-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PXn6JtyBFsDimKMe4OaSn/cPik+KGTfnGEUoGV6zNSpytKZWLsEJO5sQkSuWSEhl i/QiEkyWUWSqHAZXXniDMw== 0000950148-00-000210.txt : 20000215 0000950148-00-000210.hdr.sgml : 20000215 ACCESSION NUMBER: 0000950148-00-000210 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000214 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ALLIANCE GAMING CORP CENTRAL INDEX KEY: 0000002491 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MISCELLANEOUS AMUSEMENT & RECREATION [7990] IRS NUMBER: 880104066 STATE OF INCORPORATION: NV FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-04281 FILM NUMBER: 541802 BUSINESS ADDRESS: STREET 1: 6601 S. BERMUDA RD. CITY: LAS VEGAS STATE: NV ZIP: 89119 BUSINESS PHONE: 7028967700 MAIL ADDRESS: STREET 1: 4380 BOULDER HIGHWAY CITY: LAS VEGAS STATE: NV ZIP: 89121 FORMER COMPANY: FORMER CONFORMED NAME: UNITED GAMING INC DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: GAMING & TECHNOLOGY INC DATE OF NAME CHANGE: 19890206 FORMER COMPANY: FORMER CONFORMED NAME: ADVANCED PATENT TECHNOLOGY INC DATE OF NAME CHANGE: 19830519 10-Q 1 FORM 10-Q (12/31/1999) 1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED DECEMBER 31, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NUMBER 0-4281 ALLIANCE GAMING CORPORATION (Exact name of registrant as specified in its charter) NEVADA 88-0104066 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 6601 S. BERMUDA RD. LAS VEGAS, NEVADA 89119 (Address of principal executive offices) (Zip Code) REGISTRANT'S TELEPHONE NUMBER: (702) 270-7600 ---------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No The number of shares of Common Stock, $0.10 par value, outstanding as of February 1, 2000 according to the records of the registrant's registrar and transfer agent was 10,336,272. ================================================================================ 2 ALLIANCE GAMING CORPORATION FORM 10-Q FOR THE QUARTER ENDED DECEMBER 31, 1999 INDEX
PART I. FINANCIAL INFORMATION PAGE Item 1. Unaudited Financial Statements Unaudited Condensed Consolidated Balance Sheets as of June 30, 1999 and December 31, 1999 3 Unaudited Condensed Consolidated Statements of Operations for the three months ended December 31, 1998 and 1999 4 Unaudited Condensed Consolidated Statements of Operations for the six months ended December 31, 1998 and 1999 5 Unaudited Condensed Consolidated Statements of Stockholders' Deficiency for the six months ended December 31, 1999 6 Unaudited Condensed Consolidated Statements of Cash Flows for the six months ended December 31, 1998 and 1999 7 Notes to Unaudited Condensed Consolidated Financial Statements 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 25 Item 3. Quantitative and Qualitative Disclosures About Market Risk 36 PART II. OTHER INFORMATION Item 1. Legal Proceedings 36 Item 4. Submission of Matters to a Vote of Security Holders 36 Item 6. Exhibits and Reports on Form 8-K 36 SIGNATURES 37
2 3 PART 1 ALLIANCE GAMING CORPORATION UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS (In 000's, except share data)
June 30, Dec. 31, 1999 1999 --------- --------- ASSETS Current assets: Cash and cash equivalents $ 16,930 $ 27,952 Accounts and notes receivable, net of allowance for doubtful accounts of $12,705 and $13,369 92,665 84,232 Inventories, net of reserves of $7,077 and $6,192 46,138 47,209 Other current assets 11,423 11,381 --------- --------- Total current assets 167,156 170,774 --------- --------- Long-term notes receivable, net of allowance for doubtful accounts of $991 and $945 5,782 5,005 Leased equipment, net of accumulated depreciation of $5,111 and $7,256 10,981 17,822 Property, plant and equipment, net of accumulated depreciation of $51,686 and $56,235 74,159 77,351 Excess of costs over net assets of acquired businesses, net of accumulated amortization of $4,604 and $5,555 57,593 56,494 Intangible assets, net of accumulated amortization of $18,351 and $20,946 26,854 24,888 Other assets, net reserves of $3,468 and $1,883 13,782 13,571 --------- --------- Total assets $ 356,307 $ 365,905 ========= ========= LIABILITIES AND STOCKHOLDERS' DEFICIENCY Current liabilities: Accounts payable $ 17,372 $ 17,853 Accrued liabilities 39,196 33,573 Current maturities of long-term debt 1,927 1,055 --------- --------- Total current liabilities 58,495 52,481 --------- --------- Term loan facilities 134,096 131,937 Senior Subordinated Notes due 2007, net 149,298 149,324 Other long-term debt, less current maturities 33,385 59,970 Other liabilities 9,458 9,321 --------- --------- Total liabilities 384,732 403,033 --------- --------- Minority interest 1,983 1,338 Commitments and contingencies Stockholders' deficiency: Special Stock, 10,000,000 shares authorized: Series E, $100 liquidation value; 153,802 shares and 47,242 shares issued and outstanding 15,380 4,624 Common Stock, $.10 par value; 50,000,000 shares authorized; 9,791,000 and 10,335,000 shares issued and outstanding 979 1,034 Treasury stock at cost, 85,300 shares and 83,000 shares (522) (508) Additional paid-in capital 129,991 141,130 Accumulated other comprehensive loss (15,986) (17,765) Accumulated deficit (160,250) (166,981) --------- --------- Total stockholders' deficiency (30,408) (38,466) --------- --------- Total liabilities and stockholders' deficiency $ 356,307 $ 365,905 ========= =========
See notes to unaudited condensed consolidated financial statements. 3 4 ALLIANCE GAMING CORPORATION UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In 000's, except per share data)
Three Months Ended December 31, ------------------------- 1998 1999 --------- --------- Revenues: Gaming equipment and systems $ 22,499 $ 30,591 Wall machines and amusement games 23,769 19,542 Route operations 42,750 48,240 Casino operations 14,892 16,114 --------- --------- 103,910 114,487 --------- --------- Costs and expenses: Cost of gaming equipment and systems 13,394 17,893 Cost of wall machines and amusement games 14,674 11,157 Cost of route operations 33,516 38,007 Cost of casino operations 6,504 6,562 Selling, general and administrative 27,866 27,867 Research and development 3,976 3,329 Depreciation and amortization 5,757 6,701 Unusual items -- 526 --------- --------- 105,687 112,042 --------- --------- Operating (loss) income (1,777) 2,445 Other income (expense): Interest income 141 112 Interest expense (7,502) (8,715) Minority interest (509) (459) Other, net (355) (381) --------- --------- Loss before income taxes (10,002) (6,998) Income tax benefit (provision) 245 (178) --------- --------- Net loss (9,757) (7,176) Special Stock dividends (418) -- --------- --------- Net loss applicable to common shares $ (10,175) $ (7,176) ========= ========= Basic and diluted loss per share: $ (1.04) $ (0.70) ========= ========= Weighted average common shares outstanding 9,789 10,252 ========= ========= Weighted average common and common share equivalents outstanding 9,789 10,252 ========= =========
See notes to unaudited condensed consolidated financial statements. 4 5 ALLIANCE GAMING CORPORATION UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In 000's, except per share data)
Six Months Ended December 31, ------------------------- 1998 1999 --------- --------- Revenues: Gaming equipment and systems $ 44,441 $ 70,375 Wall machines and amusement games 44,380 34,218 Route operations 82,754 94,292 Casino operations 31,106 32,804 --------- --------- 202,681 231,689 --------- --------- Costs and expenses: Cost of gaming equipment and systems 25,234 39,986 Cost of wall machines and amusement games 26,742 21,111 Cost of route operations 64,645 74,655 Cost of casino operations 13,320 13,181 Selling, general and administrative 48,903 51,485 Research and development 8,145 6,878 Depreciation and amortization 11,159 13,025 Unusual items -- 526 --------- --------- 198,148 220,847 --------- --------- Operating income 4,533 10,842 Other income (expense): Interest income 373 226 Interest expense (15,405) (16,492) Minority interest (1,048) (927) Other, net (547) (125) --------- --------- Loss before income taxes (12,094) (6,476) Income tax (provision) benefit 61 (255) --------- --------- Net loss (12,033) (6,731) Special Stock dividends (824) -- --------- --------- Net loss applicable to common shares $ (12,857) $ (6,731) ========= ========= Basic and diluted loss per share: $ (1.34) $ (0.66) Weighted average common shares outstanding 9,607 10,204 ========= ========= Weighted average common and common share equivalents outstanding 9,607 10,204 ========= =========
See notes to unaudited condensed consolidated financial statements. 5 6 ALLIANCE GAMING CORPORATION UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY Six Months Ended December 31, 1999 (In 000's)
Total Accumulated Stock- Common Stock Series E Additional Other holders' ----------------- Special Treasury Paid-in Comprehensive Accumulated Equity Shares Dollars Stock Stock Capital Loss Deficit (Deficiency) ------ ------- -------- -------- ---------- ------------- ---------- ------------ Balances at June 30, 1999 9,791 $ 979 $ 15,380 $(522) $ 129,991 $(15,986) $(160,250) $(30,408) Net loss -- -- -- -- -- -- (6,731) (6,731) Treasury shares issued upon exercise of options -- -- -- 14 (4) -- -- 10 Special Stock dividends -- -- 442 -- -- -- -- 442 Shares issued upon conversion of Special Stock 544 55 (11,198) -- 11,143 -- -- -- Foreign currency translation adjustment -- -- -- -- -- (1,779) -- (1,779) ------ ------ -------- ----- --------- -------- --------- -------- Balances at December 31, 1999 10,335 $1,034 $ 4,624 $(508) $ 141,130 $(17,765) $(166,981) $(38,466) ====== ====== ======== ===== ========= ======== ========= ========
