**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C.  20549**

 

**FORM 10-Q**

 
| **ý**                                                | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934**  |
|-----------------------------------------------------------|-----------------------------------------------------------------------------------------------------|
|                                                      |                                                                                                |
| **For the quarterly period ended December 31, 2003** |
|                                                      |                                                                                                |
| **OR**                                                    |
|                                                      |                                                                                                |
| **o**                                                     | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |

 

**Forthe transition period from           to          **

 

**CommissionFile Number 0-4281**

 

**ALLIANCEGAMING CORPORATION**

(Exact name of registrant as specified in itscharter)

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

 

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

ý  Yes   o  No

 

The number of shares of Common Stock, $0.10 par value, outstanding asof February 2, 2003, according to the records of the registrant’sregistrar and transfer agent was 50,482,000.

 

 

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ALLIANCE GAMING CORPORATION

FORM 10-Q

 

For the Quarter Ended December 31, 2003

 

**INDEX**

 
| **PART I.**    |                  | **FINANCIAL  INFORMATION**                                                                                               |   |
|----------------|-----------------------|--------------------------------------------------------------------------------------------------------------------------|--------|
|           |                  |
| Item 1.        |                  | Unaudited Financial Statements                                                                                           |   |
|           |                  |                                                                                                                     |   |
|           |                  | Unaudited Condensed Consolidated Balance  Sheets as of June 30, 2003 and December 31, 2003                     |   |
|           |                  |                                                                                                                     |   |
|           |                  | Unaudited Condensed Consolidated Statements  of Operations for the three months ended December 31, 2002 and 2003    |   |
|           |                  |                                                                                                                     |   |
|           |                  | Unaudited Condensed Consolidated Statements  of Operations for the six months ended December 31, 2002 and 2003      |   |
|           |                  |                                                                                                                     |   |
|           |                  | Unaudited Condensed Consolidated Statement  of Stockholders’ Equity for the six months ended December 31, 2003 |   |
|           |                  |                                                                                                                     |   |
|           |                  | Unaudited Condensed Consolidated Statements  of Cash Flows for the six months ended December 31, 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 4.        |                  | Submission of matters to a vote of Security Holders                                                                      |   |
|           |                  |                                                                                                                     |   |
| Item 6.        |                  | Exhibits and Reports on Form 8-K                                                                                         |   |
|           |                  |                                                                                                                     |   |
| **SIGNATURES** |                  |
|                |                       |                                                                                                                          |        |  |  |  |  |

 

2

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**PART 1****ALLIANCE GAMING CORPORATION AND SUBSIDIARIESUNAUDITED CONDENSED CONSOLIDATEDBALANCE SHEETS**

(In 000’s, except share data)

 
|                                                                                                               |   | **June 30,  2003** | ** ** | **December 31****,  2003** | ** ** |
|--------------------------------------------------------------------------------------------------------------------|--------|-------------------------|------------|---------------------------------|------------|
| ASSETS                                                                                                             |   |                    |       |                            |       |
| Current  assets:                                                                                                   |   |                    |       |                            |       |
| Cash and cash equivalents                                                                                          |   | $                       | 38,884     |                            | $          | 72,254 |   |
| Accounts and notes receivable, net of  allowance for doubtful accounts of $6,962 and $7,427                        |   | 98,368                  |       | 106,731                         |       |
| Inventories, net of reserves of $6,503 and  $6,498                                                                 |   | 32,102                  |       | 39,274                          |       |
| Deferred tax assets, net                                                                                           |   | 44,821                  |       | 38,061                          |       |
| Other current assets                                                                                               |   | 8,010                   |       | 9,383                           |       |
| Total  current assets                                                                                              |   | 222,185                 |       | 265,703                         |       |
| Long-term investments (restricted)                                                                                 |   | 864                     |       | 2,611                           |       |
| Long-term receivables, net of allowance for  doubtful accounts of $15 and $10                                      |   | 14,865                  |       | 7,173                           |       |
| Notes receivable from Sierra Design  Group  (Note 8)                                                          |   | —                  |       | 61,025                          |       |
| Leased gaming equipment, net of accumulated  depreciation of $15,703 and $19,647                                   |   | 25,792                  |       | 30,221                          |       |
| Property, plant and equipment, net of  accumulated depreciation and amortization of $20,495 and $23,737            |   | 56,894                  |       | 59,876                          |       |
| Goodwill, net of accumulated amortization  of $5,941 and $5,941                                                    |   | 63,040                  |       | 66,225                          |       |
| Intangible assets, net of accumulated  amortization of $12,109 and $8,152                                          |   | 26,631                  |       | 29,083                          |       |
| Assets of discontinued operations held for  sale                                                                   |   | 114,314                 |       | 106,886                         |       |
| Other assets, net of reserves of $1,788 and  $1,788                                                                |   | 580                     |       | 6,235                           |       |
| Total assets                                                                                                       |   | $                       | 525,165    |                            | $          | 635,038 |   |
| LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                          |   |                    |       |                            |       |
| Current liabilities:                                                                                               |   |                    |       |                            |       |
| Accounts payable                                                                                                   |   | $                       | 22,726     |                            | $          | 20,633 |   |
| Accrued liabilities                                                                                                |   | 30,183                  |       | 23,868                          |       |
| Jackpot liabilities                                                                                                |   | 10,588                  |       | 12,785                          |       |
| Current maturities of long-term debt                                                                               |   | 3,537                   |       | 3,069                           |       |
| Liabilities of discontinued operations held  for sale                                                              |   | 16,186                  |       | 16,647                          |       |
| Total current liabilities                                                                                          |   | 83,220                  |       | 77,002                          |       |
| Long-term debt, net                                                                                                |   | 341,678                 |       | 422,217                         |       |
| Deferred tax liabilities                                                                                           |   | 3,920                   |       | 6,006                           |       |
| Other liabilities                                                                                                  |   | 3,387                   |       | 5,048                           |       |
| Minority interest                                                                                                  |   | 1,330                   |       | 1,216                           |       |
| Total liabilities                                                                                                  |   | 433,535                 |       | 511,489                         |       |
| 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 50,295,000 shares issued              |   | 4,996                   |       | 5,033                           |       |
| Treasury stock at cost, 513,000 shares                                                                             |   | (501                    | )          | (501                            | )          |
| Additional paid-in capital                                                                                         |   | 163,267                 |       | 167,724                         |       |
| Accumulated other comprehensive income                                                                             |   | 1,287                   |       | 3,940                           |       |
| Accumulated deficit                                                                                                |   | (77,431                 | )          | (52,659                         | )          |
| Total stockholders’ equity                                                                                    |   | 91,630                  |       | 123,549                         |       |
| Total liabilities and stockholders’ equity                                                                    |   | $                       | 525,165    |                            | $          | 635,038 |   |

 

See notes to unaudited condensed consolidatedfinancial statements.

 

3

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**ALLIANCE GAMING CORPORATION AND SUBSIDIARIESUNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

(In 000’s, except per share data)

 
|                                                                                         |   | **Three  Months Ended December 31,** |   |
|----------------------------------------------------------------------------------------------|--------|-------------------------------------------|--------|
|                                                                                         |   | **2002**                                  |   | **2003** | ** ** |
| Revenues:                                                                                    |   |                                      |   |   |   |
| Gaming equipment and systems                                                                 |   | $                                         | 86,627 |   | $ | 96,319 |   |
| Casino operations                                                                            |   | 11,600                                    |   | 12,312 |   |
|                                                                                         |   | 98,227                                    |   | 108,631 |   |
| Costs and expenses:                                                                          |   |                                      |   |   |   |
| Cost of gaming equipment and systems                                                         |   | 39,663                                    |   | 38,780 |   |
| Cost of casino operations                                                                    |   | 5,223                                     |   | 4,884 |   |
| Selling, general and administrative                                                          |   | 22,095                                    |   | 24,248 |   |
| Research and development costs                                                               |   | 5,158                                     |   | 6,740 |   |
| Depreciation and amortization                                                                |   | 4,847                                     |   | 6,445 |   |
|                                                                                         |   | 76,986                                    |   | 81,097 |   |
|                                                                                         |   |                                      |   |   |   |
| Operating income                                                                             |   | 21,241                                    |   | 27,534 |   |
|                                                                                         |   |                                      |   |   |   |
| Other income (expense):                                                                      |   |                                      |   |   |   |
| Interest income                                                                              |   | 79                                        |   | 83 |   |
| Interest expense                                                                             |   | (6,554                                    | )      | (3,869 | ) |
| Minority interest                                                                            |   | (309                                      | )      | (541 | ) |
| Other, net                                                                                   |   | 266                                       |   | (545 | ) |
|                                                                                         |   |                                      |   |   |   |
| Income from continuing operations before  income taxes                                       |   | 14,723                                    |   | 22,662 |   |
| Income tax expense                                                                           |   | 6,147                                     |   | 8,444 |   |
| Net income from continuing operations                                                        |   | 8,576                                     |   | 14,218 |   |
|                                                                                         |   |                                      |   |   |   |
| Discontinued operations:                                                                     |   |                                      |   |   |   |
| Income from discontinued operations of wall  machines and amusement games business unit, net |   | 895                                       |   | — |   |
| Income from discontinued operations of  Nevada Route, net                                    |   | 1,325                                     |   | 3,077 |   |
| Income from discontinued operations of  Louisiana Route, net                                 |   | 284                                       |   | 420 |   |
| Income from discontinued operations of Rail  City Casino                                     |   | 773                                       |   | 1,029 |   |
| Income from discontinued operations                                                          |   | 3,277                                     |   | 4,526 |   |
| Net income                                                                                   |   | $                                         | 11,853 |   | $ | 18,744 |   |
|                                                                                         |   |                                      |   |   |   |
| Basic earnings per share:                                                                    |   |                                      |   |   |   |
| Continuing operations                                                                        |   | $                                         | 0.17   |   | $ | 0.29 |   |
| Discontinued operations                                                                      |   | 0.07                                      |   | 0.09 |   |
|                                                                                         |   | $                                         | 0.24   |   | $ | 0.38 |   |
| Diluted earnings per share:                                                                  |   |                                      |   |   |   |
| Continuing operations                                                                        |   | $                                         | 0.17   |   | $ | 0.28 |   |
| Discontinued operations                                                                      |   | 0.07                                      |   | 0.09 |   |
|                                                                                         |   | $                                         | 0.24   |   | $ | 0.37 |   |
|                                                                                         |   |                                      |   |   |   |
| Weighted average common shares outstanding                                                   |   | 49,208                                    |   | 49,741 |   |
|                                                                                         |   |                                      |   |   |   |
| Weighted average common and common share  equivalents outstanding                            |   | 50,316                                    |   | 50,930 |   |

 

See notes to unaudited condensed consolidatedfinancial statements.

 

4

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**ALLIANCEGAMING CORPORATION AND SUBSIDIARIES**

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

(In 000’s, except per share data)

 
|                                                                                       |   | **Six Months  Ended December 31,** |    |
|--------------------------------------------------------------------------------------------|--------|-----------------------------------------|---------|
|                                                                                       |   | **2002**                                |    | **2003** | ** ** |
| Revenues:                                                                                  |   |                                    |    |   |   |
| Gaming equipment and systems                                                               |   | $                                       | 150,166 |   | $ | 184,787 |   |
| Casino operations                                                                          |   | 24,267                                  |    | 25,067 |   |
|                                                                                       |   | 174,433                                 |    | 209,854 |   |
| Costs and expenses:                                                                        |   |                                    |    |   |   |
| Cost of gaming equipment and systems                                                       |   | 65,921                                  |    | 72,017 |   |
| Cost of casino operations                                                                  |   | 10,520                                  |    | 9,887 |   |
| Selling, general and administrative                                                        |   | 42,195                                  |    | 53,313 |   |
| Research and development costs                                                             |   | 9,133                                   |    | 12,703 |   |
| Depreciation and amortization                                                              |   | 9,153                                   |    | 12,467 |   |
|                                                                                       |   | 136,922                                 |    | 160,387 |   |
|                                                                                       |   |                                    |    |   |   |
| Operating income                                                                           |   | 37,511                                  |    | 49,467 |   |
|                                                                                       |   |                                    |    |   |   |
| Other income (expense):                                                                    |   |                                    |    |   |   |
| Interest income                                                                            |   | 127                                     |    | 126 |   |
| Interest expense                                                                           |   | (13,195                                 | )       | (9,598 | ) |
| Minority interest                                                                          |   | (754                                    | )       | (1,027 | ) |
| Refinancing charge                                                                         |   | —                                  |    | (12,293 | ) |
| Other, net                                                                                 |   | 366                                     |    | (899 | ) |
|                                                                                       |   |                                    |    |   |   |
| Income from continuing operations before  income taxes                                     |   | 24,055                                  |    | 25,776 |   |
| Income tax expense                                                                         |   | 9,956                                   |    | 9,710 |   |
| Net income from continuing operations                                                      |   | 14,099                                  |    | 16,066 |   |
|                                                                                       |   |                                    |    |   |   |
| Discontinued operations:                                                                   |   |                                    |    |   |   |
| Loss from discontinued operations of wall  machines and amusement games business unit, net |   | (726                                    | )       | — |   |
| Income from discontinued operations of  Nevada Route, net                                  |   | 2,690                                   |    | 6,209 |   |
| Income from discontinued operations of  Louisiana Route, net                               |   | 559                                     |    | 730 |   |
| Income from discontinued operations of Rail  City Casino                                   |   | 1,489                                   |    | 1,767 |   |
| Income from discontinued operations                                                        |   | 4,012                                   |    | 8,706 |   |
| Net income                                                                                 |   | $                                       | 18,111  |   | $ | 24,772 |   |
|                                                                                       |   |                                    |    |   |   |
| Basic earnings per share:                                                                  |   |                                    |    |   |   |
| Continuing operations                                                                      |   | $                                       | 0.29    |   | $ | 0.32 |   |
| Discontinued operations                                                                    |   | 0.08                                    |    | 0.18 |   |
|                                                                                       |   | $                                       | 0.37    |   | $ | 0.50 |   |
| Diluted earnings per share:                                                                |   |                                    |    |   |   |
| Continuing operations                                                                      |   | $                                       | 0.29    |   | $ | 0.32 |   |
| Discontinued operations                                                                    |   | 0.08                                    |    | 0.17 |   |
|                                                                                       |   | $                                       | 0.37    |   | $ | 0.49 |   |
|                                                                                       |   |                                    |    |   |   |
| Weighted average common shares outstanding                                                 |   | 48,461                                  |    | 49,660 |   |
|                                                                                       |   |                                    |    |   |   |
| Weighted average common and common share  equivalents outstanding                          |   | 49,560                                  |    | 50,814 |   |

 

See notes to unaudited condensed consolidatedfinancial statements.

 

5

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**ALLIANCEGAMING CORPORATION AND SUBSIDIARIES**

**UNAUDITEDCONDENSED CONSOLIDATED STAT****EMENT OF STOCKHOLDERS’ EQUITY**

Six Months Ended December 31, 2003

(In 000’s)

 
|                                            |   |        | ** ** | **Series E  Special Stock** | ** ** | **Treasury  Stock** | ** ** | **Additional  Paid-in  Capital** | ** ** | **Accumulated  Other  Comprehensive  Income** | ** ** | **Accum.  Deficit** | ** ** | **Total  Stock-  holders’  Equity** | ** ** |
|-------------------------------------------------|--------|-------------|------------|-----------------------------|------------|---------------------|------------|----------------------------------|------------|-----------------------------------------------|------------|---------------------|------------|------------------------------------------|------------|
|                                            |
| **Common  Stock**                               |
| **Shares**                                      |   | **Dollars** |
|                                            |   |        |       |                        |       |                |       |                             |       |                                          |       |                |       |                                     |       |   |   |
| Balances at June 30, 2003                  |   | 49,933      |       | $                           | 4,996      |                | $          | 12                               |       | $                                             | (501       | )                   | $          | 163,267                                  |       | $ | 1,287 |   | $ | (77,431 | ) | $ | 91,630 |   |
|                                            |   |        |       |                        |       |                |       |                             |       |                                          |       |                |       |                                     |       |   |   |
| Net income                                      |   | —      |       | —                      |       | —              |       | —                           |       | —                                        |       | —              |       | 24,772                                   |       | 24,772 |   |
| Foreign currency translation adjustment         |   | —      |       | —                      |       | —              |       | —                           |       | —                                        |       | 2,653               |       | —                                   |       | 2,653 |   |
| Total comprehensive income                      |   |        |       |                        |       |                |       |                             |       |                                          |       |                |       |                                     |       | 27,425 |   |
| Shares issued upon exercise of options          |   | 362         |       | 37                          |       | —              |       | —                           |       | 2,870                                         |       | —              |       | —                                   |       | 2,907 |   |
| Tax benefit of employee stock option  exercises |   | —      |       | —                      |       | —              |       | —                           |       | 1,587                                         |       | —              |       | —                                   |       | 1,587 |   |
|                                            |   |        |       |                        |       |                |       |                             |       |                                          |       |                |       |                                     |       |   |   |
| Balances at December 31, 2003              |   | 50,295      |       | $                           | 5,033      |                | $          | 12                               |       | $                                             | (501       | )                   | $          | 167,724                                  |       | $ | 3,940 |   | $ | (52,659 | ) | $ | 123,549 |   |

 

See notes to unaudited condensed consolidatedfinancial statements.

