cost of casino operations                                        |       | 4,802                                |       | 5,003 |   |
| Selling, general and administrative                              |       | 43,655                               |       | 29,065 |   |
| Research and development costs                                   |       | 11,772                               |       | 5,963 |   |
| Restructuring charge                                             |       | 1,435                                |       | — |   |
| Depreciation and amortization                                    |       | 10,841                               |       | 6,022 |   |
|                                                             |       | 123,341                              |       | 79,290 |   |
| Operating income (loss)                                          |       | (6,428                               | )          | 21,933 |   |
| Other income (expense):                                          |       |                                 |       |   |   |
| Interest income                                                  |       | 480                                  |       | 43 |   |
| Interest expense                                                 |       | (3,962                               | )          | (5,729 | ) |
| Minority interest                                                |       | (499                                 | )          | (486 | ) |
| Refinancing charge                                               |       | —                               |       | (12,293 | ) |
| Other, net                                                       |       | 153                                  |       | (354 | ) |
|                                                             |       |                                 |       |   |   |
| Income (loss) from continuing operations before income taxes     |       | (10,256                              | )          | 3,114 |   |
| Income tax expense (benefit)                                     |       | (3,851                               | )          | 1,266 |   |
| Income (loss) from continuing operations                         |       | (6,405                               | )          | 1,848 |   |
| Discontinued operations:                                         | ** ** | ** **                           | ** ** | ** ** | ** ** |
| Income (loss) from discontinued operations of Nevada Route, net  |       | (4,701                               | )          | 3,132 |   |
| Income from discontinued operations of Louisiana Route, net      |       | 310                                  |       | 310 |   |
| Income from discontinued operations of Rail City Casino, net     |       | —                               |       | 738 |   |
| Income (loss) from discontinued operations                       |       | (4,391                               | )          | 4,180 |   |
| Net income (loss)                                                |       | $                                    | (10,796    | ) | $ | 6,028 |   |
|                                                             |       |                                 |       |   |   |
| Basic earnings (loss) per share:                                 |       |                                 |       |   |   |
| Continuing operations                                            |       | $                                    | (0.13      | ) | $ | 0.04 |   |
| Discontinued operations                                          |       | (0.08                                | )          | 0.08 |   |
|                                                             |       | $                                    | (0.21      | ) | $ | 0.12 |   |
| Diluted earnings (loss) per share                                | ** ** | ** **                           | ** ** | ** ** | ** ** |
| Continuing operations                                            |       | $                                    | (0.13      | ) | $ | 0.04 |   |
| Discontinued operations                                          |       | (0.08                                | )          | 0.08 |   |
| Total                                                            |       | $                                    | (0.21      | ) | $ | 0.12 |   |
|                                                             |       |                                 |       |   |   |
| Weighted average common shares outstanding                       |       | 50,966                               |       | 49,579 |   |
|                                                             |       |                                 |       |   |   |
| Weighted average common and common share equivalents outstanding |       | 50,966                               |       | 50,687 |   |

 

 

 

Seeaccompanying notes to unaudited condensed consolidated financial statements.

 

 

4

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**ALLIANCE GAMING CORPORATION ANDSUBSIDIARIES**

**UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY**

 (In 000s)

 
| ** **                                     | ** ** | ** **        | ** ** | ** **  | ** ** | ** **   | ** ** | ** **   | ** ** | ** **  | ** ** | ** **        | ** ** | **Accum.**         | ** ** | **Retained**           | ** ** | ** ** | ** ** |
|------------------------------------------------|------------|-------------------|------------|-------------|------------|--------------|------------|--------------|------------|-------------|------------|-------------------|------------|--------------------|------------|------------------------|------------|------------|------------|
| ** **                                     | ** ** | ** **        | ** ** | ** **  | ** ** | **Series E** | ** ** | ** **   | ** ** | ** **  | ** ** | **Additional**    | ** ** | **Other**          | ** ** | **Earnings**           | ** ** | **Total**  | ** ** |
| ** **                                     | ** ** | **Common  Stock** | ** ** | **Special** | ** ** | **Treasury** | ** ** | **Deferred** | ** ** | **Paid-in** | ** ** | **Comprehensive** | ** ** | **(Accum.**        | ** ** | **Stockholders’** | ** ** |
| ** **                                     | ** ** | **Shares**        | ** ** | **Dollars** | ** ** | **Stock**    | ** ** | **Stock**    | ** ** | **Comp.**   | ** ** | **Capital**       | ** ** | **Income  (loss)** | ** ** | **Deficit)**           | ** ** | **Equity** | ** ** |
| Balances at June  30, 2004                     |       | 51,426            |       | $           | 5,145      |         | $          | 12           |       | $           | (501       | )                 | $          | (6,500             | )          | $                      | 194,040    |       | $          | 1,524 |   | $ | 7,083 |   | $ | 200,803 |   |
|                                           |       |              |       |        |       |         |       |         |       |        |       |              |       |               |       |                   |       |       |       |
| Net loss                                       |       | —            |       | —      |       | —       |       | —       |       | —      |       | —            |       | —             |       | (10,796                | )          | (10,796    | )          |
| Foreign currency  translation adjustment       |       | —            |       | —      |       | —       |       | —       |       | —      |       | —            |       | (168               | )          | —                 |       | (168       | )          |
| Total  comprehensive income                    | ** ** | ** **        | ** ** | ** **  | ** ** | ** **   | ** ** | ** **   | ** ** | ** **  | ** ** | ** **        | ** ** | ** **         | ** ** | ** **             |       | (10,964    | )          |
| Repurchase of  common stock for treasury       |       | —            |       | —      |       | —       |       | (164         | )          | ** **  |       | —            |       | —             |       | —                 |       | (164       | )          |
| Shares issued  upon exercise of options        |       | 104               |       | 11          | ** ** | ** **   | ** ** | ** **   | ** ** | ** **  |       | 626               | ** ** | ** **         | ** ** | ** **             |       | 637        |       |
| Tax benefit of  employee stock option exercise | ** ** | ** **        | ** ** | ** **  | ** ** | ** **   | ** ** | ** **   | ** ** | ** **  |       | 236               | ** ** | ** **         | ** ** | ** **             |       | 236        |       |
|                                           |       |              |       |        |       |         |       |         |       |        |       |              |       |               |       |                   |       |       |       |
| Balances at  September 30, 2004                |       | 51,530            |       | $           | 5,156      |         | $          | 12           |       | $           | (665       | )                 | $          | (6,500             | )          | $                      | 194,902    |       | $          | 1,356 |   | $ | (3,713 | ) | $ | 190,548 |   |

 

See accompanying notes to unaudited condensedconsolidated financial statements.

 

 

5

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**ALLIANCEGAMING CORPORATION AND SUBSIDIARIES**

**UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASHFLOWS**

(In000s)

 
| ** **                                                                                                                    | ** ** | **Three Months Ended September 30,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                                                                    | ** ** | **2004**                             | ** ** | **2003** | ** ** |
| Cash flows from operating activities of continuing operations:                                                                |       |                                 |       |   |   |
| Net income (loss)                                                                                                             |       | $                                    | (10,796    | ) | $ | 6,028 |   |
| Adjustments to reconcile net income (loss) to  net cash provided by (used in) operating activities of continuing  operations: |       |                                 |       |   |   |
| (Income) loss from discontinued operations                                                                                    |       | 4,391                                |       | (4,180 | ) |
| Depreciation and amortization                                                                                                 |       | 10,841                               |       | 6,022 |   |
| Refinancing charge                                                                                                            |       | —                               |       | 12,293 |   |
| Deferred income taxes                                                                                                         |       | 2                                    |       | 1,277 |   |
| Provision for losses on receivables                                                                                           |       | 2,717                                |       | 933 |   |
| Inventory write down                                                                                                          |       | 3,582                                |       | 40 |   |
| Other                                                                                                                         |       | (2,227                               | )          | (1,574 | ) |
| Change in operating assets and liabilities:                                                                                   |       |                                 |       |   |   |
| Accounts and notes receivable                                                                                                 |       | 5,587                                |       | (5,581 | ) |
| Inventories                                                                                                                   |       | (22,596                              | )          | (5,347 | ) |
| Other current assets                                                                                                          |       | (6,831                               | )          | (480 | ) |
| Accounts payable                                                                                                              |       | 9,139                                |       | 2,616 |   |
| Accrued liabilities and jackpot liabilities                                                                                   |       | (9,350                               | )          | (8,290 | ) |
| Net cash provided by (used in) operating activities of continuing operations                                                  |       | (15,541                              | )          | 3,757 |   |
|                                                                                                                          |       |                                 |       |   |   |
| Cash flows from investing activities of continuing operations:                                                                |       |                                 |       |   |   |
| Additions to property, plant and equipment                                                                                    |       | (3,200                               | )          | (1,659 | ) |
| Additions to leased gaming equipment                                                                                          |       | (8,192                               | )          | (5,004 | ) |
| Additions to other long-term assets                                                                                           |       | (588                                 | )          | (6,431 | ) |
| Proceeds from sale of discontinued operations                                                                                 |       | —                               |       | 16,500 |   |
| Net cash provided by (used in) investing activities of continuing operations                                                  | ** ** | (11,980                              | )          | 3,406 | ** ** |
| Cash flows from financing activities of continuing operations:                                                                |       |                                 |       |   |   |
| Capitalized debt issuance costs                                                                                               |       | —                               |       | (5,686 | ) |
| Proceeds from issuance of long-term debt                                                                                      |       | —                               |       | 275,000 |   |
| Payoff of debt from refinancing                                                                                               |       | —                               |       | (337,625 | ) |
| Payoff of debt due to sale of net assets of discontinued operations                                                           |       | (101,618                             | )          | — |   |
| Reduction of long-term debt                                                                                                   |       | (1,511                               | )          | (879 | ) |
| Re-purchase of common stock for treasury                                                                                      |       | (164                                 | )          | — |   |
| Net change in revolving credit facility                                                                                       |       | —                               |       | 70,000 |   |
| Premium paid on early redemption of debt                                                                                      |       | —                               |       | (5,399 | ) |
| Proceeds from exercise of stock options and warrants                                                                          |       | 873                                  |       | 1,460 |   |
| Net cash used in financing activities of continuing operations                                                                |       | (102,420                             | )          | (3,129 | ) |
|                                                                                                                          |       |                                 |       |   |   |
| Effect of exchange rate changes on cash                                                                                       |       | 47                                   |       | (21 | ) |
|                                                                                                                          |       |                                 |       |   |   |
| Cash provided by discontinued operations                                                                                      |       | 397                                  |       | 637 |   |
|                                                                                                                          |       |                                 |       |   |   |
| Cash and cash equivalents:                                                                                                    |       |                                 |       |   |   |
| Increase (decrease) for period                                                                                                |       | (129,497                             | )          | 4,650 |   |
| Balance, beginning of period                                                                                                  |       | 172,726                              |       | 38,884 |   |
| Balance, end of period                                                                                                        |       | $                                    | 43,229     |   | $ | 43,534 |   |

 

See accompanying notes to unaudited condensedconsolidated financial statements.

 

 

6

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**ALLIANCEGAMING CORPORATION AND SUBSIDIARIES**

**NOTESTO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

 

**1.  BASIS OF PRESENTATION**

 

*Principles of presentation andconsolidation*

 

The accompanying unaudited interim condensedconsolidated financial statements reflect all adjustments, consisting of normalrecurring adjustments, which management believes are necessary to presentfairly the financial position, results of operations and cash flows of AllianceGaming Corporation and subsidiaries (“Alliance” or the “Company”) for therespective periods presented. The results of operations for an interim periodare not necessarily indicative of the results that may be expected for anyother interim period or for the year as a whole. The accompanying unaudited interimcondensed consolidated financial statements should be read in conjunction withthe consolidated financial statements and notes in the Company’s annual reporton Form 10-K for the year ended June 30, 2004.

 

We completed the sale of Rail City Casino in May2004 and the sale of United Coin Machine Co. (“UCMC”) in June 2004. As a resultof the sale of these assets, the terms of our bank loan agreement required theuse of approximately 50% of the net proceeds (as defined in the agreement) toreduce the term loan and revolver principal balances on a pro rata basis.Accordingly, in August 2004 the Company reduced its term loan by $31.6 millionand its revolver by $11.3 million.

 

The accompanyingconsolidated financial statements include the accounts of Alliance GamingCorporation, and its wholly owned and partially owned, controlled subsidiaries.The Company consolidates RCVP and records minority interest expense to reflectthe portion of the earnings of RCVP attributable to the minority shareholders.  The Company owns 100% of the voting stock andwas entitled to receive 71% of dividends declared by VSI, if any, at such timethat dividends were declared.

 

The Company is thegeneral partner of Rainbow Casino Vicksburg Partnership (“RCVP”) thepartnership that operates the Rainbow Casino. Pursuant to transactionsconsummated in March 1995, the Rainbow Corporation, which was the formergeneral partner of RCVP became a limited partner entitled to receive 10% of thenet available cash flows after debt service and other items, as defined (whichamount increases to 20% of such amount when annual revenues exceed $35.0million but only on such incremental amount), payable quarterly throughDecember 31, 2010.  The Company holds theremaining economic interest in the partnership.

 

All significant intercompanyaccounts and transactions have been eliminated in consolidation. Certainreclassifications have been made to prior year financial statements to conformto the current year presentation, and to present Rail City as discontinuedoperations for all periods presented.

 

**2.  STOCK-BASED COMPENSATION**

 

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

 

As provided under Financial Accounting StandardsBoard No. 123 “Accounting for Stock-Based Compensation” (“FASB No. 123”),companies may continue to account for employee stock-based compensation underAPB 25, but are required to disclose historical pro-forma net income andearnings per share that would have resulted from the use of the fair valuemethod described in FASB No. 123.

