**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C.  20549**

 

**FORM 10-Q**

 

**ý****        QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

 

**For thequarterly period ended September 30, 2003**

 

**OR**

 

**o****        TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

 

**For thetransition periodfrom         to         **

 

**CommissionFile Number 0-4281**

 

**ALLIANCE GAMING CORPORATION**

(Exactname of registrant as specified in its charter)

 

| **NEVADA**                                                      |   | **88-0104066**                        |
|-----------------------------------------------------------------|--------|---------------------------------------|
| (State or other jurisdiction of  incorporation or organization) |   | (I.R.S. Employer  Identification No.) |
|                                                            |   |                                  |
| **6601  S. Bermuda Rd.  Las Vegas, Nevada**                     |   | **89119**                             |
| (Address of principal executive offices)                        |   | (Zip Code)                            |

 

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

#### **Registrant’s internet:  www.alliancegaming.com**

 

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

Yes  ý   No  o

 

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

ý  Yes   o  No

 

The number of shares ofCommon Stock, $0.10 par value, outstanding as of October 31, 2003, according tothe records of the registrant’s registrar and transfer agent was 50,248,000.

 

 

----

 

**ALLIANCEGAMING CORPORATION**

**FORM10-Q**

 

**For theQuarter Ended September 30, 2003**

 

**INDEX**

 
| **PART I.**    | **FINANCIAL INFORMATION**                                                                                               |
|----------------|-------------------------------------------------------------------------------------------------------------------------|
|           |                                                                                                                    |
| Item 1.        | Unaudited  Financial Statements                                                                                         |
|           |                                                                                                                    |
|           | Unaudited  Condensed Consolidated Balance Sheets as of June 30, 2003 and September 30,  2003                            |
|           |                                                                                                                    |
|           | Unaudited  Condensed Consolidated Statements of Operations for the three months ended  September 30, 2002 and 2003      |
|           |                                                                                                                    |
|           | Unaudited  Condensed Consolidated Statement of Stockholders’ Equity for the three months  ended September 30, 2003 |
|           |                                                                                                                    |
|           | Unaudited  Condensed Consolidated Statements of Cash Flows for the three months ended  September 30, 2002 and 2003      |
|           |                                                                                                                    |
|           | Notes to Unaudited  Condensed Consolidated Financial Statements                                                         |
|           |                                                                                                                    |
| Item 2.        | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                             |
|           |                                                                                                                    |
| Item 3.        | Quantitative  and Qualitative Disclosures About Market Risk                                                             |
|           |                                                                                                                    |
| Item 4.        | Disclosure  Controls and Procedures                                                                                     |
|           |                                                                                                                    |
| **PART II.**   | **OTHER INFORMATION**                                                                                                   |
|           |                                                                                                                    |
| Item 1.        | Legal Proceedings                                                                                                       |
|           |                                                                                                                    |
| Item 6.        | Exhibits and  Reports on Form 8-K                                                                                       |
|           |                                                                                                                    |
| **SIGNATURES** |
|                |                                                                                                                         |  |

 

2

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**PART 1**

**ALLIANCEGAMING CORPORATION AND SUBSIDIARIES**

**UNAUDITEDCONDENSED CONSOLIDATED BALANCE SHEETS**

(In 000’s, except share data)

 
|                                                                                                               |   | **June 30,  2003** |    | **September 30****,  2003** |   |
|--------------------------------------------------------------------------------------------------------------------|--------|--------------------|---------|-----------------------------|--------|
| ASSETS                                                                                                             |   |               |    |                        |   |
| Current assets:                                                                                                    |   |               |    |                        |   |
| Cash  and cash equivalents                                                                                         |   | $                  | 40,158  |                        | $      | 44,588 |   |
| Accounts and notes receivable, net of allowance for  doubtful accounts of $6,993 and $7,857                        |   | 98,408             |    | 102,274                     |   |
| Inventories, net of reserves of $6,503 and $5,994                                                                  |   | 32,172             |    | 38,231                      |   |
| Deferred tax assets, net                                                                                           |   | 44,821             |    | 45,854                      |   |
| Other  current assets                                                                                              |   | 8,516              |    | 8,978                       |   |
| Total current assets                                                                                               |   | 224,075            |    | 239,925                     |   |
|                                                                                                               |   |               |    |                        |   |
| Long-term  investments (restricted)                                                                                |   | 864                |    | 2,585                       |   |
| Long-term  receivables, net of allowance for doubtful accounts of $15 and $9                                       |   | 14,865             |    | 15,159                      |   |
| Leased  gaming equipment, net of accumulated depreciation of $15,703 and $17,813                                   |   | 25,792             |    | 26,282                      |   |
| Property,  plant and equipment, net of accumulated depreciation and amortization of  $26,850 and $28,139           |   | 66,530             |    | 67,470                      |   |
| Goodwill,  net of accumulated amortization of $6,620 and $6,620                                                    |   | 64,794             |    | 64,540                      |   |
| Intangible  assets, net of accumulated amortization of $12,267 and $6,840                                          |   | 26,890             |    | 25,631                      |   |
| Assets  of discontinued operations held for sale                                                                   |   | 100,775            |    | 86,353                      |   |
| Other  assets, net of reserves of $1,788 and $1,788                                                                |   | 580                |    | 6,228                       |   |
| Total  assets                                                                                                      |   | $                  | 525,165 |                        | $      | 534,173 |   |
|                                                                                                               |   |               |    |                        |   |
| LIABILITIES AND  STOCKHOLDERS’ EQUITY                                                                         |   |               |    |                        |   |
| Current  liabilities:                                                                                              |   |               |    |                        |   |
| Accounts payable                                                                                                   |   | $                  | 22,912  |                        | $      | 25,502 |   |
| Accrued  liabilities                                                                                               |   | 30,913             |    | 20,389                      |   |
| Jackpot  liabilities                                                                                               |   | 10,604             |    | 11,320                      |   |
| Current maturities of long-term debt                                                                               |   | 3,537              |    | 2,288                       |   |
| Liabilities  of discontinued operations held for sale                                                              |   | 13,494             |    | 12,060                      |   |
| Total  current liabilities                                                                                         |   | 81,460             |    | 71,559                      |   |
| Long-term debt, net                                                                                                |   | 341,678            |    | 350,054                     |   |
| Deferred  tax liabilities                                                                                          |   | 5,680              |    | 6,957                       |   |
| Other  liabilities                                                                                                 |   | 3,387              |    | 5,048                       |   |
| Minority interest                                                                                                  |   | 1,330              |    | 1,157                       |   |
| Total  liabilities                                                                                                 |   | 433,535            |    | 434,775                     |   |
|                                                                                                               |   |               |    |                        |   |
| Commitments and contingencies                                                                                      |   |               |    |                        |   |
| Stockholders’  equity:                                                                                        |   |               |    |                        |   |
| Special  Stock, 10,000,000 shares authorized: Series E, $100 liquidation value; 115  shares issued and outstanding |   | 12                 |    | 12                          |   |
| Common  Stock, $.10 par value; 100,000,000 shares authorized; 49,933,000 and  50,165,000 shares issued             |   | 4,996              |    | 5,019                       |   |
| Treasury stock at cost,  513,000 shares                                                                            |   | (501               | )       | (501                        | )      |
| Additional paid-in capital                                                                                         |   | 163,267            |    | 165,737                     |   |
| Accumulated other comprehensive income                                                                             |   | 1,287              |    | 534                         |   |
| Accumulated  deficit                                                                                               |   | (77,431            | )       | (71,403                     | )      |
| Total  stockholders’ equity                                                                                   |   | 91,630             |    | 99,398                      |   |
| Total  liabilities and stockholders’ equity                                                                   |   | $                  | 525,165 |                        | $      | 534,173 |   |

 

See notes tounaudited condensed consolidated financial statements.

 

3

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**ALLIANCEGAMING CORPORATION AND SUBSIDIARIES**

#### **UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

(In 000’s, except per share data)

 
|                                                                                       |   | **Three Months Ended September 30,** |   |
|--------------------------------------------------------------------------------------------|--------|--------------------------------------|--------|
|                                                                                       |   | **2002**                             |   | **2003** |   |
| Revenues:                                                                                  |   |                                 |   |   |   |
| Gaming equipment and systems                                                               |   | $                                    | 63,539 |   | $ | 88,468 |   |
| Casino  operations                                                                         |   | 17,790                               |   | 18,136 |   |
|                                                                                       |   | 81,329                               |   | 106,604 |   |
| Costs and expenses:                                                                        |   |                                 |   |   |   |
| Cost  of gaming equipment and systems                                                      |   | 26,258                               |   | 33,237 |   |
| Cost  of casino operations                                                                 |   | 8,188                                |   | 7,976 |   |
| Selling,  general and administrative                                                       |   | 20,987                               |   | 30,015 |   |
| Research  and development costs                                                            |   | 3,975                                |   | 5,963 |   |
| Depreciation  and amortization                                                             |   | 4,550                                |   | 6,348 |   |
|                                                                                       |   | 63,958                               |   | 83,539 |   |
|                                                                                       |   |                                 |   |   |   |
| Operating  income                                                                          |   | 17,371                               |   | 23,065 |   |
|                                                                                       |   |                                 |   |   |   |
| Other  income (expense):                                                                   |   |                                 |   |   |   |
| Interest  income                                                                           |   | 48                                   |   | 43 |   |
| Interest  expense                                                                          |   | (6,641                               | )      | (5,729 | ) |
| Minority  interest                                                                         |   | (445                                 | )      | (486 | ) |
| Refinancing  charge                                                                        |   | —                               |   | (12,293 | ) |
| Other,  net                                                                                |   | 101                                  |   | (351 | ) |
|                                                                                       |   |                                 |   |   |   |
| Income  from continuing operations before income taxes                                     |   | 10,434                               |   | 4,249 |   |
| Income  tax expense                                                                        |   | 4,195                                |   | 1,663 |   |
| Net  income from continuing operations                                                     |   | 6,239                                |   | 2,586 |   |
|                                                                                       |   |                                 |   |   |   |
| Discontinued  operations:                                                                  |   |                                 |   |   |   |
| Loss from discontinued operations of wall machines  and amusement games business unit, net |   | (1,620                               | )      | — |   |
| Income  from discontinued operations of Nevada Route, net                                  |   | 1,364                                |   | 3,132 |   |
| Income  from discontinued operations of Louisiana Route, net                               |   | 275                                  |   | 310 |   |
| Income from  discontinued operations                                                       |   | 19                                   |   | 3,442 |   |
| Net  income                                                                                |   | $                                    | 6,258  |   | $ | 6,028 |   |
|                                                                                       |   |                                 |   |   |   |
| Basic  earnings per share:                                                                 |   |                                 |   |   |   |
| Continuing operations                                                                      |   | $                                    | 0.13   |   | $ | 0.05 |   |
| Discontinued operations                                                                    |   | —                               |   | 0.07 |   |
|                                                                                       |   | $                                    | 0.13   |   | $ | 0.12 |   |
| Diluted  earnings per share:                                                               |   |                                 |   |   |   |
| Continuing operations                                                                      |   | $                                    | 0.13   |   | $ | 0.05 |   |
| Discontinued  operations                                                                   |   | —                               |   | 0.07 |   |
|                                                                                       |   | $                                    | 0.13   |   | $ | 0.12 |   |
|                                                                                       |   |                                 |   |   |   |
| Weighted  average common shares outstanding                                                |   | 48,740                               |   | 49,579 |   |
|                                                                                       |   |                                 |   |   |   |
| Weighted  average common and common share equivalents outstanding                          |   | 49,821                               |   | 50,687 |   |

 

See notes to unaudited condensed consolidated financial statements.

 

4

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**ALLIANCEGAMING CORPORATION AND SUBSIDIARIES**

**UNAUDITEDCONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’EQUITY**

Three Months Ended September 30, 2003

(In 000’s)

 
|                                            |   | **Common Stock** |   | **Series E  Special Stock** |   | **Treasury  Stock** |   | **Additional  Paid-in  Capital** |   | **Accumulated  Other  Comprehensive  Income (loss)** |   | **Accum.  Deficit** |   | **Total  Stock-  holders’  Equity** |   |
|-------------------------------------------------|--------|------------------|--------|-----------------------------|--------|---------------------|--------|----------------------------------|--------|------------------------------------------------------|--------|---------------------|--------|------------------------------------------|--------|
|                                            |   | **Shares**       |   | **Dollars**                 |   |                |   |                             |   |                                                 |   |
|                                            |   |             |   |                        |   |                |   |                             |   |                                                 |   |                |   |                                     |   |   |   |
| Balances at June 30, 2003                       |   | 49,933           |   | $                           | 4,996  |                | $      | 12                               |   | $                                                    | (501   | )                   | $      | 163,267                                  |   | $ | 1,287 |   | $ | (77,431 | ) | $ | 91,630 |   |
|                                            |   |             |   |                        |   |                |   |                             |   |                                                 |   |                |   |                                     |   |   |   |
| Net income                                      |   | —           |   | —                      |   | —              |   | —                           |   | —                                               |   | —              |   | 6,028                                    |   | 6,028 |   |
| Foreign currency  translation adjustment        |   | —           |   | —                      |   | —              |   | —                           |   | —                                               |   | (753                | )      | —                                   |   | (753 | ) |
| Total comprehensive income                      |   |             |   |                        |   |                |   |                             |   |                                                 |   |                |   |                                     |   | 5,275 |   |
| Shares issued upon exercise  of options         |   | 232              |   | 23                          |   | —              |   | —                           |   | 1,437                                                |   | —              |   | —                                   |   | 1,460 |   |
| Tax benefit of employee  stock option exercises |   | —           |   | —                      |   | —              |   | —                           |   | 1,033                                                |   | —              |   | —                                   |   | 1,033 |   |
|                                            |   |             |   |                        |   |                |   |                             |   |                                                 |   |                |   |                                     |   |   |   |
| Balances at September 30,  2003                 |   | 50,165           |   | $                           | 5,019  |                | $      | 12                               |   | $                                                    | (501   | )                   | $      | 165,737                                  |   | $ | 534 |   | $ | (71,403 | ) | $ | 99,398 |   |

 

See notes to unaudited condensed consolidated financial statements.