 

6

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**ALLIANCEGAMING CORPORATION AND SUBSIDIARIESUNAUDITED CONDENSED CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

(In 000’s)

 
|                                                                                                        |   | **Six Months  Ended December 31,** |   |
|-------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------|--------|
|                                                                                                        |   | **2002**                                |   | **2003** | ** ** |
| Cash flows from operating activities of  continuing operations:                                             |   |                                    |   |   |   |
| Net income                                                                                                  |   | $                                       | 18,111 |   | $ | 24,772 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities of continuing operations: |   |                                    |   |   |   |
| Income from discontinued operations                                                                         |   | (4,012                                  | )      | (8,706 | ) |
| Depreciation and amortization                                                                               |   | 9,153                                   |   | 12,467 |   |
| Refinancing charge                                                                                          |   | —                                  |   | 12,293 |   |
| Deferred income taxes                                                                                       |   | 7,507                                   |   | 10,433 |   |
| Provision for losses on receivables                                                                         |   | 628                                     |   | 526 |   |
| Other                                                                                                       |   | 531                                     |   | (1,099 | ) |
| Change in operating assets and liabilities:                                                                 |   |                                    |   |   |   |
| Accounts and notes receivable                                                                               |   | (32,540                                 | )      | (2,019 | ) |
| Inventories                                                                                                 |   | (847                                    | )      | (2,493 | ) |
| Other current assets                                                                                        |   | (800                                    | )      | (1,023 | ) |
| Accounts payable                                                                                            |   | 1,806                                   |   | (2,072 | ) |
| Accrued liabilities and jackpot liabilities                                                                 |   | 4,647                                   |   | (2,924 | ) |
| Net cash provided by operating activities  of continuing operations                                         |   | 4,184                                   |   | 40,155 |   |
|                                                                                                        |   |                                    |   |   |   |
| Cash flows from investing activities of  continuing operations:                                             |   |                                    |   |   |   |
| Advances and notes receivable due from  Sierra Design Group                                                 |   | —                                  |   | (61,025 | ) |
| Additions to property, plant and equipment                                                                  |   | (4,901                                  | )      | (3,815 | ) |
| Additions to leased gaming equipment                                                                        |   | (10,010                                 | )      | (15,957 | ) |
| Additions to other long-term assets                                                                         |   | (1,879                                  | )      | (10,414 | ) |
| Acquisitions, net of cash acquired                                                                          |   | (3,038                                  | )      | (3,879 | ) |
| Proceeds from sale of assets of  discontinued operations                                                    |   | —                                  |   | 16,500 |   |
| Net cash used in investing activities of  continuing operations                                             |   | (19,828                                 | )      | (78,590 | ) |
|                                                                                                        |   |                                    |   |   |   |
| Cash flows from financing activities of  continuing operations:                                             |   |                                    |   |   |   |
| Debt issuance costs                                                                                         |   | —                                  |   | (6,954 | ) |
| Premium and consent fees paid on redemption  of subordinated notes                                          |   | —                                  |   | (5,399 | ) |
| Proceeds from issuance of long-term debt                                                                    |   | —                                  |   | 350,000 |   |
| Net change in revolving credit facility                                                                     |   | —                                  |   | 70,000 |   |
| Payoff of debt from refinancing                                                                             |   | —                                  |   | (337,625 | ) |
| Reduction of long-term debt                                                                                 |   | (1,991                                  | )      | (1,349 | ) |
| Proceeds from exercise of stock options                                                                     |   | 1,792                                   |   | 2,907 |   |
| Net cash (used in) provided by financing  activities of continuing operations                               |   | (199                                    | )      | 71,580 |   |
|                                                                                                        |   |                                    |   |   |   |
| Effect of exchange rate changes on cash                                                                     |   | 93                                      |   | 130 |   |
|                                                                                                        |   |                                    |   |   |   |
| Cash and cash equivalents provided by  discontinued operations                                              |   | 8,444                                   |   | 95 |   |
|                                                                                                        |   |                                    |   |   |   |
| Cash and cash equivalents:                                                                                  |   |                                    |   |   |   |
| (Decrease) increase for the period                                                                          |   | (7,306                                  | )      | 33,370 |   |
| Balance, beginning of period                                                                                |   | 31,800                                  |   | 38,884 |   |
| Balance, end of period                                                                                      |   | $                                       | 24,494 |   | $ | 72,254 |   |

 

See notes to unaudited condensed consolidatedfinancial statements.

 

7

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**ALLIANCEGAMING CORPORATION AND SUBSIDIARIESNOTES TO UNAUDITED CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS**

 

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

 

*Principles of consolidation*

 

The accompanying unaudited interim condensed consolidated financial statementsreflect all adjustments, consisting of normal recurring adjustments, whichmanagement believes are necessary to present fairly the financial position,results of operations and cash flows of Alliance Gaming Corporation (“Alliance”or the “Company”) for the respective periods presented. The results ofoperations for an interim period are not necessarily indicative of the resultsthat may be expected for any other interim period or for the year as a whole.The accompanying 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 endedJune 30, 2003.

 

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

 

The Company, through a wholly-owned subsidiary, is the general partnerof Rainbow Casino Vicksburg Partnership, L.P. (“RCVP”), the limited partnershipthat operates the Rainbow Casino. The limited partner, Rainbow Corporation, anindependent third party, is entitled to receive 10% of the net available cashflows after debt service and other items, as defined (which amount increases to20% of such amount for the proportional revenues above $35.0 million) eachyear through December 31, 2010. The Company holds the remaining economicinterest in the partnership and consolidates the partnership.

 

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

 

During the fiscal year ended June 30, 2003, the Company acquired100 percent of the stock of three companies: Casino Management Systems SoftwareCompany (“CMS”) on November 13, 2002, Micro Clever Consulting Systems Company(“MCC”) on April 9, 2003 and Honeyframe Systems Company (“HSC”) onMay 28, 2003.

 

On December 31, 2003, the Companyacquired 100% of the assets of U.K. based Crown Gaming from Crown LeisureLimited (“Crown”). The total purchase price in cash was $3.9 million of whichapproximately $1.0 million was allocated to goodwill. The acquisition, whichincludes Crown’s distributorship agreements for a wide variety of automatedtable games and video bingo machines, strategically builds on the Company’sfocus towards future growth projected in England.

 

All significant intercompany accounts and transactions have beeneliminated. Certain reclassifications have been made to prior year financialstatements to conform to the current year presentation.

 

*Revenue recognition*

 

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

 

Revenue from sales of computerized monitoring systems is recognized inaccordance with the AICPA’s Statement of Position 97-2 (“SOP 97-2”) “SoftwareRevenue Recognition.”  In accordancewith the provisions of SOP 97-2, the contracts for the sales of computerizedmonitoring units are considered to have “multiple elements” because theyinclude hardware, software, installation, supervision, training, andpost-contract customer support. Accordingly, revenues from the sale of systemsare deferred and begin to be recognized at the point when the

 

8

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system is deemed to be functionally operational, and the residualmethod is used to recognize revenue for the remaining elements as they aredelivered, each having vendor-specific objective evidence of relative fairvalues. Post-contract customer support revenues are recognized over the periodof the support agreement (generally one year).

 

Our Bally Gaming and Systems business unit earns revenues fromrecurring revenue sources that consist of the operations of the wide-areaprogressive jackpot systems and revenues from gaming machines placed in acasino on a daily lease or rental basis. Revenue from these sources isrecognized based on the contractual terms of the participation or rentalagreements and is generally based on a share of money wagered, a share of thenet winnings, or on a fixed daily rental rate basis.

 

In accordance with industry practice, the Company recognizes gamingrevenues in its route and casino operations as the net win from gaming machineoperations, which is the difference between coins and currency deposited intothe machines and payments to customers and, for other games, the differencebetween gaming wins and losses.  TheCompany recognizes, total net win from gaming machines as revenues for routeoperations, which the Company operates pursuant to revenue-sharingarrangements, and revenue-sharing payments (either fixed or variable) as a costof route operations.

 

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

 

*Capitalized Costs*

 

During fiscal year 2004, Bally Gaming and Systems has experienced analmost four fold increase in the volume of product submissions to the variousdomestic regulatory bodies, each of which charge fees for testing and approvalof each product. Product testing costs are capitalized once technologicalfeasibility has been established and are amortized, generally over three yearperiod once the product is placed in service. Product testing costs related toprojects that are discontinued are expensed when such determination is made.The year to date fees incurred for such regulatory approvals exceeded $5.1million. Of these amounts incurred, for the quarter ended December 31,2003, the Company capitalized a total of $2.4 million that was directlyattributable to products that have been approved.

 

*Recently Issue Accounting Pronouncements*

 

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

 

In December 2003, the FASB issued Statement of Financial AccountingStandard No. 132-R “Employers’ Disclosures about Pensions and OtherPostretirement Benefits – an amendment of FASB Statements No. 87,88, and106.”  This statement revises employers’disclosures about pension plans and other postretirement benefit plans.  The Company has reviewed this pronouncement and determined it is notapplicable.

 

9

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

 

The following computation of basic and diluted earnings per share andweighted average common and common share equivalents outstanding, are asfollows (in 000’s except per share amounts):

 
|                                                              |   | **Three  Months Ended  December 31,** | ** ** | **Six Months  Ended  December 31,** | ** ** |
|-------------------------------------------------------------------|--------|--------------------------------------------|------------|------------------------------------------|------------|
|                                                              |   | **2002**                                   |       | **2003**                                 | ** ** | **2002** | ** ** | **2003** | ** ** |
|                                                              |   |                                       |       |                                     |       |   |   |   |   |
| Net income from continuing operations                             |   | $                                          | 8,576      |                                     | $          | 14,218 |   | $ | 14,099 |   | $ | 16,066 |   |
| Net income from discontinued operations                           |   | 3,277                                      |       | 4,526                                    |       | 4,012 |   | 8,706 |   |
| Net income                                                        |   | $                                          | 11,853     |                                     | $          | 18,744 |   | $ | 18,111 |   | $ | 24,772 |   |
|                                                              |   |                                       |       |                                     |       |   |   |   |   |
| Weighted average common shares outstanding                        |   | 49,208                                     |       | 49,741                                   |       | 48,461 |   | 49,660 |   |
| Effect of dilutive securities                                     |   | 1,108                                      |       | 1,189                                    |       | 1,099 |   | 1,154 |   |
| Weighted average common and common share  equivalents outstanding |   | 50,316                                     |       | 50,930                                   |       | 49,560 |   | 50,814 |   |
|                                                              |   |                                       |       |                                     |       |   |   |   |   |
| Earnings per basic share:                                         |   |                                       |       |                                     |       |   |   |   |   |
| Income from continued operations                                  |   | $                                          | 0.17       |                                     | $          | 0.29 |   | $ | 0.29 |   | $ | 0.32 |   |
| Income from discontinued operations                               |   | 0.07                                       |       | 0.09                                     |       | 0.08 |   | 0.18 |   |
|                                                              |   | $                                          | 0.24       |                                     | $          | 0.38 |   | $ | 0.37 |   | $ | 0.50 |   |
|                                                              |   |                                       |       |                                     |       |   |   |   |   |
| Earnings per diluted share:                                       |   |                                       |       |                                     |       |   |   |   |   |
| Income from continued operations                                  |   | $                                          | 0.17       |                                     | $          | 0.28 |   | $ | 0.29 |   | $ | 0.32 |   |
| Income from discontinued operations                               |   | 0.07                                       |       | 0.09                                     |       | 0.08 |   | 0.17 |   |
|                                                              |   | $                                          | 0.24       |                                     | $          | 0.37 |   | $ | 0.37 |   | $ | 0.49 |   |

 

Diluted earnings per share represent the potential dilution that couldoccur if all dilutive securities outstanding were exercised. Certain securitiesdo not have a dilutive effect because their exercise price exceeds the averagefair market value of the underlying stock during the respective period. Suchsecurities are excluded from the diluted earnings per share calculation and consistof the following (in 000’s):

 
|          |   | **Three  Months Ended  December 31,** | ** ** | **Six Months  Ended  December 31,** | ** ** |
|---------------|--------|--------------------------------------------|------------|------------------------------------------|------------|
|          |   | **2002**                                   |       | **2003**                                 | ** ** | **2002** | ** ** | **2003** | ** ** |
| Stock options |   | 486                                        |       | 3                                        |       | 572 |   | 56 |   |

 

The Company accounts for its stock-based employee compensation awardsin accordance 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 ofthe underlying stock on the date of grant, no compensation expense isrecognized.

 

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 forStock-Based Compensation-Transition and Disclosure”. This Statement amends FASBNo. 123, to provide alternative methods of transition for a voluntary change tothe fair value based method of accounting for stock-based employeecompensation. In addition, this Statement amends the disclosure requirements ofFASB No. 123 and APB Opinion No. 28 “Interim Financial Reporting” to requireprominent disclosures in both annual and interim financial statements about themethod of

 

10

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accounting for stock-based employee compensation and the effect of themethod used on reported results.  Underthe fair value method, compensation costs are measured using an options pricingmodel and amortized over the estimated life of the option, which is generallythree to ten years, with option forfeitures accounted for at the time of theforfeiture, and all amounts are reflected net of tax.  The historical and pro forma net income (assuming an after-taxcharge for stock-based compensation) and related per share data are as follows(in 000’s, except per share data):

 
|                                        |   | **Three  Months Ended  December 31,** | ** ** | **Six Months  Ended  December 31,** | ** ** |
|---------------------------------------------|--------|--------------------------------------------|------------|------------------------------------------|------------|
|                                        |   | **2002**                                   |       | **2003**                                 | ** ** | **2002** | ** ** | **2003** | ** ** |
|                                        |   |                                       |       |                                     |       |   |   |   |   |
| Net income                                  |   |                                       |       |                                     |       |   |   |   |   |
| As reported                                 |   | $                                          | 11,853     |                                     | $          | 18,744 |   | $ | 18,111 |   | $ | 24,772 |   |
| Stock-based compensation under FASB No. 123 |   | (1,032                                     | )          | (1,021                                   | )          | (1,649 | ) | (1,893 | ) |
| Pro forma net income                        |   | $                                          | 10,821     |                                     | $          | 17,723 |   | $ | 16,462 |   | $ | 22,879 |   |
|                                        |   |                                       |       |                                     |       |   |   |   |   |
| Earnings per share:                         |   |                                       |       |                                     |       |   |   |   |   |
| Basic – As reported                    |   | 0.24                                       |       | 0.38                                     |       | $ | 0.37 |   | $ | 0.50 |   |
| Basic – Pro forma                      |   | 0.22                                       |       | 0.36                                     |       | $ | 0.34 |   | $ | 0.46 |   |
| Diluted – As reported                  |   | 0.24                                       |       | 0.37                                     |       | $ | 0.37 |   | $ | 0.49 |   |
| Diluted – Pro forma                    |   | 0.22                                       |       | 0.35                                     |       | $ | 0.33 |   | $ | 0.45 |   |

 

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

 
|                    |   | **Three  Months Ended  December 31,** | ** ** | **Six Months  Ended  December 31,** | ** ** |
|-------------------------|--------|--------------------------------------------|------------|------------------------------------------|------------|
|                    |   | **2002**                                   |       | **2003**                                 | ** ** | **2002** | ** ** | **2003** | ** ** |
|                    |   |                                       |       |                                     |       |   |   |   |   |
| Risk-fee interest rate  |   | 3.5                                        | %          | 3.5                                      | %          | 3.5 | % | 3.5 | % |
| Expected volatility     |   | 0.28                                       |       | 0.26                                     |       | 0.28 |   | 0.26 |   |
| Expected dividend yield |   | 0                                          |       | 0                                        |       | 0 |   | 0 |   |
| Expected life           |   | 3-10 years                                 |       | 3-10 years                               |       | 3-10 years |   | 3-10 years |   |

 

The resulting fair values applied to theoptions granted were $2.84 and $3.14 per share for the quarter ended December31, 2002 and 2003 and were $2.73 and $3.10 per share for the six month periodsended December 31, 2002 and 2003, respectively.

 

**3.****     DISCONTINUEDOPERATIONS**

 

In July 2003 the Company announced ithad entered into definitive sale agreements for of its route operations segmentconsisting of United CoinMachine Co. (“UCMC”) and Video Services, Inc. (“VSI”) and its German wallmachine and amusement games segment (Alliance Automaten GmbH & Co. KG dbaBally Wulff).

