Alliance Gaming (AGI)

In my opinion, one of the most useful investing blogs is footnoted.org. It hones in on corporate abuses, especially over-the-top executive compensation.

In its latest note, footnoted highlights Alliance Gaming (AGI) To quote:

“Alliance Gaming (AGI) which filed its very late K (fiscal year ended June 30) on Friday disclosed that an informal investigation launched by the SEC back in February had turned into a formal investigation in August. Yet they waited until Dec. 30 to tell investors about this change. Granted SEC investigations aren’t always a smoking gun, but given that most other companies tend to let investors know about this sort of thing and many even put out an 8-K when the SEC launches an informal investigation, it seems more than unfortunate that Alliance would try to bury this.”

The 10-K is noteworthy in its stinging views of internal controls, or rather the lack of them. It cites the following areas of inadequacy:

Inadequate staffing and training in finance and accounting:
Ineffective controls related to the preparation of certain account analyses, account summaries and account reconciliations:
Inadequate controls related to revenue recognition:
Inadequate controls related to inventory valuation:
Ineffective controls related to income taxes:
Ineffective controls at the entity level:

To be fair, the K states that as of December 2005, we have begun to implement …actions.

The inadequacies in internal controls necessitated a six month delay in revealing the financials as they existed. Looking at the financials, I can understand why!

Last year, the company had a loss at the operating line of $5.7 million versus the June 2004 FY operating profit of $92 million and the prior year’s $71 million.

Interest expense for 2005 amounted to $18.2 million versus $17.9 million the previous year despite total debt being paid down to about $325 million from levels of 2004 of $423 million. The K also mentions that the leverage ratio maximum limit for its bank debt covenant is 4.75 times versus its current (June 2005) actual ratio of 4.6 times. Net working capital has declined to $129 million versus June 2004’s $262 million.

As of June 2005, shareholders equity was $179 million but goodwill of $161 million and intangibles of about $50 million leaves negative tangible equity of negative $32 million.

The company does appear to have made some inroads with some new contract wins recently. Nevertheless, competition in this sector has been growing and gross margins have been sliding. A business with operating losses and a tight bank covenant is of little interest to me.

I do find it interesting that a company which has had such stale financials currently has 14 analysts covering it, versus last year’s 4 analyst coverage. Do I smell further capital issuance and restructuring???