See notes to unaudited condensed consolidated financial statements. 6 7 ALLIANCE GAMING CORPORATION UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In 000's)
Six Months Ended December 31, ------------------------ 1998 1999 -------- --------- Cash flows from operating activities: Net loss $(12,033) $ (6,731) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization 11,159 13,025 Amortization of debt discounts 26 26 Write down of other assets 523 591 Gain on sale of assets (25) (1,056) Provision for losses on doubtful receivables 922 2,433 Other 1,293 (656) Net change in operating assets and liabilities: Accounts and notes receivable 13,949 5,549 Inventories (6,551) (11,687) Other current assets 3,394 (32) Accounts payable 2,603 525 Accrued liabilities (4,422) (5,422) -------- -------- Net cash provided by (used in) operating activities 10,838 (3,435) Cash flows from investing activities: Additions to property, plant and equipment (5,476) (9,769) Proceeds from disposal of property and equipment and other assets 83 1,082 Proceeds from sale/leaseback transaction -- 971 Additions to other long term assets (3,216) (1,928) -------- -------- Net cash used in investing activities (8,609) (9,644) Cash flows from financing activities: Reduction of long-term debt (4,099) (3,291) Net change in lines of credit (6,200) 27,511 Proceeds from exercise of stock options and warrants 4,778 10 -------- -------- Net cash (used in) provided by financing activities (5,521) 24,230 Effect of exchange rate changes on cash 323 (130) Cash and cash equivalents: (Decrease) increase for period (2,969) 11,022 Balance, beginning of period 23,487 16,930 -------- -------- Balance, end of period $ 20,518 $ 27,952 ======== ========
See notes to unaudited condensed consolidated financial statements. 7 8 ALLIANCE GAMING CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SIX MONTHS ENDED DECEMBER 31, 1998 AND 1999 1. BASIS OF PRESENTATION The accompanying unaudited interim condensed consolidated financial statements reflect all adjustments, consisting of normal recurring adjustments, which management believes are necessary to present fairly the financial position, results of operations and cash flows of Alliance Gaming Corporation ("Alliance" or the "Company") for the respective periods presented. The results of operations for an interim period are not necessarily indicative of the results which may be expected for any other interim period or for the year as a whole. The accompanying unaudited interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes in the Company's annual report on Form 10-K as amended for the year ended June 30, 1999. All intercompany accounts and transactions have been eliminated in consolidation. The accompanying condensed consolidated financial statements at June 30, 1999 were derived from audited consolidated financial statements, but do not include all disclosures required under generally accepted accounting principles. Certain reclassifications have been made to prior period financial statements to conform with current period presentation. 2. INVENTORIES Inventories are stated at the lower of cost, determined on a first-in, first-out basis, or market. Cost elements included for work-in-process and finished goods include raw materials, freight, direct labor and manufacturing overhead. Inventories, net of reserves, consist of the following at June 30, 1999 and December 31, 1999:
June 30, Dec. 31, 1999 1999 ------- ------- (in 000's) Raw materials $16,676 $17,906 Work-in-process 2,057 1,060 Finished goods 27,405 28,243 ------- ------- Total inventories $46,138 $47,209 ======= =======
8 9 ALLIANCE GAMING CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SIX MONTHS ENDED DECEMBER 31, 1998 AND 1999 3. DEBT, LINES OF CREDIT Long-term debt at June 30, 1999 and December 31, 1999 consists of the following:
June 30, Dec. 31, 1999 1999 -------- -------- (in 000's) 10% Senior Subordinated Notes due 2007, net of unamortized discount of $702,000 and $676,000 $149,298 $149,324 Term loan facilities: Tranche B Term Loan 72,380 70,775 Tranche C Term Loan 38,744 37,869 Delayed Draw Term Facility 24,372 23,833 Revolving Credit Facility 32,200 59,069 Other, secured by related equipment 1,712 1,416 -------- -------- 318,706 342,286 Less current maturities 1,927 1,055 -------- -------- Long-term debt, less current maturities $316,779 $341,231 ======== ========
In August 1997 the Company completed a refinancing transaction whereby the Company repaid its 12 7/8% Senior Notes, repurchased its 15% Series B Special Stock, and issued $150 million of Senior Subordinated Notes and entered into bank financing of $230 million. The bank financing provides for (i) term loans in the aggregate amount of up to $140 million, comprised of a $75 million tranche with a 7 1/2-year term (the "Tranche B Term Loan"), a $40 million tranche with an 8-year term (the "Tranche C Term Loan"), and a $25 million tranche with a 7 1/2-year term (the "Delayed Draw Term Facility" and together with the Tranche B Term Loan and the Tranche C Term Loan, the "Term Loan Facilities"); and (ii) a $90 million revolving credit facility (the "Revolving Credit Facility") with a 6-year term. Each of these credit facilities are variable rate borrowings in accordance with a credit grid. The interest rates which are currently at the highest level of the credit grid and maturity dates are as follows:
Interest Maturity Rates Date ------------ ---------------- Tranche B Term Loan LIBOR + 3.25% January 31, 2005 Tranche C Term Loan LIBOR + 3.50% July 31, 2005 Delayed Draw Term Facility LIBOR + 3.25% January 31, 2005 Revolving Credit Facility LIBOR + 2.75% July 31, 2003
The Revolving Credit Facility also allows for German Deutschemark borrowings at the euro deutschmark rate plus 2.75% (or 6.0% at December 31, 1999). In an amendment to the bank credit agreement in October 1999, the Company has agreed to keep the interest rate at the highest level of the credit grid through December 31, 2000. The bank facility is collateralized by substantially all domestic property and is guaranteed by each domestic subsidiary of the U.S. Borrower and German Subsidiaries (both as defined), other than the entity which holds the Company's interest in its Louisiana operations and other non-material subsidiaries (as defined), and secured by both a U.S. and German Pledge Agreement (both as defined). The bank facility contains a number of maintenance covenants and it and the Senior Subordinated Note Indenture have other significant covenants that, among other things, restrict the ability of the Company and certain of its subsidiaries to dispose of assets, incur additional indebtedness and issue preferred stock, pay dividends or make other distributions, enter into certain acquisitions, repurchase equity interests (as defined) or subordinated indebtedness, issue or sell equity interests of the Company's subsidiaries (as defined), engage in mergers or acquisitions, or engage in certain transactions with subsidiaries and affiliates, and that otherwise restrict corporate activities. 9 10 ALLIANCE GAMING CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SIX MONTHS ENDED DECEMBER 31, 1998 AND 1999 To facilitate the disposition of non-core businesses, the Company has obtained an amendment to its bank credit agreement. The amendment provides the lenders' consent to sell the businesses at specified minimum prices by December 31, 2000 and provides other financial flexibility to the Company. The bank amendment also provides that if the Company should elect to sell any of its non-core businesses, any restructuring charges that may be incurred as a result of the sales may be excluded from the determination of EBITDA used in the calculation of the various financial covenant ratios. In addition, the bank amendment provides that any restructuring charges that may be incurred at Bally Wulff or Bally Gaming and Systems (up to $1.5 million) may be excluded from the determination of EBITDA used in the calculation of the various financial covenant ratios. The Senior Subordinated Notes bear interest at 10%, are due in 2007, and are general unsecured obligations of the Company, ranking subordinate in right of payment to all Senior Debt (as defined) of the Company, including indebtedness under the bank financing. The Senior Subordinated Notes will be fully and unconditionally guaranteed on a joint and several senior subordinated basis by all existing and future domestic Restricted Subsidiaries (as defined) of the Company, subject to certain exceptions including the partially-owned entities through which its Mississippi casino and Louisiana route operations are conducted. The Subsidiary Guarantees (as defined) are general unsecured obligations of the Guarantors, ranking subordinate in right of payment to all Senior Debt of the Guarantors. The Company will be able to designate other current or future subsidiaries as Unrestricted Subsidiaries (as defined) under certain circumstances. Unrestricted Subsidiaries will not be required to issue a Subsidiary Guarantee and will not be subject to many of the restrictive covenants set forth in the Indenture pursuant to which the Senior Subordinated Notes were issued. The Indenture for the Company's Senior Subordinated Notes contains various covenants, including limitations on incurrence of additional indebtedness, on restricted payments and on dividend and payment restrictions on subsidiaries. The Senior Subordinated Notes may not be redeemed for the first five years. Upon an occurrence of a Change of Control (as defined), the holders of the Senior Subordinated Notes will have the right to require the Company to purchase their notes at a price equal to 101% of the aggregate principal amount thereof, plus accrued and unpaid interest to the date of such purchase. 4. INCOME TAXES The Company's effective tax rate for the three and six months ended December 31, 1998 and 1999 differs from the statutory rate of 35% due to state income taxes and the impact of taxes applicable to earnings of Bally Wulff. In addition, earnings at the Company's domestic subsidiaries cannot be fully offset by the utilization of net operating loss carryforwards, and there has been no tax benefit recorded for the Company's domestic subsidiaries with net operating losses. 5. SUPPLEMENTAL CASH FLOW INFORMATION The following supplemental information is related to the unaudited condensed consolidated statements of cash flows. For the six months ended December 31, 1998 and 1999, the Company recorded the following significant non-cash items:
Six months ended December 31, ------------------- 1998 1999 ------ ------- (In 000's) Reclassify other assets to property, plant and equipment $ 242 $ 217 Dividends for Series E Special Stock 824 442 Reclassify inventory to equipment 2,842 10,170 Translation rate adjustment 5,911 1,649 Capitalized obligation incurred in acquisition of route asset 652 -- Conversion of Series E Special Stock into common shares -- 11,198 Deferred gain on sale/leaseback transaction -- 484
10 11 ALLIANCE GAMING CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SIX MONTHS ENDED DECEMBER 31, 1998 AND 1999 6. LEGAL PROCEEDINGS LITIGATION On September 25, 1995, BGII was named as a defendant in a class action lawsuit filed in federal District Court in Nevada, by Larry Schreirer on behalf of himself and all others similarly situated. The plaintiffs filed suit against BGII and approximately 45 other defendants. Each defendant is involved in the gaming business as either a gaming machine manufacturer, distributor, or casino operator. The class action lawsuit arises out of alleged fraudulent marketing and operation of casino video poker machines and electronic slot machines. The plaintiffs allege that the defendants' actions constitute violations of the Racketeer Influenced and Corrupt Organizations Act (RICO) and give rise to claims of common law fraud and unjust enrichment. The plaintiffs are seeking monetary damages in excess of $1.0 billion, and are asking that any damage awards be trebled under applicable Federal law. Management believes the plaintiffs' lawsuit to be without merit. The Company intends to vigorously pursue all legal defenses available to it. On July 20, 1999, Bally Gaming, Inc., sued International Game Technology in the United States District Court for the District of New Jersey. The suit alleged that provisions in IGT's contracts with Atlantic City casinos barred the casinos from acquiring progressive systems from IGT's competitors, thereby preserving IGT's monopoly in the lucrative Atlantic City progressive market, violating federal and state antitrust laws and common law policies against unfair competition and restraints of trade, and frustrating Bally's efforts to launch its Thrillions wide-area progressive system in Atlantic City. The lawsuit sought declaratory and injunctive relief, compensatory damages, and other relief. The parties entered into a settlement pursuant to which IGT has notified its Atlantic City customers that it will not enforce the challenged contract provisions, and Bally dismissed the suit. On August 30, 1999, Cardivan Company, a subsidiary of Jackpot Enterprises, Inc., filed an action in federal court in Nevada against Raley's and Albertson's, Inc., in which Cardivan sought to forestall the loss of its slot machine operations at fifteen Albertson's grocery stores in the Las Vegas area after Albertson's, Cardivan's customer, sold the stores to Raley's, with whom Alliance subsidiary United Coin Machine Co. has an exclusive contract. The federal court granted a preliminary injunction allowing Cardivan to continue operating machines at Raley's before trial, effectively preventing United Coin, though not a party to the lawsuit, from operating its machines there pursuant to its contract with Raley's. After the federal court granted the preliminary injunction, Anchor Gaming moved to intervene and to have the preliminary injunction extended to prohibit Raley's from removing Anchor's slot machines at four other stores that Albertson's sold to Raley's. The federal court granted the motion, allowing Anchor to intervene. United Coin likewise moved to intervene, but the court denied the motion. Raley's and Albertson's motions for summary judgment were heard on November 10, 1999, and trial was set on an expedited basis for December 7, 1999. United Coin appealed the federal court's denial of its motion to intervene to the Ninth Circuit Court of Appeals, but the court of appeals did not act before the case was settled (see below). On September 23, 1999, United Coin sued Cardivan Company and Anchor Gaming in Nevada state court for interference with contractual relations and Albertson's and Raley's for breach of contract. In January 2000, the parties announced a settlement resolving all claims between the litigants--Albertson's, Anchor Gaming, Jackpot Enterprises, Raley's, and United Coin Machine Company. Under the terms of the settlement agreement, United Coin will begin operating 305 gaming machines in 19 Raley's stores on February 1, 2000. Under its contract with Raley's, United Coin will operate these gaming machines, the machines at Raley's stores in Northern Nevada and machines at any new Raley's stores throughout Nevada until June 30, 2008. As part of the settlement, United Coin will receive cash and other consideration prior to February 1. The Company is also a party to various lawsuits relating to routine matters incidental to its business. Management does not believe that the outcome of such litigation, including the matters above, in the aggregate, will have a material adverse effect on the Company. 11 12 ALLIANCE GAMING CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SIX MONTHS ENDED DECEMBER 31, 1998 AND 1999 7. COMPREHENSIVE INCOME (LOSS) As of July 1, 1998, the Company adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 establishes new rules for the reporting of comprehensive income (loss) and its components; however, the adoption of SFAS had no impact on the Company's net income (loss) or stockholders' deficiency. SFAS 130 requires the changes in the cumulative translation adjustment account (which is a component of stockholders' deficiency) to be included as a component of other comprehensive income (loss). During the six months ended December 31, 1998 and 1999, total comprehensive loss amounted to $6.8 million and $8.5 million respectively. 8. SHARE REPURCHASE PLAN In January 1999 the Company's Board of Directors approved a share repurchase plan for up to 1.18 million shares of its Common Stock. Under the plan, subject to price and market conditions, purchases of shares will be made from time to time during calendar 1999 in the open market or in privately negotiated transactions. As of December 31, 1999, the Company had approximately 83,000 shares of common stock in treasury at a cost of $508,000. The Company intends to use the acquired common stock to satisfy obligations pursuant to the exercise of stock options under the Company's stock option plans. 9. REVERSE STOCK SPLIT On January 14, 1999 the Company's Board of Directors announced a one-for-three-and-one-half reverse stock split of its Common Stock effective February 1, 1999. The effects of the reverse split were to reduce the authorized number of common shares from 175.0 million to 50.0 million and to decrease the number of shares of Common Stock outstanding from 34.3 million to 9.8 million. In connection with the reverse split, the share number, exercise price and the trigger prices, as applicable, for the Company's stock options and warrants were proportionately adjusted. In lieu of fractional shares resulting from the reverse split, stockholders received a cash payment from the sale of the aggregate fractional shares on the open market. The reverse split also impacted the conversion ratio on the Company's Series E Special Stock. Each share of Series E Special Stock is now convertible into 4.859 shares of Common Stock instead of 17.007 shares. All share and per share data included in these financial statements have been restated to reflect the reverse split. 10. EARNINGS PER SHARE Basic earnings per share (EPS) is computed by dividing income (loss) applicable to common shares (the numerator) by the weighted-average number of common shares outstanding (the denominator) for the period. The computation of Diluted EPS is similar to Basic EPS, except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potentially dilutive common shares had been issued. Stock options and warrants are reflected in Diluted EPS by application of the "Treasury Stock Method" which reduces the dilutive effect by assuming that any proceeds from the exercise of the options and warrants would be used to purchase common shares at the average market price during the period. Series E Special Stock is reflected in Diluted EPS by application of the "If-Converted Method" which assumes full conversion at the beginning of the period. 12 13 ALLIANCE GAMING CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SIX MONTHS ENDED DECEMBER 31, 1998 AND 1999 The computation of Basic and Diluted EPS is as follows:
Three months ended Six months ended December 31, December 31, --------------------- ---------------------- 1998 1999 1998 1999 ------- ------- ------- -------- (In 000's except share data) Net income (loss) applicable to common shares (10,175) (7,176) (12,857) (6,731) Wt. average common shares outstanding 9,789 10,252 9,607 10,204 Dilutive effect of stock options outstanding -- -- -- -- Wt. average common and potential shares Outstanding 9,789 10,252 9,607 10,204 Basic and diluted earnings per share $(1.04) $ (0.70) $ (1.34) $ (0.66)
Options to purchase 9,000 and 56,000 at December 31, 1998 and 1999, respectively, were not included in the computation of diluted EPS for the respective quarters because those options' exercise prices were greater than the average market price of the common shares for those quarters. Options to purchase 9,000 and 58,000 at December 31, 1998 and 1999, respectively, were not included in the computation of the year-to-date diluted EPS for the respective periods because those options' exercise prices were greater than the average market price of the common shares. Additionally, stock options and warrants outstanding to purchase approximately 3.7 million common shares and 2.4 million shares as of December 31, 1998 and 1999, respectively, were not included in the computation of Diluted EPS because either (i) the exercise price was greater than the average market price of the common shares during the period or (ii) the contingent issue price was greater that the market price of the common shares at the end of the period. 11. UNUSUAL ITEMS During the quarter ended December 31, 1999, the Company incurred unusual items of $0.5 million, which consists of $1.5 million of restructuring charges at its Bally Gaming and Systems and Wall Machine and Amusement Games business units, partially offset by a $1.0 million gain on a release of an option the Company had to operate gaming machines at a dormant dog racing track in Kansas. 12. SEGMENT AND GEOGRAPHICAL INFORMATION The Company operates in four business segments: (i) Gaming Equipment and Systems designs, manufactures and distributes gaming machines and computerized monitoring systems for gaming machines, (ii) Wall Machines and Amusement Games designs, manufactures and distributes wall-mounted gaming machines and distributes third party manufactured amusement games, (iii) Route Operations owns and manages a significant installed base of gaming machines, and (iv) Casino Operations owns and operates two regional casinos. Operating income is the primary measure used in assessing segment performance. Corporate office costs are generally not allocated except where those costs can be specifically identified with a segment. The tables below presents information as to the Company's revenues and operating income:
Six Months Ended December 31, ---------------------------- 1998 1999 -------- -------- (In $000's) Revenues: Gaming Equipment and Systems $ 44,441 $ 70,375 Wall Machines and Amusement Games 44,380 34,218 Route Operations 82,754 94,292 Casino Operations 31,106 32,804 -------- --------
13 14 ALLIANCE GAMING CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SIX MONTHS ENDED DECEMBER 31, 1998 AND 1999 Total revenues $202,681 $231,689 ======== ======== Intersegment revenues: Gaming Equipment and Systems $ 319 $ 743 Wall Machines and Amusement Games 46 32 Route Operations -- -- Casino Operations -- -- ------- -------- Total intersegment revenues $ 365 $ 775 ======= ======== Operating income (loss): Gaming Equipment and Systems $(4,307) $ 2,875 Wall Machines and Amusement Games 2,279 (995) Route Operations 6,437 6,986 Casino Operations 8,885 10,595 Corporate/other (8,761) (8,619) ------- -------- Total operating income $ 4,533 $ 10,842 ======= ========
The Company has operations based primarily in the United States and Germany. The German operation's customers are a diverse group of operators of wall machines and amusement games at arcades, hotels, restaurants and taverns, primarily in Germany. Gaming Equipment and Systems' customers are primarily casinos and gaming machine distributors in the United States and abroad. Receivables of the German operations and Gaming Equipment and Systems are generally collateralized by the related equipment. The table below presents information as to the Company's revenues and operating income by geographic region:
Six Months Ended December 31, 1999 ------------------------------- 1998 1999 --------- --------- (In $000's) Revenues: United States $ 148,985 $ 183,884 Germany 49,827 39,331 Other foreign 3,869 8,474 --------- --------- Total revenues $ 202,681 $ 231,689 ========= ========= Operating income (loss): United States $ 2,762 $ 12,513 Germany 1,918 (1,217) Other foreign (147) (454) --------- --------- Total operating income $ 4,533 $ 10,842 ========= =========
13. UNAUDITED CONSOLIDATING FINANCIAL STATEMENTS The following unaudited condensed consolidating financial statements are presented to provide certain financial information regarding guaranteeing and non-guaranteeing subsidiaries in relation to the Company's Senior Subordinated Notes which were issued in the Refinancing (see note 2). The financial information presented includes Alliance Gaming Corporation (the "Parent") and its wholly-owned guaranteeing subsidiaries (together the "Parent and Guaranteeing Subsidiaries"), and the non-guaranteeing subsidiaries Video Services, Inc., United Gaming Rainbow, BGI Australia Pty. Limited, Bally Gaming de Puerto Rico, Inc., and Alliance Automaten GmbH & Co. KG (the subsidiary that holds the Company's German interests) (together the "Non-Guaranteeing 14 15 ALLIANCE GAMING CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SIX MONTHS ENDED DECEMBER 31, 1998 AND 1999 Subsidiaries"). The notes to consolidating financial statements should be read in conjunction with these consolidating financial statements. 15 16 ALLIANCE GAMING CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATING BALANCE SHEETS June 30, 1999 (In 000's)
Alliance Gaming Parent and Non- Corporation Guaranteeing Guaranteeing Elimina- and Subsidiaries Subsidiaries tions Subsidiaries ------------ ------------ --------- ------------ ASSETS Current assets: Cash and cash equivalents $ 5,240 $ 11,690 $ $ 16,930 Accounts and notes receivable, net 45,498 51,842 (4,675) 92,665 Inventories, net 30,269 16,398 (529) 46,138 Other current assets 8,496 2,927 11,423 --------- --------- --------- --------- Total current assets 89,503 82,857 (5,204) 167,156 --------- --------- --------- --------- Long-term notes receivable, net 99,961 1,797 (95,976) 5,782 Leased equipment, net 3,923 7,058 10,981 Property, plant and equipment, net 41,781 32,378 74,159 Excess of costs over net assets of acquired businesses, net 38,904 18,689 57,593 Intangible assets, net 26,448 406 26,854 Investments in subsidiaries 86,993 (86,993) Other assets, net 27,890 (9,915) (4,193) 13,782 --------- --------- --------- --------- $ 415,403 $ 133,270 $(192,366) $ 356,307 ========= ========= ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY) Current liabilities: Accounts payable $ 14,706 $ 2,689 $ $ 17,372 Accrued liabilities 26,771 13,915 (1,321) 39,196 Current maturities of long-term debt 6,175 3,299 (7,547) 1,927 --------- --------- --------- --------- Total current liabilities 47,652 19,903 (8,868) 58,495 --------- --------- --------- --------- Term loan facilities 134,096 134,096 Senior Subordinated Notes due 2007, net 149,298 149,298 Other long-term debt, less current maturities 104,826 24,379 (95,820) 33,385 Other liabilities 7,370 2,330 (242) 9,458 --------- --------- --------- --------- Total liabilities 443,242 46,612 (104,930) 384,732 --------- --------- --------- --------- Minority interest 1,983 1,983 Commitments and contingencies Stockholders' equity (deficiency): Series E Special Stock 15,380 15,380 Common Stock 979 17,832 (17,832) 979 Treasury stock (522) (522) Additional paid-in capital 129,991 68,700 (68,700) 129,991 Accumulated other comprehensive loss (15,981) (16,007) 16,002 (15,986) Retained earnings (accumulated deficit) (159,477) 16,133 (16,906) (160,250) --------- --------- --------- --------- Total stockholders' equity (deficiency) (29,630) 86,658 (87,436) (30,408) --------- --------- --------- --------- $ 415,403 $ 133,270 $(192,366) $ 356,307 ========= ========= ========= =========
See accompanying unaudited note. 16 17 ALLIANCE GAMING CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATING BALANCE SHEETS December 31, 1999 (In 000's)