 

On June 30, 2003 the Company enteredinto a definitive agreement for the sale of Bally Wulff to a third party equityinvestor. The sale was consummated on July 18, 2003, at which time theCompany received $16.5 million in cash consideration.  Pursuant to the sale agreement, the Company used $5.6 million ofthe sale proceeds to purchase a 5 million Euro certificate of deposit ascollateral for a tax claim currently being negotiated with the German taxauthorities, for which the Company has indemnified the buyer.  The certificate of deposit is included inOther Assets in the accompanying unaudited financial statements.

 

The Company has entered into a definitiveagreement for the sale of UCMC to the privately held Century Gaming, Inc. basedin Montana.  The sales price is based ona multiple of EBITDA (as defined in the sale agreement). The closing of thistransaction is subject to customary closing conditions including that thebusiness achieve a minimum EBITDA of $21.0 million during a defined period oftime prior to closing and that the buyer obtain the necessary gaming licenses.This transaction is expected to close in fiscal 2004.

 

Through a wholly owned subsidiary, Allianceowns 100 percent 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

 

11

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Gentilly Gaming, LLC. The all-cashtransaction is subject to customary closing conditions and is expected to closeon June 30, 2004.  Concurrent withthe sale agreement, VSI has entered into a 12-month operating agreementextension under terms and conditions that are the same as the existingagreement with the Fair Grounds Corporation.

 

On December 8, 2003 the Company announced that it had entered intoan agreement for the sale of its Rail City Casino for consideration consistingof $35 million in cash and a $3.0 million note. The sale is expected to closein early to mid calendar 2004.

 

As a result of the transactions describedabove, each of the four businesses are treated as discontinued operations, andtheir results are presented net of applicable income taxes below income fromcontinuing operations in the accompanying consolidated statements ofoperations. In accordance with generally accepted accountingprinciples, depreciation and amortization for these discontinued operationsceased as of July 1, 2003 for UCMC and VSI and as of December 8, 2003for Rail City Casino 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 have been reclassified to conform to the currentyear presentation.

 

Summary operating results for thediscontinued operations for UCMC, VSI, Bally Wulff and Rail City Casino are asfollows (in 000’s):

 
|                                 |   | **Three  Months Ended  December 31,** | ** ** | **Six Months  Ended  December 31,** | ** ** |
|--------------------------------------|--------|--------------------------------------------|------------|------------------------------------------|------------|
|                                 |   | **2002**                                   |       | **2003**                                 | ** ** | **2002** | ** ** | **2003** | ** ** |
|                                 |   |                                       |       |                                     |       |   |   |   |   |
| Net  revenues                        |   | $                                          | 75,399     |                                     | $          | 64,179 |   | $ | 145,925 |   | $ | 123,533 |   |
| Operating  income                    |   | 4,212                                      |       | 7,947                                    |       | 6,163 |   | 14,746 |   |
| Income tax  expense                  |   | 1,299                                      |       | 2,437                                    |       | 2,581 |   | 4,724 |   |
| Income  from discontinued operations |   | $                                          | 3,277      |                                     | $          | 4,526 |   | $ | 4,012 |   | $ | 8,706 |   |

 

The following net assets held for sale areincluded in the accompanying consolidated balance sheets (in 000’s):

 
|                                   |   |   |   | **June 30,  2003** | ** ** | **December 31,  2003** | ** ** |
|----------------------------------------|--------|--------|--------|-------------------------|------------|-----------------------------|------------|
|                                   |   |   |   |                    |       |                        |       |
| Cash and  cash equivalents             |   |   |   | $                       | 28,918     |                        | $          | 32,081 |   |
| Accounts  and contracts receivable     |   |   |   | 21,627                  |       | 6,042                       |       |
| Other  current assets                  |   |   |   | 5,200                   |       | 4,146                       |       |
| Property,  plant and equipment         |   |   |   | 33,316                  |       | 40,623                      |       |
| Intangible  assets                     |   |   |   | 21,695                  |       | 20,295                      |       |
| Other                                  |   |   |   | 3,558                   |       | 3,699                       |       |
| Total  assets                          |   |   |   | 114,314                 |       | 106,886                     |       |
|                                   |   |   |   |                    |       |                        |       |
| Current  liabilities                   |   |   |   | 11,913                  |       | 12,346                      |       |
| Long-term  liabilities                 |   |   |   | 4,273                   |       | 4,301                       |       |
| Total  liabilities                     |   |   |   | 16,186                  |       | 16,647                      |       |
| Net assets  of discontinued operations |   |   |   | $                       | 98,128     |                        | $          | 90,239 |   |

 

12

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**4.****      INVENTORIES**

 

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

 

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

 
|            |   | **June 30,  2003** |   | **December 31,  2003** | ** ** |
|-----------------|--------|-------------------------|--------|-----------------------------|------------|
|            |   |                    |   |                        |       |
| Raw materials   |   | $                       | 13,720 |                        | $          | 19,446 |   |
| Work-in-process |   | 789                     |   | 1,348                       |       |
| Finished goods  |   | 17,593                  |   | 18,480                      |       |
| Total           |   | $                       | 32,102 |                        | $          | 39,274 |   |

 

**5.****      DEBT**

 

Long-term debt and lines of credit consisted of the following (in000’s):

 
|                                                     |   | **June 30,  2003** |    | **December 31,  2003** | ** ** |
|----------------------------------------------------------|--------|-------------------------|---------|-----------------------------|------------|
|                                                     |   |                    |    |                        |       |
| Term loan facility                                       |   | $                       | 187,625 |                        | $          | 350,000 |   |
| Revolving credit facility                                |   | —                  |    | 70,000                      |       |
| 10% Sr. Subordinated Notes, net of  unamortized discount |   | 149,663                 |    | —                      |       |
| Other subordinated debt                                  |   | 495                     |    | —                      |       |
| Other, secured by related equipment                      |   | 7,432                   |    | 5,286                       |       |
|                                                     |   | 345,215                 |    | 425,286                     |       |
| Less current maturities                                  |   | 3,537                   |    | 3,069                       |       |
| Long-term debt, net of current maturities                |   | $                       | 341,678 |                        | $          | 422,217 |   |

 

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

 

On September 5, 2003, the Company completed a senior bank debtrefinancing transaction (the “Refinancing”) whereby the Company entered into anew $275 million term loan facility and a $125 million revolving creditfacility. Proceeds from the new loans were used to repay the existing bank termloans totaling approximately $188 million, repay the Subordinated Notes, and topay transaction fees and expenses.  Thenew term loan has an interest rate of LIBOR plus 2.75% (or 3.96% as ofDecember 31, 2003), has a 1% per year mandatory principal amortizationafter the first year, and a 6-year maturity. The revolving credit facility has an interest rate of LIBOR plus 2.50%(or 3.71% as of December 31, 2003), and the commitment decreases ratablyover its 5-year term to a 60% balloon. As of September 5, 2003, the initial outstanding on the revolvingcredit facility totaled $70.0 million.

 

On August 13, 2003, the Company initiated a tender offer andconsent solicitation for all of the outstanding Subordinated Notes at a priceof 103.33% plus a .25% tender premium which was contingent on the closing ofthe new bank facility.  OnSeptember 10, 2003, the tender offer period expired, with $78.6 million ofthe notes having been tendered.  OnSeptember 11, 2003, the Company initiated redemption of the remainingNotes at a price of 103.33%, which was completed on September 16, 2003, atwhich time the Subordinated Notes were fully redeemed.

 

13

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

 

During the December 2003 quarter the Company increased the TermLoan by $75 million, to a total of $350 million outstanding.  The proceeds were used primarily to fundloans made to Sierra Design Group (“SDG”) of $61.0 million in advance of thepreviously announced acquisition of SDG that is anticipated to close in thefirst half of calendar 2004 (See Note 8). As a result the Company incurred additional $1.3 million in debtissuance costs, which have been capitalized and will be amortized over theremaining term of the loan.

 

The new bank facility is collateralized by substantially all domesticproperty and is guaranteed by each domestic subsidiary of the Company, otherthan the entity that holds the Company’s interest in its Louisiana andMississippi operations, and is secured by a Pledge Agreement. The bank facilitycontains a number of maintenance covenants and other significant covenantsthat, among other things, restrict the ability of the Company and the abilityof certain of its subsidiaries to dispose of assets, incur additionalindebtedness and issue preferred stock, pay dividends or make otherdistributions, enter into certain acquisitions, repurchase equity interests orsubordinated indebtedness, issue or sell equity interests of the Company’ssubsidiaries, engage in mergers or acquisitions, or engage in certaintransactions with subsidiaries and affiliates, and that otherwise restrictcorporate activities.  As ofDecember 31, 2003, the Company is in compliance with these covenants.

 

**6.****     SEGMENTSAND GEOGRAPHICAL INFORMATION**

 

The Company currently operates in two business segments (exclusive ofthe two business segments included in discontinued operations): (i) GamingEquipment and Systems which designs, manufactures and distributes gamingmachines and computerized monitoring systems for gaming machines, and (ii)Casino Operations which owns and operates one regional casino. The accountingpolicies of these segments are consistent with Company’s policies for theConsolidated Financial Statements.

 

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

 
|                         |   | **Three  Months Ended  December 31,** | ** ** | **Six Months  Ended  December 31,** | ** ** |
|------------------------------|--------|--------------------------------------------|------------|------------------------------------------|------------|
|                         |   | **2002**                                   |       | **2003**                                 | ** ** | **2002** | ** ** | **2003** | ** ** |
| Revenues:                    |   |                                       |       |                                     |       |   |   |   |   |
| Gaming Equipment and Systems |   | $                                          | 86,627     |                                     | $          | 96,319 |   | $ | 150,166 |   | $ | 184,787 |   |
| Casino Operations            |   | 11,600                                     |       | 12,312                                   |       | 24,267 |   | 25,067 |   |
| Total  revenues              |   | $                                          | 98,227     |                                     | $          | 108,631 |   | $ | 174,433 |   | $ | 209,854 |   |
|                         |   |                                       |       |                                     |       |   |   |   |   |
| Intersegment  revenues:      |   |                                       |       |                                     |       |   |   |   |   |
| Gaming Equipment and Systems |   | $                                          | 265        |                                     | $          | 212 |   | $ | 1,223 |   | $ | 341 |   |
|                         |   |                                       |       |                                     |       |   |   |   |   |
| Operating income (loss):     |   |                                       |       |                                     |       |   |   |   |   |
| Gaming Equipment and Systems |   | $                                          | 21,775     |                                     | $          | 27,217 |   | $ | 36,910 |   | $ | 48,575 |   |
| Casino Operations            |   | 2,631                                      |       | 3,814                                    |       | 6,545 |   | 7,828 |   |
| Corporate/other              |   | (3,165                                     | )          | (3,497                                   | )          | (5,944 | ) | (6,936 | ) |
| Total operating income       |   | $                                          | 21,241     |                                     | $          | 27,534 |   | $ | 37,511 |   | $ | 49,467 |   |

 

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

 

14

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

 
|                   |   | **Three  Months Ended  December 31,** | ** ** | **Six Months  Ended  December 31,** | ** ** |
|------------------------|--------|--------------------------------------------|------------|------------------------------------------|------------|
|                   |   | **2002**                                   |       | **2003**                                 | ** ** | **2002** | ** ** | **2003** | ** ** |
| Revenues:              |   |                                       |       |                                     |       |   |   |   |   |
| United States          |   | $                                          | 85,946     |                                     | $          | 97,728 |   | $ | 156,467 |   | $ | 190,340 |   |
| Germany                |   | 10,031                                     |       | 5,762                                    |       | 14,417 |   | 11,794 |   |
| Other foreign          |   | 2,250                                      |       | 5,141                                    |       | 3,549 |   | 7,720 |   |
| Total revenues         |   | $                                          | 98,227     |                                     | $          | 108,631 |   | $ | 174,433 |   | $ | 209,854 |   |
|                   |   |                                       |       |                                     |       |   |   |   |   |
| Operating income:      |   |                                       |       |                                     |       |   |   |   |   |
| United States          |   | $                                          | 20,333     |                                     | $          | 25,819 |   | $ | 35,926 |   | $ | 46,978 |   |
| Germany                |   | 773                                        |       | 926                                      |       | 1,567 |   | 1,950 |   |
| Other foreign          |   | 135                                        |       | 789                                      |       | 18 |   | 539 |   |
| Total operating income |   | $                                          | 21,241     |                                     | $          | 27,534 |   | $ | 37,511 |   | $ | 49,467 |   |

 

**7.****     SUPPLEMENTALCASH FLOW INFORMATION**

 

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

 
|                                                   |   | **Six Months  Ended  December 31,** | ** ** |
|--------------------------------------------------------|--------|------------------------------------------|------------|
|                                                   |   | **2002**                                 |       | **2003** | ** ** |
|                                                   |   |                                     |       |   |   |
| Cash paid for interest                                 |   | $                                        | 13,157     |   | $ | 15,227 |   |
| Cash paid for income taxes                             |   | 925                                      |       | 1,638 |   |
|                                                   |   |                                     |       |   |   |
| Non-cash transactions:                                 |   |                                     |       |   |   |
| Reclassify property, plant and equipment to  inventory |   | $                                        | 1,402      |   | $ | 2,517 |   |
| (Favorable) unfavorable translation rate  adjustment   |   | (2,786                                   | )          | (2,524 | ) |
| Notes payable issued in acquisition                    |   | 3,000                                    |       | — |   |

 

**8.****     COMMITMENTS AND CONTINGENCIES**

 

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

 

On November 11, 2003, the Company announced an agreement topurchase 100 percent of the outstanding shares of Sierra Design Group (“SDG”)for approximately $45 million of consideration consisting of $27 million ofcash and 736,000 shares of Alliance Gaming Common Stock (valued at $18 million)to be paid at closing and up to $95 million of contingent consideration payablein equal portions of cash and stock payable over the three years following theacquisition upon SDG achieving certain financial objectives. In addition, theCompany has made loan commitments to SDG totaling $74 million, of which $61million has been advanced as of December 31, 2003, which has been used bySDG to repay existing creditors.  Theacquisition, which is subject to regulatory approvals and certain othercustomary closing conditions, is expected to close in the first half ofcalendar 2004.

 

15

----

 

**9.****     UNAUDITEDCONSOLIDATING FINANCIAL STATEMENTS**

 

The following unaudited condensed consolidating financial statementsare presented to provide certain financial information regarding guaranteeingand non-guaranteeing subsidiaries in relation to the Company’s new bank creditagreement. The financial information presented includes Alliance GamingCorporation (the “Parent”), its wholly-owned guaranteeing subsidiaries(“Guaranteeing Subsidiaries”), and the non-guaranteeing subsidiaries VideoServices, Inc., the Rainbow Casino Vicksburg Partnership, L.P. (dba RainbowCasino) and the Company’s non-domestic subsidiaries (together the“Non-Guaranteeing Subsidiaries”). The notes to the unaudited consolidatingfinancial statements should be read in conjunction with these unauditedconsolidating financial statements.