 

In December 2002, the FASB issued FASB No.148, “Accounting forStock-Based Compensation-Transition and Disclosure”. This Statement amends FASBNo. 123, to provide alternative methods of transition for a voluntary change tothe fair value based method of accounting for stock-based employeecompensation. In addition, this Statement amends the disclosure requirements ofFASB No. 123 and APB Opinion No. 28 “Interim Financial Reporting” to requireprominent disclosures in both annual and interim financial statements about themethod of accounting for stock-based employee compensation and the effect ofthe method used on reported results.  Under fair value method, compensation costs aremeasured using an options pricing model and 

 

7

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are amortized over the estimated life of theoption, which is generally three to ten years, with option forfeituresaccounted for at the time of the forfeiture, and all amounts are reflected netof tax.  The historical and pro forma netincome (assuming an after-tax charge for stock-based compensation) and relatedper share data are as follows (in 000s, except per share data):

 
| ** **                                              | ** ** | **Three Months Ended September 30,** | ** ** |
|---------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                              | ** ** | **2004**                             | ** ** | **2003** | ** ** |
| Net income (loss)                                       |       |                                 |       |   |   |
| As reported                                             |       | $                                    | (10,796    | ) | $ | 6,028 |   |
| Stock-based compensation under FASB No. 123, net of tax |       | (1,580                               | )          | (1,837 | ) |
| Pro forma net income (loss)                             |       | $                                    | (12,376    | ) | $ | 4,191 |   |
|                                                    |       |                                 |       |   |   |
| Earnings per share:                                     |       |                                 |       |   |   |
| Basic and diluted — As reported                    |       | $                                    | (0.21      | ) | $ | 0.12 |   |
| Basic and diluted — Pro forma                      |       | $                                    | (0.24      | ) | $ | 0.08 |   |

 

On the date of grant using the Black-Scholesoption-pricing model, the following assumptions were used to estimate thegrant-date fair value of the options in the periods indicated:

 
| ** **                                | ** ** | **Three Months Ended September 30,** | ** ** |
|-------------------------------------------|------------|--------------------------------------|------------|
| ** **                                | ** ** | **2004**                             | ** ** | **2003** | ** ** |
| Risk-fee interest rate (weighted average) |       | 2.5                                  | %          | 3.5 | % |
| Expected volatility                       |       | 0.26                                 |       | 0.26 |   |
| Expected dividend yield                   |       | 0                                    | %          | 0 | % |
| Expected life                             |       | 3-10  years                          |       | 3-10  years |   |

 

The resulting fairvalues applied to the options granted were $5.67 and $9.36 per share for thethree month periods ended September 30, 2004 and September 30, 2003, respectively.

 

**3.  DISCONTINUED OPERATIONS**

 

We have completedseveral divestitures in accordance with our plan to sell our “non-core”businesses, which was a strategy we announced in July 2003.  In July 2003, we completed the sale of BallyWulff to a private equity investor. Since the net assets of Bally Wulff were written down to the estimatedsell price in June 2003, no additional gain or loss was recorded upon theclosing of the sale. In May 2004, we completed the sale of Rail City Casino toThe Sands Resort.  On June 30, 2004, wecompleted the sale of United Coin Machine Co. (“UCMC”).

 

On October 15, 2004 theCompany completed the sale of its interest in VSI to Churchill DownsIncorporated.  We received approximately$2.0 million.

 

The results of thesediscontinued operations are presented net of applicable income taxes withinincome from discontinued operations in the accompanying consolidated statementsof operations.  The net assets of VSI areclassified as assets held for sale in the accompanying condensed consolidatedbalance sheets.

 

Operating results forthe discontinued operations for the quarter ended September 30, 2004 includeVSI and UCMC, while the results for the quarter ended September 30, 2003include UCMC, VSI, and Rail City. Summary operating results are as follows (in 000s):

 
| ** **                                  | ** ** | **Three Months Ended September 30,** | ** ** |
|---------------------------------------------|------------|--------------------------------------|------------|
| ** **                                  | ** ** | **2004**                             | ** ** | **2003** | ** ** |
| Net revenues                                |       | $                                    | 3,955      |   | $ | 60,012 |   |
| Operating income                            |       | 487                                  |       | 6,467 |   |
| Loss on litigation settlement, Nevada Route |       | (7,356                               | )          | — |   |
| Income tax expense (benefit)                |       | (2,478                               | )          | 2,287 |   |
| Income (loss) from discontinued operations  |       | $                                    | (4,391     | ) | $ | 4,180 |   |

 

8

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During the quarter endedSeptember 30, 2004, a Federal District Court jury reached a verdict in a patentinfringement case filed by Action Gaming, Inc. and International GameTechnology, Inc. (“plaintiffs”).  Thejury awarded the plaintiffs approximately $7.4 million (or $4.7 million aftertax) in damages related to a single, optional feature offered in certainmulti-hand poker games provided solely by UCMC. This charge is included in the UCMC discontinued operations in the tableabove.

 

The following schedulereflects the net assets held for sale, included in the accompanyingconsolidated balance sheets consisting of VSI as of September 30, 2004 and June30, 2004 (in 000s):

 
| ** **                            | ** ** | **Sept 30,** | ** ** | **June 30,** | ** ** |
|---------------------------------------|------------|--------------|------------|--------------|------------|
| ** **                            | ** ** | **2004**     | ** ** | **2004**     | ** ** |
| Cash and cash equivalents             |       | $            | 3,562      |         | $          | 3,543 |   |
| Other assets                          |       | 870          |       | 899          |       |
| Total assets                          |       | 4,432        |       | 4,442        |       |
|                                  |       |         |       |         |       |
| Current liabilities                   |       | 1,213        |       | 4,321        |       |
| Long-term liabilities                 |       | 16           |       | 16           |       |
| Total liabilities                     |       | $            | 1,229      |         | 4,337      |   |
|                                  |       |         |       |         |       |
| Net assets of discontinued operations |       | $            | 3,203      |         | $          | 105 |   |

 

**4. OTHER CURRENT ASSETS**

 

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

 
| ** **                              | ** ** | **Sept 30,** | ** ** | **June 30,** | ** ** |
|-----------------------------------------|------------|--------------|------------|--------------|------------|
| ** **                              | ** ** | **2004**     | ** ** | **2004**     | ** ** |
| Prepaid taxes                           |       | $            | 1,117      |         | $          | 814 |   |
| Prepaid royalty                         |       | 3,344        |       | 2,623        |       |
| Refundable deposits                     |       | 7,587        |       | 3,229        |       |
| Games on trial                          |       | 2,474        |       | 2,608        |       |
| Deferred cost of revenue                |       | 2,956        |       | 208          |       |
| Prepaid licensing and intellectual fees |       | 1,102        |       | 1,001        |       |
| Prepaid insurance                       |       | 873          |       | 592          |       |
| Prepaid other expense                   |       | 2,811        |       | 1,345        |       |
| Total accrued liabilities               |       | $            | 22,264     |         | $          | 12,420 |   |

 

The increase in refundable deposits of $4.4 million is a result ofunits purchased from other manufacturers. The increase in deferred costs of $2.7 million is due to shipments ofgames to the European market which will not be installed until the secondquarter 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-processand finished goods include raw materials, freight, direct labor andmanufacturing overhead. Inventories, net of valuation reserves, consist of thefollowing (in 000s):

 
| ** **      | ** ** | **Sept 30,** | ** ** | **June 30,** | ** ** |
|-----------------|------------|--------------|------------|--------------|------------|
| ** **      | ** ** | **2004**     | ** ** | **2004**     | ** ** |
| Raw materials   |       | $            | 43,780     |         | $          | 26,050 |   |
| Work-in-process |       | 5,172        |       | 3,324        |       |
| Finished goods  |       | 32,514       |       | 31,761       |       |
| Total           |       | $            | 81,466     |         | $          | 61,135 |   |

 

9

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                                                During the quarter ended September 30, 2004, the Company recorded aninventory write down of $3.0 million for recently discontinued legacy videoproducts and used games which have been identified for accelerated disposal.

 

###### **6.  PROPERTY, PLANT AND EQUIPMENT AND LEASEDGAMING EQUIPMENT**

 

                                                Property, plant and equipment is stated at cost and depreciated over theestimated useful lives or lease term, if less, using the straight line methodas follows: buildings and improvements, 28-40 years; gaming equipment, 4-7years; furniture, fixtures and equipment, 3-7 years; and leaseholdimprovements, 5-10 years. Leased gaming equipment is stated at cost anddepreciated over estimated useful life ranging from 3-4 years.

 

Significant replacements and improvements arecapitalized; other maintenance and repairs are expensed. The cost andaccumulated depreciation of assets retired or otherwise disposed of areeliminated from the accounts and any resulting gain or loss is credited or chargedto income as appropriate.

 

                                                Property, plant and equipment consist of the following (in 000s):
| ** **                                     | ** ** | **Sept 30,** | ** ** | **June 30,** | ** ** |
|------------------------------------------------|------------|--------------|------------|--------------|------------|
| ** **                                     | ** ** | **2004**     | ** ** | **2004**     | ** ** |
| Land and land improvements                     |       | $            | 19,086     |         | $          | 19,086 |   |
| Buildings and leasehold improvements           |       | 30,700       |       | 29,937       |       |
| Gaming equipment                               |       | 32,166       |       | 29,121       |       |
| Furniture, fixtures and equipment              |       | 22,113       |       | 20,821       |       |
| Less accumulated depreciation and amortization |       | (27,371      | )          | (23,127      | )          |
| Total property, plant and equipment, net       |       | $            | 76,694     |         | $          | 75,838 |   |
|                                           |       |         |       |         |       |
| Leased gaming equipment                        |       | $            | 83,219     |         | $          | 77,739 |   |
| Less accumulated depreciation                  |       | (36,081      | )          | (31,105      | )          |
| Total leased gaming equipment, net             |       | $            | 47,138     |         | $          | 46,634 |   |

 

**7.  INTANGIBLE ASSETS AND GOODWILL**

 

                                                In July 2001, the Company adopted FASB No. 142 “Goodwill and OtherIntangible Assets”, which requires companies to cease amortizing goodwill andcertain intangible assets with indefinite useful lives.  Instead, goodwill and intangible assetsdeemed to have indefinite useful lives are to be reviewed for impairmentannually at the reporting unit level (Gaming equipment and systems, and casinooperations).  There was no impairment ofgoodwill upon adoption of FASB No. 142. No impairment was charged to goodwillin the three months ended September 30, 2004 or during fiscal 2004.

 

                                                The Companyevaluates the carrying value of goodwill for impairment annually during thefourth quarter or whenever events or changes in circumstances indicate that thecarrying value of goodwill may not be recoverable. Indicators that couldtrigger an impairment review include changes in legal, regulatory, or economicfactors, market conditions or operational performance. Impairment is measuredas the difference between the carrying amount and the fair value of theintangible assets and is recognized as a component of income from operations.

 

10

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*Intangibles*

 

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

 
| ** **                            | ** ** | ** **      | ** ** | **September 30, 2004** | ** ** | **June 30, 2004** | ** ** |
|---------------------------------------|------------|-----------------|------------|------------------------|------------|-------------------|------------|
| ** **                            | ** ** | **Wt. Avg**     | ** ** | **Gross**              | ** ** | ** **        | ** ** | **Net** | ** ** | **Gross** | ** ** | ** ** | ** ** | **Net** | ** ** |
| ** **                            | ** ** | **Useful Life** | ** ** | **Carrying**           | ** ** | **Accumulated**   | ** ** | **Carrying** | ** ** | **Carrying** | ** ** | **Accumulated** | ** ** | **Carrying** | ** ** |
| ** **                            | ** ** | **(Years)**     | ** ** | **Amount**             | ** ** | **Amortization**  | ** ** | **Amount** | ** ** | **Amount** | ** ** | **Amortization** | ** ** | **Amount** | ** ** |
| Computer software                     |       | 3               |       | $                      | 8,866      |              | $          | (2,260 | ) | $ | 6,606 |   | $ | 8,963 |   | $ | (1,498 | ) | $ | 7,465 |   |
| Computer software acquisitions        |       | 9               |       | 11,700                 |       | (3,705            | )          | 7,995 |   | 11,700 |   | (3,380 | ) | 8,320 |   |
| License Rights                        |       | 3-5             |       | 3,101                  |       | (2,228            | )          | 873 |   | 2,745 |   | (1,979 | ) | 766 |   |
| Capitalized regulatory approval costs |       | 3               |       | 4,885                  |       | (1,172            | )          | 3,713 |   | 4,767 |   | (833 | ) | 3,934 |   |
| CRM Project                           |       | 5               |       | 3,290                  |       | (963              | )     | 2,327 |   | 3,039 |   | (1,046 | ) | 1,993 |   |
| PLM Project                           |       | 5               |       | 1,800                  |       | —            |       | 1,800 |   | 1,585 |   | — |   | 1,585 |   |
| Trademarks                            |       | 5               |       | 6,688                  |       | (309              | )          | 6,379 |   | 6,688 |   | (288 | ) | 6,400 |   |
| Patents                               |       | 13              |       | 9,470                  |       | (538              | )          | 8,932 |   | 9,470 |   | (307 | ) | 9,163 |   |
| Non-Compete Agreements                |       | 6               |       | 275                    |       | —            |       | 275 |   | 275 |   | — |   | 275 |   |
| Customer Relationships                |       | 5               |       | 740                    |       | —            |       | 740 |   | 740 |   | — |   | 740 |   |
| Core Technology                       |       | 8               |       | 5,445                  |       | (395              | )          | 5,050 |   | 5,445 |   | (227 | ) | 5,218 |   |
| Deferred Financing Costs              |       | 6               |       | 6,911                  |       | (1,333            | )          | 5,578 |   | 6,910 |   | (1,017 | ) | 5,893 |   |
| Contracts                             |       | 10              |       | 12,100                 |       | (714              | )          | 11,386 |   | 12,100 |   | (411 | ) | 11,689 |   |
| Other Intangibles                     |       | 7               |       | 1,255                  |       | (919              | )          | 336 |   | 1,685 |   | (1,503 | ) | 182 |   |
| Total                                 |       |            |       | $                      | 76,526     |              | $          | (14,536 | ) | $ | 61,990 |   | $ | 76,112 |   | $ | (12,489 | ) | $ | 63,623 |   |

 

                                                Amortization expense totaled $2.0 million and $1.3 million for the threemonths ended September 30, 2004 and 2003, respectively.  Computer software amortization expensetotaled $0.5 million for the three months ended September 30, 2004 and 2003.