 

5

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#### **ALLIANCE GAMING CORPORATION ANDSUBSIDIARIES**

**UNAUDITEDCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

(In 000’s)
|                                                                                                         |   | **Three  Months Ended September 30,** |   |
|--------------------------------------------------------------------------------------------------------------|--------|---------------------------------------|--------|
|                                                                                                         |   | **2002**                              |   | **2003** |   |
| Cash  flows from operating activities of continuing operations:                                              |   |                                  |   |   |   |
| Net income                                                                                                   |   | $                                     | 6,258  |   | $ | 6,028 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities of  continuing operations: |   |                                  |   |   |   |
| Income from  discontinued operations                                                                         |   | (19                                   | )      | (3,442 | ) |
| Depreciation and  amortization                                                                               |   | 4,550                                 |   | 6,348 |   |
| Refinancing charge                                                                                           |   | —                                |   | 12,293 |   |
| Deferred  income taxes                                                                                       |   | 3,802                                 |   | 1,277 |   |
| Provision  for losses on receivables                                                                         |   | (278                                  | )      | 938 |   |
| Other                                                                                                        |   | (47                                   | )      | (1,577 | ) |
| Change  in operating assets and liabilities:                                                                 |   |                                  |   |   |   |
| Accounts  and notes receivable                                                                               |   | (377                                  | )      | (5,564 | ) |
| Inventories                                                                                                  |   | (2,854                                | )      | (5,307 | ) |
| Other  current assets                                                                                        |   | 1,600                                 |   | (466 | ) |
| Accounts  payable                                                                                            |   | 1,404                                 |   | 2,590 |   |
| Accrued  liabilities and jackpot liabilities                                                                 |   | (6,730                                | )      | (8,165 | ) |
| Net  cash provided by operating activities of continuing operations                                          |   | 7,309                                 |   | 4,953 |   |
|                                                                                                         |   |                                  |   |   |   |
| Cash  flows from investing activities of continuing operations:                                              |   |                                  |   |   |   |
| Additions  to property, plant and equipment                                                                  |   | (2,679                                | )      | (2,400 | ) |
| Additions  to leased gaming equipment                                                                        |   | (4,750                                | )      | (5,004 | ) |
| Additions  to other long-term assets                                                                         |   | (1,559                                | )      | (6,399 | ) |
| Proceeds  from sale of assets of discontinued operations                                                     |   | —                                |   | 16,500 |   |
| Net  cash (used in) provided by investing activities of continuing operations                                |   | (8,988                                | )      | 2,697 |   |
|                                                                                                         |   |                                  |   |   |   |
| Cash  flows from financing activities of continuing operations:                                              |   |                                  |   |   |   |
| Debt  issuance costs                                                                                         |   | —                                |   | (5,686 | ) |
| Premium  and consent fees paid on redemption of subordinated notes                                           |   | —                                |   | (5,399 | ) |
| Proceeds  from issuance of long-term debt                                                                    |   | —                                |   | 275,000 |   |
| Net  change in revolving credit facility                                                                     |   | —                                |   | 70,000 |   |
| Payoff  of debt from refinancing                                                                             |   | —                                |   | (337,625 | ) |
| Reduction  of long-term debt                                                                                 |   | (993                                  | )      | (879 | ) |
| Proceeds  from exercise of stock options                                                                     |   | 575                                   |   | 1,460 |   |
| Net  cash used in financing activities of continuing operations                                              |   | (418                                  | )      | (3,129 | ) |
|                                                                                                         |   |                                  |   |   |   |
| Effect  of exchange rate changes on cash                                                                     |   | 2                                     |   | (21 | ) |
|                                                                                                         |   |                                  |   |   |   |
| Cash  and cash equivalents provided by (used in) discontinued operations                                     |   | 5,887                                 |   | (70 | ) |
|                                                                                                         |   |                                  |   |   |   |
| Cash  and cash equivalents:                                                                                  |   |                                  |   |   |   |
| Increase  for period                                                                                         |   | 3,792                                 |   | 4,430 |   |
| Balance,  beginning of period                                                                                |   | 33,240                                |   | 40,158 |   |
| Balance,  end of period                                                                                      |   | $                                     | 37,032 |   | $ | 44,588 |   |

 

See notes to unaudited condensed consolidatedfinancial statements.

 

6

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**ALLIANCE GAMING CORPORATION AND SUBSIDIARIES**

**NOTES TO UNAUDITED CONDENSED****CONSOLIDATED FINANCIAL STATEMENTS**

 

**1.****                                      BASISOF PRESENTATION**

 

## ***Principles of consolidation***

 

The accompanyingunaudited interim condensed consolidated financial statements reflect alladjustments, consisting of normal recurring adjustments, which managementbelieves are necessary to present fairly the financial position, results ofoperations and cash flows of Alliance Gaming Corporation (“Alliance” or the“Company”) for the respective periods presented. The results of operations foran interim period are not necessarily indicative of the results that may beexpected for any other interim period or for the year as a whole. Theaccompanying unaudited interim condensed consolidated financial statementsshould be read in conjunction with the consolidated financial statements andnotes in the Company’s annual report on Form 10-K for the year ended June 30,2003.

 

The accompanying consolidated financial statementsinclude the accounts of Alliance Gaming Corporation, and its wholly owned andpartially owned, controlled subsidiaries. In the case of Video Services, Inc.(“VSI”), the Company owns 100% of the voting stock. The Company is entitled toreceive 71% of dividends declared by VSI, if any, at such time that dividendsare declared.

 

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

 

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

 

During the fiscal year ended June 30, 2003, theCompany acquired 100 percent of the stock of three companies:  Casino Management Systems Software Company(“CMS”) on November 13, 2002, Micro Clever Consulting Systems Company (“MCC”)on April 9, 2003 and Honeyframe Systems Company (“HSC”) on May 28, 2003.  These acquisitions reinforce the Company’sposition as the leading system provider to the gaming industry.

 

All significant intercompany accounts and transactionshave been eliminated. Certain reclassifications have been made to prior yearfinancial statements to conform to the current year presentation.

### * *

### *Revenue recognition*

 

Revenuefrom sales of gaming machines is generally recognized at the time products areshipped and title has passed to the customer. Games placed with customers on atrial basis are not recognized as revenue until the trial period ends and thecustomer accepts the games. The Company sells gaming equipment on normal creditterms (generally 2%, net 30) and also offers financing to qualified customersfor periods generally between 6 and 48 months.

 

Revenuefrom sales of computerized monitoring systems is recognized in accordance withthe AICPA’s Statement of Position 97-2 (“SOP 97-2”) “Software RevenueRecognition.”  In accordance with theprovisions of SOP 97-2, the contracts for the sales of computerized monitoringunits are considered to have “multiple elements” because they include hardware,software, installation, supervision, training, and post-contract customersupport. Accordingly, revenues from the sale of systems are deferred and beginto be recognized at the point when the system is deemed to be functionallyoperational, and the residual method is used to recognize revenue for theremaining elements as they are delivered, each having vendor-specific objectiveevidence of relative fair values. Post-contract customer support revenues arerecognized over the period of the support agreement (generally one year).

 

OurBally Gaming and Systems business unit earns revenues from recurring revenuesources that consist of the operations of the wide-area progressive jackpotsystems and revenues from gaming machines placed in a casino on a daily leaseor rental basis. Revenue from these sources is recognized based on thecontractual terms of the participation or rental agreements and is generallybased on a share of money wagered, a share of the net winnings, or on a fixeddaily rental rate basis.

 

7

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Inaccordance with industry practice, the Company recognize gaming revenues init’s route and casino operations as the net win from gaming machine operations,which is the difference between coins and currency deposited into the machinesand payments to customers and, for other games, the difference between gamingwins and losses.  The Company recognizetotal net win from gaming machines as revenues for route operations which theCompany operates pursuant to revenue-sharing arrangements and revenue-sharingpayments (either fixed or variable) as a cost of route operations.

 

The Company constantlymonitors its exposure for credit losses and maintains allowances foranticipated losses.

 

*Recentlyissued accounting pronouncements*

 

In May2003, the FASB issued Statement of Financial Accounting Standard No. 150“Accounting for Certain Financial Instruments With Characteristics of BothLiability and Equity” (“FASB No. 150”). FASB No. 150 establishes standards for how companies classify andmeasure certain financial instruments with characteristics of both liabilitiesand equity.  In July 2003, the Companyadopted FASB No. 150, and which did not have any significant impact on itsresults of operations or financial position.

 

In November 2002, the EmergingIssues Task Force (“EITF”) reached a consensus on Issue No. 00-21, RevenueArrangements with Multiple Deliverables (“EITF 00-21”).  EITF 00-21 provides guidance on how toaccount for arrangements that involve the delivery or performance of multipleproducts, services and/or rights to use assets.  The provisions of EITF 00-21 were applied to revenue arrangementsentered into after July 1, 2003.

 

**2.****             EARNINGSPER SHARE**

 

Thefollowing computation of basic and diluted earnings per share and weighted average common and common shareequivalents outstanding, are as follows (in 000’s except per share amounts):

 

|                                                              |   | **Three Months Ended  September 30,** |   |
|-------------------------------------------------------------------|--------|---------------------------------------|--------|
|                                                              |   | **2002**                              |   | **2003** |   |
|                                                              |   |                                  |   |   |   |
| Net  income from continuing operations                       |   | $                                     | 6,239  |   | $ | 2,586 |   |
| Net  income from discontinued operations                          |   | 19                                    |   | 3,442 |   |
| Net  Income                                                       |   | $                                     | 6,258  |   | $ | 6,028 |   |
|                                                              |   |                                  |   |   |   |
| Weighted average common shares outstanding                        |   | 48,740                                |   | 49,579 |   |
| Effect  of dilutive securities                                    |   | 1,081                                 |   | 1,108 |   |
| Weighted  average common and common share equivalents outstanding |   | 49,821                                |   | 50,687 |   |
|                                                              |   |                                  |   |   |   |
| Earnings per basic  share:                                        |   |                                  |   |   |   |
| Income  from continued operations                                 |   | $                                     | 0.13   |   | $ | 0.05 |   |
| Income  from discontinued operations                              |   | —                                |   | 0.07 |   |
|                                                              |   | $                                     | 0.13   |   | $ | 0.12 |   |
|                                                              |   |                                  |   |   |   |
| Earnings  per diluted share:                                      |   |                                  |   |   |   |
| Income  from continued operations                                 |   | $                                     | 0.13   |   | $ | 0.05 |   |
| Income  from discontinued operations                         |   | —                                |   | 0.07 |   |
|                                                              |   | $                                     | 0.13   |   | $ | 0.12 |   |

 

8

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Diluted earningsper share represent the potential dilution that could occur if all dilutivesecurities outstanding were exercised. Certain securities do not have adilutive effect because their exercise price exceeds the average fair marketvalue of the underlying stock during the respective period. Such securities areexcluded from the diluted earnings per share calculation and consist of thefollowing (in 000’s):

 

|           |   | **Three Months Ended  September 30,** |   |
|----------------|--------|---------------------------------------|--------|
|           |   | **2002**                              |   | **2003** |   |
|           |   |                                  |   |   |   |
| Stock  options |   | 754                                   |   | 672 |   |

 

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

 

In 1998, the Company adopted FASB No. 123 “Accounting for Stock-BasedCompensation” (“FASB No. 123”). Under FASB No. 123 companies may continue toaccount for employee stock-based compensation under APB 25, but are required todisclose historical pro-forma net income and earnings per share that would haveresulted from the use of the fair value method described in FASB No. 123.