 

16

----

 

**UNAUDITED CONSOLIDATING BALANCE SHEETS**

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  |                           | $          | 18,036                               |       | $                                              | 8,118      |                                                 | $          | — |   | $ | 38,884 |   |
| Accounts and notes receivable, net               |   | 738        |    | 70,880                         |       | 27,496                               |       | (746                                           | )          | 98,368                                               |       |
| Inventories, net                                 |   | —     |    | 29,801                         |       | 2,518                                |       | (217                                           | )          | 32,102                                               |       |
| Deferred tax assets, net                         |   | 33,182     |    | 11,639                         |       | —                               |       | —                                         |       | 44,821                                               |       |
| Other current assets                             |   | 404        |    | 7,110                          |       | 496                                  |       | —                                         |       | 8,010                                                |       |
| Total current assets                             |   | 47,054     |    | 137,466                        |       | 38,628                               |       | (963                                           | )          | 222,185                                              |       |
| Long-term investments (restricted)               |   | —     |    | 864                            |       | —                               |       | —                                         |       | 864                                                  |       |
| Long-term receivables, net                       |   | 159,723    |    | 15,113                         |       | 12                                   |       | (159,983                                       | )          | 14,865                                               |       |
| Leased gaming equipment, net                     |   | —     |    | 25,792                         |       | —                               |       | —                                         |       | 25,792                                               |       |
| Property, plant and equipment, net               |   | 74         |    | 20,394                         |       | 36,426                               |       | —                                         |       | 56,894                                               |       |
| Goodwill, net                                    |   | (900       | )       | 48,293                         |       | 15,647                               |       | —                                         |       | 63,040                                               |       |
| Intangible assets, net                           |   | 7,049      |    | 14,550                         |       | 5,032                                |       | —                                         |       | 26,631                                               |       |
| Investments in subsidiaries                      |   | 294,513    |    | 74,990                         |       | —                               |       | (369,503                                       | )          | —                                               |       |
| Deferred tax assets, net                         |   | 3,394      |    | —                         |       | —                               |       | (3,394                                         | )          | —                                               |       |
| Assets of discontinued operations held for  sale |   | 16,539     |    | 93,672                         |       | 4,103                                |       | —                                         |       | 114,314                                              |       |
| Other assets, net                                |   | (84,406    | )       | 99,918                         |       | (14,933                              | )          | 1                                              |       | 580                                                  |       |
|                                             |   | $          | 443,040 |                           | $          | 531,052                              |       | $                                              | 84,915     |                                                 | $          | (533,842 | ) | $ | 525,165 |   |
|                                             |   |       |    |                           |       |                                 |       |                                           |       |                                                 |       |
| LIABILITIES AND STOCKHOLDERS’ EQUITY        |   |       |    |                           |       |                                 |       |                                           |       |                                                 |       |
| Current liabilities:                             |   |       |    |                           |       |                                 |       |                                           |       |                                                 |       |
| Accounts payable                                 |   | $          | 1,295   |                           | $          | 19,507                               |       | $                                              | 1,924      |                                                 | $          | — |   | $ | 22,726 |   |
| Accrued liabilities                              |   | 7,378      |    | 18,188                         |       | 5,368                                |       | (751                                           | )          | 30,183                                               |       |
| Jackpot liabilities                              |   | —     |    | 10,446                         |       | 142                                  |       | —                                         |       | 10,588                                               |       |
| Current maturities of long-term debt             |   | 2,395      |    | 1,124                          |       | 18                                   |       | —                                         |       | 3,537                                                |       |
| Liabilities of disc. operations held for  sale   |   | 1,000      |    | 14,358                         |       | 828                                  |       | —                                         |       | 16,186                                               |       |
| Total current liabilities                        |   | 12,068     |    | 63,623                         |       | 8,280                                |       | (751                                           | )          | 83,220                                               |       |
|                                             |   |       |    |                           |       |                                 |       |                                           |       |                                                 |       |
| Long term debt, net                              |   | 335,388    |    | 166,013                        |       | —                               |       | (159,723                                       | )          | 341,678                                              |       |
| Deferred tax liabilites                          |   | —     |    | 5,679                          |       | 1,635                                |       | (3,394                                         | )          | 3,920                                                |       |
| Other liabilities                                |   | 2,624      |    | 753                            |       | 10                                   |       | —                                         |       | 3,387                                                |       |
| Minority interest                                |   | 1,330      |    | —                         |       | —                               |       | —                                         |       | 1,330                                                |       |
| Total liabilities                                |   | 351,410    |    | 236,068                        |       | 9,925                                |       | (163,868                                       | )          | 433,535                                              |       |
| Commitments and contingencies                    |   |       |    |                           |       |                                 |       |                                           |       |                                                 |       |
| Stockholders’ equity:                       |   |       |    |                           |       |                                 |       |                                           |       |                                                 |       |
| Special Stock Series E                           |   | 12         |    | —                         |       | —                               |       | —                                         |       | 12                                                   |       |
| Common Stock                                     |   | 4,996      |    | 478                            |       | 1,027                                |       | (1,505                                         | )          | 4,996                                                |       |
| Treasury stock                                   |   | (501       | )       | —                         |       | —                               |       | —                                         |       | (501                                                 | )          |
| Additional paid-in capital                       |   | 163,267    |    | 190,449                        |       | 33,415                               |       | (223,864                                       | )          | 163,267                                              |       |
| Accumulated other comprehensive income  (loss)   |   | 1,287      |    | 1,290                          |       | 1,267                                |       | (2,557                                         | )          | 1,287                                                |       |
| Retained earnings (accumulated deficit)          |   | (77,431    | )       | 102,767                        |       | 39,281                               |       | (142,048                                       | )          | (77,431                                              | )          |
| Total stockholders’ equity                  |   | 91,630     |    | 294,984                        |       | 74,990                               |       | (369,974                                       | )          | 91,630                                               |       |
|                                             |   | $          | 443,040 |                           | $          | 531,052                              |       | $                                              | 84,915     |                                                 | $          | (533,842 | ) | $ | 525,165 |   |

 

See accompanying unaudited notes.

 

17

----

 

#### **UNAUDITED CONSOLIDATINGBALANCE SHEETS**

December 31, 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                        |   | $          | 44,883  |                           | $          | 18,897                               |       | $                                              | 8,474      |                                                 | $          | — |   | $ | 72,254 |   |
| Accounts and notes receivable, net               |   | 674        |    | 80,005                         |       | 26,705                               |       | (653                                           | )          | 106,731                                              |       |
| Inventories, net                                 |   | —     |    | 34,473                         |       | 5,195                                |       | (394                                           | )          | 39,274                                               |       |
| Deferred tax assets, net                         |   | 26,423     |    | 11,638                         |       | —                               |       | —                                         |       | 38,061                                               |       |
| Other current assets                             |   | 844        |    | 7,367                          |       | 1,172                                |       | —                                         |       | 9,383                                                |       |
| Total current assets                             |   | 72,824     |    | 152,380                        |       | 41,546                               |       | (1,047                                         | )          | 265,703                                              |       |
| Long-term investments (restricted)               |   | —     |    | 2,611                          |       | —                               |       | —                                         |       | 2,611                                                |       |
| Long-term receivables, net                       |   | 167,287    |    | 5,933                          |       | —                               |       | (166,047                                       | )          | 7,173                                                |       |
| Notes receivables from Sierra Design Group       |   | 61,025     |    | —                         |       | —                               |       | —                                         |       | 61,025                                               |       |
| Leased gaming equipment, net                     |   | —     |    | 30,221                         |       | —                               |       | —                                         |       | 30,221                                               |       |
| Property, plant and equipment, net               |   | 73         |    | 22,480                         |       | 37,323                               |       | —                                         |       | 59,876                                               |       |
| Goodwill, net                                    |   | (900       | )       | 48,333                         |       | 18,792                               |       | —                                         |       | 66,225                                               |       |
| Intangible assets, net                           |   | 6,923      |    | 17,416                         |       | 4,744                                |       | —                                         |       | 29,083                                               |       |
| Investments in subsidiaries                      |   | 346,011    |    | 77,724                         |       | —                               |       | (423,735                                       | )          | —                                               |       |
| Deferred tax assets, net                         |   | 1,309      |    | —                         |       | —                               |       | (1,309                                         | )          | —                                               |       |
| Assets of discontinued operations held for  sale |   | 39         |    | 102,866                        |       | 3,981                                |       | —                                         |       | 106,886                                              |       |
| Other assets, net                                |   | (106,940   | )       | 130,181                        |       | (16,980                              | )          | (26                                            | )          | 6,235                                                |       |
|                                             |   | $          | 547,651 |                           | $          | 590,145                              |       | $                                              | 89,406     |                                                 | $          | (592,164 | ) | $ | 635,038 |   |
|                                             |   |       |    |                           |       |                                 |       |                                           |       |                                                 |       |
| LIABILITIES  AND STOCKHOLDERS’ EQUITY       |   |       |    |                           |       |                                 |       |                                           |       |                                                 |       |
| Current liabilities:                             |   |       |    |                           |       |                                 |       |                                           |       |                                                 |       |
| Accounts payable                                 |   | $          | 260     |                           | $          | 18,162                               |       | $                                              | 2,211      |                                                 | $          | — |   | $ | 20,633 |   |
| Accrued liabilities                              |   | 1          |    | 17,903                         |       | 6,655                                |       | (691                                           | )          | 23,868                                               |       |
| Jackpot liabilities                              |   | —     |    | 12,614                         |       | 171                                  |       | —                                         |       | 12,785                                               |       |
| Current maturities of long-term debt             |   | 1,563      |    | 1,500                          |       | 6                                    |       | —                                         |       | 3,069                                                |       |
| Liabilities of disc operations held for  sale    |   | —     |    | 15,638                         |       | 1,009                                |       | —                                         |       | 16,647                                               |       |
| Total current liabilities                        |   | 1,824      |    | 65,817                         |       | 10,052                               |       | (691                                           | )          | 77,002                                               |       |
|                                             |   |       |    |                           |       |                                 |       |                                           |       |                                                 |       |
| Long term debt, net                              |   | 418,438    |    | 169,566                        |       | —                               |       | (165,787                                       | )          | 422,217                                              |       |
| Deferred tax liabilites                          |   | —     |    | 5,680                          |       | 1,635                                |       | (1,309                                         | )          | 6,006                                                |       |
| Other liabilities                                |   | 2,624      |    | 2,424                          |       | —                               |       | —                                         |       | 5,048                                                |       |
| Minority interest                                |   | 1,216      |    | —                         |       | —                               |       | —                                         |       | 1,216                                                |       |
| Total liabilities                                |   | 424,102    |    | 243,487                        |       | 11,687                               |       | (167,787                                       | )          | 511,489                                              |       |
| Commitments and contingencies                    |   |       |    |                           |       |                                 |       |                                           |       |                                                 |       |
| Stockholders’ equity:                       |   |       |    |                           |       |                                 |       |                                           |       |                                                 |       |
| Special Stock Series E                           |   | 12         |    | —                         |       | —                               |       | —                                         |       | 12                                                   |       |
| Common Stock                                     |   | 5,033      |    | 478                            |       | 1,027                                |       | (1,505                                         | )          | 5,033                                                |       |
| Treasury stock                                   |   | (501       | )       | —                         |       | —                               |       | —                                         |       | (501                                                 | )          |
| Additional paid-in capital                       |   | 167,724    |    | 190,449                        |       | 33,415                               |       | (223,864                                       | )          | 167,724                                              |       |
| Accumulated other comprehensive income  (loss)   |   | 3,940      |    | 3,944                          |       | 3,921                                |       | (7,865                                         | )          | 3,940                                                |       |
| Retained earnings (accumulated deficit)          |   | (52,659    | )       | 151,787                        |       | 39,356                               |       | (191,143                                       | )          | (52,659                                              | )          |
| Total stockholders’ equity                  |   | 123,549    |    | 346,658                        |       | 77,719                               |       | (424,377                                       | )          | 123,549                                              |       |
|                                             |   | $          | 547,651 |                           | $          | 590,145                              |       | $                                              | 89,406     |                                                 | $          | (592,164 | ) | $ | 635,038 |   |

 

See accompanying unaudited notes.

 

18

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**UNAUDITED****CONSOLIDATINGSTATEMENTS OF OPERATIONS**

Three months ended December 31, 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                                                                        |   | $          | — |                           | $          | 83,616                               |       | $                                              | 12,304     |                                                 | $          | (9,293 | ) | $ | 86,627 |   |
| Casino operations                                                                                   |   | —     |   | —                         |       | 13,186                               |       | (1,586                                         | )          | 11,600                                               |       |
|                                                                                                |   | —     |   | 83,616                         |       | 25,490                               |       | (10,879                                        | )          | 98,227                                               |       |
| Costs and expenses:                                                                                 |   |       |   |                           |       |                                 |       |                                           |       |                                                 |       |
| Cost of gaming equipment and systems                                                                |   | —     |   | 39,835                         |       | 9,076                                |       | (9,248                                         | )          | 39,663                                               |       |
| Cost of casino operations                                                                           |   | —     |   | —                         |       | 5,223                                |       | —                                         |       | 5,223                                                |       |
| Selling, general and administrative                                                                 |   | 2,623      |   | 15,440                         |       | 5,641                                |       | (1,609                                         | )          | 22,095                                               |       |
| Research and development costs                                                                      |   | —     |   | 4,159                          |       | 999                                  |       | —                                         |       | 5,158                                                |       |
| Depreciation and amortization                                                                       |   | 542        |   | 3,766                          |       | 539                                  |       | —                                         |       | 4,847                                                |       |
|                                                                                                |   | 3,165      |   | 63,200                         |       | 21,478                               |       | (10,857                                        | )          | 76,986                                               |       |
|                                                                                                |   |       |   |                           |       |                                 |       |                                           |       |                                                 |       |
| Operating income (loss)                                                                             |   | (3,165     | )      | 20,416                         |       | 4,012                                |       | (22                                            | )          | 21,241                                               |       |
|                                                                                                |   |       |   |                           |       |                                 |       |                                           |       |                                                 |       |
| Earnings in consolidated subsidiaries                                                               |   | 17,590     |   | 954                            |       | —                               |       | (18,544                                        | )          | —                                               |       |
|                                                                                                |   |       |   |                           |       |                                 |       |                                           |       |                                                 |       |
| Other income (expense):                                                                             |   |       |   |                           |       |                                 |       |                                           |       |                                                 |       |
| Interest income                                                                                     |   | 3,099      |   | —                         |       | 11                                   |       | (3,031                                         | )          | 79                                                   |       |
| Interest expense                                                                                    |   | (6,501     | )      | (3,064                         | )          | (20                                  | )          | 3,031                                          |       | (6,554                                               | )          |
| Rainbow royalty                                                                                     |   | 1,458      |   | —                         |       | (1,458                               | )          | —                                         |       | —                                               |       |
| Minority interest                                                                                   |   | (309       | )      | —                         |       | —                               |       | —                                         |       | (309                                                 | )          |
| Other, net                                                                                          |   | 665        |   | (58                            | )          | (341                                 | )          | —                                         |       | 266                                                  |       |
| Income (loss) from continuing operations  before income taxes                                       |   | 12,837     |   | 18,248                         |       | 2,204                                |       | (18,566                                        | )          | 14,723                                               |       |
| Income tax expense                                                                                  |   | 4,261      |   | 636                            |       | 1,250                                |       | —                                         |       | 6,147                                                |       |
| Net income (loss) from continuing  operations                                                       |   | 8,576      |   | 17,612                         |       | 954                                  |       | (18,566                                        | )          | 8,576                                                |       |
|                                                                                                |   |       |   |                           |       |                                 |       |                                           |       |                                                 |       |
| Discontinued operations:                                                                            |   |       |   |                           |       |                                 |       |                                           |       |                                                 |       |
| Income (loss) from discontinued operations  of wall machines and amusement games business unit, net |   | 175        |   | (1,210                         | )          | 1,930                                |       | —                                         |       | 895                                                  |       |
| Income from disc. ops. of Nevada Route, net                                                         |   | —     |   | 1,325                          |       | —                               |       | —                                         |       | 1,325                                                |       |
| Income from disc. ops. of Louisiana Route,  net                                                     |   | —     |   | —                         |       | 284                                  |       | —                                         |       | 284                                                  |       |
| Income from disc. ops. of Rail City Casino,  net                                                    |   | —     |   | 773                            |       | —                               |       | —                                         |       | 773                                                  |       |
| Earnings from consolidated discontinued  operations                                                 |   | 3,102      |   | 2,214                          |       | —                               |       | (5,316                                         | )          | —                                               |       |
| Income (loss) from discontinued operations                                                          |   | 3,277      |   | 3,102                          |       | 2,214                                |       | (5,316                                         | )          | 3,277                                                |       |
| Net income (loss)                                                                                   |   | $          | 11,853 |                           | $          | 20,714                               |       | $                                              | 3,168      |                                                 | $          | (23,882 | ) | $ | 11,853 |   |

 

See accompanying unaudited notes.