 

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

 
| **Periods and Years ending June 30,** | ** ** | ** ** | ** ** |
|---------------------------------------|------------|------------|------------|
| 2005                                  |       | $          | 7,796      |   |
| 2006                                  |       | 8,636      |       |
| 2007                                  |       | 6,778      |       |
| 2008                                  |       | 5,509      |       |
| 2009                                  |       | 4,882      |       |
| Thereafter                            |       | 28,389     |       |
| Total                                 |       | $          | 61,990     |   |

 

 

*Goodwill*

 

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

 
| Balance as of June 30, 2004             |   | $    | 136,989 |   |
|-----------------------------------------|--------|------|---------|--------|
| Foreign currency translation adjustment |   | (225 | )       |
| Balance as of September 30, 2004        |   | $    | 136,764 |   |

 

The purchase agreements for two recentacquisitions, Sierra Design Group (“SDG”) and MindPlay LLC, call for futurecontingent consideration (“earnouts”) to be paid to the former principals ofthese companies, as more fully descried in footnote 14. The MindPlay earnout ispayable based on future revenues and gross margins from the sale of MindPlayproducts, while the SDG earnout is payable based on Adjusted EBITDA (as thatterm is defined in the purchase agreement) and revenues generated from the SDG relatedbusiness division over the three year period ended June 30, 2007. Any earnoutpayments made under either agreement will be treated as additional purchaseconsideration, which would result in increases in goodwill.

 

11

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**8.  ACCRUED AND JACKPOT LIABILITIES**

 

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

 
| ** **                              | ** ** | **Sept 30,** | ** ** | **June 30,** | ** ** |
|-----------------------------------------|------------|--------------|------------|--------------|------------|
| ** **                              | ** ** | **2004**     | ** ** | **2004**     | ** ** |
| Payroll and related costs               |       | $            | 10,600     |         | $          | 11,905 |   |
| Interest                                |       | 898          |       | 1,265        |       |
| Professional and consulting fees        |       | 3,548        |       | 3,102        |       |
| Deferred revenues, sales and use taxes  |       | 7,359        |       | 5,113        |       |
| Regulatory approval cost accruals       |       | 690          |       | 652          |       |
| Royalties, rebates, direct mail coupons |       | 8,146        |       | 6,607        |       |
| Customer deposits                       |       | 11,670       |       | 9,896        |       |
| Acquisition related accruals            |       | 3,714        |       | 3,806        |       |
| Divestiture related accruals            |       | 560          |       | 4,377        |       |
| Litigation accruals                     |       | 8,581        |       | —       |       |
| Severance accruals                      |       | 1,353        |       | —       |       |
| Other                                   |       | 4,368        |       | 4,746        |       |
| Subtotal                                |       | 61,487       |       | 51,469       |       |
| Jackpots accrued not yet awarded        |       | 9,447        |       | 12,075       |       |
| Total accrued liabilities               |       | $            | 70,934     |         | $          | 63,544 |   |

 

                                                The Companyrecognizes liability for jackpot expense for the cost to fund these jackpots inthe future.  Generally winners may electto receive a single lump sum payment or may opt to receive payments in equalinstallments over a specified period of time.  The most recent history patternindicates that approximately 85% of winners will elect the single paymentoption.

 

                                                The Companyfunds jackpot installment payments through qualifying U.S. government or agencysecurities. The present value of the outstanding progressive jackpotliabilities is computed based upon the payment stream discounted at theapplicable discount rate.

 

                        The increase inlitigation accruals of $8.6 million is a result of the patent litigationdiscussed in Note 3 and consists of the damage award of $7.4 million andrelated litigation costs.

 

**           ****            9.  LONG-TERM DEBT**

 

  Long-term debt consisted of the following (in000s):

 
| ** **                              | ** ** | **Sept 30,** | ** ** | **June 30,** | ** ** |
|-----------------------------------------|------------|--------------|------------|--------------|------------|
| ** **                              | ** ** | **2004**     | ** ** | **2004**     | ** ** |
| Term Loan facility                      |       | $            | 317,507    |         | $          | 350,000 |   |
| Revolving credit facility               |       | —       |       | 70,000       |       |
| Other, generally unsecured              |       | 8,350        |       | 8,955        |       |
|                                    |       | 325,857      |       | 428,955      |       |
| Less current maturities                 |       | 14,662       |       | 5,866        |       |
| Long-term debt, less current maturities |       | $            | 311,195    |         | $          | 423,089 |   |

 

TheCompany’s debt structure at September 30, 2004 consists primarily of a termloan facility with an original balance of $350 million and a $125 millionrevolving credit facility. The term loan which is due on September 4, 2009, hasan interest rate of LIBOR plus 2.25% or 3.8% at September 30, 2004, and hasrequired quarterly principal reductions of approximately 1% per annum.

 

12

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We completed the sale of Rail City in May 2004 andthe sale of UCMC in June 2004. As a result of the sale of these assets, theterms of our bank loan agreement required the use of approximately 50% of thenet proceeds (as defined in the agreement) to reduce the term loan and revolverprincipal balances on a pro rata basis, no later than 180 days after the closeof the sales. Accordingly, in August 2004 the Company made an initial reductionin the term loan of $31.6 million and the revolver of $11.3 million and will berequired to make additional term loan reduction currently estimated to beapproximately $10.0 million by December 31, 2004. In August 2004 the Companymade additional revolver paydown totaling $58.7 million, which reduced therevolver to zero.  The Company has theability to borrow approximately $10.0 million on the revolver as of September30, 2004.

 

TheCompany’s bank credit agreement contains several covenants including maximumleverage ratio, minimum cash flow (as that term is defined in the agreement)and fixed charge coverage ratio.  Thecredit agreement also contains a number of maintenance covenants and other significant covenants that, among otherthings, restrict the ability of the Company certain of its subsidiaries todispose of assets, incur additional indebtedness and issue preferred stock, paydividends or make other distributions, enter into certain acquisitions,repurchase equity interests or subordinated indebtedness, issue or sell equityinterests of the Company’s subsidiaries, engage in mergers or acquisitions, orengage in certain transactions with subsidiaries and affiliates, and thatotherwise restrict corporate activities. As of September 30, 2004, the Company is in compliance with the financialcovenants.

 

Theother debt totaling approximately $8.4 million as of September 30, 2004,consists primarily of the debt owed to the former principals of MCC, MindPlay,and CMS totaling $2.5 million, $4.0 million  and $0.4 million respectively.  The loans are due at various dates between2005 and 2006 and bear rates of interest between LIBOR plus 2% (3.8% as ofSeptember 30, 2004) and 6%, and are generally unsecured.

 

**10.  EARNINGS PER SHARE**

 

The following computation of basic and dilutedearnings (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 September 30,** | ** ** |
|---------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                              | ** ** | **2004**                             | ** ** | **2003** | ** ** |
| Net income (loss) from continuing operations       |       | $                                    | (6,405     | ) | $ | 1,848 |   |
| Net income (loss) from discontinued operations          |       | (4,391                               | )          | 4,180 |   |
| Net income (loss)                                       |       | $                                    | (10,796    | ) | $ | 6,028 |   |
|                                                    |       |                                 |       |   |   |
| Weighted average common shares outstanding              |       | 50,966                               |       | 49,579 |   |
| Effect of dilutive securities                           |       | —                               |       | 1,108 |   |
| Weighted average common and dilutive shares outstanding |       | 50,966                               |       | 50,687 |   |
|                                                    |       |                                 |       |   |   |
| Earnings (loss) per basic share:                        |       |                                 |       |   |   |
| Income (loss) from continued operations                 |       | $                                    | (0.13      | ) | $ | 0.04 |   |
| Income (loss) from discontinued operations              |       | (0.08                                | )          | 0.08 |   |
|                                                    |       | $                                    | (0.21      | ) | $ | 0.12 |   |
| Earnings (loss) per diluted share:                      |       |                                 |       |   |   |
| Income (loss) from continued operations                 |       | $                                    | (0.13      | ) | $ | 0.04 |   |
| Income (loss) from discontinued operations              |       | (0.08                                | )          | 0.08 |   |
|                                                    |       | $                                    | (0.21      | ) | $ | 0.12 |   |

 

13

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Diluted earnings per share represents the potential dilution that couldoccur if all dilutive securities outstanding were exercised. Certain securitiesdo not have dilutive effect because their exercise price exceeds the fairmarket value of the underlying stock. Such securities are excluded from thediluted earnings per share calculation and consist of the following (in 000s):

 
| ** **             | ** ** | **Three Months Ended September 30,** | ** ** |
|------------------------|------------|--------------------------------------|------------|
| ** **             | ** ** | **2004**                             | ** ** | **2003** | ** ** |
| Stock options          |       | 2,004                                |       | 672 |   |
| Restricted stock units |       | 377                                  |       | — |   |
| Warrants               |       | 100                                  |       | — |   |
|                   |       | 2,481                                |       | 672 |   |

 

Forthe quarter ended September 30, 2004, a total of 2.2 million in-the-moneyoptions were also excluded from the dilutive earnings per share calculation asthey are also antidilutive.

 

Atotal of 377,030 RSU’s were granted on June 30, 2004, as part of the employmentagreement of the Company’s new Chief Executive Officer. The RSU’s granted weretreated as deferred compensation which will be amortized over the three yearterm of Mr. Haddrill’s employment agreement which began October 1, 2004.

 

**11.    SEGMENTS****ANDGEOGRAPHICAL INFORMATION**

 

TheCompany currently operates in two business segments (exclusive of the businesssegments included in discontinued operations): (i) Gaming Equipment and Systems which designs, manufactures anddistributes gaming machines and computerized monitoring systems for gamingmachines, and (ii) Casino Operations which currently owns and operates a casinoin Vicksburg, Mississippi. The accounting policies of these segments areconsistent with Company’s policies for the Consolidated Financial Statements.

 

Thetable below presents information as to the Company’s revenues and operatingincome by segment (in 000s):

 
| ** **                    | ** ** | **Three Months Ended** | ** ** |
|-------------------------------|------------|------------------------|------------|
| ** **                    | ** ** | **September 30,**      | ** ** |
| ** **                    | ** ** | **2004**               | ** ** | **2003** | ** ** |
| Revenues:                     |       |                   |       |   |   |
| Gaming Equipment and Systems  |       | $                      | 104,077    |   | $ | 88,468 |   |
| Casino Operations             |       | 12,836                 |       | 12,755 |   |
| Total revenues                |       | $                      | 116,913    |   | $ | 101,223 |   |
|                          |       |                   |       |   |   |
| Intersegment revenues:        |       |                   |       |   |   |
| Gaming Equipment and Systems  |       | $                      | 172        |   | $ | 93 |   |
| Casino Operations             |       | —                 |       | — |   |
| Total intersegment revenues   |       | $                      | 172        |   | $ | 93 |   |
|                          |       |                   |       |   |   |
| Operating income (loss):      |       |                   |       |   |   |
| Gaming Equipment and Systems  |       | $                      | (4,487     | ) | $ | 21,358 |   |
| Casino Operations             |       | 3,796                  |       | 4,014 |   |
| Corporate/other               |       | (5,737                 | )          | (3,439 | ) |
| Total operating income (loss) |       | $                      | (6,428     | ) | $ | 21,933 |   |

 

The Company has operations based primarily in the United States withsales and distribution offices in Europe and South America.