 

In December 2002, the FASB issued FASB No.148, “Accounting for Stock-BasedCompensation-Transition and Disclosure”. This Statement amends FASB No. 123, toprovide alternative methods of transition for a voluntary change to the fairvalue based method of accounting for stock-based employee compensation. Inaddition, this Statement amends the disclosure requirements of FASB No. 123 andAPB Opinion No. 28 “Interim Financial Reporting” to require prominent disclosuresin both annual and interim financial statements about the method of accountingfor stock-based employee compensation and the effect of the method used onreported results.  Under the fair valuemethod, compensation costs are measured using an options pricing model andamortized over the estimated life of the option, which is generally three toten years, with option forfeitures accounted for at the time of the forfeiture,and all amounts are reflected net of tax. The historical and pro forma net income (assuming an after-tax chargefor stock-based compensation) and related per share data are as follows (in000’s, except per share data):

 

|                                        |   | **Three Months Ended  September 30,** |   |
|---------------------------------------------|--------|---------------------------------------|--------|
|                                        |   | **2002**                              |   | **2003** |   |
| Net income                                  |   |                                  |   |   |   |
| As reported                                 |   | 6,258                                 |   | $ | 6,028 |   |
| Stock-based compensation under FASB No. 123 |   | (736                                  | )      | (1,837 | ) |
| Pro forma net income                        |   | $                                     | 5,522  |   | $ | 4,191 |   |
|                                        |   |                                  |   |   |   |
| Earnings per share:                         |   |                                  |   |   |   |
| Basic – As reported                    |   | $                                     | 0.13   |   | $ | 0.12 |   |
| Basic – Pro forma                      |   | $                                     | 0.11   |   | $ | 0.08 |   |
| Diluted – As reported                  |   | $                                     | 0.13   |   | $ | 0.12 |   |
| Diluted – Pro forma                    |   | $                                     | 0.11   |   | $ | 0.08 |   |

9

----

 

On thedate of grant using the Black-Scholes option-pricing model, the followingassumptions were used to value the options in the periods indicated:

 

|                    |   | **Three Months Ended  September 30,** |   |
|-------------------------|--------|---------------------------------------|--------|
|                    |   | **2002**                              |   | **2003** |   |
|                    |   |                                  |   |   |   |
| Risk-fee interest rate  |   | 3.5                                   | %      | 3.5 | % |
| Expected volatility     |   | 0.28                                  |   | 0.26 |   |
| Expected dividend yield |   | 0                                     |   | 0 |   |
| Expected life           |   | 3-10 years                            |   | 3-10 years |   |

 

The resulting fair values applied to the optionsgranted were $2.27 and $3.09 per share for the three month periods endedSeptember 30, 2002 and 2003, respectively.

 

**3.****                                      DISCONTINUEDOPERATIONS**

 

In July2003 the Company announced it had entered into definitive sale of its routeoperations segment consisting of United Coin Machine Co. (“UCMC”) and VideoServices, Inc. (“VSI”) and its German wall machine and amusement games segment(Alliance Automaten GmbH & Co. KG dba Bally Wulff).

 

On June 30, 2003 the Company entered into adefinitive agreement for the sale of Bally Wulff to a third party equityinvestor. The sale was consummated on July 18, 2003, at which time the Companyreceived $16.5 million in cash consideration. Pursuant to the sale agreement, the Company used $5.6 million of thesale proceeds to purchase a 5 million Euro certificate of deposit as collateralfor a tax claim currently being negotiated with the German tax authorities, forwhich the Company has indemnified the buyer. The certificate of deposit is included in Other Assets in theaccompanying unaudited financial statements.

 

The Company has entered into a definitive agreementfor the sale of UCMC to the privately held Century Gaming, Inc. based inMontana.  The sales price is based on amultiple of EBITDA (as defined in the sale agreement) and is currently estimatedat $127 million, consisting of $103 million in cash, $18 million in 10%Pay-In-Kind preferred stock and $6 million in assumed liabilities. The closingof this transaction is subject to customary closing conditions including thatthe business achieve a minimum EBITDA of $21.0 million during a defined periodof time prior to closing and that the buyer obtain the necessary gaminglicenses. This transaction is expected to close in fiscal 2004.

 

Through a wholly owned subsidiary, Alliance owns 100percent of the class B voting shares of VSI. Alliance and the owners of the class A shares have entered into adefinitive agreement to sell 100 percent of VSI’s stock to Gentilly Gaming,LLC. The all-cash transaction is subject to customary closing conditions and isexpected to close on June 30, 2004. Concurrent with the sale agreement, VSI has entered into a 12-monthoperating agreement extension under terms and conditions that are the same asthe existing agreement with the Fair Grounds Corporation.

 

As a result of the transactions described above,each of the three businesses are treated as discontinued operations, and theirresults are presented net of applicable income taxes below income fromcontinuing operations in the accompanying consolidated statements ofoperations. In accordance with generally accepted accounting principles,depreciation and amortization for these discontinued operations ceased as ofJuly 1, 2003 as a result of their designation as assets held for sale. The assets and liabilities of the businessesare now classified as held for sale in the accompanying consolidated balancesheets.  The prior year results havebeen reclassified to conform to the current year presentation.

 

10

----

 

Summary operating results for the discontinuedoperations for UCMC, VSI and Wulff are as follows (in 000’s):

 

|                                 |   | **Three Months Ended  September 30,** |   |
|--------------------------------------|--------|---------------------------------------|--------|
|                                 |   | **2002**                              |   | **2003** |   |
|                                 |   |                                  |   |   |   |
| Net revenues                         |   | $                                     | 65,403 |   | $ | 53,973 |   |
| Operating income                     |   | 850                                   |   | 5,667 |   |
| Income tax expense                   |   | 897                                   |   | 1,890 |   |
| Income from discontinued  operations |   | $                                     | 19     |   | $ | 3,442 |   |

 

The following net assetsheld for sale are included in the accompanying consolidated balance sheets (in000’s):

 

|                                   |   | **June 30,  2003** |   | **Sept. 30  2003** |   |
|----------------------------------------|--------|--------------------|--------|--------------------|--------|
|                                   |   |               |   |               |   |
| Cash and cash equivalents              |   | $                  | 27,644 |               | $      | 27,787 |   |
| Accounts and contracts  receivable     |   | 21,587             |   | 4,374              |   |
| Other current assets                   |   | 4,624              |   | 4,435              |   |
| Property, plant and  equipment         |   | 23,680             |   | 27,227             |   |
| Intangible assets                      |   | 19,682             |   | 18,728             |   |
| Other                                  |   | 3,558              |   | 3,802              |   |
| Total assets                           |   | 100,775            |   | 86,353             |   |
|                                   |   |               |   |               |   |
| Current liabilities                    |   | 9,221              |   | 7,646              |   |
| Long-term liabilities                  |   | 4,273              |   | 4,414              |   |
| Total liabilities                      |   | 13,494             |   | 12,060             |   |
| Net assets of discontinued  operations |   | $                  | 87,281 |               | $      | 74,293 |   |

 

**4.****                                      INVENTORIES**

 

Inventoriesare stated at the lower of cost, determined on a first-in, first-out basis, ormarket. Cost elements included for work-in-process and finished goods includeraw materials, freight, direct labor and manufacturing overhead.

 

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

 

|            |   | **June 30,  2003** |   | **September 30,  2003** |   |
|-----------------|--------|--------------------|--------|-------------------------|--------|
|            |   |               |   |                    |   |
| Raw materials   |   | $                  | 13,720 |                    | $      | 17,620 |   |
| Work-in-process |   | 789                |   | 3,864                   |   |
| Finished goods  |   | 17,663             |   | 16,747                  |   |
| Total           |   | $                  | 32,172 |                    | $      | 38,231 |   |

 

11

----

 

**5.****                                      DEBT**

 

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

 

|                                                     |   | **June 30,  2003** |    | **September  30,  2003** |   |
|----------------------------------------------------------|--------|--------------------|---------|--------------------------|--------|
|                                                     |   |               |    |                     |   |
| Term  Loan facility                                      |   | $                  | 187,625 |                     | $      | 275,000 |   |
| Revolving  credit facility                               |   | —             |    | 70,000                   |   |
| 10%  Sr. Subordinated Notes, net of unamortized discount |   | 149,663            |    | —                   |   |
| Other subordinated debt                                  |   | 495                |    | —                   |   |
| Other,  secured by related equipment                     |   | 7,432              |    | 7,342                    |   |
|                                                     |   | 345,215            |    | 352,342                  |   |
| Less  current maturities                                 |   | 3,537              |    | 2,288                    |   |
| Long-term  debt, less current maturities                 |   | $                  | 341,678 |                     | $      | 350,054 |   |

 

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

 

OnSeptember 5, 2003, the Company completed a senior bank debt refinancingtransaction (the “Refinancing”) whereby the Company entered into a new $275million term loan facility and a $125 million revolving credit facility (whichcan be increased by up to $75.0 million upon the consent of the bank group).Proceeds from the new loans were used to repay the existing bank term loanstotaling approximately $188 million, repay the Subordinated Notes, and to paytransaction fees and expenses.  The newterm loan has an interest rate of LIBOR plus 2.75% (or 3.96% as of September30, 2003), has a 1% per year mandatory principal amortization after the firstyear, and a 6-year maturity.  Therevolving credit facility has an interest rate of LIBOR plus 2.50% (or 3.71% asof September 30, 2003), and the commitment decreases ratably over its 5-yearterm to a 60% balloon.  As of September5, 2003, the initial outstanding on the revolving credit facility totaled $70.0million.

 

OnAugust 13, 2003, the Company initiated a tender offer and consent solicitationfor all of the outstanding Subordinated Notes at a price of 103.33% plus a .25%tender premium which was contingent on the closing of the new bankfacility.  On September 10, 2003, thetender offer period expired, with $78.6 million of the notes having beentendered.  On September 11, 2003, theCompany initiated redemption of the remaining Notes at a price of 103.33%,which was completed on September 16, 2003, at which time the Subordinated Noteswere fully redeemed.

 

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

 

Thenew bank facility is collateralized by substantially all domestic property andis guaranteed by each domestic subsidiary of the Company, other than the entitythat holds the Company’s interest in its Louisiana and Mississippi operations,and is secured by a Pledge Agreement. The bank facility contains a number ofmaintenance covenants and other significant covenants that, among other things,restrict the ability of the Company and the ability of certain of itssubsidiaries to dispose of assets, incur additional indebtedness and issuepreferred stock, pay dividends or make other distributions, enter into certainacquisitions, repurchase equity interests or subordinated indebtedness, issueor sell equity interests of the Company’s subsidiaries, engage in mergers oracquisitions, or engage in certain transactions with subsidiaries andaffiliates, and that otherwise restrict corporate activities.  As of September 30, 2003, the Company is incompliance with these covenants.

 

12

----

 

**6.****                                     ****INCOME TAXES**

 

The Company recognizes Federalincome tax expense based on 35% of pre-tax domestic income and state incometaxes at a rate of approximately 4% of domestic income.

 

**7.****                                      SEGMENTSAND GEOGRAPHICAL INFORMATION**

 

The Company currentlyoperates in two business segments (exclusive of the two business segmentsincluded in discontinued operations): (i) Gaming Equipment and Systems whichdesigns, manufactures and distributes gaming machines and computerizedmonitoring systems for gaming machines, and (ii) Casino Operations which ownsand operates two regional casinos. The accounting policies of these segmentsare consistent with Company’s policies for the Consolidated FinancialStatements.

 

The table below presentsinformation as to the Company’s revenues and operating income by segment (in000’s):

 

|                          |   | **Three Months Ended  September 30,** |   |
|-------------------------------|--------|---------------------------------------|--------|
|                          |   | **2002**                              |   | **2003** |   |
| Revenues:                     |   |                                  |   |   |   |
| Gaming  Equipment and Systems |   | $                                     | 63,539 |   | $ | 88,468 |   |
| Casino  Operations            |   | 17,790                                |   | 18,136 |   |
| Total revenues                |   | $                                     | 81,329 |   | $ | 106,604 |   |
|                          |   |                                  |   |   |   |
| Intersegment revenues:        |   |                                  |   |   |   |
| Gaming  Equipment and Systems |   | $                                     | 958    |   | $ | 129 |   |
|                          |   |                                  |   |   |   |
| Operating  income (loss):     |   |                                  |   |   |   |
| Gaming  Equipment and Systems |   | $                                     | 15,135 |   | $ | 21,358 |   |
| Casino Operations             |   | 5,015                                 |   | 5,146 |   |
| Corporate/other               |   | (2,779                                | )      | (3,439 | ) |
| Total  operating income       |   | $                                     | 17,371 |   | $ | 23,065 |   |

 

The Company hasoperations based primarily in the United States with a significant sales anddistribution office based in Germany.

 

The table below presentsinformation as to the Company’s revenues, intersegment revenues and operatingincome by geographic region (in 000’s):

 

|                      |   | **Three Months Ended  September 30,** |   |
|---------------------------|--------|---------------------------------------|--------|
|                      |   | **2002**                              |   | **2003** |   |
| Revenues:                 |   |                                  |   |   |   |
| United  States            |   | $                                     | 75,644 |   | $ | 97,993 |   |
| Germany                   |   | 4,386                                 |   | 6,032 |   |
| Other  foreign            |   | 1,299                                 |   | 2,579 |   |
| Total  revenues           |   | $                                     | 81,329 |   | $ | 106,604 |   |
|                      |   |                                  |   |   |   |
| Operating  income (loss): |   |                                  |   |   |   |
| United  States            |   | $                                     | 17,166 |   | $ | 22,291 |   |
| Germany                   |   | 322                                   |   | 1,024 |   |
| Other foreign             |   | (117                                  | )      | (250 | ) |
| Total operating income    |   | $                                     | 17,371 |   | $ | 23,065 |   |

 

13

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**8.             SUPPLEMENTALCASH FLOW INFORMATION**

 

Thefollowing supplemental information is related to the unaudited condensedconsolidated statements of cash flows (in 000’s).

 

|                                                   |   | **Three Months Ended  September 30,** |   |
|--------------------------------------------------------|--------|---------------------------------------|--------|
|                                                   |   | **2002**                              |   | **2003** |   |
|                                                   |   |                                  |   |   |   |
| Cash paid for interest                                 |   | $                                     | 10,317 |   | $ | 11,695 |   |
| Cash paid for income taxes                             |   | 486                                   |   | 1,239 |   |
|                                                   |   |                                  |   |   |   |
| Non-cash transactions:                                 |   |                                  |   |   |   |
| Reclassify property, plant and equipment to  inventory |   | $                                     | 283    |   | $ | 799 |   |
| (Favorable) unfavorable translation rate adjustment    |   | (27                                   | )      | 732 |   |

 

**9.****            ****COMMITMENTS AND CONTINGENCIES**

 

The Company is also a party tovarious lawsuits relating to routine matters incidental to its business.  Management does not believe that the outcomeof such litigation, including the matters above, in the aggregate, will have amaterial adverse effect on the Company.