 

19

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**UNAUDITED****CONSOLIDATING STATEMENTS OF OPERATIONS**Three months ended December 31, 2003(In 000’s)

 
|                                                          |   | **Parent** |   | **Guaranteeing  Subsidiaries** | ** ** | **Non-  Guaranteeing  Subsidiaries** | ** ** | **Reclas-  sifications  and  Elimina-  tions** | ** ** | **Alliance  Gaming  Corporation  and  Subsidiaries** | ** ** |
|---------------------------------------------------------------|--------|------------|--------|--------------------------------|------------|--------------------------------------|------------|------------------------------------------------|------------|------------------------------------------------------|------------|
| Revenues:                                                     |   |       |   |                           |       |                                 |       |                                           |       |                                                 |       |
| Gaming equipment and systems                                  |   | $          | — |                           | $          | 92,361                               |       | $                                              | 10,902     |                                                 | $          | (6,944 | ) | $ | 96,319 |   |
| Casino operations                                             |   | —     |   | —                         |       | 13,758                               |       | (1,446                                         | )          | 12,312                                               |       |
|                                                          |   | —     |   | 92,361                         |       | 24,660                               |       | (8,390                                         | )          | 108,631                                              |       |
| Costs and expenses:                                           |   |       |   |                           |       |                                 |       |                                           |       |                                                 |       |
| Cost of gaming equipment and systems                          |   | —     |   | 39,293                         |       | 6,371                                |       | (6,884                                         | )          | 38,780                                               |       |
| Cost of casino operations                                     |   | —     |   | —                         |       | 4,884                                |       | —                                         |       | 4,884                                                |       |
| Selling, general and administrative                           |   | 3,124      |   | 15,723                         |       | 6,847                                |       | (1,446                                         | )          | 24,248                                               |       |
| Research and development costs                                |   | —     |   | 6,587                          |       | 153                                  |       | —                                         |       | 6,740                                                |       |
| Depreciation and amortization                                 |   | 373        |   | 5,196                          |       | 876                                  |       | —                                         |       | 6,445                                                |       |
|                                                          |   | 3,497      |   | 66,799                         |       | 19,131                               |       | (8,330                                         | )          | 81,097                                               |       |
|                                                          |   |       |   |                           |       |                                 |       |                                           |       |                                                 |       |
| Operating income (loss)                                       |   | (3,497     | )      | 25,562                         |       | 5,529                                |       | (60                                            | )          | 27,534                                               |       |
|                                                          |   |       |   |                           |       |                                 |       |                                           |       |                                                 |       |
| Earnings in consolidated subsidiaries                         |   | 25,005     |   | 3,156                          |       | —                               |       | (28,161                                        | )          | —                                               |       |
|                                                          |   |       |   |                           |       |                                 |       |                                           |       |                                                 |       |
| Other income (expense):                                       |   |       |   |                           |       |                                 |       |                                           |       |                                                 |       |
| Interest income                                               |   | 3,107      |   | 5                              |       | 3                                    |       | (3,032                                         | )          | 83                                                   |       |
| Interest expense                                              |   | (3,805     | )      | (3,081                         | )          | (15                                  | )          | 3,032                                          |       | (3,869                                               | )          |
| Rainbow royalty                                               |   | 1,541      |   | —                         |       | (1,541                               | )          | —                                         |       | —                                               |       |
| Minority interest                                             |   | (541       | )      | —                         |       | —                               |       | —                                         |       | (541                                                 | )          |
| Other, net                                                    |   | 126        |   | (190                           | )          | (481                                 | )          | —                                         |       | (545                                                 | )          |
| Income (loss) from continuing operations  before income taxes |   | 21,936     |   | 25,452                         |       | 3,495                                |       | (28,221                                        | )          | 22,662                                               |       |
| Income tax expense                                            |   | 7,718      |   | 387                            |       | 339                                  |       | —                                         |       | 8,444                                                |       |
| Net income (loss) from continuing  operations                 |   | 14,218     |   | 25,065                         |       | 3,156                                |       | (28,221                                        | )          | 14,218                                               |       |
|                                                          |   |       |   |                           |       |                                 |       |                                           |       |                                                 |       |
| Discontinued operations:                                      |   |       |   |                           |       |                                 |       |                                           |       |                                                 |       |
| Income from disc. ops. of Nevada Route, net                   |   | —     |   | 3,077                          |       | —                               |       | —                                         |       | 3,077                                                |       |
| Income from disc. ops. of Louisiana Route,  net               |   | —     |   | —                         |       | 420                                  |       | —                                         |       | 420                                                  |       |
| Income from disc. ops. of Rail City Casino,  net              |   | —     |   | 1,029                          |       | —                               |       | —                                         |       | 1,029                                                |       |
| Earnings from consolidated discontinued  operations           |   | 4,526      |   | 420                            |       | —                               |       | (4,946                                         | )          | —                                               |       |
| Income (loss) from discontinued operations                    |   | 4,526      |   | 4,526                          |       | 420                                  |       | (4,946                                         | )          | 4,526                                                |       |
| Net income (loss)                                             |   | $          | 18,744 |                           | $          | 29,591                               |       | $                                              | 3,576      |                                                 | $          | (33,167 | ) | $ | 18,744 |   |

 

See accompanying unaudited notes.

 

20

----

 

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

Six months ended December 31, 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                                                    |   | $          | — |                           | $          | 146,526                              |       | $                                              | 18,005     |                                                 | $          | (14,365 | ) | $ | 150,166 |   |
| Casino operations                                                               |   | —     |   | —                         |       | 27,431                               |       | (3,164                                         | )          | 24,267                                               |       |
|                                                                            |   | —     |   | 146,526                        |       | 45,436                               |       | (17,529                                        | )          | 174,433                                              |       |
| Costs and expenses:                                                             |   |       |   |                           |       |                                 |       |                                           |       |                                                 |       |
| Cost of gaming equipment and systems                                            |   | —     |   | 67,638                         |       | 12,587                               |       | (14,304                                        | )          | 65,921                                               |       |
| Cost of casino operations                                                       |   | —     |   | —                         |       | 10,520                               |       | —                                         |       | 10,520                                               |       |
| Selling, general and administrative                                             |   | 4,858      |   | 29,177                         |       | 11,363                               |       | (3,203                                         | )          | 42,195                                               |       |
| Research and development costs                                                  |   | —     |   | 7,342                          |       | 1,791                                |       | —                                         |       | 9,133                                                |       |
| Depreciation and amortization                                                   |   | 1,086      |   | 7,023                          |       | 1,044                                |       | —                                         |       | 9,153                                                |       |
|                                                                            |   | 5,944      |   | 111,180                        |       | 37,305                               |       | (17,507                                        | )          | 136,922                                              |       |
|                                                                            |   |       |   |                           |       |                                 |       |                                           |       |                                                 |       |
| Operating income (loss)                                                         |   | (5,944     | )      | 35,346                         |       | 8,131                                |       | (22                                            | )          | 37,511                                               |       |
|                                                                            |   |       |   |                           |       |                                 |       |                                           |       |                                                 |       |
| Earnings in consolidated subsidiaries                                           |   | 31,553     |   | 3,399                          |       | —                               |       | (34,952                                        | )          | —                                               |       |
|                                                                            |   |       |   |                           |       |                                 |       |                                           |       |                                                 |       |
| Other income (expense):                                                         |   |       |   |                           |       |                                 |       |                                           |       |                                                 |       |
| Interest income                                                                 |   | 6,165      |   | —                         |       | 25                                   |       | (6,063                                         | )          | 127                                                  |       |
| Interest expense                                                                |   | (13,119    | )      | (6,099                         | )          | (40                                  | )          | 6,063                                          |       | (13,195                                              | )          |
| Rainbow royalty                                                                 |   | 3,044      |   | —                         |       | (3,044                               | )          | —                                         |       | —                                               |       |
| Minority interest                                                               |   | (754       | )      | —                         |       | —                               |       | —                                         |       | (754                                                 | )          |
| Other, net                                                                      |   | 765        |   | 24                             |       | (423                                 | )          | —                                         |       | 366                                                  |       |
| Income (loss) from continuing operations  before income taxes                   |   | 21,710     |   | 32,670                         |       | 4,649                                |       | (34,974                                        | )          | 24,055                                               |       |
| Income tax expense                                                              |   | 7,611      |   | 1,095                          |       | 1,250                                |       | —                                         |       | 9,956                                                |       |
| Net income (loss) from continuing  operations                                   |   | 14,099     |   | 31,575                         |       | 3,399                                |       | (34,974                                        | )          | 14,099                                               |       |
|                                                                            |   |       |   |                           |       |                                 |       |                                           |       |                                                 |       |
| Discontinued operations:                                                        |   |       |   |                           |       |                                 |       |                                           |       |                                                 |       |
| Income (loss) from disc ops of wall  machines and amusement games business unit |   | 408        |   | (1,211                         | )          | 77                                   |       | —                                         |       | (726                                                 | )          |
| Income from disc. ops. of Nevada Route, net                                     |   | —     |   | 2,690                          |       | —                               |       | —                                         |       | 2,690                                                |       |
| Income from disc. ops. of Louisiana Route,  net                                 |   | —     |   | —                         |       | 559                                  |       | —                                         |       | 559                                                  |       |
| Income from disc. ops. of Rail City Casino,  net                                |   | —     |   | 1,489                          |       | —                               |       | —                                         |       | 1,489                                                |       |
| Earnings from consolidated discontinued  operations                             |   | 3,604      |   | 636                            |       | —                               |       | (4,240                                         | )          | —                                               |       |
| Income (loss) from discontinued operations                                      |   | 4,012      |   | 3,604                          |       | 636                                  |       | (4,240                                         | )          | 4,012                                                |       |
| Net income (loss)                                                               |   | $          | 18,111 |                           | $          | 35,179                               |       | $                                              | 4,035      |                                                 | $          | (39,214 | ) | $ | 18,111 |   |

 

See accompanying unaudited notes.

 

21

----

 

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

Six months ended December 31, 2003

(In 000’s)

 
|                                                          |   | **Parent** |   | **Guaranteeing  Subsidiaries** | ** ** | **Non-  Guaranteeing  Subsidiaries** | ** ** | **Reclas-  sifications  and  Elimina-  tions** | ** ** | **Alliance  Gaming  Corporation  and  Subsidiaries** | ** ** |
|---------------------------------------------------------------|--------|------------|--------|--------------------------------|------------|--------------------------------------|------------|------------------------------------------------|------------|------------------------------------------------------|------------|
| Revenues:                                                     |   |       |   |                           |       |                                 |       |                                           |       |                                                 |       |
| Gaming equipment and systems                                  |   | $          | — |                           | $          | 177,370                              |       | $                                              | 19,514     |                                                 | $          | (12,097 | ) | $ | 184,787 |   |
| Casino operations                                             |   | —     |   | —                         |       | 27,997                               |       | (2,930                                         | )          | 25,067                                               |       |
|                                                          |   | —     |   | 177,370                        |       | 47,511                               |       | (15,027                                        | )          | 209,854                                              |       |
| Costs and expenses:                                           |   |       |   |                           |       |                                 |       |                                           |       |                                                 |       |
| Cost of gaming equipment and systems                          |   | —     |   | 71,981                         |       | 11,956                               |       | (11,920                                        | )          | 72,017                                               |       |
| Cost of casino operations                                     |   | —     |   | —                         |       | 9,887                                |       | —                                         |       | 9,887                                                |       |
| Selling, general and administrative                           |   | 6,057      |   | 36,935                         |       | 13,251                               |       | (2,930                                         | )          | 53,313                                               |       |
| Research and development costs                                |   | —     |   | 12,328                         |       | 375                                  |       | —                                         |       | 12,703                                               |       |
| Depreciation and amortization                                 |   | 879        |   | 9,865                          |       | 1,723                                |       | —                                         |       | 12,467                                               |       |
|                                                          |   | 6,936      |   | 131,109                        |       | 37,192                               |       | (14,850                                        | )          | 160,387                                              |       |
|                                                          |   |       |   |                           |       |                                 |       |                                           |       |                                                 |       |
| Operating income (loss)                                       |   | (6,936     | )      | 46,261                         |       | 10,319                               |       | (177                                           | )          | 49,467                                               |       |
|                                                          |   |       |   |                           |       |                                 |       |                                           |       |                                                 |       |
| Earnings in consolidated subsidiaries                         |   | 44,757     |   | 5,725                          |       | —                               |       | (50,482                                        | )          | —                                               |       |
|                                                          |   |       |   |                           |       |                                 |       |                                           |       |                                                 |       |
| Other income (expense):                                       |   |       |   |                           |       |                                 |       |                                           |       |                                                 |       |
| Interest income                                               |   | 6,177      |   | 5                              |       | 8                                    |       | (6,064                                         | )          | 126                                                  |       |
| Interest expense                                              |   | (9,466     | )      | (6,165                         | )          | (31                                  | )          | 6,064                                          |       | (9,598                                               | )          |
| Rainbow royalty                                               |   | 3,134      |   | —                         |       | (3,134                               | )          | —                                         |       | —                                               |       |
| Minority interest                                             |   | (1,027     | )      | —                         |       | —                               |       | —                                         |       | (1,027                                               | )          |
| Refinancing charge                                            |   | (12,293    | )      | —                         |       | —                               |       | —                                         |       | (12,293                                              | )          |
| Other, net                                                    |   | 235        |   | (387                           | )          | (747                                 | )          | —                                         |       | (899                                                 | )          |
| Income (loss) from continuing operations  before income taxes |   | 24,581     |   | 45,439                         |       | 6,415                                |       | (50,659                                        | )          | 25,776                                               |       |
| Income tax expense                                            |   | 8,515      |   | 505                            |       | 690                                  |       | —                                         |       | 9,710                                                |       |
| Net income (loss) from continuing operations                  |   | 16,066     |   | 44,934                         |       | 5,725                                |       | (50,659                                        | )          | 16,066                                               |       |
|                                                          |   |       |   |                           |       |                                 |       |                                           |       |                                                 |       |
| Discontinued operations:                                      |   |       |   |                           |       |                                 |       |                                           |       |                                                 |       |
| Income from disc. ops. of Nevada Route, net                   |   | —     |   | 6,209                          |       | —                               |       | —                                         |       | 6,209                                                |       |
| Income from disc. ops. of Louisiana Route,  net               |   | —     |   | —                         |       | 730                                  |       | —                                         |       | 730                                                  |       |
| Income from disc. ops of Rail City Casino,  net               |   | —     |   | 1,767                          |       | —                               |       | —                                         |       | 1,767                                                |       |
| Earnings from consolidated discontinued  operations           |   | 8,706      |   | 730                            |       | —                               |       | (9,436                                         | )          | —                                               |       |
| Income (loss) from discontinued operations                    |   | 8,706      |   | 8,706                          |       | 730                                  |       | (9,436                                         | )          | 8,706                                                |       |
| Net income (loss)                                             |   | $          | 24,772 |                           | $          | 53,640                               |       | $                                              | 6,455      |                                                 | $          | (60,095 | ) | $ | 24,772 |   |

 

See accompanying unaudited notes.

 

22

----

 

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

Six Months Ended December 31, 2002

(000’s)

 
|                                                                                                |   | **Parent** |   | **Guaranteeing  Subsidiaries** | ** ** | **Non-  Guaranteeing  Subsidiaries** | ** ** | **Reclas  sifications  and  Elimina-  tions** | ** ** | **Alliance  Gaming  Corporation  and  Subsidiaries** | ** ** |
|-----------------------------------------------------------------------------------------------------|--------|------------|--------|--------------------------------|------------|--------------------------------------|------------|-----------------------------------------------|------------|------------------------------------------------------|------------|
| Cash flows from operating activities of  continuing operations:                                     |   |       |   |                           |       |                                 |       |                                          |       |                                                 |       |
| Net income (loss)                                                                                   |   | $          | 18,111 |                           | $          | 35,179                               |       | $                                             | 4,035      |                                                 | $          | (39,214 | ) | $ | 18,111 |   |
| Adjustments to reconcile net income (loss)  to net cash provided by (used in) operating activities: |   |       |   |                           |       |                                 |       |                                          |       |                                                 |       |
| (Income) loss from discontinued operations                                                          |   | (4,012     | )      | (3,604                         | )          | (636                                 | )          | 4,240                                         |       | (4,012                                               | )          |
| Depreciation and amortization                                                                       |   | 1,086      |   | 7,023                          |       | 1,044                                |       | —                                        |       | 9,153                                                |       |
| Deferred income taxes                                                                               |   | 7,519      |   | (3                             | )          | (9                                   | )          | —                                        |       | 7,507                                                |       |
| Provision for losses on receivables                                                                 |   | —     |   | 616                            |       | 12                                   |       | —                                        |       | 628                                                  |       |
| Other                                                                                               |   | (273       | )      | 797                            |       | 7                                    |       | —                                        |       | 531                                                  |       |
| Change in operating assets and liabilities:                                                         |   |       |   |                           |       |                                 |       |                                          |       |                                                 |       |
| Accounts and notes receivable                                                                       |   | (96        | )      | (28,867                        | )          | (3,662                               | )          | 85                                            |       | (32,540                                              | )          |
| Intercompany accounts                                                                               |   | (15,232    | )      | (25,937                        | )          | 6,153                                |       | 35,016                                        |       | —                                               |       |
| Inventories                                                                                         |   | —     |   | (889                           | )          | 20                                   |       | 22                                            |       | (847                                                 | )          |
| Other current assets                                                                                |   | (186       | )      | (753                           | )          | 139                                  |       | —                                        |       | (800                                                 | )          |
| Accounts payable                                                                                    |   | 2,100      |   | (276                           | )          | (18                                  | )          | —                                        |       | 1,806                                                |       |
| Accrued liabilities and jackpot liabilities                                                         |   | (5,559     | )      | 9,479                          |       | 840                                  |       | (113                                          | )          | 4,647                                                |       |
| Net cash provided by (used in) operating  activities of continuing operations                       |   | 3,458      |   | (7,235                         | )          | 7,925                                |       | 36                                            |       | 4,184                                                |       |
|                                                                                                |   |       |   |                           |       |                                 |       |                                          |       |                                                 |       |
| Cash flows from investing activities of  continuing operations:                                     |   |       |   |                           |       |                                 |       |                                          |       |                                                 |       |
| Additions to property, plant and equipment                                                          |   | (3         | )      | (2,423                         | )          | (2,475                               | )          | —                                        |       | (4,901                                               | )          |
| Additions to leased gaming equipment                                                                |   | —     |   | (10,010                        | )          | —                               |       | —                                        |       | (10,010                                              | )          |
| Additions to other long-term assets                                                                 |   | —     |   | (1,831                         | )          | (48                                  | )          | —                                        |       | (1,879                                               | )          |
| Acquisitions, net of cash acquired                                                                  |   | —     |   | (3,038                         | )          | —                               |       | —                                        |       | (3,038                                               | )          |
| Net cash used in investing activities of  continuing operations                                     |   | (3         | )      | (17,302                        | )          | (2,523                               | )          | —                                        |       | (19,828                                              | )          |
|                                                                                                |   |       |   |                           |       |                                 |       |                                          |       |                                                 |       |
| Cash flows from financing activities of  continuing operations:                                     |   |       |   |                           |       |                                 |       |                                          |       |                                                 |       |
| Reduction of long-term debt                                                                         |   | (1,950     | )      | (35                            | )          | (6                                   | )          | —                                        |       | (1,991                                               | )          |
| Bally Austria APIC                                                                                  |   | —     |   | —                         |       | 36                                   |       | (36                                           | )          | —                                               |       |
| Proceeds from exercise of stock options                                                             |   | 1,792      |   | —                         |       | —                               |       | —                                        |       | 1,792                                                |       |
| Dividends received (paid)                                                                           |   | —     |   | 2,940                          |       | (2,940                               | )          | —                                        |       | —                                               |       |
| Net cash provided by (used in) financing  activities of continuing operations                       |   | (158       | )      | 2,905                          |       | (2,910                               | )          | (36                                           | )          | (199                                                 | )          |
|                                                                                                |   |       |   |                           |       |                                 |       |                                          |       |                                                 |       |
| Effect of exchange rate changes on cash                                                             |   | —     |   | —                         |       | 93                                   |       | —                                        |       | 93                                                   |       |
|                                                                                                |   |       |   |                           |       |                                 |       |                                          |       |                                                 |       |
| Cash and cash equivalents provided by (used  in) discontinued operations                            |   | —     |   | 9,180                          |       | (736                                 | )          | —                                        |       | 8,444                                                |       |
|                                                                                                |   |       |   |                           |       |                                 |       |                                          |       |                                                 |       |
| Increase (decrease) for the period                                                                  |   | 3,297      |   | (12,452                        | )          | 1,849                                |       | —                                        |       | (7,306                                               | )          |
| Balance, beginning of period                                                                        |   | 8,121      |   | 17,414                         |       | 6,265                                |       | —                                        |       | 31,800                                               |       |
| Balance, end of period                                                                              |   | $          | 11,418 |                           | $          | 4,962                                |       | $                                             | 8,114      |                                                 | $          | — |   | $ | 24,494 |   |