 

14

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Thetable below presents information as to the Company’s revenues, operatingincome, identifiable assets capital expenditures and depreciation andamortization by geographic region (in 000s):

 
| ** **                    | ** ** | **Three Months Ended** | ** ** |
|-------------------------------|------------|------------------------|------------|
| ** **                    | ** ** | **September 30,**      | ** ** |
| ** **                    | ** ** | **2004**               | ** ** | **2003** | ** ** |
| Revenues:                     |       |                   |       |   |   |
| United States                 |       | $                      | 111,682    |   | $ | 92,612 |   |
| Germany                       |       | 1,176                  |       | 6,032 |   |
| Other foreign                 |       | 4,055                  |       | 2,579 |   |
| Total revenues                |       | $                      | 116,913    |   | $ | 101,223 |   |
|                          |       |                   |       |   |   |
| Operating income (loss):      |       |                   |       |   |   |
| United States                 |       | $                      | (5,515     | ) | $ | 21,159 |   |
| Germany                       |       | (401                   | )          | 1,024 |   |
| Other foreign                 |       | (512                   | )          | (250 | ) |
| Total operating income (loss) |       | $                      | (6,428     | ) | $ | 21,933 |   |

 

**12.    SUPPLEMENTAL CASH FLOW INFORMATION**

 

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

 
| ** **                                            | ** ** | **Three Months Ended** | ** ** |
|-------------------------------------------------------|------------|------------------------|------------|
| ** **                                            | ** ** | **September 30,**      | ** ** |
| ** **                                            | ** ** | **2004**               | ** ** | **2003** | ** ** |
| Cash paid for interest                                |       | $                      | 3,311      |   | $ | 11,695 |   |
| Cash paid for income taxes                            |       | 3,057                  |       | 1,239 |   |
|                                                  |       |                   |       |   |   |
| Non-cash investing and financing transactions:        |       |                   |       |   |   |
| Reclassify property, plant and equipment to inventory |       | $                      | 1,193      |   | $ | 799 |   |
| Unfavorable translation rate adjustment               |       | 215                    |       | 732 |   |

 

**          13. RESTRUCTURING CHARGE**

 

During the quarter ended September 30, 2004, theCompany undertook an extensive review of its operations and accordingly reducedits workforce which resulted in a restructuring charge and accrual totaling$1.4 million, of this charge, $0.9 million was recorded at the gaming equipmentand systems segment and $0.5 million was recorded at corporate segment.  No further costs will be incurred inconnection with this restructuring, as all employees subject to this have beenterminated from the Company as of September 30, 2004; however futurerestructuring charges may be incurred if the Company initiates future reductionin its workforce.

 

**14.  COMMITMENTS AND CONTINGENCIES**

 

TheCompany is also a party to various lawsuits relating to routine mattersincidental to its business.  Managementdoes not believe that the outcome of such litigation, in the aggregate, willhave a material adverse effect on the Company.

 

In Juneand July 2004, purported class actions were filed against Alliance GamingCorporation and its officers, Robert Miodunski (the Company’s former ChiefExecutive Officer), Robert Saxton, Mark Lerner, and Steven Des Champs, in theFederal District Court for the District of Nevada. The nearly identicalcomplaints allege violations of the Securities Exchange Act of 1934 stemmingfrom the revision of earnings guidance, and declines in the stock price. At theplaintiffs’ request, the district court consolidated the cases and appointed alead plaintiff and counsel, as is customary in such cases. The next step is forthe plaintiffs to file a consolidated complaint. We believe the lawsuits arewithout merit and the Company intends to vigorously defend the action. Inaddition, in July 2004 two derivative lawsuits were filed in Nevada state courtagainst the members of the board of directors and the officers 

 

15

----

 

listedabove. The Company is named as a nominal defendant in the derivative lawsuitsas the claims are purportedly asserted for the benefit of the Company. Theselawsuits assert claims for breach of fiduciary duty and waste of corporateassets arising out of the same events as those giving rise to the class actionsdescribed above. These two cases have also been consolidated, and aconsolidated complaint has been filed.

 

OnFebruary 19, 2004, the Company completed the acquisition of MindPlay. TheCompany purchased substantially all of the assets and liabilities of MindPlayfor consideration of $11.0 million in cash, a promissory note in the amount of$4.0 million and a warrant to purchase 100,000 shares of Alliance Common Stock,plus transaction fees and expense resulting in total consideration of $15.9million.  Additional consideration maybecome payable in cash over the next 13 years upon the MindPlay business unitachieving certain significant revenue and gross margin targets.  The additional consideration that may becomepayable will be recorded as an additional cost of the acquired entity.

 

Additionally,on March 2, 2004, the Company completed the acquisition of SDG. The Companypurchased 100 percent of the outstanding shares of SDG for consideration ofapproximately $29.8 million in cash and 662,000 shares of Alliance CommonStock. In addition, the Company assumed approximately $80 million of debt  plus transaction fees and expenses, resultingin total initial consideration of $126.4 million. Additional contingentconsideration of up to $95.6 million may become payable, in equal portions ofcash and stock, over the next three fiscal years upon the SDG business unitachieving certain significant revenue and EBITDA (as that term is defined inthe purchase agreement) targets.  Theadditional consideration that may become payable will be recorded as anadditional cost of the acquired entity.

 

Management believes that cash flows from current operating activitiesand the limited availability under the revolving credit facility will providethe Company with sufficient capital resources and liquidity.  At September 30, 2004 we had no materialcommitments for capital expenditures.

 

**          15.  UNAUDITED CONSOLIDATING FINANCIAL STATEMENTS**

 

Thefollowing unaudited condensed consolidating financial statements are presentedto provide certain financial information regarding guaranteeing andnon-guaranteeing subsidiaries in relation to the Company’s new bank creditagreement. The financial information presented includes Alliance GamingCorporation (the “Parent”), its wholly-owned guaranteeing subsidiaries (“GuaranteeingSubsidiaries”), and the non-guaranteeing subsidiaries Video Services, Inc., theRainbow Casino Vicksburg Partnership, L.P. (dba Rainbow Casino) and the Company’snon-domestic subsidiaries (together the “Non-Guaranteeing Subsidiaries”). Thenotes to the unaudited consolidating financial statements should be read inconjunction with these unaudited consolidating financial statements.

 

 

16

----

#### ** **

#### **UNAUDITED CONSOLIDATINGBALANCE SHEETS**

September30, 2004

(In000s)

 
| ** **                                      | ** ** | ** ** | ** ** | ** **       | ** ** | ** **       | ** ** | **Reclass-**   | ** ** | **Alliance**     | ** ** |
|-------------------------------------------------|------------|------------|------------|------------------|------------|------------------|------------|----------------|------------|------------------|------------|
| ** **                                      | ** ** | ** ** | ** ** | ** **       | ** ** | ** **       | ** ** | **ifications** | ** ** | **Gaming**       | ** ** |
| ** **                                      | ** ** | ** ** | ** ** | ** **       | ** ** | **Non-**         | ** ** | **and**        | ** ** | **Corporation**  | ** ** |
| ** **                                      | ** ** | ** ** | ** ** | **Guaranteeing** | ** ** | **Guaranteeing** | ** ** | **Elimina-**   | ** ** | **and**          | ** ** |
| ** **                                      | ** ** | **Parent** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries** | ** ** | **tions**      | ** ** | **Subsidiaries** | ** ** |
| ASSETS                                          |       |       |       |             |       |             |       |           |       |             |       |
| Current assets:                                 |       |       |       |             |       |             |       |           |       |             |       |
| Cash and cash equivalents                       |       | $          | 27,839     |             | $          | 6,405            |       | $              | 8,985      |             | $          | — |   | $ | 43,229 |   |
| Accounts and notes receivable, net              |       | 2,070      |       | 93,081           |       | 15,754           |       | (805           | )          | 110,100          |       |
| Inventories, net                                |       | —     |       | 74,033           |       | 7,773            |       | (340           | )          | 81,466           |       |
| Deferred tax assets, net                        |       | 1,461      |       | 18,592           |       | —           |       | —         |       | 20,053           |       |
| Other current assets                            |       | 1,240      |       | 18,725           |       | 2,299            |       | —         |       | 22,264           |       |
| Total current assets                            |       | 32,610     |       | 210,836          |       | 34,811           |       | (1,145         | )          | 277,112          |       |
| Long-term investment (restricted)               |       | —     |       | 4,676            |       | —           |       | —         |       | 4,676            |       |
| Long-term receivables, net                      |       | 259,355    |       | 18,777           |       | 22               |       | (256,814       | )          | 21,340           |       |
| Net investment in leases                        |       | —     |       | 8,308            |       | —           |       | —         |       | 8,308            |       |
| Leased gaming equipment, net                    |       | —     |       | 51,424           |       | (4,286           | )          | —         |       | 47,138           |       |
| Property, plant and equipment, net              |       | 77         |       | 33,693           |       | 42,924           |       | —         |       | 76,694           |       |
| Goodwill, net                                   |       | (900       | )          | 119,715          |       | 17,949           |       | —         |       | 136,764          |       |
| Intangible assets, net                          |       | 5,582      |       | 51,932           |       | 4,476            |       | —         |       | 61,990           |       |
| Investments in subsidiaries                     |       | 338,335    |       | 75,203           |       | —           |       | (413,538       | )          | —           |       |
| Deferred tax assets, net                        |       | 5,342      |       | —           |       | —           |       | (5,342         | )          | —           |       |
| Assets of discontinued operations held for sale |       | 39         |       | —           |       | 4,393            |       | —         |       | 4,432            |       |
| Other assets, net                               |       | (110,570   | )          | 133,173          |       | (16,190          | )          | (48            | )          | 6,365            |       |
|                                            |       | $          | 529,870    |             | $          | 707,737          |       | $              | 84,099     |             | $          | (676,887 | ) | $ | 644,819 |   |
| LIABILITIES AND STOCKHOLDERS’ EQUITY       |       |       |       |             |       |             |       |           |       |             |       |
| Current liabilities:                            |       |       |       |             |       |             |       |           |       |             |       |
| Accounts payable                                |       | $          | 971        |             | $          | 44,535           |       | $              | 1,148      |             | $          | — |   | $ | 46,654 |   |
| Accrued liabilities                             |       | 12,922     |       | 44,687           |       | 4,743            |       | (865           | )          | 61,487           |       |
| Jackpot liabilities                             |       | —     |       | 9,301            |       | 146              |       | —         |       | 9,447            |       |
| Taxes payable                                   |       | —     |       | 420              |       | —           |       | —         |       | 420              |       |
| Current maturities of long-term debt            |       | 12,388     |       | 2,274            |       | —           |       | —         |       | 14,662           |       |
| Liabilities of disc operations held for sale    |       | —     |       | —           |       | 1,229            |       | —         |       | 1,229            |       |
| Total current liabilities                       |       | 26,281     |       | 101,217          |       | 7,266            |       | (865           | )          | 133,899          |       |
| Long term debt, net                             |       | 309,119    |       | 258,724          |       | —           |       | (256,648       | )          | 311,195          |       |
| Deferred tax liabilities                        |       | —     |       | 4,557            |       | 1,635            |       | (5,342         | )          | 850              |       |
| Other liabilities                               |       | 2,624      |       | 4,405            |       | —           |       | —         |       | 7,029            |       |
| Minority interest                               |       | 1,298      |       | —           |       | —           |       | —         |       | 1,298            |       |
| Total liabilities                               |       | 339,322    |       | 368,903          |       | 8,901            |       | (262,855       | )          | 454,271          |       |
| Commitments and contingencies                   |       |       |       |             |       |             |       |           |       |             |       |
| Stockholders’ equity:                      |       |       |       |             |       |             |       |           |       |             |       |
| Special stock series E                          |       | 12         |       | —           |       | —           |       | —         |       | 12               |       |
| Common stock                                    |       | 5,156      |       | 109              |       | 1,027            |       | (1,136         | )          | 5,156            |       |
| Treasury stock                                  |       | (665       | )          | —           |       | —           |       | —         |       | (665             | )          |
| Deferred compensation                           |       | (6,500     | )          | —           |       | —           |       | —         |       | (6,500           | )          |
| Additional paid-in capital                      |       | 194,902    |       | 260,813          |       | 33,415           |       | (294,228       | )          | 194,902          |       |
| Accumulated other comprehensive income (loss)   |       | 1,356      |       | 1,359            |       | 2,688            |       | (4,047         | )          | 1,356            |       |
| Retained earnings (accumulated deficit)         |       | (3,713     | )          | 76,553           |       | 38,068           |       | (114,621       | )          | (3,713           | )          |
| Total stockholders’ equity                 |       | 190,548    |       | 338,834          |       | 75,198           |       | (414,032       | )          | 190,548          |       |
|                                            |       | $          | 529,870    |             | $          | 707,737          |       | $              | 84,099     |             | $          | (676,887 | ) | $ | 644,819 |   |
|                                                 |            |            |            |                  |            |                  |            |                |            |                  |            |  |  |  |  |  |  |  |  |  |

 

See accompanying unaudited notes.

 

 

17

----

 

 

**UNAUDITED CONSOLIDATING BALANCESHEETS**

June 30,2004

(In000s)

 
| ** **                                      | ** ** | ** ** | ** ** | ** **       | ** ** | ** **       | ** ** | **Reclass-**   | ** ** | **Alliance**     | ** ** |
|-------------------------------------------------|------------|------------|------------|------------------|------------|------------------|------------|----------------|------------|------------------|------------|
| ** **                                      | ** ** | ** ** | ** ** | ** **       | ** ** | ** **       | ** ** | **ifications** | ** ** | **Gaming**       | ** ** |
| ** **                                      | ** ** | ** ** | ** ** | ** **       | ** ** | **Non-**         | ** ** | **and**        | ** ** | **Corporation**  | ** ** |
| ** **                                      | ** ** | ** ** | ** ** | **Guaranteeing** | ** ** | **Guaranteeing** | ** ** | **Elimina-**   | ** ** | **and**          | ** ** |
| ** **                                      | ** ** | **Parent** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries** | ** ** | **tions**      | ** ** | **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           |       |
| Taxes payable                                   |       | 5,538      |       | 1,140            |       | 555              |       | —         |       | 7,233            |       |
| Current maturities of long-term debt            |       | 3,313      |       | 2,553            |       | —           |       | —         |       | 5,866            |       |
| Liabilities of disc 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          |       |
| Accumulated other comprehensive income (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 notes.