Alliance Gaming Parent and Non- Corporation Guaranteeing Guaranteeing Adjust- and Subsidiaries Subsidiaries ments Subsidiaries ------------ ------------ --------- ------------ ASSETS Current assets: Cash and cash equivalents $ 13,619 $ 14,333 $ $ 27,952 Accounts and notes receivable, net 42,711 45,620 (4,099) 84,232 Inventories, net 29,727 18,011 (529) 47,209 Other current assets 7,940 3,441 11,381 --------- --------- --------- --------- Total current assets 93,997 81,405 (4,628) 170,774 --------- --------- --------- --------- Long-term notes receivable, net 102,685 1,130 (98,810) 5,005 Leased equipment, net 9,753 8,069 17,822 Property, plant and equipment, net 42,124 35,227 77,351 Excess of costs over net assets of acquired businesses, net 38,375 18,119 56,494 Intangible assets, net 24,535 353 24,888 Investment in subsidiaries 81,898 (81,898) Other assets, net 32,145 (14,555) (4,022) 13,571 --------- --------- --------- --------- $ 425,515 $ 129,748 $(189,358) $ 365,905 ========= ========= ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY) Current liabilities: Accounts payable $ 15,869 $ 1,984 $ $ 17,853 Accrued liabilities 22,615 12,851 (1,893) 33,573 Current maturities of long-term debt 3,814 3,395 (6,154) 1,055 --------- --------- --------- --------- Total current liabilities 42,298 18,230 (8,047) 52,481 --------- --------- --------- --------- Term loan facilities 131,937 131,937 Senior Subordinated Notes due 2007, net 149,324 149,324 Other long-term debt, less current maturities 131,790 26,895 (98,715) 59,970 Other liabilities 7,179 2,330 (188) 9,321 --------- --------- --------- --------- Total liabilities 462,528 47,455 (106,950) 403,033 --------- --------- --------- --------- Minority interest 1,338 1,338 Commitments and contingencies Stockholders' equity (deficiency): Series E Special Stock 4,624 4,624 Common Stock 1,034 17,832 (17,832) 1,034 Treasury stock (508) (508) Additional paid-in capital 141,130 68,715 (68,715) 141,130 Accumulated other comprehensive income (17,624) (17,786) 17,645 (17,765) Retained earnings (accumulated deficit) (167,007) 13,352 (13,506) (166,981) --------- --------- --------- --------- Total stockholders' equity (deficiency) (38,351) 82,293 (82,408) (38,466) --------- --------- --------- --------- $ 425,515 $ 129,748 $(189,358) $ 365,905 ========= ========= ========= =========
See accompanying unaudited note. 17 18 ALLIANCE GAMING CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATING STATEMENTS OF OPERATIONS Three Months Ended December 31, 1998 (In 000's)
Alliance Gaming Parent and Non- Corporation Guaranteeing Guaranteeing Adjust- and Subsidiaries Subsidiaries ments Subsidiaries ------------ ------------ --------- ------------ Revenues: Gaming equipment and systems $ 20,295 $ 3,005 $ (2,467) $ 22,499 Wall machines and amusement games 23,769 23,769 Route operations 37,370 5,380 42,750 Casino operations 3,553 11,339 14,892 -------- -------- --------- --------- 61,544 43,493 (2,467) 103,910 Costs and expenses: Cost of gaming equipment and systems 11,917 2,365 (2,467) 13,394 Cost of wall machines and amusement games 14,674 14,674 Cost of route operations 29,894 3,622 33,516 Cost of casino operations 2,123 4,381 6,504 Selling, general and administrative 15,931 11,935 27,866 Research and development 3,178 798 3,976 Depreciation and amortization 3,739 2,018 5,757 -------- -------- --------- --------- 66,782 41,372 (2,467) 105,687 Operating income (loss) (5,564) 3,787 (1,777) Earnings in consolidated subsidiaries 2,056 (2,056) Other income (expense): Interest income 228 104 (191) 141 Interest expense (7,268) (425) 191 (7,502) Rainbow royalty 1,333 (1,333) Minority interest (509) (509) Other, net (177) (178) (355) -------- -------- --------- --------- Income (loss) before income taxes (9,901) 1,955 (2,056) (10,002) Income tax benefit 144 101 245 -------- -------- --------- --------- Net income (loss) (9,757) 2,056 (2,056) (9,757) Special Stock dividends (418) (418) -------- -------- --------- --------- Net income (loss) applicable to common shares $(10,175) $ 2,056 $ (2,056) $ (10,175) ======== ======== ========= =========
See accompanying unaudited note. 18 19 ALLIANCE GAMING CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATING STATEMENTS OF OPERATIONS Three Months Ended December 31, 1999 (In 000's)
Alliance Gaming Parent and Non- Corporation Guaranteeing Guaranteeing Adjust- and Subsidiaries Subsidiaries ments Subsidiaries ------------ ------------ -------- ------------- Revenues: Gaming equipment and systems $ 29,695 $ 6,303 $ (5,407) $ 30,591 Wall machines and amusement games 19,542 19,542 Route operations 43,490 4,750 48,240 Casino operations 4,365 11,749 16,114 -------- -------- -------- --------- 77,550 42,344 (5,407) 114,487 Costs and expenses: Cost of gaming equipment and systems 18,174 5,126 (5,407) 17,893 Cost of wall machines and amusement games 11,157 11,157 Cost of route operations 34,984 3,023 38,007 Cost of casino operations 2,203 4,359 6,562 Selling, general and administrative 16,844 11,023 27,867 Research and development 2,622 707 3,329 Depreciation and amortization 4,496 2,205 6,701 Unusual items (165) 691 526 -------- -------- -------- --------- 79,158 38,291 (5,407) 112,042 -------- -------- -------- --------- Operating income (loss) (1,608) 4,053 2,445 Earnings in consolidated subsidiaries 1,465 (1,465) Other income (expense): Interest income 133 99 (120) 112 Interest expense (8,348) (489) 122 (8,715) Rainbow royalty 1,372 (1,372) Minority interest (459) (459) Other, net 65 (446) (381) -------- -------- -------- --------- Income (loss) before income taxes (7,308) 1,845 (1,463) (6,998) Income tax benefit (provision) 202 (380) (178) -------- -------- -------- --------- Net income (loss) applicable to common shares $ (7,178) $ 1,465 $ (1,463) $ (7,176) ======== ======== ======== =========
See accompanying unaudited note. 19 20 ALLIANCE GAMING CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATING STATEMENTS OF OPERATIONS Six Months Ended December 31, 1998 (In 000's)
Alliance Gaming Parent and Non- Corporation Guaranteeing Guaranteeing Adjust- and Subsidiaries Subsidiaries ments Subsidiaries ------------ ------------ -------- ------------ Revenues: Gaming equipment and systems $ 40,310 $ 9,316 $ (5,185) $ 44,441 Wall machines and amusement games 44,391 (11) 44,380 Route operations 72,259 10,495 82,754 Casino operations 6,860 24,246 31,106 --------- -------- -------- --------- 119,429 88,448 (5,196) 202,681 --------- -------- -------- --------- Costs and expenses: Cost of gaming equipment and systems 22,970 7,449 (5,185) 25,234 Cost of wall machines and amusement games 26,753 (11) 26,742 Cost of route operations 57,710 6,935 64,645 Cost of casino operations 4,162 9,158 13,320 Selling, general and administrative 27,648 21,255 48,903 Research and development 6,589 1,446 8,145 Depreciation and amortization 7,408 3,744 11,159 --------- -------- -------- --------- 126,487 76,857 (5,185) 198,148 --------- -------- -------- --------- Operating income (loss) (7,058) 11,591 4,533 Earnings in consolidated subsidiaries 7,304 (7,304) Other income (expense): Interest income 543 208 (378) 373 Interest expense (14,969) (814) 378 (15,405) Rainbow royalty 2,840 (2,840) Minority interest (1,048) (1,048) Other, net (66) (481) (547) --------- -------- -------- --------- Income (loss) before income taxes (12,454) 7,664 (7,304) (12,094) Income tax benefit (provision) 421 (360) 61 --------- -------- -------- --------- Net income (loss) (12,033) 7,304 (7,304) (12,033) Special Stock dividends (824) (824) --------- -------- -------- --------- Net income (loss) applicable to common shares $ (12,857) $ 7,304 $ (7,304) $ (12,857) ========= ======== ======== =========
See accompanying unaudited note. 20 21 ALLIANCE GAMING CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATING STATEMENTS OF OPERATIONS Six Months Ended December 31, 1999 (In 000's)
Alliance Gaming Parent and Non- Corporation Guaranteeing Guaranteeing Adjust- and Subsidiaries Subsidiaries ments Subsidiaries ------------ ------------ --------- ------------ Revenues: Gaming equipment and systems $ 67,219 $ 13,587 $ (10,431) $ 70,375 Wall machines and amusement games 34,218 34,218 Route operations 84,271 9,571 94,292 Casino operations 8,493 24,311 32,804 --------- --------- --------- --------- 160,433 81,687 (10,431) 231,689 Costs and expenses: Cost of gaming equipment and systems 39,230 11,187 (10,431) 39,986 Cost of wall machines and amusement games 21,111 21,111 Cost of route operations 68,516 6,139 74,655 Cost of casino operations 4,315 8,866 13,181 Selling, general and administrative 31,580 19,905 51,485 Research and development 5,433 1,445 6,878 Depreciation and amortization 8,913 4,112 13,025 Unusual items (165) 691 526 --------- --------- --------- --------- 157,822 73,456 (10,431) 220,847 --------- --------- --------- --------- Operating income 2,611 8,231 10,842 Earnings in consolidated subsidiaries 3,412 (3,412) Other income (expense): Interest income 268 206 (248) 226 Interest expense (15,813) (927) 248 (16,492) Rainbow royalty 2,847 (2,847) Minority interest (927) (927) Other, net 380 (505) (125) --------- --------- --------- --------- Income (loss) before income taxes (7,222) 4,158 (3,412) (6,476) Income tax benefit (provision) 491 (746) (255) --------- --------- --------- --------- Net income (loss) applicable to common shares $ (6,731) $ 3,412 $ (3,412) $ (6,731) ========= ========= ========= =========
See accompanying unaudited note. 21 22 ALLIANCE GAMING CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATING STATEMENTS OF CASH FLOWS Six Months Ended December 31, 1998 (In 000's)
Alliance Gaming Parent and Non- Corporation Guaranteeing Guaranteeing Adjust- and Subsidiaries Subsidiaries ments Subsidiaries ------------ ------------ ------- ------------ Net cash provided by (used in) operating activities $ (9,751) $ 21,275 $(1,286) $ 10,838 -------- -------- ------- -------- Cash flows from investing activities: Additions to property and equipment (4,219) (1,257) (5,476) Proceeds from disposal of property and equipment 54 29 83 Additions to other long term assets (3,135) (81) (3,216) -------- -------- ------- -------- Net cash used in investing activities (7,300) (1,309) (8,609) -------- -------- ------- -------- Cash flows from financing activities: Repayments of long-term debt (3,858) (1,527) 1,286 (4,099) Net change in lines of credit (6,200) (6,200) Proceeds from exercise of stock options and warrants 4,778 4,778 Dividends received (paid) 18,600 (18,600) -- -------- -------- ------- -------- Net cash provided by (used in) financing activities 13,320 (20,127) 1,286 (5,521) -------- -------- ------- -------- Effect of exchange rate changes on cash 323 323 -------- -------- ------- -------- Cash and cash equivalents: Increase (decrease) for period (3,731) 762 (2,969) Balance, beginning of period 8,577 14,910 23,487 -------- -------- ------- -------- Balance, end of period $ 4,846 $ 15,672 $ -- $ 20,518 ======== ======== ======= ========