 

See accompanying unaudited notes.

 

23

----

 

**UNAUDITED****CONSOLIDATINGSTATEMENTS OF CASH FLOWS**

Six Months Ended December 31, 2003

(000’s)

 
|                                                                                      |   | **Parent** |   | **Guaranteeing  Subsidiaries** | ** ** | **Non-  Guaranteeing  Subsidiaries** | ** ** | **Reclas  sifications  and  Elimina-  tions** | ** ** | **Alliance  Gaming  Corporation  and  Subsidiaries** | ** ** |
|-------------------------------------------------------------------------------------------|--------|------------|--------|--------------------------------|------------|--------------------------------------|------------|-----------------------------------------------|------------|------------------------------------------------------|------------|
| Cash flows from operating activities of continuing  operations:                           |   |       |   |                           |       |                                 |       |                                          |       |                                                 |       |
| Net income (loss)                                                                         |   | $          | 24,772 |                           | $          | 53,640                               |       | $                                             | 6,455      |                                                 | $          | (60,095 | ) | $ | 24,772 |   |
| Adjustments to reconcile net income (loss) to net  cash provided by operating activities: |   |       |   |                           |       |                                 |       |                                          |       |                                                 |       |
| (Income) loss from discontinued operations                                                |   | (8,706     | )      | (8,706                         | )          | (730                                 | )          | 9,436                                         |       | (8,706                                               | )          |
| Depreciation and amortization                                                             |   | 879        |   | 9,865                          |       | 1,723                                |       | —                                        |       | 12,467                                               |       |
| Refinancing charge                                                                        |   | 12,293     |   | —                         |       | —                               |       | —                                        |       | 12,293                                               |       |
| Deferred income taxes                                                                     |   | 8,671      |   | 1,762                          |       | —                               |       | —                                        |       | 10,433                                               |       |
| Provision for losses on receivables                                                       |   | —     |   | 505                            |       | 21                                   |       | —                                        |       | 526                                                  |       |
| Other                                                                                     |   | (99        | )      | (1,006                         | )          | 6                                    |       | —                                        |       | (1,099                                               | )          |
| Change in operating assets and liabilities:                                               |   |       |   |                           |       |                                 |       |                                          |       |                                                 |       |
| Accounts and notes receivable                                                             |   | (1,436     | )      | (492                           | )          | 2                                    |       | (93                                           | )          | (2,019                                               | )          |
| Intercompany accounts                                                                     |   | (16,285    | )      | (35,946                        | )          | 1,716                                |       | 50,515                                        |       | —                                               |       |
| Inventories                                                                               |   | —     |   | (2,155                         | )          | (515                                 | )          | 177                                           |       | (2,493                                               | )          |
| Other current assets                                                                      |   | (440       | )      | (588                           | )          | 5                                    |       | —                                        |       | (1,023                                               | )          |
| Accounts payable                                                                          |   | (1,035     | )      | (1,345                         | )          | 308                                  |       | —                                        |       | (2,072                                               | )          |
| Accrued liabilities and jackpot liabilities                                               |   | (8,377     | )      | 4,556                          |       | 837                                  |       | 60                                            |       | (2,924                                               | )          |
| Net cash provided by operating activities of  continuing operations                       |   | 10,237     |   | 20,090                         |       | 9,828                                |       | —                                        |       | 40,155                                               |       |
|                                                                                      |   |       |   |                           |       |                                 |       |                                          |       |                                                 |       |
| Cash flows from investing activities of continuing  operations:                           |   |       |   |                           |       |                                 |       |                                          |       |                                                 |       |
| Advances and notes receivable due from Sierra  Design Group                               |   | (61,025    | )      | —                         |       | —                               |       | —                                        |       | (61,025                                              | )          |
| Additions to property, plant and equipment                                                |   | (19        | )      | (1,365                         | )          | (2,431                               | )          | —                                        |       | (3,815                                               | )          |
| Additions to leased gaming equipment                                                      |   | —     |   | (14,081                        | )          | (1,876                               | )          | —                                        |       | (15,957                                              | )          |
| Additions to other long-term assets                                                       |   | (5,974     | )      | (4,504                         | )          | 64                                   |       | —                                        |       | (10,414                                              | )          |
| Acquisitions, net of cash acquired                                                        |   | —     |   | (3,879                         | )          | —                               |       | —                                        |       | (3,879                                               | )          |
| Proceeds from sale of assets of discontinued  operations                                  |   | 16,500     |   | —                         |       | —                               |       | —                                        |       | 16,500                                               |       |
| Net cash used in investing activities of continuing  operations                           |   | (50,518    | )      | (23,829                        | )          | (4,243                               | )          | —                                        |       | (78,590                                              | )          |
|                                                                                      |   |       |   |                           |       |                                 |       |                                          |       |                                                 |       |
| Cash flows from financing activities of continuing  operations:                           |   |       |   |                           |       |                                 |       |                                          |       |                                                 |       |
| Debt issuance costs                                                                       |   | (6,954     | )      | —                         |       | —                               |       | —                                        |       | (6,954                                               | )          |
| Premium and consents fees paid on redemption of  subordinated notes                       |   | (5,399     | )      | —                         |       | —                               |       | —                                        |       | (5,399                                               | )          |
| Proceeds from issuance of long-term debt                                                  |   | 350,000    |   | —                         |       | —                               |       | —                                        |       | 350,000                                              |       |
| Payoff of debt from refinancing                                                           |   | (337,625   | )      | —                         |       | —                               |       | —                                        |       | (337,625                                             | )          |
| Reduction of long-term debt                                                               |   | (495       | )      | (842                           | )          | (12                                  | )          | —                                        |       | (1,349                                               | )          |
| Net change in revolving credit facility                                                   |   | 70,000     |   | —                         |       | —                               |       | —                                        |       | 70,000                                               |       |
| Proceeds from exercise of stock options                                                   |   | 2,907      |   | —                         |       | —                               |       | —                                        |       | 2,907                                                |       |
| Dividends received (paid)                                                                 |   | —     |   | 6,380                          |       | (6,380                               | )          | —                                        |       | —                                               |       |
| Net cash provided by (used in) financing activities  of continuing operations             |   | 72,434     |   | 5,538                          |       | (6,392                               | )          | —                                        |       | 71,580                                               |       |
| Effect of exchange rate changes on cash                                                   |   | —     |   | —                         |       | 130                                  |       | —                                        |       | 130                                                  |       |
|                                                                                      |   |       |   |                           |       |                                 |       |                                          |       |                                                 |       |
| Cash and cash equivalents provided by (used in)  discontinued operations                  |   | —     |   | (938                           | )          | 1,033                                |       | —                                        |       | 95                                                   |       |
| Increase for the period                                                                   |   | 32,153     |   | 861                            |       | 356                                  |       | —                                        |       | 33,370                                               |       |
| Balance, beginning of period                                                              |   | 12,730     |   | 18,036                         |       | 8,118                                |       | —                                        |       | 38,884                                               |       |
| Balance, end of period                                                                    |   | $          | 44,883 |                           | $          | 18,897                               |       | $                                             | 8,474      |                                                 | $          | — |   | $ | 72,254 |   |

 

See accompanying unaudited notes.

 

24

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**Debt and Revolving Credit Facility**

 

Long-term debt and lines of credit at June 30, 2003 consist of thefollowing (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, net of current maturities                   |   | $          | 335,388 |                           | $          | 166,013                              |       | $                                              | —     |                                                 | $          | (159,723 | ) | $ | 341,678 |   |

 

Long-term debt and lines of credit at December 31, 2003, consistedof the following (in 000’s):

 
|                                     |   | **Parent** |    | **Guaranteeing  Subsidiaries** | ** ** | **Non-  Guaranteeing  Subsidiaries** | ** ** | **Reclas-  sifications  and  Elimina-  tions** | ** ** | **Alliance  Gaming  Corporation  and  Subsidiaries** | ** ** |
|------------------------------------------|--------|------------|---------|--------------------------------|------------|--------------------------------------|------------|------------------------------------------------|------------|------------------------------------------------------|------------|
|                                     |   |       |    |                           |       |                                 |       |                                           |       |                                                 |       |
| Term loan facility                       |   | $          | 350,000 |                           | $          | —                               |       | $                                              | —     |                                                 | $          | — |   | $ | 350,000 |   |
| Revolving credit facility                |   | 70,000     |    | —                         |       | —                               |       | —                                         |       | 70,000                                               |       |
| Intercompany notes payable               |   | —     |    | 165,787                        |       | —                               |       | (165,787                                       | )          | —                                               |       |
| Other                                    |   | 1          |    | 5,279                          |       | 6                                    |       | —                                         |       | 5,286                                                |       |
|                                     |   | 420,001    |    | 171,066                        |       | 6                                    |       | (165,787                                       | )          | 425,286                                              |       |
| Less current maturities                  |   | 1,563      |    | 1,500                          |       | 6                                    |       | —                                         |       | 3,069                                                |       |
| Long-term debt net of current maturities |   | $          | 418,438 |                           | $          | 169,566                              |       | $                                              | —     |                                                 | $          | (165,787 | ) | $ | 422,217 |   |

 

25

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**ALLIANCEGAMING CORPORATION**

**FORM10-Q**

 

**December 31, 2003**

 

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

 

***Overviewand Summary***

 

We are a diversified, worldwide gaming company that (i) designs,manufactures and distributes gaming machines and computerized monitoring systemsfor gaming machines; and (ii) owns and operates a casino. Operating underthe name Bally Gaming and Systems, we are a worldwide leader in designing,manufacturing and distributing gaming machines, having marketed over 90,000gaming machines during the past five years. We also design, integrate and sellhighly specialized computerized monitoring systems that provide casinos withnetworked accounting and security services for their gaming machines with over240,000 game monitoring units installed worldwide. Our dockside casino inVicksburg, Mississippi offers 12 table games and approximately 930 gamingdevices.

 

Several significant events should be highlighted. In July 2003, weannounced our intention to transform our Company from a diversified gaming conglomerateto a technology provider to the gaming industry.  In July 2003, we entered into definitive agreements to sell routeoperations in Nevada and Louisiana, and our wall machine and amusement gamesbusiness in Germany.  The Germanbusiness has been sold and the sales of the Nevada and Louisiana routeoperations are expected to be completed during fiscal 2004.  In addition, on December 8, 2003, theCompany announced that it had entered into an agreement for the sale of itsRail City Casino.  For purposes of financial reporting, each ofthese four businesses are now treated as discontinued operations and theirresults are presented net of applicable income taxes, below income fromcontinuing operations.

 

On November 11, 2003, we announced anagreement to purchase 100 percent of the outstanding shares of Sierra DesignGroup (“SDG”), a leading supplier of Class II and Class III gaming devices,systems and technology.  Over the lastseveral years we believed that the next significant expansion in gaming will bederived from the VLT and the Racino markets both domestically andinternationally. SDG’s presence in both arenas and more importantly theirtechnology supporting centrally determined gaming and Class II gaming will giveus significant presence in these markets and significant head start incapitalizing on the expected growth in these markets. Finally, onDecember 31, 2003, we acquired England-based Crown Gaming from CrownLeisure Limited, one of the United Kingdom’s largest distributors of gaming andamusement machines.

 

***Liquidityand Capital Resources***

 

As of December 31, 2003, we had $72.3 million in cash and cashequivalents, and $55.0 million in unborrowed availability on our revolvingcredit facility. In addition, we had net working capital of approximately$205.3 million at December 31, 2003, compared to $155.2 million atJune 30, 2003 excluding liabilities of discontinued operations.  The changes within working capital are morefully described in the cash flow section below. Consolidated cash and cashequivalents at December 31, 2003 includes approximately $2.7 million ofcash which is utilized in Casino Operations held in vaults, cages or changebanks, as well as $13.7 million which is held in jackpot reserve accounts wemaintain to ensure availability of funds to pay wide-area progressive jackpotawards. In addition, long-term investments of $2.6 million include investmentsin Treasury Strips for the previous jackpot winners.

 

Management believes that cash flows from operating activities, cash andcash equivalents held and the $125 million revolving credit facility commitmentwill provide the Company with sufficient capital resources and liquidity. AtDecember 31, 2003, we had no material commitments for capitalexpenditures.

 

The acquisition of SDG will be forconsideration of approximately $45 million consisting of $27 million of cashand 736,000 shares of Alliance Gaming Common Stock (valued at $18 million) tobe paid at closing and approximately $95 million of contingentconsideration payable in equal portions of cash and stock payable over thethree years following the acquisition upon SDG

 

26

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achieving certain financial objectives. In addition, the Company hasmade loan commitments to SDG of $74 million with interest accruing at 8% ofwhich $61 million has been advanced as of December 31, 2003.  Principal and interest on these loans is duein November 2004. The acquisition, which is subject to regulatoryapprovals and certain other customary closing conditions, is expected to closein the first half of calendar 2004.

 

From time to time we become aware of potential acquisition ordevelopment opportunities and we may at any time be negotiating to engage intransactions or developments both domestically and internationally.Additionally, we regularly evaluate all of our assets within our portfolio andwill continue to consider disposition of assets that, in our opinion, do notrepresent the best use of our capital. If such transactions occur our capital resourcesand liquidity may be affected.

 

***Cash Flow***

 

During the six months ended December 31, 2003, we generated $40.2million of cash flows from operating activities of continuing operations,compared to $4.2 million in the prior year period primarily as the result offavorable operating performance discussed earlier.

 

# **During the six months endedDecember 31, 2003, cash flow from investing activities of continuingoperations included $10.9 million of cash provided from the sale of Bally Wulff(net of $5.6 million used to purchase a5 million Euro certificate of deposit as collateral for a tax claim currentlybeing negotiated with the German tax authorities, for which the Company hasindemnified the buyer), offset by the issuance of $61.0 million in loanadvance to SDG, net cash used in the in the acquisition of Crown for $3.9million, capital expenditures totaling $3.8 million, and costs incurred toproduce participation games totaling $16.0 million.**

# ** **

During the six months ended December 31, 2003, $71.6 million cashwas provided by financing activities of continuing operations resulting from$70 million increase in term loans and $350.0 million proceeds from issuance oflong-term debt and $2.9 million of cash provided from the exercise of stockoptions, offset by $337.6 million payoff of debt from refinancing, $7.0 ofrefinancing costs, $5.4 million of premium paid on early redemption of thesubordinated notes bonds and principal payments on long term debt totaling $1.3million.