 

 

18

----

 

 

**UNAUDITED****CONSOLIDATING STATEMENTS OF OPERATIONS**

Three Months Ended September 30, 2004

(In 000s)

 
| ** **                                                   | ** ** | ** ** | ** ** | ** **       | ** ** | ** **       | ** ** | **Reclass-**   | ** ** | **Alliance**     | ** ** |
|--------------------------------------------------------------|------------|------------|------------|------------------|------------|------------------|------------|----------------|------------|------------------|------------|
| ** **                                                   | ** ** | ** ** | ** ** | ** **       | ** ** | ** **       | ** ** | **ifications** | ** ** | **Gaming**       | ** ** |
| ** **                                                   | ** ** | ** ** | ** ** | ** **       | ** ** | **Non-**         | ** ** | **and**        | ** ** | **Corporation**  | ** ** |
| ** **                                                   | ** ** | ** ** | ** ** | **Guaranteeing** | ** ** | **Guaranteeing** | ** ** | **Elimina-**   | ** ** | **and**          | ** ** |
| ** **                                                   | ** ** | **Parent** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries** | ** ** | **tions**      | ** ** | **Subsidiaries** | ** ** |
| Revenues:                                                    |       |       |       |             |       |             |       |           |       |             |       |
| Gaming equipment and systems                                 |       | $          | —     |             | $          | 103,094          |       | $              | 5,231      |             | $          | (4,248 | ) | $ | 104,077 |   |
| Casino operations                                            |       | —     |       | —           |       | 14,258           |       | (1,422         | )          | 12,836           |       |
|                                                         |       | —     |       | 103,094          |       | 19,489           |       | (5,670         | )          | 116,913          |       |
| Costs and expenses:                                          |       |       |       |             |       |             |       |           |       |             |       |
| Cost of gaming equipment and systems                         |       | —     |       | 52,202           |       | 2,693            |       | (4,059         | )          | 50,836           |       |
| Cost of casino operations                                    |       | —     |       | —           |       | 4,802            |       | —         |       | 4,802            |       |
| Selling, general and administrative                          |       | 3,979      |       | 33,139           |       | 7,959            |       | (1,422         | )          | 43,655           |       |
| Research and development costs                               |       | —     |       | 11,669           |       | 103              |       | —         |       | 11,772           |       |
| Restructuring charge                                         |       | 1,435      |       | —           |       | —           |       | —         |       | 1,435            |       |
| Depreciation and amortization                                |       | 323        |       | 9,469            |       | 1,049            |       | —         |       | 10,841           |       |
|                                                         |       | 5,737      |       | 106,479          |       | 16,606           |       | (5,481         | )          | 123,341          |       |
| Operating income (loss)                                      |       | (5,737     | )          | (3,385           | )          | 2,883            |       | (189           | )          | (6,428           | )          |
|                                                         |       |       |       |             |       |             |       |           |       |             |       |
| Earnings in consolidated subsidiaries                        |       | (6,600     | )          | 1,449            |       | —           |       | 5,151          |       | —           |       |
|                                                         |       |       |       |             |       |             |       |           |       |             |       |
| Other income (expense):                                      |       |       |       |             |       |             |       |           |       |             |       |
| Interest income                                              |       | 5,007      |       | 8                |       | 124              |       | (4,659         | )          | 480              |       |
| Interest expense                                             |       | (3,885     | )          | (4,733           | )          | (3               | )          | 4,659          |       | (3,962           | )          |
| Rainbow royalty                                              |       | 1,613      |       | —           |       | (1,613           | )          | —         |       | —           |       |
| Minority interest                                            |       | (499       | )          | —           |       | —           |       | —         |       | (499             | )          |
| Other, net                                                   |       | 140        |       | (44              | )          | 57               |       | —         |       | 153              |       |
| Income (loss) from continuing operations before income taxes |       | (9,961     | )          | (6,705           | )          | 1,448            |       | 4,962          |       | (10,256          | )          |
| Income tax expense (benefit)                                 |       | (3,556     | )          | (294             | )          | (1               | )          | —         |       | (3,851           | )          |
| Net income (loss) from continuing operations                 |       | (6,405     | )          | (6,411           | )          | 1,449            |       | 4,962          |       | (6,405           | )          |
|                                                         |       |       |       |             |       |             |       |           |       |             |       |
| Discontinued Operations:                                     |       |       |       |             |       |             |       |           |       |             |       |
| Income from disc. ops. of Nevada Route, net                  |       | (4,701     | )          | —           |       | —           |       | —         |       | (4,701           | )          |
| Income from disc. ops. of Louisiana Route, net               |       | —     |       | —           |       | 310              |       | —         |       | 310              |       |
| Earnings from consolidated discontinued operations           |       | 310        |       | 310              |       | —           |       | (620           | )          | —           |       |
| Income (loss) from discontinued operations                   |       | (4,391     | )          | 310              |       | 310              |       | (620           | )          | (4,391           | )          |
| Net income (loss)                                            |       | $          | (10,796    | )                | $          | (6,101           | )          | $              | 1,759      |             | $          | 4,342 |   | $ | (10,796 | ) |

 

Seeaccompanying unaudited notes.

 

 

19

----

 

 

**UNAUDITED****CONSOLIDATING STATEMENTS OF OPERATIONS**

Three Months Ended September 30, 2003

(In 000s)

 
| ** **                                                   | ** ** | ** ** | ** ** | ** **       | ** ** | ** **       | ** ** | **Reclass-**   | ** ** | **Alliance**     | ** ** |
|--------------------------------------------------------------|------------|------------|------------|------------------|------------|------------------|------------|----------------|------------|------------------|------------|
| ** **                                                   | ** ** | ** ** | ** ** | ** **       | ** ** | ** **       | ** ** | **ifications** | ** ** | **Gaming**       | ** ** |
| ** **                                                   | ** ** | ** ** | ** ** | ** **       | ** ** | **Non-**         | ** ** | **and**        | ** ** | **Corporation**  | ** ** |
| ** **                                                   | ** ** | ** ** | ** ** | **Guaranteeing** | ** ** | **Guaranteeing** | ** ** | **Elimina-**   | ** ** | **and**          | ** ** |
| ** **                                                   | ** ** | **Parent** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries** | ** ** | **tions**      | ** ** | **Subsidiaries** | ** ** |
| Revenues:                                                    |       |       |       |             |       |             |       |           |       |             |       |
| Gaming equipment and systems                                 |       | $          | —     |             | $          | 85,009           |       | $              | 8,612      |             | $          | (5,153 | ) | $ | 88,468 |   |
| Casino operations                                            |       | —     |       | —           |       | 14,239           |       | (1,484         | )          | 12,755           |       |
|                                                         |       | —     |       | 85,009           |       | 22,851           |       | (6,637         | )          | 101,223          |       |
| Costs and expenses:                                          |       |       |       |             |       |             |       |           |       |             |       |
| Cost of gaming equipment and systems                         |       | —     |       | 32,688           |       | 5,585            |       | (5,036         | )          | 33,237           |       |
| Cost of casino operations                                    |       | —     |       | —           |       | 5,003            |       | —         |       | 5,003            |       |
| Selling, general and administrative                          |       | 2,933      |       | 21,212           |       | 6,404            |       | (1,484         | )          | 29,065           |       |
| Research and development costs                               |       | —     |       | 5,741            |       | 222              |       | —         |       | 5,963            |       |
| Depreciation and amortization                                |       | 506        |       | 4,669            |       | 847              |       | —         |       | 6,022            |       |
|                                                         |       | 3,439      |       | 64,310           |       | 18,061           |       | (6,520         | )          | 79,290           |       |
| Operating income (loss)                                      |       | (3,439     | )          | 20,699           |       | 4,790            |       | (117           | )          | 21,933           |       |
|                                                         |       |       |       |             |       |             |       |           |       |             |       |
| Earnings in consolidated subsidiaries                        |       | 19,752     |       | 2,569            |       | —           |       | (22,321        | )          | —           |       |
|                                                         |       |       |       |             |       |             |       |           |       |             |       |
| Other income (expense):                                      |       |       |       |             |       |             |       |           |       |             |       |
| Interest income                                              |       | 3,070      |       | —           |       | 5                |       | (3,032         | )          | 43               |       |
| Interest expense                                             |       | (5,661     | )          | (3,084           | )          | (16              | )          | 3,032          |       | (5,729           | )          |
| Rainbow royalty                                              |       | 1,593      |       | —           |       | (1,593           | )          | —         |       | —           |       |
| Minority interest                                            |       | (486       | )          | —           |       | —           |       | —         |       | (486             | )          |
| Refinancing charge                                           |       | (12,293    | )          | —           |       | —           |       | —         |       | (12,293          | )          |
| Other, net                                                   |       | 109        |       | (197             | )          | (266             | )          | —         |       | (354             | )          |
|                                                         |       |       |       |             |       |             |       |           |       |             |       |
| Income (loss) from continuing operations before income taxes |       | 2,645      |       | 19,987           |       | 2,920            |       | (22,438        | )          | 3,114            |       |
| Income tax expense                                           |       | (797       | )          | (118             | )          | (351             | )          | —         |       | (1,266           | )          |
| Net income (loss) from continuing operations                 |       | 1,848      |       | 19,869           |       | 2,569            |       | (22,438        | )          | 1,848            |       |
|                                                         |       |       |       |             |       |             |       |           |       |             |       |
| Discontinued Operations:                                     |       |       |       |             |       |             |       |           |       |             |       |
| Income from disc. ops. of Nevada Route, net                  |       | —     |       | 3,132            |       | —           |       | —         |       | 3,132            |       |
| Income from disc. ops. of Louisiana Route,  net              |       | —     |       | —           |       | 310              |       | —         |       | 310              |       |
| Income from disc. ops. of Rail City, net                     |       | —     |       | 738              |       | —           |       | —         |       | 738              |       |
| Earnings from consolidated discontinued operations           |       | 4,180      |       | 310              |       | —           |       | (4,490         | )          | —           |       |
| Income (loss) from discontinued operations                   |       | 4,180      |       | 4,180            |       | 310              |       | (4,490         | )          | 4,180            |       |
| Net income (loss)                                            |       | $          | 6,028      |             | $          | 24,049           |       | $              | 2,879      |             | $          | (26,928 | ) | $ | 6,028 |   |

 

See accompanying unaudited notes.

 

 

20

----

 

 

**UNAUDITED****CONSOLIDATING STATEMENTS OF CASHFLOWS**

Three Months Ended September 30, 2004

(000s)

 
| ** **                                                                                                                   | ** ** | ** ** | ** ** | ** **       | ** ** | ** **       | ** ** | **Reclass-**   | ** ** | **Alliance**     | ** ** |
|------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|------------------|------------|------------------|------------|----------------|------------|------------------|------------|
| ** **                                                                                                                   | ** ** | ** ** | ** ** | ** **       | ** ** | ** **       | ** ** | **ifications** | ** ** | **Gaming**       | ** ** |
| ** **                                                                                                                   | ** ** | ** ** | ** ** | ** **       | ** ** | **Non-**         | ** ** | **and**        | ** ** | **Corporation**  | ** ** |
| ** **                                                                                                                   | ** ** | ** ** | ** ** | **Guaranteeing** | ** ** | **Guaranteeing** | ** ** | **Elimina-**   | ** ** | **and**          | ** ** |
| ** **                                                                                                                   | ** ** | **Parent** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries** | ** ** | **tions**      | ** ** | **Subsidiaries** | ** ** |
| Cash flows from operating activities of continuing operations:                                                               |       |       |       |             |       |             |       |           |       |             |       |
| Net income (loss)                                                                                                            |       | $          | (10,796    | )                | $          | (6,101           | )          | $              | 1,759      |             | $          | 4,342 |   | $ | (10,796 | ) |
| Adjustments to reconcile net income (loss) to net cash provided by  (used in) operating activities of continuing operations: |       |       |       |             |       |             |       |           |       |             |       |
| (Income) loss from discontinued operations                                                                                   |       | 4,391      |       | (310             | )          | (310             | )          | 620            |       | 4,391            |       |
| Depreciation and amortization                                                                                                |       | 323        |       | 9,469            |       | 1,049            |       | —         |       | 10,841           |       |
| Deferred income taxes                                                                                                        |       | —     |       | 2                |       | —           |       | —         |       | 2                |       |
| Provision for losses on receivables                                                                                          |       | —     |       | 2,650            |       | 67               |       | —         |       | 2,717            |       |
| Inventory write down                                                                                                         |       | —     |       | 3,582            |       | —           |       | —         |       | 3,582            |       |
| Other                                                                                                                        |       | (29        | )          | (2,159           | )          | (39              | )          | —         |       | (2,227           | )          |
| Change in operating assets and liabilities:                                                                                  |       |       |       |             |       |             |       |           |       |             |       |
| Accounts and notes receivable                                                                                                |       | (96        | )          | 3,167            |       | 2,415            |       | 101            |       | 5,587            |       |
| Intercompany accounts                                                                                                        |       | (13,459    | )          | 17,817           |       | 747              |       | (5,105         | )          | —           |       |
| Inventories                                                                                                                  |       | —     |       | (21,298          | )          | (1,487           | )          | 189            |       | (22,596          | )          |
| Other current assets                                                                                                         |       | (272       | )          | (5,431           | )          | (1,128           | )          | —         |       | (6,831           | )          |
| Accounts payable                                                                                                             |       | (5         | )          | 10,520           |       | (1,376           | )          | —         |       | 9,139            |       |
| Accrued liabilities and jackpot liabilities                                                                                  |       | (5,769     | )          | (2,584           | )          | (850             | )          | (147           | )          | (9,350           | )          |
| Net cash provided by (used in) operating activities of continuing  operations                                                |       | (25,712    | )          | 9,324            |       | 847              |       | —         |       | (15,541          | )          |
|                                                                                                                         |       |       |       |             |       |             |       |           |       |             |       |
| Cash flows from investing activities of continuing operations:                                                               |       |       |       |             |       |             |       |           |       |             |       |
| Additions to property, plant and equipment                                                                                   |       | (12        | )          | (2,006           | )          | (1,182           | )          | —         |       | (3,200           | )          |
| Additions to leased gaming equipment                                                                                         |       | —     |       | (8,192           | )          | —           |       | —         |       | (8,192           | )          |
| Additions to other long-term assets                                                                                          |       | —     |       | (592             | )          | 4                |       | —         |       | (588             | )          |
| Net cash used in investing activities of continuing operations                                                               |       | (12        | )          | (10,790          | )          | (1,178           | )          | —         |       | (11,980          | )          |
|                                                                                                                         |       |       |       |             |       |             |       |           |       |             |       |
| Cash flows from financing activities of continuing operations:                                                               |       |       |       |             |       |             |       |           |       |             |       |
| Payoff of debt due to sale of net assets of discontinued operations                                                          |       | (101,618   | )          | —           |       | —           |       | —         |       | (101,618         | )          |
| Reduction of long-term debt                                                                                                  |       | (875       | )          | (636             | )          | —           |       | —         |       | (1,511           | )          |
| Re-purchase of common stock for treasury                                                                                     |       | (164       | )          | —           |       | —           |       | —         |       | (164             | )          |
| Proceeds from exercise of stock options and warrants                                                                         |       | 873        |       | —           |       | —           |       | —         |       | 873              |       |
| Dividends received (paid)                                                                                                    |       | —     |       | 765              |       | (765             | )          | —         |       | —           |       |
| Net cash provided by (used in) financing activities of continuing  operations                                                |       | (101,784   | )          | 129              |       | (765             | )          | —         |       | (102,420         | )          |
|                                                                                                                         |       |       |       |             |       |             |       |           |       |             |       |
| Effect of exchange rate changes on cash                                                                                      |       | —     |       | —           |       | 47               |       | —         |       | 47               |       |
|                                                                                                                         |       |       |       |             |       |             |       |           |       |             |       |
| Cash provided by discontinued operations                                                                                     |       | —     |       | —           |       | 397              |       | —         |       | 397              |       |
|                                                                                                                         |       |       |       |             |       |             |       |           |       |             |       |
| Cash and cash equivalents:                                                                                                   |       |       |       |             |       |             |       |           |       |             |       |
| Decrease for the period                                                                                                      |       | (127,508   | )          | (1,337           | )          | (652             | )          | —         |       | (129,497         | )          |
| Balance, beginning of period                                                                                                 |       | 155,347    |       | 7,742            |       | 9,637            |       | —         |       | 172,726          |       |
| Balance, end of period                                                                                                       |       | $          | 27,839     |             | $          | 6,405            |       | $              | 8,985      |             | $          | — |   | $ | 43,229 |   |
|                                                                                                                              |            |            |            |                  |            |                  |            |                |            |                  |            |  |  |  |  |  |  |