See accompanying unaudited note. 22 23 ALLIANCE GAMING CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATING STATEMENTS OF CASH FLOWS Six Months Ended December 31, 1999 (In 000's)
Alliance Gaming Parent and Non- Corporation Guaranteeing Guaranteeing Adjust- and Subsidiaries Subsidiaries ments Subsidiaries ------------ ------------ -------- ------------ Net cash provided by (used in) operating activities $(10,516) $ 8,443 $ (1,362) $ (3,435) -------- -------- -------- -------- Cash flows from investing activities: Additions to property and equipment (5,383) (4,386) (9,769) Proceeds from disposal of property and equipment and other assets 1,056 26 1,082 Proceeds from sale/leaseback transaction 971 971 Additions to other long term assets (1,888) (40) (1,928) -------- -------- -------- -------- Net cash used in investing activities (5,244) (4,400) (9,644) -------- -------- -------- -------- Cash flows from financing activities: Reduction of long-term debt (3,020) (1,633) 1,362 (3,291) Net change in lines of credit 22,600 4,911 27,511 Proceeds from exercise of stock options and warrants 10 10 Dividends received (paid) 4,550 (4,550) -------- -------- -------- -------- Net cash provided by (used in) financing activities 24,140 (1,272) 1,362 24,230 -------- -------- -------- -------- Effect of exchange rate changes on cash (130) (130) Cash and cash equivalents: Increase for period 8,379 2,643 11,022 Balance, beginning of period 5,240 11,690 16,930 -------- -------- -------- -------- Balance, end of period $ 13,619 $ 14,333 $ $ 27,952 ======== ======== ======== ========
See accompanying unaudited note. 23 24 ALLIANCE GAMING CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS DEBT AND LINES OF CREDIT Long-term debt and lines of credit at June 30, 1999 consist of the following:
Alliance Gaming Parent and Non- Corporation Guaranteeing Guaranteeing Elimina- and Subsidiaries Subsidiaries tions Subsidiaries ------------ ------------ --------- ------------ (in 000's) 10% Senior Subordinated Notes due 2007, net of unamortized discount $149,298 $ $ $ 149,298 Term loan facilities: Tranche B Term Loan 72,380 72,380 Tranche C Term Loan 38,744 38,744 Delayed Draw Term Facility 24,372 24,372 Revolving Credit Facility 12,900 19,300 32,200 Intercompany notes payable 96,701 6,666 (103,367) Other 1,712 1,712 -------- --------- --------- --------- 394,395 27,678 (103,367) 318,706 Less current maturities 6,175 3,299 (7,547) 1,927 -------- --------- --------- --------- Long-term debt, less current maturities $388,220 $ 24,379 $ (95,820) $ 316,779 ======== ========= ========= =========
Long-term debt and lines of credit at December 31, 1999 consist of the following:
Alliance Gaming Parent and Non- Corporation Guaranteeing Guaranteeing Adjust- and Subsidiaries Subsidiaries ments Subsidiaries ------------ ------------ -------- ------------ (in 000's) 10% Senior Subordinated Notes due 2007, net of unamortized discount $149,324 $149,324 Term loan facilities: Tranche B Term Loan 70,775 70,775 Tranche C Term Loan 37,869 37,869 Delayed Draw Term Facility 23,833 23,833 Revolving Credit Facility 25,500 23,569 59,069 Intercompany notes payable 99,564 5,304 (104,868) Other 1,416 1,416 -------- --------- -------- -------- 416,865 30,289 (104,868) 342,286 Less current maturities 3,814 3,395 (6,154) 1,055 -------- --------- -------- -------- Long-term debt, less current maturities $414,131 $ 26,894 $(98,714) $341,231 ======== ========= ======== ========
24 25 ALLIANCE GAMING CORPORATION FORM 10-Q FOR THE QUARTER ENDED DECEMBER 31, 1999 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS LIQUIDITY AND CAPITAL RESOURCES At December 31, 1999, based on the terms of the $90.0 million revolving credit facility, the Company would have been able to borrow $67.5 million under the facility, of which the Company had borrowings of approximately $59.1 million outstanding. The borrowing base for the revolving credit facility consists of eligible receivables and inventory, as defined in the credit agreement. At December 31, 1999, the Company had $28.0 million in cash and cash equivalents and $8.4 million in unborrowed availability on its revolving credit facility pursuant to the borrowing base limitations contained in the credit agreement. In addition, the Company had working capital of approximately $118.3 million, an increase of approximately $9.6 million from June 30, 1999, which is explained below. Consolidated cash and cash equivalents at December 31, 1999 includes approximately $22.2 million of cash which is utilized in Casino and Route Operations which is held in vaults, cages or change banks. The Company is in compliance with the financial and maintenance covenants under both the credit agreement for the Bank Facility as amended and the Indenture for the Senior Subordinated Notes. Consistent with the Company's plan to enlarge the installed base of recurring revenues gaming machines at its Bally Gaming and Systems business unit, the Company has increased its investment in leased gaming equipment during the six months ended December 31, 1999. The Company will continue the roll out, and thus increase its investment in, these proprietary games and wide area progressive games in the future. At December 31, 1999, due in part to the lower level of revenues from Bally Gaming and Systems and increased collections on accounts receivable, the borrowing base for the Company's revolving line of credit declined by $6.9 million from September 30, 1999 to December 31, 1999. The Company is actively managing its working capital and other assets. As part of these efforts, during the three months ended December 31, 1999 the Company received $1.0 million for the release of an option it held to operate gaming machines at a dormant dog racing track in Kansas and entered into a sale and leaseback transaction for $1.0 million for gaming machines deployed in its Nevada Route Operation. As part of this plan, similar dispositions of other non-core assets are likely to continue. While management believes that cash flow from operating activities, cash and cash equivalents held and the remaining borrowing availability under the revolving credit facility will provide the Company with sufficient capital resources and liquidity for ongoing operating needs, it will continue to actively manage its working capital by more timely collecting on accounts receivable, reducing levels of raw materials and finished goods inventories and obtaining extended payment terms with certain vendors. At December 31, 1999 the Company did not have any significant commitments for capital expenditures. Working Capital During the six months ended December, 1999, working capital increased $9.6 million to $118.3 million. The primary fluctuations in working capital were: (i) a net decrease in accounts receivable resulting from cash collections partially offset by improved revenues at the Bally Gaming and Systems business unit, (ii) an increase in inventory due to a larger number of product platforms to support at Bally Gaming and Systems, (iii) a decrease in accrued liabilities due to decreases in certain payroll related accrued expenses, (v) the impact of foreign exchange fluctuations between the dollar and the deutschemark on all working capital categories, (vi) increases in accounts payable based on the increase in inventory levels and timing of payments, (vii) a decrease in current maturities of long-term debt due to certain amounts reclassified to long-term debt and (viii) the corresponding impact of the above listed items on cash and cash equivalents. Cash Flow During the six months ended December 31, 1999 the Company used $3.4 million of cash in operating activities resulting from the net loss, an increase in inventory and a decrease in accrued liabilities, partially offset by a net decreases in accounts receivable, and increases in depreciation and amortization, provision for doubtful receivables and accounts payable. During the six months ended December 31, 1999 the Company used $9.6 million of cash in investing activities resulting primarily from $9.8 million in capital expenditures and $1.9 million in additions to other long-term assets including $0.3 million of payments made in acquiring the rights to manufacture and distribute several gaming 25 26 ALLIANCE GAMING CORPORATION FORM 10-Q FOR THE QUARTER ENDED DECEMBER 31, 1999 products, and $0.6 million of payments in acquiring gaming rights of route locations, partially offset by the cash proceeds of $1.0 million from the release of an option the Company had to operate gaming machines at a dormant dog racing track in Kansas. During the six months ended December 31, 1999, $24.2 million was provided by financing activities primarily resulting from additional borrowings from the Company's revolving credit facility of $27.5 million, partially offset by $3.3 million used to reduce the Company's long-term debt. The following is a summary of the Company's earnings before interest, taxes, depreciation and amortization (EBITDA) by business unit:
Three Months Ending Six Months Ending December 31, December 31, --------------------- ----------------------- 1998 1999 1998 1999 ------- ------- -------- -------- (In $000's) EBITDA by Business Unit: Bally Gaming and Systems $(3,532) $ (159) $ (2,572) $ 6,626 Wall Machines and Amusement Games 1,287 2,361 4,432 1,751 Route Operations 6,035 6,229 11,713 11,652 Casino Operations 4,605 5,150 10,047 11,623 Corporate Administrative Expenses (4,415) (3,909) (7,928) (7,259) Unusual Items -- (526) -- (526) ------- ------- -------- -------- EBITDA $ 3,980 $ 9,146 $ 15,692 $ 23,867 ======= ======= ======== ========
The Company believes that the analysis of EBITDA is a useful adjunct to net income, cash flow and other GAAP measurements. However, this information should not be construed as an alternative to net income or any other GAAP measure of performance as an indicator of the Company's performance or to GAAP-defined cash flows generated by operating, investing and financing activities as an indicator of cash flows or a measure of liquidity. The Bank Facility is collateralized by substantially all domestic property and is guaranteed by each domestic subsidiary of the U.S. Borrower and German Subsidiaries (both as defined), other than the entity which holds the Company's interest in its Louisiana operations and other non-material subsidiaries (as defined), and secured by both a U.S. and German Pledge Agreement (both as defined). The Bank Facility contains a number of maintenance covenants and it and the Indenture have other significant covenants that, among other things, restrict the ability of the Company and certain of its subsidiaries to dispose of assets, incur additional indebtedness, issue preferred stock, pay dividends or make other distributions, enter into certain acquisitions, repurchase equity interests (as defined) or subordinated indebtedness, issue or sell equity interests of the Company's subsidiaries (as defined), engage in mergers or acquisitions, or engage in certain transactions with subsidiaries and affiliates, and that otherwise restrict corporate activities. Sale of Route and Casino Businesses, Bally Wulff matters and bank amendments The Company has retained investment bankers to explore the sale of its Nevada and Louisiana Route businesses and its Mississippi and Nevada Casino businesses which will enable management to focus on its core gaming machine and systems businesses. The sale process for each of the businesses is proceeding and the Board of Directors should have final offers to consider in the March 2000 quarter for the Casinos and the Nevada Route Operations. The sales depend on receiving offers acceptable to the Company. The net proceeds from the sale of these non-core assets will be used to repay the Company's bank debt. To facilitate the disposition of the businesses, the Company has obtained an 26 27 ALLIANCE GAMING CORPORATION FORM 10-Q FOR THE QUARTER ENDED DECEMBER 31, 1999 amendment to its bank credit agreement. The amendment provides the lenders' consent to sell the businesses and provides other financial flexibility to the Company. In addition, the bank amendment provides that if the Company should elect to sell any of its non-core businesses, any restructuring charges that may be incurred as a result of the sales may be excluded from the determination of EBITDA used in the calculation of the various financial covenant ratios. The Company is also exploring various alternatives to return its Bally Wulff operations to higher levels of profitability. The amendment to the credit agreement provides the lenders' consent to a restructuring of the Bally Wulff legal entities. In addition, the bank amendment provides that any restructuring charges that may be incurred at Bally Wulff or Bally Gaming and Systems (up to $1.5 million) may be excluded from the determination of EBITDA used in the calculation of the various financial covenant ratios. Customer Financing Management believes that customer financing terms and leasing have become an increasingly important competitive factor for the Gaming Equipment and Systems and Wall Machine and Amusement Games business units, respectively. Competitive conditions sometimes require Gaming Equipment and Systems to grant extended payment terms on gaming machines, systems and other gaming equipment, especially for sales in emerging markets. While these financings are normally collateralized by such equipment, the resale value of the collateral in the event of default may be less than the amount financed. Accordingly, the Company will have greater exposure to the financial condition of its customers in emerging markets than has historically been the case in established markets like Nevada and Atlantic City. Bally Wulff provides customer financing for approximately 20% of its sales and also provides lease financing to its customers. Lease terms are generally for six months, but are also available for 12 up to 43 month terms. Year 2000 The Company has not experience any significant Year 2000 interruptions from any information technology ("IT") systems or non-IT systems such as its manufacturing systems and physical facilities. The Company will continue to monitor all critical systems for the appearance of any delayed Year 2000 related issues including both internal systems and through suppliers, customers and third parties with whom the Company does business. Euro Currency Conversion The Company's Bally Wulff subsidiary uses the German deutschmark as its functional currency. The new Euro currency will replace the deutschmark as well as most other European currencies after a phase in period which begins January 1, 1999. As most of Bally Wulff's transactions are within Germany, the switch to the Euro is not expected to have a material impact on revenues, expenses or income. The new Euro coins and bills will become the official currency in January 2002. The Company's products can be brought into Euro compliance by moving a switch inside the wall machine, replacing the coin tubes and modifying the front glass to indicate Euros. Management believes the cost of the implementing the Euro conversion will be borne be the customers. The Company currently has borrowings outstanding on its line of credit facility, a portion of which has a floating rate of interest tied to the Euro deutschmark rate. Upon the full implementation of the Euro, as of January 1, 2002, the interest rate will be tied to this new index. The impact of the change in this index, if any, is not known and can not be quantified at this time. 27 28 ALLIANCE GAMING CORPORATION FORM 10-Q FOR THE QUARTER ENDED DECEMBER 31, 1999 RESULTS OF OPERATIONS: GENERAL The Company operates through four business units: (i) gaming equipment and systems, (ii) wall machines and amusement games (consisting of the manufacture and distribution of wall-mounted gaming machines and distribution of other recreational and amusement machines), (iii) route operations and (iv) casino operations. The following tables set forth the combined revenues and operating income (loss) for the four business units for the three and six months ended December 31, 1998 and 1999:
Three Months Ending Six Months Ending December 31, December 31, --------------------------- --------------------------- 1998 1999 1998 1999 ---------- ---------- ---------- ---------- (In $000's) REVENUES: Bally Gaming and Systems $ 22,499 $ 30,591 $ 44,441 $ 70,375 Wall Machines and Amusement Games 23,769 19,542 44,380 34,218 Route Operations 42,750 48,240 82,754 94,292 Casino Operations 14,892 16,114 31,106 32,804 ---------- ---------- ---------- ---------- TOTAL REVENUES $ 103,910 $ 114,487 $ 202,681 $ 231,689 ========== ========== ========== ========== OPERATING INCOME (LOSS): Bally Gaming and Systems $ (4,454) $ (2,128) $ (4,307) $ 2,875 Wall Machines and Amusement Games 122 835 2,279 (995) Route Operations 3,361 3,957 6,437 6,986 Casino Operations 4,023 4,631 8,885 10,595 Corporate Administrative Expenses (4,829) (4,324) (8,761) (8,093) Unusual items(a) -- (526) -- (526) ---------- ---------- ---------- ---------- TOTAL OPERATING INCOME (LOSS) $ (1,777) $ 2,445 $ 4,533 $ 10,842 ========== ========== ========== ==========