 

**10.****          SUBSEQUENT EVENT**

 

As of November 11, 2003, theCompany announced an agreement to purchase 100 percent of the outstandingshares of Sierra Design Group (“SDG”) for approximately $45 million ofconsideration consisting of $27 million of cash and 736,000 shares of AllianceGaming Common Stock (valued at $18 million) paid at closing and approximately$95 million of contingent consideration payable in equal portions of cash andstock payable over the three years following the closing upon SDG achievingcertain financial objectives. The acquisition, which is subject to regulatoryapprovals and certain other customary closing conditions, is expected to closein the first half of calendar 2004.

 

**11.          UNAUDITEDCONSOLIDATING FINANCIAL STATEMENTS**

 

The following unaudited condensedconsolidating financial statements are presented to provide certain financialinformation regarding guaranteeing and non-guaranteeing subsidiaries inrelation to the Company’s new bank credit agreement. The financial informationpresented includes Alliance Gaming Corporation (the “Parent”), its wholly-ownedguaranteeing subsidiaries (“Guaranteeing Subsidiaries”), and thenon-guaranteeing subsidiaries Video Services, Inc., the Rainbow CasinoVicksburg Partnership, L.P. (dba Rainbow Casino) and the Company’s non-domesticsubsidiaries (together the “Non-Guaranteeing Subsidiaries”). The notes to theunaudited consolidating financial statements should be read in conjunction withthese unaudited consolidating financial statements.

 

14

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**ALLIANCE GAMING CORPORATION AND SUBSIDIARIES**

**NOTES TO UNAUDITED CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS**

 

#### **UNAUDITED CONSOLIDATING BALANCESHEETS**

June 30, 2003

(In 000’s)

 
|                                                  |   | **Parent** |    | **Guaranteeing  Subsidiaries** |   | **Non-  Guaranteeing  Subsidiaries** |   | **Reclas-  sifications  and  Elimina-  tions** |   | **Alliance  Gaming  Corporation  and  Subsidiaries** |   |
|-------------------------------------------------------|--------|------------|---------|--------------------------------|--------|--------------------------------------|--------|------------------------------------------------|--------|------------------------------------------------------|--------|
|                                                  |   |       |    |                           |   |                                 |   |                                           |   |                                                 |   |
| ASSETS                                                |   |       |    |                           |   |                                 |   |                                           |   |                                                 |   |
| Current  assets:                                      |   |       |    |                           |   |                                 |   |                                           |   |                                                 |   |
| Cash  and cash equivalents                            |   | $          | 12,730  |                           | $      | 19,310                               |   | $                                              | 8,118  |                                                 | $      | — |   | $ | 40,158 |   |
| Accounts  and notes receivable, net                   |   | 738        |    | 70,920                         |   | 27,496                               |   | (746                                           | )      | 98,408                                               |   |
| Inventories,  net                                     |   | —     |    | 29,871                         |   | 2,518                                |   | (217                                           | )      | 32,172                                               |   |
| Deferred  tax assets, net                             |   | 33,182     |    | 11,639                         |   | —                               |   | —                                         |   | 44,821                                               |   |
| Other  current assets                                 |   | 404        |    | 7,616                          |   | 496                                  |   | —                                         |   | 8,516                                                |   |
| Total  current assets                                 |   | 47,054     |    | 139,356                        |   | 38,628                               |   | (963                                           | )      | 224,075                                              |   |
| Long-term  investments (restricted)                   |   | —     |    | 864                            |   | —                               |   | —                                         |   | 864                                                  |   |
| Long-term  receivables, net                           |   | 159,723    |    | 15,113                         |   | 12                                   |   | (159,983                                       | )      | 14,865                                               |   |
| Leased  gaming equipment, net                         |   | —     |    | 25,792                         |   | —                               |   | —                                         |   | 25,792                                               |   |
| Property,  plant and equipment, net                   |   | 74         |    | 30,030                         |   | 36,426                               |   | —                                         |   | 66,530                                               |   |
| Goodwill,  net                                        |   | (900       | )       | 50,047                         |   | 15,647                               |   | —                                         |   | 64,794                                               |   |
| Intangible  assets, net                               |   | 7,049      |    | 14,809                         |   | 5,032                                |   | —                                         |   | 26,890                                               |   |
| Investments  in subsidiaries                          |   | 296,273    |    | 74,990                         |   | —                               |   | (371,263                                       | )      | —                                               |   |
| Deferred  tax assets, net                             |   | 1,634      |    | —                         |   | —                               |   | (1,634                                         | )      | —                                               |   |
| Assets  of discontinued operations held for sale      |   | 16,539     |    | 80,133                         |   | 4,103                                |   | —                                         |   | 100,775                                              |   |
| Other  assets, net                                    |   | (84,406    | )       | 99,918                         |   | (14,933                              | )      | 1                                              |   | 580                                                  |   |
|                                                  |   | $          | 443,040 |                           | $      | 531,052                              |   | $                                              | 84,915 |                                                 | $      | (533,842 | ) | $ | 525,165 |   |
|                                                  |   |       |    |                           |   |                                 |   |                                           |   |                                                 |   |
| LIABILITIES AND STOCKHOLDERS’ EQUITY             |   |       |    |                           |   |                                 |   |                                           |   |                                                 |   |
| Current  liabilities:                                 |   |       |    |                           |   |                                 |   |                                           |   |                                                 |   |
| Accounts  payable                                     |   | $          | 1,295   |                           | $      | 19,693                               |   | $                                              | 1,924  |                                                 | $      | — |   | $ | 22,912 |   |
| Accrued  liabilities                                  |   | 7,378      |    | 18,918                         |   | 5,368                                |   | (751                                           | )      | 30,913                                               |   |
| Jackpot  liabilities                                  |   | —     |    | 10,462                         |   | 142                                  |   | —                                         |   | 10,604                                               |   |
| Current  maturities of long-term debt                 |   | 2,395      |    | 1,124                          |   | 18                                   |   | —                                         |   | 3,537                                                |   |
| Liabilities  of discontinued operations held for sale |   | 1,000      |    | 11,666                         |   | 828                                  |   | —                                         |   | 13,494                                               |   |
| Total  current liabilities                            |   | 12,068     |    | 61,863                         |   | 8,280                                |   | (751                                           | )      | 81,460                                               |   |
| Long  term debt, net                                  |   | 335,388    |    | 166,013                        |   | —                               |   | (159,723                                       | )      | 341,678                                              |   |
| Deferred  tax liabilites                              |   | —     |    | 5,679                          |   | 1,635                                |   | (1,634                                         | )      | 5,680                                                |   |
| Other liabilities                                     |   | 2,624      |    | 753                            |   | 10                                   |   | —                                         |   | 3,387                                                |   |
| Minority  interest                                    |   | 1,330      |    | —                         |   | —                               |   | —                                         |   | 1,330                                                |   |
| Total  liabilities                                    |   | 351,410    |    | 234,308                        |   | 9,925                                |   | (162,108                                       | )      | 433,535                                              |   |
| Commitments  and contingencies                        |   |       |    |                           |   |                                 |   |                                           |   |                                                 |   |
| Stockholders’  equity:                           |   |       |    |                           |   |                                 |   |                                           |   |                                                 |   |
| Special  Stock Series E                               |   | 12         |    | —                         |   | —                               |   | —                                         |   | 12                                                   |   |
| Common  Stock                                         |   | 4,996      |    | 478                            |   | 1,027                                |   | (1,505                                         | )      | 4,996                                                |   |
| Treasury  stock                                       |   | (501       | )       | —                         |   | —                               |   | —                                         |   | (501                                                 | )      |
| Additional  paid-in capital                           |   | 163,267    |    | 190,449                        |   | 33,415                               |   | (223,864                                       | )      | 163,267                                              |   |
| Accumulated  other comprehensive income (loss)        |   | 1,287      |    | 1,290                          |   | 1,267                                |   | (2,557                                         | )      | 1,287                                                |   |
| Retained  earnings (accumulated deficit)              |   | (77,431    | )       | 104,527                        |   | 39,281                               |   | (143,808                                       | )      | (77,431                                              | )      |
| Total  stockholders’ equity                      |   | 91,630     |    | 296,744                        |   | 74,990                               |   | (371,734                                       | )      | 91,630                                               |   |
|                                                  |   | $          | 443,040 |                           | $      | 531,052                              |   | $                                              | 84,915 |                                                 | $      | (533,842 | ) | $ | 525,165 |   |

 

See accompanyingunaudited note.

 

15

----

 

#### **UNAUDITED CONSOLIDATING BALANCESHEETS**

September 30, 2003

(In 000’s)

 
|                                                  |   | **Parent** |    | **Guaranteeing  Subsidiaries** |   | **Non-  Guaranteeing  Subsidiaries** |   | **Reclas-  sifications  and  Elimina-  tions** |   | **Alliance  Gaming  Corporation  and  Subsidiaries** |   |
|-------------------------------------------------------|--------|------------|---------|--------------------------------|--------|--------------------------------------|--------|------------------------------------------------|--------|------------------------------------------------------|--------|
|                                                  |   |       |    |                           |   |                                 |   |                                           |   |                                                 |   |
| ASSETS                                                |   |       |    |                           |   |                                 |   |                                           |   |                                                 |   |
| Current  assets:                                      |   |       |    |                           |   |                                 |   |                                           |   |                                                 |   |
| Cash  and cash equivalents                            |   | $          | 15,305  |                           | $      | 20,434                               |   | $                                              | 8,849  |                                                 | $      | — |   | $ | 44,588 |   |
| Accounts  and notes receivable, net                   |   | 804        |    | 77,847                         |   | 24,502                               |   | (879                                           | )      | 102,274                                              |   |
| Inventories,  net                                     |   | —     |    | 36,017                         |   | 2,549                                |   | (335                                           | )      | 38,231                                               |   |
| Deferred  tax assets, net                             |   | 34,216     |    | 11,638                         |   | —                               |   | —                                         |   | 45,854                                               |   |
| Other  current assets                                 |   | 751        |    | 7,731                          |   | 496                                  |   | —                                         |   | 8,978                                                |   |
| Total  current assets                                 |   | 51,076     |    | 153,667                        |   | 36,396                               |   | (1,214                                         | )      | 239,925                                              |   |
| Long-term  investments (restricted)                   |   | —     |    | 2,585                          |   | —                               |   | —                                         |   | 2,585                                                |   |
| Long-term  receivables, net                           |   | 164,255    |    | 13,906                         |   | 13                                   |   | (163,015                                       | )      | 15,159                                               |   |
| Leased  gaming equipment, net                         |   | —     |    | 26,282                         |   | —                               |   | —                                         |   | 26,282                                               |   |
| Property,  plant and equipment, net                   |   | 71         |    | 31,668                         |   | 35,731                               |   | —                                         |   | 67,470                                               |   |
| Goodwill,  net                                        |   | (900       | )       | 50,048                         |   | 15,392                               |   | —                                         |   | 64,540                                               |   |
| Intangible  assets, net                               |   | 5,679      |    | 15,042                         |   | 4,910                                |   | —                                         |   | 25,631                                               |   |
| Investments  in subsidiaries                          |   | 316,617    |    | 73,886                         |   | —                               |   | (390,503                                       | )      | —                                               |   |
| Deferred  tax assets, net                             |   | 358        |    | —                         |   | —                               |   | (358                                           | )      | —                                               |   |
| Assets  of discontinued operations held for sale      |   | 39         |    | 82,724                         |   | 3,590                                |   | —                                         |   | 86,353                                               |   |
| Other  assets, net                                    |   | (88,211    | )       | 107,180                        |   | (12,728                              | )      | (13                                            | )      | 6,228                                                |   |
|                                                  |   | $          | 448,984 |                           | $      | 556,988                              |   | $                                              | 83,304 |                                                 | $      | (555,103 | ) | $ | 534,173 |   |
|                                                  |   |       |    |                           |   |                                 |   |                                           |   |                                                 |   |
| LIABILITIES AND STOCKHOLDERS’ EQUITY             |   |       |    |                           |   |                                 |   |                                           |   |                                                 |   |
| Current  liabilities:                                 |   |       |    |                           |   |                                 |   |                                           |   |                                                 |   |
| Accounts  payable                                     |   | $          | 755     |                           | $      | 22,975                               |   | $                                              | 1,772  |                                                 | $      | — |   | $ | 25,502 |   |
| Accrued  liabilities                                  |   | (95        | )       | 16,347                         |   | 5,040                                |   | (903                                           | )      | 20,389                                               |   |
| Jackpot  liabilities                                  |   | —     |    | 11,154                         |   | 166                                  |   | —                                         |   | 11,320                                               |   |
| Current  maturities of long-term debt                 |   | 688        |    | 1,591                          |   | 9                                    |   | —                                         |   | 2,288                                                |   |
| Liabilities  of discontinued operations held for sale |   | 144        |    | 11,117                         |   | 799                                  |   | —                                         |   | 12,060                                               |   |
| Total  current liabilities                            |   | 1,492      |    | 63,184                         |   | 7,786                                |   | (903                                           | )      | 71,559                                               |   |
| Long  term debt, net                                  |   | 344,313    |    | 168,496                        |   | —                               |   | (162,755                                       | )      | 350,054                                              |   |
| Deferred  tax liabilites                              |   | —     |    | 5,680                          |   | 1,635                                |   | (358                                           | )      | 6,957                                                |   |
| Other  liabilities                                    |   | 2,624      |    | 2,424                          |   | —                               |   | —                                         |   | 5,048                                                |   |
| Minority  interest                                    |   | 1,157      |    | —                         |   | —                               |   | —                                         |   | 1,157                                                |   |
| Total  liabilities                                    |   | 349,586    |    | 239,784                        |   | 9,421                                |   | (164,016                                       | )      | 434,775                                              |   |
| Commitments  and contingencies                        |   |       |    |                           |   |                                 |   |                                           |   |                                                 |   |
| Stockholders’  equity:                           |   |       |    |                           |   |                                 |   |                                           |   |                                                 |   |
| Special  Stock Series E                               |   | 12         |    | —                         |   | —                               |   | —                                         |   | 12                                                   |   |
| Common  Stock                                         |   | 5,019      |    | 478                            |   | 1,027                                |   | (1,505                                         | )      | 5,019                                                |   |
| Treasury  stock                                       |   | (501       | )       | —                         |   | —                               |   | —                                         |   | (501                                                 | )      |
| Additional  paid-in capital                           |   | 165,737    |    | 190,449                        |   | 33,415                               |   | (223,864                                       | )      | 165,737                                              |   |
| Accumulated  other comprehensive income (loss)        |   | 534        |    | 537                            |   | 514                                  |   | (1,051                                         | )      | 534                                                  |   |
| Retained  earnings (accumulated deficit)              |   | (71,403    | )       | 125,740                        |   | 38,927                               |   | (164,667                                       | )      | (71,403                                              | )      |
| Total  stockholders’ equity                      |   | 99,398     |    | 317,204                        |   | 73,883                               |   | (391,087                                       | )      | 99,398                                               |   |
|                                                  |   | $          | 448,984 |                           | $      | 556,988                              |   | $                                              | 83,304 |                                                 | $      | (555,103 | ) | $ | 534,173 |   |