 

See accompanying unauditednotes.

 

 

21

----

 

**UNAUDITED****CONSOLIDATING STATEMENTS OF CASHFLOWS**

Three Months Ended September 30, 2003

(000s)

 
| ** **                                                                                                                   | ** ** | ** ** | ** ** | ** **       | ** ** | ** **       | ** ** | **Reclass-**   | ** ** | **Alliance**     | ** ** |
|------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|------------------|------------|------------------|------------|----------------|------------|------------------|------------|
| ** **                                                                                                                   | ** ** | ** ** | ** ** | ** **       | ** ** | ** **       | ** ** | **ifications** | ** ** | **Gaming**       | ** ** |
| ** **                                                                                                                   | ** ** | ** ** | ** ** | ** **       | ** ** | **Non-**         | ** ** | **and**        | ** ** | **Corporation**  | ** ** |
| ** **                                                                                                                   | ** ** | ** ** | ** ** | **Guaranteeing** | ** ** | **Guaranteeing** | ** ** | **Elimina-**   | ** ** | **and**          | ** ** |
| ** **                                                                                                                   | ** ** | **Parent** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries** | ** ** | **tions**      | ** ** | **Subsidiaries** | ** ** |
| Cash flows from operating activities of continuing operations:                                                               |       |       |       |             |       |             |       |           |       |             |       |
| Net income (loss)                                                                                                            |       | $          | 6,028      |             | $          | 24,049           |       | $              | 2,879      |             | $          | (26,928 | ) | $ | 6,028 |   |
| Adjustments to reconcile net income (loss) to net cash provided by  (used in) operating activities of continuing operations: |       |       |       |             |       |             |       |           |       |             |       |
| (Income) loss from discontinued operations                                                                                   |       | (4,180     | )          | (4,180           | )          | (310             | )          | 4,490          |       | (4,180           | )          |
| Depreciation and amortization                                                                                                |       | 506        |       | 4,669            |       | 847              |       | —         |       | 6,022            |       |
| Refinancing charge                                                                                                           |       | 12,293     |       | —           |       | —           |       | —         |       | 12,293           |       |
| Deferred income taxes                                                                                                        |       | 1,275      |       | 2                |       | —           |       | —         |       | 1,277            |       |
| Provision for losses on receivables                                                                                          |       | —     |       | 915              |       | 18               |       | —         |       | 933              |       |
| Inventory write down                                                                                                         |       | —     |       | 40               |       | —           |       | —         |       | 40               |       |
| Other                                                                                                                        |       | (159       | )          | (1,421           | )          | 6                |       | —         |       | (1,574           | )          |
| Change in operating assets and liabilities:                                                                                  |       |       |       |             |       |             |       |           |       |             |       |
| Accounts and notes receivable                                                                                                |       | (1,566     | )          | (6,658           | )          | 2,510            |       | 133            |       | (5,581           | )          |
| Intercompany accounts                                                                                                        |       | (10,124    | )          | (10,010          | )          | (2,205           | )          | 22,339         |       | —           |       |
| Inventories                                                                                                                  |       | —     |       | (5,387           | )          | (78              | )          | 118            |       | (5,347           | )          |
| Other current assets                                                                                                         |       | (347       | )          | (129             | )          | (4               | )          | —         |       | (480             | )          |
| Accounts payable                                                                                                             |       | (540       | )          | 3,308            |       | (152             | )          | —         |       | 2,616            |       |
| Accrued liabilities and jackpot liabilities                                                                                  |       | (8,726     | )          | 921              |       | (333             | )          | (152           | )          | (8,290           | )          |
| Net cash provided by (used in) operating activities of continuing  operations                                                |       | (5,540     | )          | 6,119            |       | 3,178            |       | —         |       | 3,757            |       |
|                                                                                                                         |       |       |       |             |       |             |       |           |       |             |       |
| Cash flows from investing activities of continuing operations:                                                               |       |       |       |             |       |             |       |           |       |             |       |
| Additions to property, plant and equipment                                                                                   |       | (7         | )          | (1,546           | )          | (106             | )          | —         |       | (1,659           | )          |
| Additions to leased gaming equipment                                                                                         |       | —     |       | (5,004           | )          | —           |       | —         |       | (5,004           | )          |
| Additions to other long-term assets                                                                                          |       | (5,633     | )          | (926             | )          | 128              |       | —         |       | (6,431           | )          |
| Proceeds from sale of discontinued operations                                                                                |       | 16,500     |       | —           |       | —           |       | —         |       | 16,500           |       |
| Net cash used in investing activities of continuing operations                                                               |       | 10,860     |       | (7,476           | )          | 22               |       | —         |       | 3,406            |       |
|                                                                                                                         |       |       |       |             |       |             |       |           |       |             |       |
| Cash flows from financing activities of continuing operations:                                                               |       |       |       |             |       |             |       |           |       |             |       |
| Capitalized debt issuance costs                                                                                              |       | (5,686     | )          | —           |       | —           |       | —         |       | (5,686           | )          |
| Proceeds from issuance of long-term debt                                                                                     |       | 275,000    |       | —           |       | —           |       | —         |       | 275,000          |       |
| Payoff of debt from refinancing                                                                                              |       | (337,625   | )          | —           |       | —           |       | —         |       | (337,625         | )          |
| Reduction of long-term debt                                                                                                  |       | (495       | )          | (375             | )          | (9               | )          | —         |       | (879             | )          |
| Net change in revolving credit facility                                                                                      |       | 70,000     |       | —           |       | —           |       | —         |       | 70,000           |       |
| Premium paid on early redemption of debt                                                                                     |       | (5,399     | )          | —           |       | —           |       | —         |       | (5,399           | )          |
| Proceeds from exercise of stock options                                                                                      |       | 1,460      |       | —           |       | —           |       | —         |       | 1,460            |       |
| Dividends received (paid)                                                                                                    |       | —     |       | 3,233            |       | (3,233           | )          | —         |       | —           |       |
| Net cash provided by (used in) financing activities of continuing  operations                                                |       | (2,745     | )          | 2,858            |       | (3,242           | )          | —         |       | (3,129           | )          |
|                                                                                                                         |       |       |       |             |       |             |       |           |       |             |       |
| Effect of exchange rate changes on cash                                                                                      |       | —     |       | —           |       | (21              | )          | —         |       | (21              | )          |
|                                                                                                                         |       |       |       |             |       |             |       |           |       |             |       |
| Cash provided by (used in) discontinued operations                                                                           |       | —     |       | (157             | )          | 794              |       | —         |       | 637              |       |
|                                                                                                                         |       |       |       |             |       |             |       |           |       |             |       |
| Cash and cash equivalents:                                                                                                   |       |       |       |             |       |             |       |           |       |             |       |
| Increase for the period                                                                                                      |       | 2,575      |       | 1,344            |       | 731              |       | —         |       | 4,650            |       |
| Balance, beginning of period                                                                                                 |       | 12,730     |       | 18,036           |       | 8,118            |       | —         |       | 38,884           |       |
| Balance, end of period                                                                                                       |       | $          | 15,305     |             | $          | 19,380           |       | $              | 8,849      |             | $          | — |   | $ | 43,534 |   |
|                                                                                                                              |            |            |            |                  |            |                  |            |                |            |                  |            |  |  |  |  |  |  |  |  |

 

 

See accompanying unaudited notes.

 

22

----

 

 

## **Debt and RevolvingCredit Facility**

 

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

 
| ** **                              | ** ** | ** ** | ** ** | ** **       | ** ** | **Reclass-**   | ** ** | **Alliance**     | ** ** |
|-----------------------------------------|------------|------------|------------|------------------|------------|----------------|------------|------------------|------------|
| ** **                              | ** ** | ** ** | ** ** | ** **       | ** ** | **ifications** | ** ** | **Gaming**       | ** ** |
| ** **                              | ** ** | ** ** | ** ** | ** **       | ** ** | **and**        | ** ** | **Corporation**  | ** ** |
| ** **                              | ** ** | ** ** | ** ** | **Guaranteeing** | ** ** | **Elimina-**   | ** ** | **and**          | ** ** |
| ** **                              | ** ** | **Parent** | ** ** | **Subsidiaries** | ** ** | **tions**      | ** ** | **Subsidiaries** | ** ** |
| Term Loan Facility                      |       | $          | 317,507    |             | $          | —         |       | $                | —     |   | $ | 317,507 |   |
| Intercompany notes payable              |       | —     |       | 256,648          |       | (256,648       | )          | —           |       |
| Other, generally unsecured              |       | 4,000      |       | 4,350            |       | —         |       | 8,350            |       |
|                                    |       | 321,507    |       | 260,998          |       | (256,648       | )          | 325,857          |       |
| Less current maturities                 |       | 12,388     |       | 2,274            |       | —         |       | 14,662           |       |
| Long-term debt, less current maturities |       | $          | 309,119    |             | $          | 258,724        |       | $                | (256,648   | ) | $ | 311,195 |   |

 

Long-term debt and lines of credit at June30, 2004 consist of the following (in 000s):

 
| ** **                              | ** ** | ** ** | ** ** | ** **       | ** ** | **Reclass-**   | ** ** | **Alliance**     | ** ** |
|-----------------------------------------|------------|------------|------------|------------------|------------|----------------|------------|------------------|------------|
| ** **                              | ** ** | ** ** | ** ** | ** **       | ** ** | **ifications** | ** ** | **Gaming**       | ** ** |
| ** **                              | ** ** | ** ** | ** ** | ** **       | ** ** | **and**        | ** ** | **Corporation**  | ** ** |
| ** **                              | ** ** | ** ** | ** ** | **Guaranteeing** | ** ** | **Elimina-**   | ** ** | **and**          | ** ** |
| ** **                              | ** ** | **Parent** | ** ** | **Subsidiaries** | ** ** | **tions**      | ** ** | **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 |   |
|                                         |            |            |            |                  |            |                |            |                  |            |  |  |  |  |  |

 

 

23

----

 

 

**ALLIANCE GAMING CORPORATION**

**FORM 10-Q**

 

**September 30, 2004**

 

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

 

**Forward-LookingStatements**

 

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

 

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

 

**Introduction**

 

Operating under the name *Bally Gaming and Systems*, we are aworldwide leader in designing, manufacturing and distributing traditional andnontraditional gaming machines, having marketed over 100,000 gaming machinesduring the past five years, and computerized monitoring systems for gamingfacilities.  The Bally Gaming and Systems business unit consists of threedivisions: Game sales, System sales and Gaming operations. We also own andoperate a dockside casino in Vicksburg, Mississippi, which has approximately 12table games and approximately 930 gaming devices (“Casino Operations”). Furtherinformation about our business units is contained in the notes to theConsolidated Financial Statements (“Segments and Geographical Information”) andin our annual report filed on Form 10-K.