 

***Results ofOperations for each Business Unit:***

 

***Bally Gaming andSystems***

 

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

 
|                                |   | **Three  Months Ended  December 31,** | ** ** | **Six Months  Ended  December 31,** | ** ** |
|-------------------------------------|--------|--------------------------------------------|------------|------------------------------------------|------------|
|                                |   | **2002**                                   |       | **2003**                                 | ** ** | **2002** | ** ** | **2003** | ** ** |
| Revenues                            |   |                                       |       |                                     |       |   |   |   |   |
| Game sales                          |   | $                                          | 50,421     |                                     | $          | 49,577 |   | $ | 84,204 |   | $ | 92,318 |   |
| System sales                        |   | 23,041                                     |       | 30,749                                   |       | 38,316 |   | 60,733 |   |
| Gaming operations                   |   | 13,165                                     |       | 15,993                                   |       | 27,646 |   | 31,736 |   |
| Total revenues                      |   | 86,627                                     |       | 96,319                                   |       | 150,166 |   | 184,787 |   |
|                                |   |                                       |       |                                     |       |   |   |   |   |
| Gross Margin                        |   |                                       |       |                                     |       |   |   |   |   |
| Game sales                          |   | 21,621                                     |       | 23,259                                   |       | 37,546 |   | 42,867 |   |
| System sales                        |   | 17,106                                     |       | 22,854                                   |       | 29,039 |   | 46,718 |   |
| Gaming operations                   |   | 8,237                                      |       | 11,426                                   |       | 17,660 |   | 23,185 |   |
| Total gross margin                  |   | 46,964                                     |       | 57,539                                   |       | 84,245 |   | 112,770 |   |
|                                |   |                                       |       |                                     |       |   |   |   |   |
| Selling, general and administrative |   | 16,254                                     |       | 18,193                                   |       | 31,161 |   | 41,275 |   |
| Research and development costs      |   | 5,158                                      |       | 6,740                                    |       | 9,133 |   | 12,703 |   |
| Depreciation and amortization       |   | 3,777                                      |       | 5,389                                    |       | 7,041 |   | 10,217 |   |
| Operating income                    |   | $                                          | 21,775     |                                     | $          | 27,217 |   | $ | 36,910 |   | $ | 48,575 |   |

 

27

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|                          |   | **Three  Months Ended  December 31,** | ** ** | **Six Months  Ended  December 31,** | ** ** |
|-------------------------------|--------|--------------------------------------------|------------|------------------------------------------|------------|
|                          |   | **2002**                                   |       | **2003**                                 | ** ** | **2002** | ** ** | **2003** | ** ** |
| Operating Statistics:         |   |                                       |       |                                     |       |   |   |   |   |
| New Gaming  Devices Sold      |   | 5,430                                      |       | 4,600                                    |       | 9,430 |   | 9,795 |   |
| Game  Monitoring Units Sold   |   | 8,900                                      |       | 10,950                                   |       | 15,030 |   | 22,300 |   |
| WAP and  daily-fee games      |   |                                       |       |                                     |       |   |   |   |   |
| End of  period installed base |   | 3,930                                      |       | 4,790                                    |       | 3,930 |   | 4,790 |   |
| Average  installed base       |   | 3,910                                      |       | 4,800                                    |       | 3,800 |   | 4,740 |   |

 

Our Bally Gaming and Systems business unit reported an overall increasein revenues of 11% for the quarter and 23% for the year-to-date period, whencompared to the prior year periods. Bally game sales division reported adecrease in revenues of 2% for the quarter and an increase of 10% for theyear-to-date period. New units sold decreased 15% during the quarter andincreased 4% for the year-to-date period. The percentage decrease in new unitssold for the quarter on a comparative basis reflects a comparison to the prioryear quarter in which there were two significant new casino properties sales ofwhich include approximately 1,600 units. The average new-unit selling price(excluding OEM games) increased 10% for the quarter and 8% for the year-to-dateperiod.

 

Bally Systems division reported an increase in revenues of 33% for thequarter and 59% for the year-to-date period, when compared to the prior yearperiods driven by an increase in sales of game monitoring units for the quarterof 23% and an increase of 48% for the year-to-date period. For the currentquarter and year-to-date period, Bally Systems experienced a continued increasein the average selling price per unit, increased sales of software licenses foreTICKETTM, as well as sales of its bonusing and promotions software. BallySystems recurring hardware and software revenues for the quarter increased to$5.1 million, resulting from the larger base of installed systems, which nowstands at approximately 244,000.

 

The Gaming Operations division reported an increase of 21% in revenuesfor the quarter and an increase of 15% for the year-to-date period, whencompared to the prior year periods driven by the 23% increase for the quarterand the 25% increase for the year-to-date-period in the average installed baseof wide-area progressive (WAP) and daily-fee games deployed, which now total1,840 and 2,950, respectively. The current quarter placements included thecontinued roll out of “Cash for Life” WAP games and the continued placement ofdaily fee games such as Playboy and the Saturday Night Live series, as well asthe installation of an additional 130 games at Delaware race tracks.

 

For the quarter ended December 31, 2003, the overall gross marginpercentage for Bally Gaming and Systems increased to 60% compared to 54% in theprior year quarter, primarily as a result of an increase in higher marginsystems revenues.

 

Selling, general and administrative expenses increased 12% over theprior year quarter, as a result of an overall increase in regulatory fees,advertising and marketing expenses. Selling, general and administrative costsas a percentage of this business unit’s revenue remained constant at 19% in thecurrent year quarter. Research and development costs increased 31% for thequarter, resulting from an increase in headcount and consulting fees during thecurrent quarter. Total depreciation expense increased 43% over the prior yearquarter, driven by the increase in the installed base of wide-area progressiveand daily fee games.

 

During fiscal year 2004, Bally Gaming and Systems has experienced analmost four fold increase in the volume of product submissions to the variousdomestic regulatory bodies, each of which charge fees for testing and approvalof each product. Product testing costs are capitalized once technologicalfeasibility has been established and are amortized, generally over three yearperiod once the product is placed in service. Product testing costs related toprojects that are discontinued are expensed when such determinations is made.The year to date fees incurred for such regulatory approvals and classified asResearch and Development costs, exceeded $5.1 million. Of these amountsincurred, for the quarter ended December 31, 2003, the Company capitalizeda total of $2.4 million that was directly attributable to products that havebeen approved.

 

28

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***Rainbow CasinoOperation***

 

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

 
|                                 |   | **Three  Months Ended  December 31,** | ** ** | **Six Months  Ended  December 31,** | ** ** |
|--------------------------------------|--------|--------------------------------------------|------------|------------------------------------------|------------|
|                                 |   | **2002**                                   |       | **2003**                                 | ** ** | **2002** | ** ** | **2003** | ** ** |
|                                 |   |                                       |       |                                     |       |   |   |   |   |
| Revenues                             |   | $                                          | 11,600     |                                     | $          | 12,312 |   | $ | 24,267 |   | $ | 25,067 |   |
| Gross Margin                         |   | 6,377                                      |       | 7,428                                    |       | 13,747 |   | 15,180 |   |
| Selling, general and administrative  |   | 3,218                                      |       | 2,931                                    |       | 6,176 |   | 5,981 |   |
| Depreciation and amortization        |   | 528                                        |       | 683                                      |       | 1,026 |   | 1,371 |   |
| Operating income                     |   | $                                          | 2,631      |                                     | $          | 3,814 |   | $ | 6,545 |   | $ | 7,828 |   |
|                                 |   |                                       |       |                                     |       |   |   |   |   |
| Operating Statistics:                |   |                                       |       |                                     |       |   |   |   |   |
| **Average Number of Gaming Devices** |   | **905**                                    | ** ** | **910**                                  | ** ** | **930** | ** ** | **930** | ** ** |
| **Average Number of Table Games**    |   | **16**                                     | ** ** | **12**                                   | ** ** | **16** | ** ** | **12** | ** ** |

 

Rainbow Casino revenues increased 6% for the quarter and 3% for theyear-to-date-period, when compared to the prior year periods.The revenueincrease in the quarter is a result of a 5% increase in net win per day pergaming machine to $142 and 1% increase in the average number of gaming machinesfor the quarter.

 

The gross margin for Casino Operations as a percentage of revenuesincreased to 60% for the quarter as compared to 55% for the prior year 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 decreased 9%over the prior year quarter, as a result of a decrease in advertising andpromotional expenses. Selling, general and administrative costs as a percentageof this business unit’s revenue decreased to 24% in the current quartercompared to 28% in the prior year quarter. Total depreciation expense increased28% over the prior year quarter as a result of the capital improvements made tothe Rainbow Casino in the prior year.

 

29

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***DiscontinuedOperations***

 

As previously discussed, we announced that we had entered intodefinitive agreements for the sale of our two route operations inJuly 2003 and the sale of our Rail City Casino in December 2003. Forpurposes of financial reporting, these three business units are now treated asdiscontinued operations.

 

***Rail City Casino***

 

Summaryfinancial results and operating statistics are as follows (dollars in 000’s):

 
|                                 |   | **Three  Months Ended  December 31,** | ** ** | **Six Months  Ended  December 31,** | ** ** |
|--------------------------------------|--------|--------------------------------------------|------------|------------------------------------------|------------|
|                                 |   | **2002**                                   |       | **2003**                                 | ** ** | **2002** | ** ** | **2003** | ** ** |
|                                 |   |                                       |       |                                     |       |   |   |   |   |
| Revenues                             |   | $                                          | 5,178      |                                     | $          | 5,866 |   | $ | 10,301 |   | $ | 11,247 |   |
| Gross Margin                         |   | 2,339                                      |       | 2,778                                    |       | 4,571 |   | 5,186 |   |
| Selling, general and administrative  |   | 885                                        |       | 956                                      |       | 1,772 |   | 1,906 |   |
| Depreciation and amortization        |   | 264                                        |       | 239                                      |       | 508 |   | 565 |   |
| Operating income                     |   | $                                          | 1,190      |                                     | $          | 1,583 |   | $ | 2,291 |   | $ | 2,715 |   |
|                                 |   |                                       |       |                                     |       |   |   |   |   |
| Operating Statistics:                |   |                                       |       |                                     |       |   |   |   |   |
| **Average Number of Gaming Devices** |   | **545**                                    | ** ** | **580**                                  | ** ** | **545** | ** ** | **575** | ** ** |
| **Average Number of Table Games**    |   | **8**                                      | ** ** | **7**                                    | ** ** | **8** | ** ** | **7** | ** ** |

 

Rail City Casino revenues increased 13% for the quarter and increased9% for the year-to-date-period when compared to the prior year periods. Therevenue improvement in the quarter at the Rail City Casino was attributable toa 6% increase in the average number of gaming machines and 12% increase in netwin per day per gaming machine to $93.

 

The gross margin for Casino Operations as a percentage of revenuesincreased to 47% for the quarter from 45% in the prior year quarter. Thisincrease was a result of decreases in certain operating costs. Cost of casinorevenues includes gaming taxes, rental costs and direct labor including payrolltaxes and benefits.

 

The overall selling, general and administrative expenses increased 8%over the prior year quarter, as a result of an increase in advertising andpromotional expenses. Selling, general and administrative costs as a percentageof this business unit’s revenue decreased to 16% in the current quartercompared to 17% the prior year quarter. In accordance with generally acceptedaccounting principles, depreciation and amortization for these discontinuedoperation ceased as of December 8, 2003 as a result of their designationas assets held for sale. As a result, total depreciation expense decressed 9%over that recorded in the prior year quarter. Had depreciation and amortizationexpense been recorded for the current period, operating income for thediscontinued operations would have decreased by $0.1 million compared to prioryear quarter.

 

30

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***Route Operations***

 

Summaryfinancial results and operating statistics are as follows (dollars in 000’s):

 
|                                 |   | **Three  Months Ended  December 31,** | ** ** | **Six Months  Ended  December 31,** | ** ** |
|--------------------------------------|--------|--------------------------------------------|------------|------------------------------------------|------------|
|                                 |   | **2002**                                   |       | **2003**                                 | ** ** | **2002** | ** ** | **2003** | ** ** |
| Revenues                             |   |                                       |       |                                     |       |   |   |   |   |
| Nevada                               |   | $                                          | 49,727     |                                     | $          | 54,127 |   | $ | 100,874 |   | $ | 104,396 |   |
| Louisiana                            |   | 3,594                                      |       | 4,186                                    |       | 7,284 |   | 7,890 |   |
| Total revenues                       |   | 53,321                                     |       | 58,313                                   |       | 108,158 |   | 112,286 |   |
|                                 |   |                                       |       |                                     |       |   |   |   |   |
| Gross Margin                         |   |                                       |       |                                     |       |   |   |   |   |
| Nevada                               |   | 7,432                                      |       | 8,319                                    |       | 15,328 |   | 15,923 |   |
| Louisiana                            |   | 1,207                                      |       | 1,421                                    |       | 2,428 |   | 2,628 |   |
| Total gross margin                   |   | 8,639                                      |       | 9,740                                    |       | 17,756 |   | 18,551 |   |
|                                 |   |                                       |       |                                     |       |   |   |   |   |
| Selling, general and administrative  |   | 2,856                                      |       | 3,376                                    |       | 5,998 |   | 6,520 |   |
| Depreciation and amortization        |   | 3,315                                      |       | —                                   |       | 6,625 |   | — |   |
|                                 |   |                                       |       |                                     |       |   |   |   |   |
| Operating income                     |   |                                       |       |                                     |       |   |   |   |   |
| Nevada                               |   | 2,017                                      |       | 5,683                                    |       | 4,226 |   | 10,877 |   |
| Louisiana                            |   | 451                                        |       | 681                                      |       | 907 |   | 1,154 |   |
| Total operating income               |   | $                                          | 2,468      |                                     | $          | 6,364 |   | $ | 5,133 |   | $ | 12,031 |   |
|                                 |   |                                       | ** ** |                                     | ** ** |   | ** ** |   | ** ** |
| **Operating Statistics:**            |   |                                       | ** ** |                                     | ** ** |   | ** ** |   | ** ** |
| **Average Number of Gaming Devices** |   |                                       | ** ** |                                     | ** ** |   | ** ** |   | ** ** |
| **Nevada**                           |   | **8,130**                                  | ** ** | **8,425**                                | ** ** | **8,235** | ** ** | **8,130** | ** ** |
| **Louisiana**                        |   | **710**                                    | ** ** | **745**                                  | ** ** | **710** | ** ** | **730** | ** ** |
| **Total Gaming Devices**             |   | **8,840**                                  | ** ** | **9,170**                                | ** ** | **8,945** | ** ** | **8,860** | ** ** |

 

Revenues from the Nevada route operations in the quarter increased 9%over the prior year quarter. This increase was attributable to a 4% increase inthe average number of gaming machines for the quarter and an increase in theaverage net win per gaming machine per day of 4% to $68.80 from $65.85.Gamblers’ Bonus, a cardless players club and player tracking system, continuedto have a favorable impact on the net win per day. As of December 31,2003, the Gamblers’ Bonus product was installed in over 4,160 gaming machinesat approximately 428 locations statewide or 50% of the installed base of gamingmachines.

 

Revenues from route operations in Louisiana operations in the quarterincreased 16% over the prior year quarter as the result of an 11% increase inthe net win per gaming machine per day to $60.40 from $54.65 and a 5% increasethe number of units deployed compared to prior year quarter.

 

For quarter ended December 31, 2003, the overall gross marginpercentage for the Route Operations remained relatively constant at 16%. Theoverall selling, general and administrative expenses increased in the quarter18% over the prior year quarter. Selling, general and administrative costs as apercentage of revenue remained at 6% compared to prior year quarter.

 

The results of the Nevada Route and Louisiana Route operations for thequarter and the six months ended December 31, 2002 include depreciationand amortization expense. In accordance with generally accepted accountingprinciples, depreciation and amortization for these discontinued operationsceased as of July 1, 2003 as a result of their designation as assets heldfor sale. Had depreciation and amortization expense been recorded for thecurrent period, operating income for the discontinued operations would havedecreased by $3.5 million to $2.9 million, an increase of 18% compared to prioryear quarter.