 

See accompanyingunaudited note.

 

16

----

 

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

Three months endedSeptember 30, 2002

(In 000’s)

 
|                                                                                                 |   | **Parent** |   | **Guaranteeing  Subsidiaries** |   | **Non-  Guaranteeing  Subsidiaries** |   | **Reclas-  sifications  and  Elimina-  tions** |   | **Alliance  Gaming  Corporation  and  Subsidiaries** |   |
|------------------------------------------------------------------------------------------------------|--------|------------|--------|--------------------------------|--------|--------------------------------------|--------|------------------------------------------------|--------|------------------------------------------------------|--------|
| Revenues:                                                                                            |   |       |   |                           |   |                                 |   |                                           |   |                                                 |   |
| Gaming  equipment and systems                                                                        |   | $          | — |                           | $      | 62,910                               |   | $                                              | 5,701  |                                                 | $      | (5,072 | ) | $ | 63,539 |   |
| Casino  operations                                                                                   |   | —     |   | 5,712                          |   | 14,245                               |   | (2,167                                         | )      | 17,790                                               |   |
|                                                                                                 |   | —     |   | 68,622                         |   | 19,946                               |   | (7,239                                         | )      | 81,329                                               |   |
| Costs  and expenses:                                                                                 |   |       |   |                           |   |                                 |   |                                           |   |                                                 |   |
| Cost  of gaming equipment and systems                                                                |   | —     |   | 27,803                         |   | 3,511                                |   | (5,056                                         | )      | 26,258                                               |   |
| Cost  of casino operations                                                                           |   | —     |   | 2,891                          |   | 5,297                                |   | —                                         |   | 8,188                                                |   |
| Selling,  general and administrative                                                                 |   | 2,235      |   | 15,213                         |   | 5,722                                |   | (2,183                                         | )      | 20,987                                               |   |
| Research  and development costs                                                                      |   | —     |   | 3,183                          |   | 792                                  |   | —                                         |   | 3,975                                                |   |
| Depreciation  and amortization                                                                       |   | 544        |   | 3,501                          |   | 505                                  |   | —                                         |   | 4,550                                                |   |
|                                                                                                 |   | 2,779      |   | 52,591                         |   | 15,827                               |   | (7,239                                         | )      | 63,958                                               |   |
|                                                                                                 |   |       |   |                           |   |                                 |   |                                           |   |                                                 |   |
| Operating  income (loss)                                                                             |   | (2,779     | )      | 16,031                         |   | 4,119                                |   | —                                         |   | 17,371                                               |   |
|                                                                                                 |   |       |   |                           |   |                                 |   |                                           |   |                                                 |   |
| Earnings  in consolidated subsidiaries                                                               |   | 15,064     |   | 2,445                          |   | —                               |   | (17,509                                        | )      | —                                               |   |
|                                                                                                 |   |       |   |                           |   |                                 |   |                                           |   |                                                 |   |
| Other  income (expense):                                                                             |   |       |   |                           |   |                                 |   |                                           |   |                                                 |   |
| Interest  income                                                                                     |   | 3,066      |   | —                         |   | 14                                   |   | (3,032                                         | )      | 48                                                   |   |
| Interest  expense                                                                                    |   | (6,618     | )      | (3,035                         | )      | (20                                  | )      | 3,032                                          |   | (6,641                                               | )      |
| Rainbow  royalty                                                                                     |   | 1,586      |   | —                         |   | (1,586                               | )      | —                                         |   | —                                               |   |
| Minority  interest                                                                                   |   | (445       | )      | —                         |   | —                               |   | —                                         |   | (445                                                 | )      |
| Other,  net                                                                                          |   | 101        |   | 82                             |   | (82                                  | )      | —                                         |   | 101                                                  |   |
| Income  (loss) from continuing operations before income taxes                                        |   | 9,975      |   | 15,523                         |   | 2,445                                |   | (17,509                                        | )      | 10,434                                               |   |
| Income  tax expense                                                                                  |   | 3,736      |   | 459                            |   | —                               |   | —                                         |   | 4,195                                                |   |
| Net  income (loss) from continuing operations                                                        |   | 6,239      |   | 15,064                         |   | 2,445                                |   | (17,509                                        | )      | 6,239                                                |   |
|                                                                                                 |   |       |   |                           |   |                                 |   |                                           |   |                                                 |   |
| Discontinued  Operations:                                                                            |   |       |   |                           |   |                                 |   |                                           |   |                                                 |   |
| Income  (loss) from discontinued operations of wall machines and amusement games  business unit, net |   | 233        |   | —                         |   | (1,853                               | )      | —                                         |   | (1,620                                               | )      |
| Income  from disc. ops. of Nevada Route, net                                                         |   | —     |   | 1,364                          |   | —                               |   | —                                         |   | 1,364                                                |   |
| Income  from disc. ops. of Louisiana Route, net                                                      |   | —     |   | —                         |   | 275                                  |   | —                                         |   | 275                                                  |   |
| Earnings  from consolidated discontinued operations                                                  |   | (214       | )      | —                         |   | —                               |   | 214                                            |   | —                                               |   |
| Income  (loss) from discontinued operations                                                          |   | 19         |   | 1,364                          |   | (1,578                               | )      | 214                                            |   | 19                                                   |   |
| Net  income (loss)                                                                                   |   | $          | 6,258  |                           | $      | 16,428                               |   | $                                              | 867    |                                                 | $      | (17,295 | ) | $ | 6,258 |   |

 

See accompanyingunaudited note.

 

17

----

 

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

Three months endedSeptember 30, 2003

(In 000’s)

 
|                                                          |   | **Parent** |   | **Guaranteeing  Subsidiaries** |   | **Non-  Guaranteeing  Subsidiaries** |   | **Reclas-  sifications  and  Elimina-  tions** |   | **Alliance  Gaming  Corporation  and  Subsidiaries** |   |
|---------------------------------------------------------------|--------|------------|--------|--------------------------------|--------|--------------------------------------|--------|------------------------------------------------|--------|------------------------------------------------------|--------|
| Revenues:                                                     |   |       |   |                           |   |                                 |   |                                           |   |                                                 |   |
| Gaming  equipment and systems                                 |   | $          | — |                           | $      | 85,009                               |   | $                                              | 8,612  |                                                 | $      | (5,153 | ) | $ | 88,468 |   |
| Casino  operations                                            |   | —     |   | 6,039                          |   | 14,239                               |   | (2,142                                         | )      | 18,136                                               |   |
|                                                          |   | —     |   | 91,048                         |   | 22,851                               |   | (7,295                                         | )      | 106,604                                              |   |
| Costs  and expenses:                                          |   |       |   |                           |   |                                 |   |                                           |   |                                                 |   |
| Cost  of gaming equipment and systems                         |   | —     |   | 32,688                         |   | 5,585                                |   | (5,036                                         | )      | 33,237                                               |   |
| Cost  of casino operations                                    |   | —     |   | 2,973                          |   | 5,003                                |   | —                                         |   | 7,976                                                |   |
| Selling,  general and administrative                          |   | 2,933      |   | 22,820                         |   | 6,404                                |   | (2,142                                         | )      | 30,015                                               |   |
| Research  and development costs                               |   | —     |   | 5,741                          |   | 222                                  |   | —                                         |   | 5,963                                                |   |
| Depreciation  and amortization                                |   | 506        |   | 4,995                          |   | 847                                  |   | —                                         |   | 6,348                                                |   |
|                                                          |   | 3,439      |   | 69,217                         |   | 18,061                               |   | (7,178                                         | )      | 83,539                                               |   |
|                                                          |   |       |   |                           |   |                                 |   |                                           |   |                                                 |   |
| Operating  income (loss)                                      |   | (3,439     | )      | 21,831                         |   | 4,790                                |   | (117                                           | )      | 23,065                                               |   |
|                                                          |   |       |   |                           |   |                                 |   |                                           |   |                                                 |   |
| Earnings  in consolidated subsidiaries                        |   | 20,887     |   | 2,569                          |   | —                               |   | (23,456                                        | )      | —                                               |   |
|                                                          |   |       |   |                           |   |                                 |   |                                           |   |                                                 |   |
| Other  income (expense):                                      |   |       |   |                           |   |                                 |   |                                           |   |                                                 |   |
| Interest  income                                              |   | 3,070      |   | —                         |   | 5                                    |   | (3,032                                         | )      | 43                                                   |   |
| Interest  expense                                             |   | (5,661     | )      | (3,084                         | )      | (16                                  | )      | 3,032                                          |   | (5,729                                               | )      |
| Rainbow  royalty                                              |   | 1,593      |   | —                         |   | (1,593                               | )      | —                                         |   | —                                               |   |
| Minority  interest                                            |   | (486       | )      | —                         |   | —                               |   | —                                         |   | (486                                                 | )      |
| Refinancing  charge                                           |   | (12,293    | )      | —                         |   | —                               |   | —                                         |   | (12,293                                              | )      |
| Other,  net                                                   |   | 109        |   | (194                           | )      | (266                                 | )      | —                                         |   | (351                                                 | )      |
| Income  (loss) from continuing operations before income taxes |   | 3,780      |   | 21,122                         |   | 2,920                                |   | (23,573                                        | )      | 4,249                                                |   |
| Income  tax expense                                           |   | 1,194      |   | 118                            |   | 351                                  |   | —                                         |   | 1,663                                                |   |
| Net  income (loss) from continuing operations                 |   | 2,586      |   | 21,004                         |   | 2,569                                |   | (23,573                                        | )      | 2,586                                                |   |
|                                                          |   |       |   |                           |   |                                 |   |                                           |   |                                                 |   |
| Discontinued  Operations:                                     |   |       |   |                           |   |                                 |   |                                           |   |                                                 |   |
| Income  from disc. ops. of Nevada Route, net                  |   | —     |   | 3,132                          |   | —                               |   | —                                         |   | 3,132                                                |   |
| Income  from disc. ops. of Louisiana Route, net               |   | —     |   | —                         |   | 310                                  |   | —                                         |   | 310                                                  |   |
| Earnings  from consolidated discontinued operations           |   | 3,442      |   | 310                            |   | —                               |   | (3,752                                         | )      | —                                               |   |
| Income  (loss) from discontinued operations                   |   | 3,442      |   | 3,442                          |   | 310                                  |   | (3,752                                         | )      | 3,442                                                |   |
| Net  income (loss)                                            |   | $          | 6,028  |                           | $      | 24,446                               |   | $                                              | 2,879  |                                                 | $      | (27,325 | ) | $ | 6,028 |   |

 

See accompanyingunaudited note.