 

We recognize revenue from the followingsources:  sales of gaming machines,operation of wide-area progressive systems and lease of gaming machines, salesof computerized monitoring systems and related recurring hardware and softwaremaintenance revenue, and from casino operations.  We often accept used machines as trade-instoward the purchase of new gaming equipment. These trade-ins are negotiated atthe time of sale for that transaction only, and there are no provisions forrights to future trade-ins contained in the purchase agreement for the newgaming equipment.   The traded-in gamingmachine is accounted for as a discount to the contracted selling price of a newgaming machine.

 

Our most significant expenses are (1) cost ofsales, (2) research and development expenses, (3) advertising and promotionalexpenses and (4) administrative expenses. We strive to control these expenses by working closely with divisionunit leaders and by centralizing functions such as finance, accounting, legal,human resources and management information systems.  We also use our market presence andpurchasing power to negotiate favorable rates with vendors and suppliers.

 

24

----

 

Our research and development costs are driven bythe development cycle for hardware which varies between a few months for minorrevisions to more than a year for major design changes or for changes made byvarious slot manufacturers with which our product must communicate and bephysically integrated. Software development results in (i) periodicproduct releases that include new features that extend and enhance casinoenterprise systems; (ii) periodic maintenance releases that enable casinooperators 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 tangibleand intangible assets have historically been significant factors in determiningour overall profitability.  Based onintangible assets currently held by us and the allocation of the aggregatepurchase price of acquisitions completed during the year ended June 30, 2004, weexpect the total amortization expense incurred will continue to increase.

 

**Basis of Presentation**

 

Our results include the accounts of AllianceGaming Corporation, and its wholly-owned and partially-owned, controlledsubsidiaries.

 

**Results of Operations**

 

***Bally Gaming and Systems***

 

Summary financial results and operating statistics (dollars inmillions):

 
| ** **                          | ** ** | **Three Months Ended**

**September 30,** | ** ** | **Increase/** | ** ** | **%**          | ** ** |
|-------------------------------------|------------|-------------------------------------------|------------|---------------|------------|----------------|------------|
| ** **                          | ** ** | **2004**                                  | ** ** | **2003**      | ** ** | **(Decrease)** | ** ** | **Change** | ** ** |
| Revenues                            |       |                                      |       |          |       |           |       |   |   |
| Game sales                          |       | $                                         | 51.5       |          | $          | 42.8           |       | $ | 8.7 |   | 20 | % |
| System sales                        |       | 19.4                                      |       | 30.0          |       | (10.6          | )          | (35 | )% |
| Gaming operations                   |       | 33.2                                      |       | 15.7          |       | 17.5           |       | 111 | % |
| Total revenues                      |       | $                                         | 104.1      |          | $          | 88.5           |       | $ | 15.6 |   | 18 | % |
|                                |       |                                      |       |          |       |           |       |   |   |
| Gross Margin                        |       |                                      |       |          |       |           |       |   |   |   |   |   |
| Game sales                          |       | $                                         | 12.9       |          | $          | 19.6           |       | $ | (6.7 | ) | (34 | )% |
| System sales                        |       | 15.9                                      |       | 23.9          |       | (8.0           | )          | (33 | )% |
| Gaming operations                   |       | 24.4                                      |       | 11.7          |       | 12.7           |       | 109 | % |
| Total gross margin                  |       | $                                         | 53.2       |          | $          | 55.2           |       | $ | (2.0 | ) | (4 | )% |
|                                |       |                                      |       |          |       |           |       |   |   |   |   |   |
| Selling, general and administrative |       | $                                         | 36.2       |          | $          | 23.1           |       | $ | 13.1 |   | 57 | % |
| Research and development costs      |       | 11.8                                      |       | 6.0           |       | 5.8            |       | 97 | % |
| Depreciation and amortization       |       | 9.7                                       |       | 4.8           |       | 4.9            |       | 102 | % |
|                                |       |                                      |       |          |       |           |       |   |   |
| Operating income (loss)             |       | $                                         | (4.5       | )             | $          | 21.4           |       | $ | (25.9 | ) | (121 | )% |

 

 

25

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| ** **                                                   | ** ** | **Three Months Ended**

**September 30,** | ** ** | **Increase/** | ** ** | **%**          | ** ** |
|--------------------------------------------------------------|------------|-------------------------------------------|------------|---------------|------------|----------------|------------|
| ** **                                                   | ** ** | **2004**                                  | ** ** | **2003**      | ** ** | **(Decrease)** | ** ** | **Change** | ** ** |
| Operating Statistics:                                        |       |                                      |       |          |       |           |       |   |   |
| New Gaming Devices Sold                                      |       | 2,740                                     |       | 3,330         |       | (590           | )          | (18 | )% |
| Original Equipment Manufacturer (“OEM”) Units Sold |       | 1,920                                     |       | 1,865         |       | 55             |       | 3 | % |
| New Unit average selling price (Excluding OEM)               |       | $                                         | 10,394     |          | $          | 8,433          |       | $ | 1,961 |   | 23 | % |
| Game monitoring units installed base                         |       | 281,000                                   |       | 239,000       |       | 42,000         |       | 18 | % |
| Casino management systems installed base                     |       | 221                                       |       | 197           |       | 24             |       | 12 | % |
| System managed cashless games                                |       | 97,800                                    |       | 34,000        |       | 63,800         |       | 188 | % |
| End of period installed base:                                |       |                                      |       |          |       |           |       |   |   |
| Wide-area progressive                                        |       | 1,825                                     |       | 1,985         |       | (160           | )          | (8 | )% |
| Daily-fee games                                              |       | 8,259                                     |       | 2,995         |       | 5,264          |       | 176 | % |
| Centrally determined games                                   |       | 17,193                                    |       | —        |       | 17,193         |       | — |   |
|                                                              |            |                                           |            |               |            |                |            |  |  |  |  |  |

 

Total revenuesincreased due to the following:

 

**•**      Bally game sales revenue increased as a result of the following:

•                  Revenuescontributed by SDG in non-traditional gaming jurisdictions offset by lower unitsales in traditional gaming jurisdictions.

•      Total unit sales declined to 4,660 from 5,195

•      Average selling price increased 23% to $10,394

 

•      Bally System revenue decreasedprimarily as a result of:

•                  Decreased hardware sales dueto the lack of new property openings in the current quarter.

•                  Recurringhardware and software maintenance revenues increased by 23% to $6.0 million forthe quarter, resulting from the larger base of installed units, which nowstands at approximately 281,000 in 221 casinos world-wide.

 

•      Gaming Operations revenues increased dueto the following:

•                  An increaseof 176% in the installed base of daily-fee games deployed to 8,259 unitsinstalled primarily driven by the installation relative to the New York Lotteryand games such as Monte Carlo and Quarter Millions, as well as the revenuesreceived from centrally-determined games.

 

•                  Gross margin decreased as a result of  the following:

•                  Game salesgross margin declined to 25% from 46% in the prior year quarter resulting fromlower margin international sales, lower margins on video games, as well as a$3.6 million inventory write down charge, which included $3.0 million forslow-moving recently discontinued legacy video products and used games. Webelieve the product mix of games sold will cause the gross margin to fluctuatealthough we believe the gross margin should exceed 40% in the future barringany other unusual charges.

•                  Systemsgross margin was 82% compared to 80% in the prior year period.

•                  Gamingoperations gross margin was 73% compared to 75% in the prior year quarter,reflecting a slightly higher frequency of WAP jackpots awarded during thecurrent quarter.

 

26

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•                  Selling, general and administrative expenses increased in the currentquarter over prior year quarter primarily due to:

•                  Increase in headcount related to acquisitions resulted in an increase inpayroll.

•                  A one time charge for severance costs of $0.9 million as a result of thereduction in workforce.

•                  Legal expense as a result of higher patent and litigation costs.

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

•                  Increase in the provision for doubtful accounts receivables of $2.7million primarily as a result of one specific customer delinquency for which weprovided a reserve of $1.0 million.

 

•                  Research and development costs increased as a result of the increasedinvestment in the development of the Alpha game platform and related gamecontent, and sustaining development of multiple existing game platforms andsystems.

 

•                  Depreciation and amortization increased as a result of the following:

•                  Acquisition relatedintangible assets.

•                  Increase in the base of installed recurring revenue games from 4,981units in the prior year quarter to 9,530 units.

•                  Increase in operating capital expenditures relative to new technologyinitiatives.

 

•                  The operating loss from the current period of $(4.5) million compared tooperating income of $21.4 million in the prior year period, which is a resultof the modest increase in revenues and significantly increased level ofexpenses, as described in the preceding paragraphs.

 

***Rainbow Casino Operations***

 

Summary financial results and operating statistics (dollars inmillions):

 
| ** **                          | ** ** | **Three Months Ended** | ** ** | ** **    | ** ** | ** **     | ** ** |
|-------------------------------------|------------|------------------------|------------|---------------|------------|----------------|------------|
| ** **                          | ** ** | **September 30,**      | ** ** | **Increase/** | ** ** | **%**          | ** ** |
| ** **                          | ** ** | **2004**               | ** ** | **2003**      | ** ** | **(Decrease)** | ** ** | **Change** | ** ** |
| Revenue                             |       | $                      | 12.8       |          | $          | 12.8           |       | $ | — |   | 0 | % |
| Gross Margin                        |       | 8.0                    |       | 7.8           |       | (0.2           | )          | (3 | )% |
| Selling, general and administrative |       | 3.4                    |       | 3.1           |       | 0.3            |       | 10 | % |
| Depreciation and amortization       |       | 0.8                    |       | 0.7           |       | 0.1            |       | 14 | % |
| Operating income                    |       | $                      | 3.8        |          | $          | 4.0            |       | $ | (0.2 | ) | (5 | )% |
|                                |       |                   |       |          |       |           |       |   |   |
| Operating Statistics:               |       |                   |       |          |       |           |       |   |   |
| Average Number of Gaming Devices    |       | 930                    |       | 905           |       | 25             |       | 3 | % |
| Average Number of Table Games       |       | 12                     |       | 12            |       | —         |       | 0 | % |

 

•                  Rainbow Casino revenuesremained flat compared to the prior year quarter.

 

•                  Gross margin increased to 62% as a result of decreases in certainoperating costs. Cost of casino revenues includes gaming taxes, rental costsand direct labor including payroll taxes and benefits.

 

•                  The overall selling, general and administrative expenses increased by$0.3 million primarily due to increases in casino promotional expenses.

 

•                  Depreciation and amortization expense increased $0.1 million for thequarter resulting from additionalcapital improvements made to the Rainbow Casino  in fiscal 2004.

 

•                  Total operating income decreased $0.2 million reflecting the smallimprovements in gross margin, offset by higher promotional expenses andslightly higher depreciation.

 

 

27

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***Parent Company and other unallocated  income(expense)***

 

Summaryfinancial results (dollars in million):

 

** **
|                          |       | **Three Months Ended** |       |          |       |           |       |       |
|-------------------------------|------------|------------------------|------------|---------------|------------|----------------|------------|------------|
|                          |       | **September 30,**      |       | **Increase/** |       | **%**          |       |       |
|                          |       | **2004**               |       | **2003**      |       | **(Decrease)** |       | **Change** |   |   |
| General and administrative    |       | $                      | 5.4        |          | $          | 2.9            |       | $          | 2.5 |   | 86 | % |   |
| Depreciation and amortization |       | 0.3                    |       | 0.5           |       | (0.2           | )          | (40        | )% |   |
| Total Parent company expense  |       | $                      | 5.7        |          | $          | 3.4            |       | $          | 2.3 |   | 68 | % |   |
|                          | ** ** | ** **             | ** ** | ** **    | ** ** | ** **     | ** ** | ** ** | ** ** |   |
| Other income (expense):       | ** ** | ** **             | ** ** | ** **    | ** ** | ** **     | ** ** | ** ** | ** ** |   |
| Interest income               |       | $                      | 0.5        |          | $          | 0.0            |       | $          | 0.5 |   | — |   |   |
| Interest expense              |       | (4.0                   | )          | (5.7          | )          | 1.7            |       | (30        | )% |   |
| Minority interest             |       | (0.5                   | )          | (0.5          | )          | —         |       | 0          | % |   |
| Refinancing charge            |       | —                 |       | (12.3         | )          | 12.3           |       | 100        | % |   |
| Other, net                    |       | 0.2                    |       | (0.3          | )          | 0.5            |       | (167       | )% |   |
| Total other income (expense)  |       | $                      | (3.8       | )             | $          | (18.8          | )          | $          | 15.0 |   | (80 | )% |   |
|                          |       |                   |       |          |       |           |       |       |   |   |   |   |   |
| Income tax expense (benefit)  |       | $                      | (3.9       | )             | $          | 1.3            |       | $          | (5.2 | ) | (400 | )% |   |

 

•                  General and administrative expenses increased primarily as a result of:

•                  Increase in severance and relocation costs of approximately $0.7million.

•                  Increase in litigation and general legal costs of approximately $1.2million relative to protection of our patents and class action law suits.

•                  Increase in professional fees relative to Sarbanes-Oxleyimplementations, which are expected to continue in fiscal year 2005.

•                  Increase in general liability and director and officer insurancecosts.  Such increases in insurance costsare expected to continue in fiscal 2005.

 

•                  Otherincome (expense) decreased as a result of the prior year refinancing, whichresulted in charge of $12.3 million (consisting of $5.0 million charge for theearly extinguishment of the Subordinated Notes, $7.0 million for the non-cashwrite off of deferred financing costs, and $0.3 million in fees and expenses) and resulted in a reduction in our interestexpense relative to lower interest rates achieved in the refinancing of $1.7million for the quarter ended September 30, 2004.