 

31

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***ParentCompany and other unallocated income (expense)***

 

Summary financial results (dollars in 000’s):

 
|                          |   | **Three  Months Ended  December 31,** | ** ** | **Six Months  Ended  December 31,** | ** ** |
|-------------------------------|--------|--------------------------------------------|------------|------------------------------------------|------------|
|                          |   | **2002**                                   |       | **2003**                                 | ** ** | **2002** | ** ** | **2003** | ** ** |
|                          |   |                                       |       |                                     |       |   |   |   |   |
| General and administrative    |   | $                                          | 2,623      |                                     | $          | 3,124 |   | $ | 4,858 |   | $ | 6,057 |   |
| Depreciation and amortization |   | 542                                        |       | 373                                      |       | 1,086 |   | 879 |   |
| Total Parent company expense  |   | $                                          | 3,165      |                                     | $          | 3,497 |   | $ | 5,944 |   | $ | 6,936 |   |
|                          |   |                                       | ** ** |                                     | ** ** |   | ** ** |   | ** ** |
| **Other income (expense):**   |   |                                       | ** ** |                                     | ** ** |   | ** ** |   | ** ** |
| Interest income               |   | $                                          | 79         |                                     | $          | 83 |   | $ | 127 |   | $ | 126 |   |
| Interest expense              |   | (6,554                                     | )          | (3,869                                   | )          | (13,195 | ) | (9,598 | ) |
| Minority interest             |   | (309                                       | )          | (541                                     | )          | (754 | ) | (1,027 | ) |
| Refinancing charge            |   | —                                     |       | —                                   |       | — |   | (12,293 | ) |
| Other, net                    |   | 266                                        |       | (545                                     | )          | 366 |   | (899 | ) |
| Total other expense           |   | $                                          | (6,518     | )                                        | $          | (4,872 | ) | $ | (13,456 | ) | $ | (23,691 | ) |
|                          |   |                                       |       |                                     |       |   |   |   |   |
| Income tax expense            |   | $                                          | 6,147      |                                     | $          | 8,444 |   | $ | 9,956 |   | $ | 9,710 |   |

 

The general and administrative expenses increased 19% over the prior yearquarter. This increase was driven by higher corporate litigation and regulatoryapproval cost. Total depreciation expense decreased 31% for the quarter as aresult of lower amortization expenses due to lower capitalized costs in therecent debt refinancing transaction.

 

Interest expense (net of interest income) for the current quartertotaled $3.8 million compared to $6.5 million in the prior year period. Thelower interest expense in the current quarter reflects reduced interest ratespost-refinancing.

 

For the six month ended December 31, 2003, reflect a $12.3 millionrefinancing charge recorded in the first quarter consisting primarily of a $5.0million prepayment penalty for the redemption of our Subordinated Notes, anon-cash charge of $7.0 million to write off the deferred financing costs, and$0.3 million of fees and expenses. We recorded a tax benefit from these chargestotaling approximately $4.8 million.

 

Beginning July 1, 2002, the Company began recognizing Federalincome tax expense based on 35% of pre-tax domestic income and state incometaxes at a rate of approximately 4% of domestic income.

 

32

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**Results of Operations**

 

The following table reconciles our earnings before interest, taxes,depreciation and amortization (“EBITDA”) to our consolidated net income from continuing operations (in000’s):

 
|                                  |   | **Three  Months Ended  December 31,** | ** ** | **Six Months  Ended  December 31,** | ** ** |
|---------------------------------------|--------|--------------------------------------------|------------|------------------------------------------|------------|
|                                  |   | **2002**                                   |       | **2003**                                 | ** ** | **2002** | ** ** | **2003** | ** ** |
|                                  |   |                                       |       |                                     |       |   |   |   |   |
| Net income from continuing operations |   | $                                          | 8,576      |                                     | $          | 14,218 |   | $ | 14,099 |   | $ | 16,066 |   |
| Income tax expense                    |   | 6,147                                      |       | 8,444                                    |       | 9,956 |   | 9,710 |   |
| Other expense, net                    |   | 43                                         |       | 1,086                                    |       | 388 |   | 1,926 |   |
| Interest expense, net                 |   | 6,475                                      |       | 3,786                                    |       | 13,068 |   | 9,472 |   |
| Refinancing charge                    |   | —                                     |       | —                                   |       | — |   | 12,293 |   |
| Operating income                      |   | 21,241                                     |       | 27,534                                   |       | 37,511 |   | 49,467 |   |
| Depreciation and amortization         |   | 4,847                                      |       | 6,445                                    |       | 9,153 |   | 12,467 |   |
| EBITDA from continuing operations     |   | $                                          | 26,088     |                                     | $          | 33,979 |   | $ | 46,664 |   | $ | 61,934 |   |

 

The following tables reconcile operating income by business segment toEBITDA:

 

For the three months ended December 31, 2002 (from continuingoperations) (in 000’s):

 
|                     |   | **Operating  Income  (Loss)** |   | **Depreciation  and  Amortization** | ** ** | **EBITDA** | ** ** |
|--------------------------|--------|-------------------------------|--------|-------------------------------------|------------|------------|------------|
|                     |   |                          |   |                                |       |       |       |
| Bally Gaming and Systems |   | $                             | 21,775 |                                | $          | 3,777      |       | $ | 25,552 |   |
| Casino Operations        |   | 2,631                         |   | 528                                 |       | 3,159      |       |
| Corporate expenses       |   | (3,165                        | )      | 542                                 |       | (2,623     | )          |
|                     |   | $                             | 21,241 |                                | $          | 4,847      |       | $ | 26,088 |   |

 

For the three months ended December 31, 2003 (from continuingoperations) (in 000’s):

 
|                     |   | **Operating  Income  (Loss)** |   | **Depreciation  and  Amortization** | ** ** | **EBITDA** | ** ** |
|--------------------------|--------|-------------------------------|--------|-------------------------------------|------------|------------|------------|
|                     |   |                          |   |                                |       |       |       |
| Bally Gaming and Systems |   | $                             | 27,217 |                                | $          | 5,389      |       | $ | 32,606 |   |
| Casino Operations        |   | 3,814                         |   | 683                                 |       | 4,497      |       |
| Corporate expenses       |   | (3,497                        | )      | 373                                 |       | (3,124     | )          |
|                     |   | $                             | 27,534 |                                | $          | 6,445      |       | $ | 33,979 |   |

 

For the six months ended December 31, 2002 (from continuingoperations) (in 000’s):

 
|                     |   | **Operating  Income  (Loss)** |   | **Depreciation  and  Amortization** | ** ** | **EBITDA** | ** ** |
|--------------------------|--------|-------------------------------|--------|-------------------------------------|------------|------------|------------|
|                     |   |                          |   |                                |       |       |       |
| Bally Gaming and Systems |   | $                             | 36,910 |                                | $          | 7,041      |       | $ | 43,951 |   |
| Rainbow Casino           |   | 6,545                         |   | 1,026                               |       | 7,571      |       |
| Corporate expenses       |   | (5,944                        | )      | 1,086                               |       | (4,858     | )          |
|                     |   | $                             | 37,511 |                                | $          | 9,153      |       | $ | 46,664 |   |

 

33

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For the six months ended December 31, 2003 (from continuingoperations) (in 000’s):

 
|                     |   | **Operating  Income  (Loss)** |   | **Depreciation  and  Amortization** | ** ** | **EBITDA** | ** ** |
|--------------------------|--------|-------------------------------|--------|-------------------------------------|------------|------------|------------|
|                     |   |                          |   |                                |       |       |       |
| Bally Gaming and Systems |   | $                             | 48,575 |                                | $          | 10,217     |       | $ | 58,792 |   |
| Rainbow Casino           |   | 7,828                         |   | 1,371                               |       | 9,199      |       |
| Corporate expenses       |   | (6,936                        | )      | 879                                 |       | (6,057     | )          |
|                     |   | $                             | 49,467 |                                | $          | 12,467     |       | $ | 61,934 |   |

 

The following table reconciles our earnings before interest, taxes,depreciation and amortization (“EBITDA”) to our consolidated net income from our discontinuedoperations (in 000’s):

 
|                                    |   | **Three  Months Ended  December 31,** | ** ** | **Six Months  Ended  December 31,** | ** ** |
|-----------------------------------------|--------|--------------------------------------------|------------|------------------------------------------|------------|
|                                    |   | **2002**                                   |       | **2003**                                 | ** ** | **2002** | ** ** | **2003** | ** ** |
|                                    |   |                                       |       |                                     |       |   |   |   |   |
| Net income from discontinued operations |   | $                                          | 3,277      |                                     | $          | 4,526 |   | $ | 4,012 |   | $ | 8,706 |   |
| Income tax expense                      |   | 1,299                                      |       | 2,437                                    |       | 2,581 |   | 4,724 |   |
| Other expense, net                      |   | (3                                         | )          | 956                                      |       | 169 |   | 993 |   |
| Interest (income) expense, net          |   | (361                                       | )          | 28                                       |       | (599 | ) | 323 |   |
| Operating income                        |   | 4,212                                      |       | 7,947                                    |       | 6,163 |   | 14,746 |   |
| Depreciation and amortization           |   | 4,074                                      |       | 239                                      |       | 7,767 |   | 565 |   |
| EBITDA from discontinued operations     |   | $                                          | 8,286      |                                     | $          | 8,186 |   | $ | 13,930 |   | $ | 15,311 |   |

 

For the three months ended December 31, 2002 (from discontinuedoperations) (in 000’s):

 
|                              |   | **Operating  Income** |   | **Depreciation  and  Amortization** | ** ** | **EBITDA** | ** ** |
|-----------------------------------|--------|-----------------------|--------|-------------------------------------|------------|------------|------------|
|                              |   |                  |   |                                |       |       |       |
| Route Operations                  |   | $                     | 2,468  |                                | $          | 3,315      |       | $ | 5,783 |   |
| Wall Machines and Amusement Games |   | 554                   |   | 495                                 |       | 1,049      |       |
| Rail City Casino                  |   | 1,190                 |   | 264                                 |       | 1,454      |       |
|                              |   | $                     | 4,212  |                                | $          | 4,074      |       | $ | 8,286 |   |

 

For the three months ended December 31, 2003 (from discontinuedoperations) (in 000’s):

 
|             |   | **Operating  Income** |   | **Depreciation  and  Amortization** | ** ** | **EBITDA** | ** ** |
|------------------|--------|-----------------------|--------|-------------------------------------|------------|------------|------------|
|             |   |                  |   |                                |       |       |       |
| Route Operations |   | $                     | 6,364  |                                | $          | —     |       | $ | 6,364 |   |
| Rail City Casino |   | 1,583                 |   | 239                                 |       | 1,822      |       |
|             |   | $                     | 7,947  |                                | $          | 239        |       | $ | 8,186 |   |

 

34

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For the six months ended December 31, 2002 (from discontinuedoperations) (in 000’s):

 
|                                |   | **Operating  Income  (Loss)** |   | **Depreciation  and  Amortization** | ** ** | **EBITDA** | ** ** |
|-------------------------------------|--------|-------------------------------|--------|-------------------------------------|------------|------------|------------|
|                                |   |                          |   |                                |       |       |       |
| Route Operations                    |   | $                             | 5,133  |                                | $          | 6,625      |       | $ | 11,758 |   |
| Wall Machines & Amusement Games |   | (1,261                        | )      | 634                                 |       | (627       | )          |
| Rail City Casino                    |   | 2,291                         |   | 508                                 |       | 2,799      |       |
|                                |   | $                             | 6,163  |                                | $          | 7,767      |       | $ | 13,930 |   |

 

For the six months ended December 31, 2003 (from discontinuedoperations) (in 000’s):

 
|             |   | **Operating  Income** |   | **Depreciation  and  Amortization** | ** ** | **EBITDA** | ** ** |
|------------------|--------|-----------------------|--------|-------------------------------------|------------|------------|------------|
| Route Operations |   | $                     | 12,031 |                                | $          | —     |       | $ | 12,031 |   |
| Rail City Casino |   | 2,715                 |   | 565                                 |       | 3,280      |       |
|             |   | $                     | 14,746 |                                | $          | 565        |       | $ | 15,311 |   |

 

We believe that the analysis of EBITDA is a useful adjunct to operatingincome, net income, cash flows and other GAAP-based measures. However, EBITDAshould not be construed as an alternative to net income (loss) or cash flowsfrom operating, investing and financing activities determined in accordancewith GAAP or as a measure of liquidity. EBITDA is a common measure ofperformance in the gaming industry but may not be comparable to similarlytitled measures reported by other companies. We disclose EBITDA primarilybecause it is a performance measure used by management in evaluating theperformance of our business units and is one of several performance measuresused in our management incentive plan. Additionally, EBITDA is utilized as a performance measure in covenantsfor our bank credit agreement.

 

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**ITEM3****.****          QUANTITATIVE ANDQUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

***Currency RateFluctuations***

 

We derive revenues from our non-U.S. subsidiaries, all of whichrevenues are denominated in their local currencies, and their results areaffected by changes in the relative values of non-U.S. currencies and the U.S.dollar. Most of the currencies in countries in which we have foreign operationsstrengthened versus the U.S. dollar in 2002 and 2003, which resulted in assetsand liabilities denominated in local currencies being translated into lessdollars. We do not currently utilize hedging instruments.

 

***Market risks***

 

During the normal course of our business, we are routinely subjected toa variety of market risks, examples of which include, but are not limited to,interest and currency rate movements, collectibility of accounts and notesreceivable, and recoverability of residual values on leased assets. Wecontinually assess these risks and have established policies and practicesdesigned to protect against the adverse effects of these and other potentialexposures. Although we do not anticipate any material losses in these riskareas, no assurances can be made that material losses will not be incurred inthese areas in the future.

 

We have performed a sensitivity analysis of our financial instruments,which consist of our cash and cash equivalents and debt. We have no derivativefinancial instruments. In performing the sensitivity analysis, we define riskof loss as the hypothetical impact on earnings of changes in the marketinterest rates or currency exchange rates.

 

The results of the sensitivity analysis at December 31, 2003, areas follows:

 

Interest Rate Risk:

 

As of December 2003, we had total debt of approximately $425.3million, consisting primarily of the new $350 million term loan and the initial$70 million borrowing on the revolver. The interest rate for each loan is seton the borrowing date and is effective for the term outstanding. If the LIBORrates were to increase or decrease by 100 basis points, with all other factorsremaining constant, earnings would decrease or increase by approximately $4.3million on a pre-tax basis.

 

Foreign Currency Exchange Rate Risk:

 

Our foreign subsidiaries generally use their domestic currency as theirfunctional currency. A 10% fluctuation in the exchange rates of thesecurrencies against the U.S. dollar would result in a corresponding change inearnings reported in the consolidated group of approximately $137,000.

 

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

 

The Company’s management, including the Chief Executive Officer andChief Financial Officer, conducted an evaluation of the effectiveness of thedesign and operation of the company’s disclosure controls and procedures asdefined in Exchange Act Rule 13a-15(e) as described at the end of the periodcovered by this report.  Based on thatevaluation, the Chief Executive Officer and Chief Financial Officer concludedthat as of the end of the period covered by this report, the company’sdisclosure controls and procedures were effective.  During the period covered by this report there have been nochanges in the Company’s internal control over financial reporting that havematerially affected, or are reasonably likely to materially affect theCompany’s internal control over financial reporting.

 

**PART II**

 

**ITEM 1****.****                 ****LegalProceedings**

 

There have been no material changes in any legal proceedings sincefiling of the Company’s annual report on Form 10-K for the fiscal year endedJune 30, 2003.

 

**ITEM 4.****                  Submissionof Matters to a Vote of Security Holders**

 

On December 3, 2003, the Company held its annual shareholdersmeeting at which the shareholders were asked to vote on the election of twodirectors and the approval of an amendment the Company’s Amended 2001 Long TermIncentive Plan (the “2001 Plan”) to increase the shares issuable under the 2001Plan. Of the 49,933,687 shares of common stock outstanding, 40,796,307 shareswere voted for and 2,097,152 withheld from Mr. Robert Miodunski and 36,202,328shares were voted for and 6,691,131 withheld from Mr. David Robbins; and27,228,492 shares were voted for and 7,916,948 shares against, 85,905 sharesabstained and there were 7,662,114 broker non-votes, resulting in  the approval of the amendment to the 2001Plan. Additionally, the shareholders ratified the Board of Director’sappointment of Deloitte & Touche LLP to act as independent publicaccountants of the Company for the fiscal year ending June 30, 2004.

 

**ITEM 6****.****                 ****Exhibits andReports 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.  |

 

37

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b.             Reportson Form 8-K

 
| • |   | The Company filed a Form 8-K on October 15, 2003 announcing the  financial results for the period ended September 30, 2003.                                     |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| • |   | The Company filed a Form 8-K on November 11, 2003 announcing  that the Company had signed a definitive agreement to acquire the privately  held Sierra Design Group. |

 

38

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SIGNATURES

 

 

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

 

 
| ALLIANCE GAMING CORPORATION  (Registrant) | Date: February 10, 2004              |
|-------------------------------------------|-------------------------------------------|
|                                      |                                      |   |
|                                      |                                      |   |
| By                                        |    /s/ Robert L. Miodunski |   |   |
|                                      | President and Chief Executive Officer     |   |
|                                      | (Principal Executive Officer)             |   |
|                                      |                                      |   |
|                                      |                                      |   |
| By                                        |    /s/ Robert L. Saxton    |   |   |
|                                      | Executive Vice President, Chief Financial |   |
|                                      | Officer and Treasurer (Principal          |   |
|                                      | Financial and Accounting Officer)         |   |
|                                           |                                           |  |  |  |

 

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