 

18

----

 

**UNAUDITED****CONSOLIDATING STATEMENTS OF CASH FLOWS**

Three Months EndedSeptember 30, 2002

(000’s)

 
|                                                                                                |   | **Parent** |   | **Guaranteeing  Subsidiaries** |   | **Non-  Guaranteeing  Subsidiaries** |   | **Reclas-  sifications  and  Elimina-  tions** |   | **Alliance  Gaming  Corporation  and  Subsidiaries** |   |
|-----------------------------------------------------------------------------------------------------|--------|------------|--------|--------------------------------|--------|--------------------------------------|--------|------------------------------------------------|--------|------------------------------------------------------|--------|
| Cash  flows from operating activities:                                                              |   |       |   |                           |   |                                 |   |                                           |   |                                                 |   |
| Net income (loss)                                                                                   |   | $          | 6,258  |                           | $      | 16,428                               |   | $                                              | 867    |                                                 | $      | (17,295 | ) | $ | 6,258 |   |
| Adjustments to reconcile net income (loss) to net  cash provided by (used in) operating activities: |   |       |   |                           |   |                                 |   |                                           |   |                                                 |   |
| (Income) loss from  discontinued operations                                                         |   | (19        | )      | (1,364                         | )      | 1,578                                |   | (214                                           | )      | (19                                                  | )      |
| Depreciation  and amortization                                                                      |   | 544        |   | 3,501                          |   | 505                                  |   | —                                         |   | 4,550                                                |   |
| Deferred income taxes                                                                               |   | 3,800      |   | 2                              |   | —                               |   | —                                         |   | 3,802                                                |   |
| Provision for losses on  receivables                                                                |   | —     |   | (284                           | )      | 6                                    |   | —                                         |   | (278                                                 | )      |
| Other                                                                                               |   | (113       | )      | 66                             |   | —                               |   | —                                         |   | (47                                                  | )      |
| Change in operating assets and liabilities:                                                         |   |       |   |                           |   |                                 |   |                                           |   |                                                 |   |
| Accounts and notes  receivable                                                                      |   | (326       | )      | (1,246                         | )      | 1,099                                |   | 96                                             |   | (377                                                 | )      |
| Intercompany accounts                                                                               |   | 4,432      |   | (22,886                        | )      | 904                                  |   | 17,550                                         |   | —                                               |   |
| Inventories                                                                                         |   | —     |   | (2,557                         | )      | (297                                 | )      | —                                         |   | (2,854                                               | )      |
| Other current assets                                                                                |   | (319       | )      | 1,838                          |   | 81                                   |   | —                                         |   | 1,600                                                |   |
| Accounts payable                                                                                    |   | 724        |   | 521                            |   | 159                                  |   | —                                         |   | 1,404                                                |   |
| Accrued  liabilities and jackpot liabilities                                                        |   | (7,103     | )      | 542                            |   | (68                                  | )      | (101                                           | )      | (6,730                                               | )      |
| Net  cash provided by (used in) operating activities                                                |   | 7,878      |   | (5,439                         | )      | 4,834                                |   | 36                                             |   | 7,309                                                |   |
| Cash flows from  investing activities:                                                              |   |       |   |                           |   |                                 |   |                                           |   |                                                 |   |
| Additions to property,  plant and equipment                                                         |   | —     |   | (1,489                         | )      | (1,190                               | )      | —                                         |   | (2,679                                               | )      |
| Additions  to leased gaming equipment                                                               |   | —     |   | (4,750                         | )      | —                               |   | —                                         |   | (4,750                                               | )      |
| Additions  to other long-term assets                                                                |   | —     |   | (1,558                         | )      | (1                                   | )      | —                                         |   | (1,559                                               | )      |
| Net  cash used in investing activities                                                              |   | —     |   | (7,797                         | )      | (1,191                               | )      | —                                         |   | (8,988                                               | )      |
| Cash flows from  financing activities:                                                              |   |       |   |                           |   |                                 |   |                                           |   |                                                 |   |
| Reduction  of long-term debt                                                                        |   | (975       | )      | (15                            | )      | (3                                   | )      | —                                         |   | (993                                                 | )      |
| Bally Austria APIC                                                                                  |   | —     |   | —                         |   | 36                                   |   | (36                                            | )      | —                                               |   |
| Net  change in revolving credit facility                                                            |   | —     |   | —                         |   | —                               |   | —                                         |   | —                                               |   |
| Proceeds  from exercise of stock options                                                            |   | 575        |   | —                         |   | —                               |   | —                                         |   | 575                                                  |   |
| Dividends  received (paid)                                                                          |   | —     |   | 344                            |   | (344                                 | )      | —                                         |   | —                                               |   |
| Net  cash provided by (used in) financing activities                                                |   | (400       | )      | 329                            |   | (311                                 | )      | (36                                            | )      | (418                                                 | )      |
| Effect  of exchange rate changes on cash                                                            |   | —     |   | —                         |   | 2                                    |   | —                                         |   | 2                                                    |   |
|                                                                                                |   |       |   |                           |   |                                 |   |                                           |   |                                                 |   |
| Cash  and cash equivalents provided by (used in) discontinued operations                            |   | —     |   | 5,648                          |   | 239                                  |   | —                                         |   | 5,887                                                |   |
|                                                                                                |   |       |   |                           |   |                                 |   |                                           |   |                                                 |   |
| Increase (decrease) for the period                                                                  |   | 7,478      |   | (7,259                         | )      | 3,573                                |   | —                                         |   | 3,792                                                |   |
| Balance,  beginning of period                                                                       |   | 8,121      |   | 18,854                         |   | 6,265                                |   | —                                         |   | 33,240                                               |   |
|                                                                                                |   |       |   |                           |   |                                 |   |                                           |   |                                                 |   |
| Balance,  end of period                                                                             |   | $          | 15,599 |                           | $      | 11,595                               |   | $                                              | 9,838  |                                                 | $      | — |   | $ | 37,032 |   |

 

See accompanyingunaudited note.

 

19

----

 

**UNAUDITED****CONSOLIDATING STATEMENTS OF CASH FLOWS**

Three Months EndedSeptember 30, 2003

(000’s)

 
|                                                                                                 |   | **Parent** |   | **Guaranteeing  Subsidiaries** |   | **Non-  Guaranteeing  Subsidiaries** |   | **Reclas-  sifications  and  Elimina-  tions** |   | **Alliance  Gaming  Corporation  and  Subsidiaries** |   |
|------------------------------------------------------------------------------------------------------|--------|------------|--------|--------------------------------|--------|--------------------------------------|--------|------------------------------------------------|--------|------------------------------------------------------|--------|
| Cash  flows from operating activities:                                                               |   |       |   |                           |   |                                 |   |                                           |   |                                                 |   |
| Net income (loss)                                                                                    |   | $          | 6,028  |                           | $      | 24,446                               |   | $                                              | 2,879  |                                                 | $      | (27,325 | ) | $ | 6,028 |   |
| Adjustments to  reconcile net income (loss) to net cash provided by (used in) operating  activities: |   |       |   |                           |   |                                 |   |                                           |   |                                                 |   |
| (Income) loss from  discontinued operations                                                          |   | (3,442     | )      | (3,442                         | )      | (310                                 | )      | 3,752                                          |   | (3,442                                               | )      |
| Refinancing charge                                                                                   |   | 12,293     |   | —                         |   | —                               |   | —                                         |   | 12,293                                               |   |
| Depreciation and amortization                                                                        |   | 506        |   | 4,995                          |   | 847                                  |   | —                                         |   | 6,348                                                |   |
| Deferred income taxes                                                                                |   | 1,275      |   | 2                              |   | —                               |   | —                                         |   | 1,277                                                |   |
| Provision for losses on  receivables                                                                 |   | —     |   | 920                            |   | 18                                   |   | —                                         |   | 938                                                  |   |
| Other                                                                                                |   | (159       | )      | (1,424                         | )      | 6                                    |   | —                                         |   | (1,577                                               | )      |
| Change in operating assets and liabilities:                                                          |   |       |   |                           |   |                                 |   |                                           |   |                                                 |   |
| Accounts and notes  receivable                                                                       |   | (1,566     | )      | (6,641                         | )      | 2,510                                |   | 133                                            |   | (5,564                                               | )      |
| Intercompany accounts                                                                                |   | (11,259    | )      | (10,010                        | )      | (2,205                               | )      | 23,474                                         |   | —                                               |   |
| Inventories                                                                                          |   | —     |   | (5,347                         | )      | (78                                  | )      | 118                                            |   | (5,307                                               | )      |
| Other current assets                                                                                 |   | (347       | )      | (115                           | )      | (4                                   | )      | —                                         |   | (466                                                 | )      |
| Accounts payable                                                                                     |   | (540       | )      | 3,282                          |   | (152                                 | )      | —                                         |   | 2,590                                                |   |
| Accrued  liabilities and jackpot liabilities                                                         |   | (8,329     | )      | 648                            |   | (332                                 | )      | (152                                           | )      | (8,165                                               | )      |
| Net  cash provided by (used in) operating activities                                                 |   | (5,540     | )      | 7,314                          |   | 3,179                                |   | —                                         |   | 4,953                                                |   |
| Cash flows from  investing activities:                                                               |   |       |   |                           |   |                                 |   |                                           |   |                                                 |   |
| Additions to property,  plant and equipment                                                          |   | (7         | )      | (2,287                         | )      | (106                                 | )      | —                                         |   | (2,400                                               | )      |
| Additions  to leased gaming equipment                                                                |   | —     |   | (5,004                         | )      | —                               |   | —                                         |   | (5,004                                               | )      |
| Proceeds from sale of assets of discontinued  operations                                             |   | 16,500     |   | —                         |   | —                               |   | —                                         |   | 16,500                                               |   |
| Additions to other  long-term assets                                                                 |   | (5,633     | )      | (893                           | )      | 127                                  |   | —                                         |   | (6,399                                               | )      |
| Net  cash provided by (used in) investing activities                                                 |   | 10,860     |   | (8,184                         | )      | 21                                   |   | —                                         |   | 2,697                                                |   |
| Cash  flows from financing activities:                                                               |   |       |   |                           |   |                                 |   |                                           |   |                                                 |   |
| 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 and consents  fees paid on redemption of subordinated notes                                  |   | (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                                                 |   | (2,745     | )      | 2,858                          |   | (3,242                               | )      | —                                         |   | (3,129                                               | )      |
| Effect  of exchange rate changes on cash                                                             |   | —     |   | —                         |   | (21                                  | )      | —                                         |   | (21                                                  | )      |
| Cash  and cash equivalents provided by (used in) discontinued operations                             |   | —     |   | (864                           | )      | 794                                  |   | —                                         |   | (70                                                  | )      |
| Increase (decrease) for the period                                                                   |   | 2,575      |   | 1,124                          |   | 731                                  |   | —                                         |   | 4,430                                                |   |
| Balance,  beginning of period                                                                        |   | 12,730     |   | 19,310                         |   | 8,118                                |   | —                                         |   | 40,158                                               |   |
| Balance,  end of period                                                                              |   | $          | 15,305 |                           | $      | 20,434                               |   | $                                              | 8,849  |                                                 | $      | — |   | $ | 44,588 |   |

 

See accompanyingunaudited note.

 

20

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## **Debtand Revolving Credit Facility**

 

Long-term debt and linesof credit at June 30, 2003 consisted of the following (in 000’s):

 
|                                                        |   | **Parent** |    | **Guaranteeing  Subsidiaries** |   | **Non-  Guaranteeing  Subsidiaries** |   | **Reclas-  sifications  and  Elimina-  tions** |   | **Alliance  Gaming  Corporation  and  Subsidiaries** |   |
|-------------------------------------------------------------|--------|------------|---------|--------------------------------|--------|--------------------------------------|--------|------------------------------------------------|--------|------------------------------------------------------|--------|
|                                                        |   |       |    |                           |   |                                 |   |                                           |   |                                                 |   |
| 10% Senior Subordinated Notes, net of unamortized  discount |   | $          | 149,663 |                           | $      | —                               |   | $                                              | — |                                                 | $      | — |   | $ | 149,663 |   |
| Term Loan Facility                                          |   | 187,625    |    | —                         |   | —                               |   | —                                         |   | 187,625                                              |   |
| Other subordinated debt                                     |   | 495        |    | —                         |   | —                               |   | —                                         |   | 495                                                  |   |
| Intercompany notes payable                                  |   | —     |    | 159,723                        |   | —                               |   | (159,723                                       | )      | —                                               |   |
| Other                                                       |   | —     |    | 7,414                          |   | 18                                   |   | —                                         |   | 7,432                                                |   |
|                                                        |   | 337,783    |    | 167,137                        |   | 18                                   |   | (159,723                                       | )      | 345,215                                              |   |
|                                                        |   |       |    |                           |   |                                 |   |                                           |   |                                                 |   |
| Less  current maturities                                    |   | 2,395      |    | 1,124                          |   | 18                                   |   | —                                         |   | 3,537                                                |   |
| Long-term  debt, less current maturities                    |   | $          | 335,388 |                           | $      | 166,013                              |   | $                                              | — |                                                 | $      | (159,723 | ) | $ | 341,678 |   |

 

 

Long-term debt and lines of credit at September 30, 2003, consisted of thefollowing (in 000’s):

 
|                                     |   | **Parent** |    | **Guaranteeing  Subsidiaries** |   | **Non-  Guaranteeing  Subsidiaries** |   | **Reclas-  sifications  and  Elimina-  tions** |   | **Alliance  Gaming  Corporation  and  Subsidiaries** |   |
|------------------------------------------|--------|------------|---------|--------------------------------|--------|--------------------------------------|--------|------------------------------------------------|--------|------------------------------------------------------|--------|
|                                     |   |       |    |                           |   |                                 |   |                                           |   |                                                 |   |
| Term  Loan Facility                      |   | $          | 275,000 |                           | $      | —                               |   | $                                              | — |                                                 | $      | — |   | $ | 275,000 |   |
| Revolving credit facility                |   | 70,000     |    | —                         |   | —                               |   | —                                         |   | 70,000                                               |   |
| Intercompany notes payable               |   | —     |    | 162,755                        |   | —                               |   | (162,755                                       | )      | —                                               |   |
| Other                                    |   | 1          |    | 7,332                          |   | 9                                    |   | —                                         |   | 7,342                                                |   |
|                                     |   | 345,001    |    | 170,087                        |   | 9                                    |   | (162,755                                       | )      | 352,342                                              |   |
| Less  current maturities                 |   | 688        |    | 1,591                          |   | 9                                    |   | —                                         |   | 2,288                                                |   |
| Long-term  debt, less current maturities |   | $          | 344,313 |                           | $      | 168,496                              |   | $                                              | — |                                                 | $      | (162,755 | ) | $ | 350,054 |   |

 

21

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**ALLIANCE GAMING CORPORATION**

**FORM 10-Q**

 

**September 30****, 2003**

 

# **ITEM 2.**          MANAGEMENT’S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

***Liquidity and Capital Resources***

 

As of September 30, 2003, we had$44.6 million in cash and cash equivalents, and $55.0 million in unborrowedavailability on our revolving credit facility. In addition we had net workingcapital of approximately $180.4 million at September 30, 2003, compared to$156.1 million at June 30, 2003 excluding liabilities of discontinuedoperations. The changes within working capital are more fully described in thecash flow section below. Consolidated cash and cash equivalents at September30, 2003 includes approximately $3.7 million of cash which is utilized inCasino Operations held in vaults, cages or change banks, as well as $13.4million which is held in jackpot reserve accounts we maintain to ensureavailability of funds to pay wide-area progressive jackpot awards. In addition,long-term investments of $2.6 million are held in Treasury Strips for theprevious jackpot winners.