 

•                  Oureffective income tax rate for the quarter ended September 30, 2004 was 38%compared to the prior year quarter of 41%.

 

***Discontinued Operations***:

 

Thecurrent quarter discontinued operations includes VSI, which contributedrevenues of $4.0 million, and operating income of $0.4 million, as well as acharge of $7.4 million (or $4.7 million after tax) for the jury award ofdamages against UCMC in a patent infringement case.

 

On October 15, 2004 theCompany completed the sale of our interest in VSI to Churchill DownsIncorporated.  The net proceeds wereceived totaled approximately $2.0 million. No significant gain or loss on disposition is expected.

 

For the comparative three month period endedSeptember 30, 2003, UCMC revenues totaled $50.3 million and operating incometotaled $5.2 million.  Rail City revenuestotaled $5.4 million and operating income totaled $1.5 million.

 

28

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**Liquidity and Capital Resources**

 

As of September 30,2004, we had $43.2 million in cash and cash equivalents.  In addition we had net working capital ofapproximately $154 million (excluding assets and liabilities of discontinuedoperations), a decrease of approximately $138 million from June 30, 2004, whichis explained in the working capital section below. Consolidated cash and cashequivalents at September 30, 2004 include approximately $1.9 million of cashutilized in our Casino Operations that is held in vaults, cages or changebanks. Additionally, pursuant to various state gaming regulations, we maintaincertain cash accounts to ensure availability of funds to pay wide-area progressivejackpot awards, which totaled approximately $14.4 million at September 30,2004.  In addition, we purchase U.S.Treasury Strip securities for the benefit of jackpot winners who elect toreceive annual or weekly installment payments. These securities are presentedas restricted investments in the accompanying consolidated balance sheets, andtotaled $4.7 million and $2.5 million as of September 30, 2004 and June 30,2004, respectively.

 

We completed the sale of Rail City in May 2004 andthe sale of UCMC in June 2004. As a result of the sale of these assets, theterms of our bank loan agreement required the use of approximately 50% of thenet proceeds (as defined in the agreement) to reduce the term loan and revolverprincipal balances on a pro rata basis. Accordingly, in August 2004 we made aninitial reduction in our term loan of $31.6 million and the revolver of $11.3million and will be required to make additional term loan reductions currentlyestimated to be $10.0 million by December 31, 2004.

 

As of September 30, 2004 our outstanding debttotaled $325.9 million.  The Company’s revolving credit facility of $125million was undrawn as of September 30, 2004. The Company is currently limited to approximately $10 million in the borrowingavailability under the revolver.  TheCompany is currently in compliance with its financial covenants consisting of leverageratio, fixed charges coverage ratio and minimum EBITDA (as that term is definedin the credit agreement).  The Companymay elect to seek modifications of certain of these financial covenants in thefuture.

 

Management believes that cash flows from currentoperating activities and the limited availability under the revolving creditfacility will provide the Company with sufficient capital resources andliquidity.  At September 30, 2004 we hadno material commitments for capital expenditures.

 

***Working Capital***

 

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

 
| ** **                         | ** ** | **Sept 30,** | ** ** | **June 30,** | ** ** | ** ** | ** ** |
|------------------------------------|------------|--------------|------------|--------------|------------|------------|------------|
| ** **                         | ** ** | **2004**     | ** ** | **2004**     | ** ** | **Change** | ** ** |
| Cash and cash equivalents          |       | $            | 43,229     |         | $          | 172,726    |       | (129,497 | ) |
| Accounts and notes receivable, net |       | 110,100      |       | 129,779      |       | (19,679    | )          |
| Inventories, net                   |       | 81,466       |       | 61,135       |       | 20,331     |       |
| Deferred tax assets, net           |       | 20,053       |       | 20,054       |       | (1         | )          |
| Other current assets               |       | 22,264       |       | 12,420       |       | 9,844      |       |
| Total current assets               |       | 277,112      |       | 396,114      |       | (119,002   | )          |
|                                    |            |              |            |              |            |            |            |  |  |

 

 

29

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| ** **                           | ** ** | **Sept 30,** | ** ** | **June 30,** | ** ** | ** ** | ** ** |
|--------------------------------------|------------|--------------|------------|--------------|------------|------------|------------|
| ** **                           | ** ** | **2004**     | ** ** | **2004**     | ** ** | **Change** | ** ** |
| Accounts payable                     |       | 46,654       |       | 37,515       |       | 9,139      |       |
| Jackpot liabilities                  |       | 9,447        |       | 12,075       |       | (2,628     | )          |
| Accrued liabilities                  |       | 61,487       |       | 51,469       |       | 10,018     |       |
| Taxes payable                        |       | 420          |       | 7,233        |       | (6,813     | )          |
| Current maturities of long-term debt |       | 14,662       |       | 5,866        |       | 8,796      |       |
| Total current liabilities            |       | 132,670      |       | 114,158      |       | 18,512     |       |
| Net working capital                  |       | $            | 144,442    |         | $          | 281,956    |       | $ | (137,514 | ) |
|                                      |            |              |            |              |            |            |            |  |  |  |

 

The primary fluctuations contributing to theincrease in working capital were:

 

•                  Cash and cash equivalents asa result of the following:

•                                    $101.6 millionpay down on the term loan and revolver in accordance with the terms of ourloan.

•            $17.2 million used in currentoperations for inventory and gaming assets.

 

•                  A net decrease in accountsand notes receivable resulting from the overall reduction in game and systemssales.

 

•                  An increase in inventoryrelative to the production and purchase of game units expected to be deployedin the second and third quarters of fiscal year 2005.

 

•      An increase in other assets as a result ofthe following:

•                                    Increases inrefundable deposits relative to units purchased from other manufacturers.

•                                    Increase indeferred costs due to shipments of games to the European market that will notbe installed until the second quarter 2005.

•                                    Increase inprepaid royalties.

 

•                  The impact of foreignexchange fluctuations between the dollar and the euro on all working capital categories.

 

•      An increase in accounts payable primarilyrelated to the increase in inventory.

 

•      An increase in accrued liabilities as aresult of the following:

•                                    Customerdeposits and deferred revenue increased due to contractual requirements fromcustomers for deposits in advance of Systems installation.

•                                    An accrual of$7.4 million for damages awarded to Action Gaming and International Game Technologyfor patent infringement relative to a single optional feature offered incertain multi-hand poker games operated by UCMC.

 

*Cash Flow*

 

During the quarter endedSeptember 30, 2004, cash flows used in operating activities totaled $15.5 million as a result of:

•                  Increase ininventory of $20.3 million.

•                  Timing ofreceivables collections.

•                  Increase inaccounts payable and accrued liabilities largely due to the increase ininventory and legal settlement costs.

 

30

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During the quarter ended September 30, 2004,cash flow used in investing activities totaled $12.0 million due to thefollowing:

•                  Capital expenditures of $3.2million.

•                  Costs incurred to produceparticipation games totaling $8.2 million.

•                  Additions to other long-termassets of $0.6 million.

 

During the quarter ended September 30, 2004, $102.4 million cash wasused in financing activities of continuing operations resulting from:

•                  Pay down on the term loanand revolver of $101.6 million.

•                  Principal payments on otherlong term debt totaling $1.5 million.

•                  Cash provided from exerciseof stock options of $0.9 million.

 

*Contractual Commitments*

 

A description of the Company’s contractualcommitments can be found in Item 7 of the Company’s Annual Report on Form 10-Kfor the year ended June 30, 2004.  For amore extensive discussion of the Company’s contractual commitments, see note 12“Commitments and Contingencies” in the Notes to the Consolidated FinancialStatements in the Company’s 2004 Annual Report on Form 10-K for the year endedJune 30, 2004.

 

**Critical Accounting Policies andEstimates**

 

Weprepare our Consolidated Financial Statements in conformity with accountingprinciples generally accepted in the United States of America. Certain of ouraccounting policies, including valuations utilized in asset impairment tests,acquisitions accounting, revenue recognition, allowance for doubtful accounts,capitalized costs, reserves for inventory, and deferred tax reserves requirethat we apply significant judgment in defining the appropriate assumptions forcalculating financial estimates. These judgments are subject to an inherentdegree of uncertainty. There can be no assurance that the actual results willnot differ from our estimates.

 

Adescription of the Company’s critical accounting policies and estimates can befound in Item 7 of the Company’s Annual Report on Form 10-K for the year endedJune 30, 2004.  For a more extensivediscussion of the Company’s accounting policies, see Note 1, “Summary of SignificantAccounting Policies,” in the Notes to the Consolidated Financial Statements inthe Company’s 2004 Annual Report on Form 10-K for the year ended June 30, 2004.

 

**ITEM 3.****  QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISK**

 

***Currency Rate Fluctuations***

 

We derive revenues from our non-U.S.subsidiaries, all of which revenues are denominated in their local currencies,and their results are affected by changes in the relative values of non-U.S.currencies and the U.S. dollar. Most of the currencies in countries in which wehave foreign operations strengthened versus the U.S. dollar, which resulted inassets and liabilities denominated in local currencies being translated intomore dollars. We do not currently utilize hedging instruments.

 

***Market risks***

 

During the normal course of our business, weare routinely subjected to a variety of market risks, examples of whichinclude, but are not limited to, interest and currency rate movements,collectibility of accounts and notes receivable, and recoverability of residualvalues on leased assets. We constantly assess these risks and have establishedpolicies and practices designed to protect against the adverse effects of theseand other potential exposures. Although we do not anticipate any material lossesin these risk areas, no assurances can be made that material losses will not beincurred in these areas in the future.

 

31

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We have performed a sensitivity analysis ofour financial instruments, which consist of our cash and cash equivalents anddebt. We have no derivative financial instruments. In performing thesensitivity analysis, we define risk of loss as the hypothetical impact onearnings of changes in the market interest rates or currency exchange rates.

 

The results of the sensitivity analysis atSeptember 30, 2004, are as follows:

 

Interest Rate Risk:

 

Wehad total debt of approximately $325.9 million, consisting primarily of the new$317.5 million is outstanding term loan and other debt at approximately $8.4million.  The bank facility borrowingseach have a term of nine months at which time the interest rate is subject toadjustment to the then current rate. If the LIBOR rates were to increase ordecrease by 100 basis points, with all other factors remaining constant,earnings would decrease or increase by approximately $3.3 million annually on apre-tax basis.

 

Foreign Currency Exchange Rate Risk:

 

Our foreign subsidiaries generally use theirdomestic currency as their functional currency. A 10% fluctuation in theexchange rates of these currencies against the U.S. dollar would result in acorresponding change in annual earnings reported in the consolidated group ofapproximately $0.1 million net of tax.

#### ** **

#### **Estimates:**

 

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

 

# **ITEM 4.**                             DISCLOSURECONTROLS AND PROCEDURES

 

TheCompany’s management, including the Chief Executive Officer and Chief FinancialOfficer, conducted an evaluation of the effectiveness of the design andoperation of the Company’s disclosure controls and procedures as defined inExchange Act Rule 13a-15(e) as described at the end of the period covered bythis report.  Based on that evaluation,the Chief Executive Officer and Chief Financial Officer concluded that as ofthe end of the period covered by this report, the Company’s disclosure controlsand procedures were effective.  Duringthe period covered by this report there have been no changes in the Company’sinternal control over financial reporting that have materially affected, or arereasonably likely to materially affect the Company’s internal control overfinancial reporting.

 

**PART II**

 

**ITEM 1.****           Legal Proceedings**

 

For a description of our legal proceedings, seenote 14 of Notes to Unaudited Condensed Financial Statement, which isincorporated by reference in response to this item.

 

InSeptember 2004, a federal district court jury entered a $7.4 million verdictagainst the Company in a suit filed by Action Gaming, Inc., and IGT. The suitalleged that the multi-hand video poker game deployed by the Company’s formersubsidiary, United Coin Machine Co., infringed the plaintiffs’ patents. Thedistrict court had ruled on summary judgment that the game does not infringethe patents. However, the court left to the jury the question whether the useof “autohold,” a specific, optional feature of the game, caused it to infringeunder the “doctrine of equivalents,” a doctrine of patent law. After a two-weektrial, the jury determined that the game with the autohold option enabled didinfringe under the doctrine of equivalents and awarded damages accordingly. Thefeature has been disabled on all affected games in the field, and the decisionpermits continued deployment of the game as long as the autohold feature is notincluded. The Company is pursuing various remedies and has posted a bond tostay payment of the judgment pending post-trial motions and appeal.

 

32

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Weare also a party to various lawsuits relating to routine matters incidental toour business.  Management does notbelieve that the outcome of such litigation, including the matters above, inthe aggregate, will have a material adverse effect on our financial position.

 

**ITEM 6.****           Exhibits**

a.                                       Exhibits

 
| 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. |

 

33

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SIGNATURES

 

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934 the Registrant has duly caused this report to be signed onits behalf by the undersigned thereunto authorized.

 

 

 
| ALLIANCE GAMING CORPORATION |   | Date: November 8, 2004                                  |
|-----------------------------|--------|---------------------------------------------------------|
| (Registrant)                |   |                                                    |
|                        |   |                                                    |
| By                          |   | /s/ Richard Haddrill                                    |   |   |
|                        |   | President and Chief Executive Officer                   |   |   |
|                        |   | (Principal Executive Officer)                           |   |   |
|                        |   |                                                    |   |   |
| By                          |   | /s/ Robert L. Saxton                                    |   |   |
|                        |   | Executive Vice President, Treasurer and Chief Financial |   |   |
|                        |   | Officer (Principal Financial and Accounting  Officer)   |   |   |

 

 

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