 

Management believes thatcash flows from operating activities, cash and cash equivalents held and the$125 million revolving credit facility commitment will provide the Company withsufficient capital resources and liquidity. At September 30, 2003, we had nomaterial commitments for capital expenditures.

 

As ofNovember 11, 2003, the Company announced an agreement to purchase 100 percentof the outstanding shares of Sierra Design Group (“SDG”) for approximately $45million of consideration consisting of $27 million of cash and 736,000 sharesof Alliance Gaming Common Stock (valued at $18 million) paid at closing and approximately $95 million ofcontingent consideration payable in equal portions of cash and stock payableover the three years following the closing upon SDG achieving certain financialobjectives. The acquisition, which is subject to regulatory approvals andcertain other customary closing conditions, is expected to close in the firsthalf of calendar 2004. This acquisitionreinforces the Company’s position as the leading gaming provider to the gamingindustry.

 

From time to time webecome aware of potential acquisition or development opportunities and we mayat any time be negotiating to engage in transactions or developments bothdomestically and internationally. Additionally, we regularly evaluate all of our assets within ourportfolio and will continue to consider disposition of assets that, in ouropinion, do not represent the best use of our capital.

 

***Cash Flow***

 

During the three months endedSeptember 30, 2003, we generated $5.0 million of cash flows from operatingactivities, was down compared to $7.3 million in the prior year period. 

 

During the three months endedSeptember 30, 2003, cash flow from investing activities included $10.9 millionof cash provided from the sale of Bally Wulff (net of $5.6 million, used topurchase a 5 million Euro certificate of deposit as collateral for a tax claimcurrently being negotiated with the German tax authorities, for which theCompany has indemnified the buyer), offset by capital expenditures totaling$2.4 million, and costs incurred to produce participation games totaling $5.0million.

 

During the three monthsended September 30, 2003, we used $3.1 million of cash in financing activitiesresulting from $345.0 million proceeds from issuance of long-term debt and $1.5million of cash provided from the exercise of stock options, offset by $337.6million payoff of debt from refinancing, $5.7 of refinancing cost, $5.4 millionof premium paid on early redemption of the subordinated notes bonds andprincipal payments on long-term debt totaling $0.9 million.

 

22

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***Resultsof Operations for each Business Unit:***

 

***Bally Gaming and Systems***

 

Summary financialresults and operating statistics (dollars in 000’s):

 
|                                 |   | **Three  Months Ended September 30,** |   |
|--------------------------------------|--------|---------------------------------------|--------|
|                                 |   | **2002**                              |   | **2003** |   |
| Revenues                             |   |                                  |   |   |   |
| Game  sales                          |   | $                                     | 33,783 |   | $ | 42,741 |   |
| System  sales                        |   | 15,275                                |   | 29,984 |   |
| Gaming  operations                   |   | 14,481                                |   | 15,743 |   |
| Total revenues                       |   | 63,539                                |   | 88,468 |   |
|                                 |   |                                  |   |   |   |
| Gross Margin                         |   |                                  |   |   |   |
| Game  sales                          |   | 15,925                                |   | 19,608 |   |
| System sales                         |   | 11,933                                |   | 23,864 |   |
| Gaming  operations                   |   | 9,423                                 |   | 11,759 |   |
| Total gross margin                   |   | 37,281                                |   | 55,231 |   |
|                                 |   |                                  |   |   |   |
| Selling,  general and administrative |   | 14,907                                |   | 23,082 |   |
| Research  and development costs      |   | 3,975                                 |   | 5,963 |   |
| Depreciation  and amortization       |   | 3,264                                 |   | 4,828 |   |
|                                 |   |                                  |   |   |   |
| Operating  income                    |   | $                                     | 15,135 |   | $ | 21,358 |   |
|                                 |   |                                  |   |   |   |
| Operating  Statistics:               |   |                                  |   |   |   |
| New Gaming Devices Sold              |   | 4,000                                 |   | 5,200 |   |
| Game Monitoring Units Sold           |   | 6,100                                 |   | 11,360 |   |
| WAP and daily-fee games              |   |                                  |   |   |   |
| End of period installed base         |   | 3,780                                 |   | 4,790 |   |
| Average installed base               |   | 3,695                                 |   | 4,670 |   |

 

Our Bally Gaming and Systemsbusiness unit reported an overall increase in revenues of 39% over the prioryear’s quarter. Bally game sales division reported an increase in revenues of27% for the quarter. New units sold increased 30% to 5,200 and the averagenew-unit selling price (excluding OEM games) increased 6% for the quarter to$8,400. Bally Systems revenues increased 96% over the prior year quarter drivenby a 85% increase in game monitoring units shipped to 11,360, a 36% increase inthe average selling price per unit to $1,800, and increased sales of softwarelicenses for the single-wire TITO solution, eTICKETTM, as well as its bonusingand promotions software. Bally Systems recurring hardware and software revenuesincreased to $4.9 million for the quarter, resulting from the larger base ofinstalled systems, which now stands at approximately 240,000 and an increase inthe Bally eSeries installed cashless software. Gaming Operations revenuesincreased 9% compared to the prior year quarter as a result of a 27% increasein the end of period installed base of wide-area progressive (WAP) anddaily-fee games deployed, which now total 1,980 and 2,810, respectively. Thecurrent quarter placements included the continued roll out of the “Cash forLife” WAP game which went live in July in Atlantic City, and continuedplacement of daily fee games such as Playboy and the recently introducedSaturday Night Live series.

 

23

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For the quarter endedSeptember 30, 2003, the overall gross margin percentage for Bally Gaming andSystems increased to 62% compared to 59% in the prior year quarter, thisimprovement is primarily a result of an increase in higher margin systemsrevenues.

 

Selling, general andadministrative expenses increased 54% over the prior year quarter, as a resultof the additional headcount added from acquisitions.  In addition, increased submissions of our products to certaingaming jurisdictions for approval prior to commercialization resulted in an increasein regulatory expenses.  Selling,general and administrative costs as a percentage of this business unit’srevenue increased to 26% in the current year quarter compared to 23% for theprior year quarter. Research and development costs increased 50% for thequarter, resulting from the increase in hardware and software engineers addedduring the current quarter. Total depreciation expense increased 48% over theprior year quarter, driven by the increase in the installed base of wide-areaprogressive and daily fee games.

 

***Casino Operations***

 

Summary financial results and operating statistics(dollars in 000’s):

 
|                                 |   | **Three  Months Ended September 30,** |       |
|--------------------------------------|--------|---------------------------------------|------------|
|                                 |   | **2002**                              |       | **2003** |   |
|                                 |   |                                  |       |   |   |
| Revenues                             |   |                                  |       |   |   |
| Rainbow Casino                       |   | $                                     | 12,667     |   | $ | 12,755 |   |
| Rail  City Casino                    |   | 5,123                                 |       | 5,381 |   |
| Total  revenues                      |   | 17,790                                |       | 18,136 |   |
| Gross  Margin                        |   |                                  |       |   |   |
| Rainbow  Casino                      |   | 7,370                                 |       | 7,752 |   |
| Rail  City Casino                    |   | 2,232                                 |       | 2,408 |   |
| Total  gross margin                  |   | 9,602                                 |       | 10,160 |   |
|                                 |   |                                  |       |   |   |
| Selling,  general and administrative |   | 3,845                                 |       | 4,000 |   |
| Depreciation  and amortization       |   | 742                                   |       | 1,014 |   |
|                                 |   |                                  |       |   |   |
| Operating  income                    |   |                                  |       |   |   |
| Rainbow Casino                       |   | 3,914                                 |       | 4,014 |   |
| Rail  City Casino                    |   | 1,101                                 |       | 1,132 |   |
| Total  operating income              |   | $                                     | 5,015      |   | $ | 5,146 |   |
|                                 |   |                                  |       |   |   |
| Operating  Statistics:               |   |                                  | ** ** |   | ** ** |
| **Average Number of Gaming Devices** |   |                                  | ** ** |   | ** ** |
| **Rainbow Casino**                   |   | **980**                               | ** ** | **905** | ** ** |
| **Rail City Casino**                 |   | **540**                               | ** ** | **570** | ** ** |
| **Total Gaming Devices**             |   | **1,520**                             | ** ** | **1,475** | ** ** |
| Average Number of Table Games        |   | 24                                    |       | 19 |   |

 

Rainbow Casino revenuesincreased 1% over the prior year quarter, as a result of a 10% increase in netwin per day per gaming machine to $148 offset by 7% decrease in the averagenumber of gaming machines. Rail City Casino reported an increase in revenues of5% for the quarter. The revenue improvement at the Rail City Casino wasattributable to a 5% increase in the average number of gaming machines and 3%increase in net win per day per gaming machine to $86.

 

24

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The gross margin forCasino Operations as a percentage of revenues increased to 56% for the quarter.This increase was a result of decreases in certain operating costs. Cost ofcasino revenues includes gaming taxes, rental costs and direct labor includingpayroll taxes and benefits.

 

The overall selling,general and administrative expenses increased 4% over the prior year quarter,as a result of an increase in advertising and promotional expenses. Selling,general and administrative costs as a percentage of revenue remained constantcompared to prior year quarter. Total depreciation expense increased 37% overthe prior year quarter as a result of the additional capital improvements madeto the Rainbow Casino in the prior year.

 

***Discontinued Operations***

 

As previously discussed,in July 2003, we announced that we had entered into definitive agreements forthe sale of our route operations. For purposes of financial reporting, thesetwo business units are now treated as discontinued operations.

 

***Route Operations***

 

Summary financial results and operating statisticsare as follows (dollars in 000’s):

 
|                                 |   | **Three Months Ended September 30,** |       |
|--------------------------------------|--------|--------------------------------------|------------|
|                                 |   | **2002**                             |       | **2003** |   |
| Revenues                             |   |                                 |       |   |   |
| Nevada                               |   | $                                    | 51,147     |   | $ | 50,269 |   |
| Louisiana                            |   | 3,690                                |       | 3,704 |   |
| Total  revenues                      |   | 54,837                               |       | 53,973 |   |
|                                 |   |                                 |       |   |   |
| Gross  Margin                        |   |                                 |       |   |   |
| Nevada                               |   | 7,896                                |       | 7,604 |   |
| Louisiana                            |   | 1,221                                |       | 1,207 |   |
| Total  gross margin                  |   | 9,117                                |       | 8,811 |   |
|                                 |   |                                 |       |   |   |
| Selling,  general and administrative |   | 3,142                                |       | 3,144 |   |
| Depreciation  and amortization       |   | 3,310                                |       | — |   |
|                                 |   |                                 |       |   |   |
| Operating  income                    |   |                                 |       |   |   |
| Nevada                               |   | 2,209                                |       | 5,194 |   |
| Louisiana                            |   | 456                                  |       | 473 |   |
| Total  operating income              |   | $                                    | 2,665      |   | $ | 5,667 |   |
|                                 |   |                                 | ** ** |   | ** ** |
| **Operating Statistics:**            |   |                                 | ** ** |   | ** ** |
| **Average Number of Gaming Devices** |   |                                 | ** ** |   | ** ** |
| **Nevada**                           |   | **8,340**                            | ** ** | **7,840** | ** ** |
| **Louisiana**                        |   | **710**                              | ** ** | **715** | ** ** |
| **Total Gaming Devices**             |   | **9,050**                            | ** ** | **8,555** | ** ** |

 

Revenues from the Nevadaroute operations decreased 2% over the prior year quarter. This decrease wasattributable to a 6% decrease in the average number of gaming machines for thequarter, offset by an increase in the average net win per gaming machine perday of 3% to $68.55 from $66.60. Late in the quarter, the Nevada Routeoperations entered into an agreement to operate 750 games at a third partyowned Las Vegas casino, and the full effect of the revenues and income will berealized in the coming quarter. Gamblers’ Bonus, a cardless players club and player tracking system,continued to have a favorable impact

 

25

----

 

on the net win per day. As of September 30, 2003, the Gamblers’ Bonusproduct was installed in over 4,190 gaming machines at approximately 419locations statewide or 55% of the installed base of gaming machines.

 

Revenues from routeoperations in Louisiana remained constant primarily as the result of a 1%decrease in the net win per gaming machine per day to $55.90 from $56.65 andthe number of units deployed remained relatively flat compared to prior yearquarter.

 

For quarter ended September30, 2003, the overall gross margin percentage for the Route Operations remainedconstant.

 

The overall selling,general and administrative expenses remained constant compared to prior yearquarter. Selling, general and administrative costs as a percentage of revenueremained at 6% compared to prior year quarter.

 

Theresults of the Nevada Route and Louisiana Route operations for the quarterended September 30, 2002 include depreciation and amortization expense. Inaccordance with generally accepted accounting principles, depreciation andamortization for these discontinued operations ceased as of July 1, 2003 as aresult of their designation as assets held for sale. Had depreciation andamortization expense been recorded for the current period, operating income forthe discontinued operations would have decreased by $3.8 million, an increaseof 14% compared to prior year quarter.

 

***Parent Company andother unallocated  income (expense)***

 

Summaryfinancial results (dollars in 000’s):

 
|                           |   | **Three Months Ended September 30,** |       |
|--------------------------------|--------|--------------------------------------|------------|
|                           |   | **2002**                             |       | **2003** |   |
|                           |   |                                 |       |   |   |
| General  and administrative    |   | $                                    | 2,235      |   | $ | 2,933 |   |
| Depreciation  and amortization |   | 544                                  |       | 506 |   |
| Total  Parent company expense  |   | $                                    | 2,779      |   | $ | 3,439 |   |
|                           |   |                                 | ** ** |   | ** ** |
| **Other income (expense):**    |   |                                 | ** ** |   | ** ** |
| Interest  income               |   | $                                    | 48         |   | $ | 43 |   |
| Interest expense               |   | (6,641                               | )          | (5,729 | ) |
| Minority interest              |   | (445                                 | )          | (486 | ) |
| Refinancing charges            |   | —                               |       | (12,293 | ) |
| Other,  net                    |   | 101                                  |       | (351 | ) |
| Total other expense            |   | $                                    | (6,937     | ) | $ | (18,816 | ) |
|                           |   |                                 |       |   |   |
| Income tax expense             |   | $                                    | 4,195      |   | $ | 1,663 |   |

 

The general andadministrative expenses increased 31% over the prior year quarter. Thisincrease was driven by higher corporate litigation cost and higher accruals forcertain elements of our incentive based compensation plan. Total depreciationexpense decreased 7% for the quarter.

 

**Interestexpense (net of interest income) for the current quarter totaled $5.7 millioncompared to $6.6 million in the prior year period. The current quarter lowerinterest expense reflects only 25 days of interest post-refinancing.**

** **

**Werecorded a $12.3 million refinancing charge in the current quarter consistingprimarily of a $5.0 million prepayment penalty for the redemption of ourSubordinated Notes, a non-cash charge of $7.0 million to write off the deferred**

** **

**26**

----

** **

**financingcosts, and $0.3 million of fees and expenses. We recorded a tax benefit fromthese charges totaling approximately $4.8 million.**

** **

Management has considered certaintax planning strategies as permitted by Statement of Financial AccountingStandards No. 109 “Accounting for Income Taxes” (“FASB No. 109”).

 

Beginning July 1,2002, the Company began recognizing Federal income tax expense based on 35% ofpre-tax domestic income and state income taxes at a rate of approximately 4% ofdomestic income.

 

**Results of Operations**

 

The following tablereconciles our earnings before interest, taxes, depreciation andamortization  (“EBITDA”) to ourconsolidated net income from continuing operations (in 000’s):

 
|                                   |   | **Three Months Ended September 30,** |   |
|----------------------------------------|--------|--------------------------------------|--------|
|                                   |   | **2002**                             |   | **2003** |   |
|                                   |   |                                 |   |   |   |
| Net  income from continuing operations |   | $                                    | 6,239  |   | $ | 2,586 |   |
| Income  tax expense                    |   | 4,195                                |   | 1,663 |   |
| Other  expense, net                    |   | 344                                  |   | 837 |   |
| Interest  expense, net                 |   | 6,593                                |   | 5,686 |   |
| Refinancing  charge                    |   | —                               |   | 12,293 |   |
| Operating  income                      |   | 17,371                               |   | 23,065 |   |
| Depreciation  and amortization         |   | 4,550                                |   | 6,348 |   |
| EBITDA  from continuing operations     |   | $                                    | 21,921 |   | $ | 29,413 |   |

 

The following tablesreconcile operating income by business segment to EBITDA:

 

For the three monthsended September 30, 2003 (from continuing operations) (in 000’s):

 
|                      |   | **Operating  Income  (Loss)** |   | **Depreciation  and  Amortization** |   | **EBITDA** |   |
|---------------------------|--------|-------------------------------|--------|-------------------------------------|--------|------------|--------|
|                      |   |                          |   |                                |   |       |   |
| Bally  Gaming and Systems |   | $                             | 21,358 |                                | $      | 4,828      |   | $ | 26,186 |   |
| Casino  Operations        |   | 5,146                         |   | 1,014                               |   | 6,160      |   |
| Corporate  expenses       |   | (3,439                        | )      | 506                                 |   | (2,933     | )      |
|                      |   | $                             | 23,065 |                                | $      | 6,348      |   | $ | 29,413 |   |

 

For the three monthsended September 30, 2002 (from continuing operations) (in 000’s):

 
|                      |   | **Operating  Income  (Loss)** |   | **Depreciation  and  Amortization** |   | **EBITDA** |   |
|---------------------------|--------|-------------------------------|--------|-------------------------------------|--------|------------|--------|
|                      |   |                          |   |                                |   |       |   |
| Bally  Gaming and Systems |   | $                             | 15,135 |                                | $      | 3,264      |   | $ | 18,399 |   |
| Casino  Operations        |   | 5,015                         |   | 742                                 |   | 5,757      |   |
| Corporate  expenses       |   | (2,779                        | )      | 544                                 |   | (2,235     | )      |
|                      |   | $                             | 17,371 |                                | $      | 4,550      |   | $ | 21,921 |   |

 

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The following tablereconciles our earnings before interest, taxes, depreciation andamortization  (“EBITDA”) to ourconsolidated net income from our discontinued operations (in 000’s):

 
|                                     |   | **Three Months Ended September 30,** |   |
|------------------------------------------|--------|--------------------------------------|--------|
|                                     |   | **2002**                             |   | **2003** |   |
|                                     |   |                                 |   |   |   |
| Net  income from discontinued operations |   | $                                    | 19     |   | $ | 3,442 |   |
| Income  tax expense                      |   | 897                                  |   | 1,890 |   |
| Other  expense                           |   | 172                                  |   | 40 |   |
| Interest  (income) expense, net          |   | (238                                 | )      | 295 |   |
| Operating  income                        |   | 850                                  |   | 5,667 |   |
| Depreciation  and amortization           |   | 3,449                                |   | — |   |
| EBITDA  from discontinued operations     |   | $                                    | 4,299  |   | $ | 5,667 |   |

 

For the three monthsended September 30, 2003 (from discontinued operations) (in 000’s):

 
|              |   | **Operating  Income** |   | **Depreciation  and  Amortization** |   | **EBITDA** |   |
|-------------------|--------|-----------------------|--------|-------------------------------------|--------|------------|--------|
|              |   |                  |   |                                |   |       |   |
| Route  Operations |   | $                     | 5,667  |                                | $      | —     |   | $ | 5,667 |   |
|                   |        |                       |        |                                     |        |            |        |  |  |  |

 

For the three monthsended September 30, 2002 (from discontinued operations) (in 000’s):

 
|                               |   | **Operating  Income  (Loss)** |   | **Depreciation  and  Amortization** |   | **EBITDA** |   |
|------------------------------------|--------|-------------------------------|--------|-------------------------------------|--------|------------|--------|
|                               |   |                          |   |                                |   |       |   |
| Route  Operations                  |   | $                             | 2,665  |                                | $      | 3,310      |   | $ | 5,975 |   |
| Wall  Machines and Amusement Games |   | (1,815                        | )      | 139                                 |   | (1,676     | )      |
|                               |   | $                             | 850    |                                | $      | 3,449      |   | $ | 4,299 |   |

 

We believe that the analysis of EBITDA is a usefuladjunct to operating income, net income, cash flows and other GAAP-basedmeasures. However, EBITDA should not be construed as an alternative to netincome (loss) or cash flows from operating, investing and financing activitiesdetermined in accordance with GAAP or as a measure of liquidity. EBITDA is acommon measure of performance in the gaming industry but may not be comparableto similarly titled measures reported by other companies. We disclose EBITDAprimarily because it is a performance measure used by management in evaluatingthe performance of our business units and is one of several performancemeasures used in our management incentive plan.  Additionally, EBITDA is utilized as a performance measure incovenants for our bank credit agreement.

 

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**ITEM 3.****                            ****QUANTITATIVE****AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

***Currency Rate Fluctuations***

 

We derive revenues fromour non-U.S. subsidiaries, all of which revenues are denominated in their localcurrencies, and their results are affected by changes in the relative values ofnon-U.S. currencies and the U.S. dollar. Most of the currencies in countries inwhich we have foreign operations strengthened versus the U.S. dollar in 2002and 2003, which resulted in assets and liabilities denominated in localcurrencies being translated into more dollars. We do not currently utilizehedging instruments.

 

***Market risks***

 

During the normal courseof our business, we are routinely subjected to a variety of market risks,examples of which include, but are not limited to, interest and currency ratemovements, collectibility of accounts and notes receivable, and recoverabilityof residual values on leased assets. We continually assess these risks and haveestablished policies and practices designed to protect against the adverseeffects of these and other potential exposures. Although we do not anticipateany material losses in these risk areas, no assurances can be made thatmaterial losses will not be incurred in these areas in the future.

 

We have performed asensitivity analysis of our financial instruments, which consist of our cashand cash equivalents and debt. We have no derivative financial instruments. Inperforming the sensitivity analysis, we define risk of loss as the hypotheticalimpact on earnings of changes in the market interest rates or currency exchangerates.

 

The results of thesensitivity analysis at September 30, 2003, are as follows:

 

Interest Rate Risk:

 

Upon completion of the Refinancingin September 2003, we had total debt of approximately $352.3 million,consisting primarily of the new $275 million term loan and the initial $70million borrowing on the revolver. The bank facility loans are broken intoindividual loans with varying terms from one to six months. The interest ratefor each loan is set on the borrowing date and is effective for the termoutstanding. If the LIBOR rates were to increase or decrease by 100 basispoints, with all other factors remaining constant, earnings would decrease orincrease by approximately $3.6 million on a pre-tax basis.

 

Foreign Currency ExchangeRate 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 earnings reported in the consolidated group ofapproximately $78,000.

 

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**ITEM 4.****                            ****DISCLOSURE CONTROLS AND PROCEDURES**

 

The Company’s management, includingthe Chief Executive Officer and Chief Financial Officer, conducted anevaluation of the effectiveness of the design and operation of the company’sdisclosure controls and procedures as defined in Exchange Act Rule 13a-15(e) asdescribed at the end of the period covered by this report.  Based on that evaluation, the ChiefExecutive Officer and Chief Financial Officer concluded that as of the end ofthe period covered by this report, the company’s disclosure controls andprocedures were effective.  During theperiod 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**

 

**ITEM1.****          LegalProceedings**

 

Therehave been no material changes in any legal proceedings since filing of theCompany’s annual report on Form 10-K for the fiscal year ended June 30, 2003.

 

**ITEM6.****                             Exhibitsand Reports on Form 8-K**

 

a.                                       Exhibits

 
| 31.1   |   | Certification of Chief  Executive Officer, pursuant to Rule 15d-15(e) 4 of the Securities Act of  1934, as amended.                                   |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                  |
| 31.2   |   | Certification of Chief  Financial Officer, pursuant to Rule 15d-15(e) 4 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 2002. |
|   |   |                                                                                                                                                  |
| 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 2002. |

 

b.                                      Reportson Form 8-K

 
| • |   | The Company  filed a Form 8-K on July 2, 2003 announcing the definitive agreement for  significant divestitures of non-core assets.                                                                     |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| • |   | The Company  filed a Form 8-K on July 18, 2003 announcing the completion of the sale of  Bally Wulff 100% of the stock of its wholly-owned subsidiary and received the  sale proceeds of $16.5 million. |
| • |   | The Company  filed a Form 8-K on August 4, 2003, its press release for the financial  results for the period ended June 30, 2003.                                                                       |
| • |   | The Company  filed a Form 8-K on August 13, 2003 announcing the tender offer and consent  solicitation for the $150,000,00 aggregate principal amount of its 10% Senior  Subordinated Notes due 2007.   |
| • |   | The Company filed  a Form 8-K on September 11, 2003 announcing the closing of the tender offer  and consent solicitation for the $150,000,00 and the funding of a new $400  million bank loan.          |

 

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SIGNATURES

 

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

 

 
| ALLIANCE GAMING CORPORATION | Date: November  11, 2003                |
|-----------------------------|-----------------------------------------|
| (Registrant)                |                                    |
|                        |                                    |   |
|                        |                                    |   |
| By                          | /s/ Robert L.  Miodunski                |   |   |
|                        | President and  Chief Executive Officer  |   |
|                        | (Principal  Executive Officer)          |   |
|                        |                                    |   |
|                        |                                    |   |
| By                          | /s/ Robert L.  Saxton                   |   |   |
|                        | Sr. Vice  President, Chief Financial    |   |
|                        | Officer and  Treasurer (Principal       |   |
|                        | Financial  and Accounting Officer) |   |
|                             |                                         |  |  |  |

 

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