- ---------- (a) The unusual items consist of approximately $1.5 million of restructuring charges, partially offset by a $1.0 million gain on the release of an option the Company had to operate gaming machines at a dormant dog racing track in Kansas. THREE MONTHS ENDED DECEMBER 31, 1998 AND 1999 BALLY GAMING AND SYSTEMS For the quarter ended December 31, 1999, Bally Gaming and Systems reported revenues of $30.6 million, a 36% increase compared to revenues of $22.5 million in the prior year quarter. The improvement was due primarily to a $4.9 million increase in recurring revenue sources which is more fully described below, and increases in units shipped and the average selling price of new gaming machines. Bally Gaming reported unit sales of approximately 2,300 new gaming machines, an increase of 29% compared to unit sales of approximately 1,800 in the prior year quarter, due primarily to an overall increase in market demand and the successful introduction of new products recently licensed in more jurisdictions. By market segment, Bally Gaming's unit sales for the quarter consisted of approximately 450 units to the Nevada and Atlantic City markets, 1,350 units to international markets and 500 units 28 29 ALLIANCE GAMING CORPORATION FORM 10-Q FOR THE QUARTER ENDED DECEMBER 31, 1999 to riverboats, Native American and other domestic markets. Bally Gaming reported revenues from the sale of new gaming machines of $13.8 million, an increase of 55% compared to $8.9 million in the prior year quarter, due to higher unit volume and a 21% increase in average selling prices over the prior year quarter. Bally Systems reported revenues from SDS 6000 game monitoring unit sales of $5.9 million, an increase of 5% compared to revenues of $5.6 million in the prior year quarter. In addition, revenues from recurring revenue sources were $6.4 million, an increase of 333% compared to revenues of $1.5 million in the prior year quarter as the installed base of such gaming machines continued to increase. Gross margin for the quarter ended December 31, 1999 improved to 42% compared to 41% in the prior year quarter. The improvement was due primarily to a change in product mix to higher margin gaming machines and larger revenues from higher margin recurring revenue units, partially offset by an increase in royalty expense and higher cost of goods sold. For the quarter ended December 31, 1999, Bally Gaming and Systems reported an operating loss of $2.1 million compared to an operating loss of $4.5 million in the prior year quarter. The improvement resulted from higher revenues, improved gross margins and lower research and development costs, partially offset by a higher provision for doubtful accounts and higher depreciation and amortization expense resulting from the larger installed base of recurring revenue units. Research and development costs totaled $2.6 million, a decrease of 18 percent over the prior year quarter. WALL MACHINES AND AMUSEMENT GAMES For the quarter ended December 31, 1999, the Wall Machines and Amusement Games business unit reported revenues of $19.5 million, an 18% decrease compared to the prior year quarter. The lower revenues resulted from a 6% decrease in shipments of new wall machines, a 12% decrease in the average selling price of new wall machines and a 37% decrease in amusement game distribution revenues, partially offset by a 16% increase in leased machine revenues. The foreign currency fluctuation between the dollar and the deutschmark decreased revenues by $2.6 million and EBITDA by $0.3 million in the quarter ended December 31, 1999. The Company believes that the soft demand for new wall machines is due toe potential changes in the laws regulating wall machines that are being reviewed by the German government. The soft demand will likely remain until the outcome of the proposed law changes is known. The ultimate outcome and timing of the proposed changes is not determinable at this time. Wall Machines and Amusement Games continued to expand its leasing program whereby new wall machines are leased to customers pursuant to operating leases. These leases provide Wall Machines and Amusement Games with a stream of revenues and cash flow over the life of the leases, which range from six months to three and one half years. The increase in lease revenues compared to the prior year quarter was due primarily to a 21% increase in the average monthly lease rate and an increase in the installed base of leased machines. For the quarter ended December 31, 1999, gross profit margin increased to 43% compared to 38% in the prior year quarter. This improvement was due to sales of higher margin progressive jackpot machines and the increase in lease revenues, partially offset by the unfavorable impact of a lower fixed cost absorption rate from a decrease in production. Wall Machines and Amusement Games reported operating income of $0.8 million compared to operating income of $0.1 million in the prior year quarter, due primarily to the increase in gross margins and lower selling, general and administrative expenses, principally a decrease in salary and wages and marketing expenses, partially offset by a decrease in revenues and an increase in depreciation expense. 29 30 ALLIANCE GAMING CORPORATION FORM 10-Q FOR THE QUARTER ENDED DECEMBER 31, 1999 ROUTE OPERATIONS For the quarter ended December 31, 1999, the Route Operations business unit reported revenues of $48.2 million, an increase of 13% compared to revenues of $42.8 million in the prior year quarter. Revenues for the Nevada operations increased 16% as net win per gaming machine per day increased to $61.00 from $55.50 in the prior year quarter, while the average number of gaming machines increased to 7,670 from 7,250 in the prior year quarter resulting primarily from machines added as a result of new locations and taking over the contracts to operate locations previously served by competitors. Revenues continue to be strong in Southern Nevada, particularly in Gamblers Bonus locations. Revenues for the Louisiana operations decreased 12% due primarily to the closing of two OTB's that, pursuant to a prior vote, effective July 1, 1999 were required to close. This resulted in a 10% decrease in the average number of gaming units deployed. Additionally, there was a decrease in net win per day per gaming machine to $76.10 from $78.90 in the prior year quarter. For the quarter ended December 31, 1999, cost of revenues increased 13% to $38.0 million compared to $33.5 million in the prior year quarter. As a percentage of revenues, cost of revenues increased slightly to 79% from 78% in the prior year quarter. Nevada route operations cost of revenues as a percentage of revenues increased to 81% from 80% in the prior year quarter, due primarily to lower margins in the Southern Nevada route operations, partially offset by improved margins in the Northern Nevada route operations. The lower margins in Southern Nevada resulted primarily from increased gaming machine rental costs and participation payments. Louisiana operations cost of revenues as a percentage of revenues improved to 64% from 67% in the prior year quarter. The Route Operations business unit reported operating income of $4.0 million, an increase of 18% compared to operating income of $3.4 million in the prior year quarter. The increase in operating income resulted primarily from higher revenues and lower depreciation expense, partially offset higher operating costs and higher selling, general and administrative expenses, primarily increased promotion and marketing costs at the Nevada route operation. Effective February 1, 2000 the Company began operating an additional 305 games in 19 Raley's stores in Nevada. This agreement with Raley's runs through June 2008, and brings the total games on the Nevada route to over 8,000. CASINO OPERATIONS For the quarter ended December 31, 1999, the Casino Operations business unit reported revenues of $16.1 million, an increase of 8% compared to revenues of $14.9 million in the prior year quarter. This increase was a result of a 23% increase at the Rail City Casino and a 4 percent increase at the Rainbow Casino. The revenue improvement at the Rail City Casino to $4.4 million from $3.6 million in the prior year quarter was attributable to an increase in the average gaming machine net win per day of 18% to $77 from $65 in the prior year quarter and an 11% increase in the average number of gaming machines. Rainbow Casino revenues increased to $11.7 million from $11.4 in the prior year quarter as a result of a 6% increase in the average number of gaming machines and higher table game revenue, partially offset by a 4% decrease in net win per day per gaming machine to $141 from $147 in the prior year quarter. The increase in revenues at the Rainbow Casino was despite the adverse impact of temporarily removing machines as part of the casino expansion and internal remodeling projects. The expansion space at the Rainbow Casino opened in late November and the casino now has over 1,000 gaming machines. For the quarter ended December 31, 1999, the cost of revenues for Casino Operations increased to $6.6 million compared to $6.5 million in the prior year quarter and, as a percentage of revenues, improved to 41% from 44% in the prior year quarter. The Casino Operations business unit reported operating income of $4.6 million, an improvement of 15% compared to operating income of $4.0 million in the prior year quarter. Rainbow Casino operating income increased 5% to $3.6 million due primarily to the increase in revenues and improved operating margins, partially offset by an increase in selling, general and administrative costs, principally marketing costs. Rail City Casino operating 30 31 ALLIANCE GAMING CORPORATION FORM 10-Q FOR THE QUARTER ENDED DECEMBER 31, 1999 income increased by 81% to $1.0 million due primarily to the increase in revenues and improved operating margins, partially offset by an increase in selling, general and administrative costs, primarily gaming machine rent. CONSOLIDATED Total revenues for the quarter ended December 31, 1999 were $114.5 million, an increase of 10% compared to revenues of $103.9 million in the prior year quarter. The increase is due primarily to the aforementioned increases at the Bally Gaming and Systems, Route Operations and Casino Operations business units, partially offset by a decrease at the Wall Machines and Amusement Games business unit. Cost of revenues for the quarter ended December 31, 1999 was $73.6 million, an increase of 8% compared to $68.1 million in the prior year quarter. Cost of revenues as a percentage of total revenues improved to 64% from 65% in the prior year quarter. The increase was due primarily to the improvements in costs as a percentage of revenues at the Bally Gaming and Systems, the Wall Machines and Amusement Games and the Casino Operations business units, partially offset by an increase in costs as a percentage of revenues at Route Operations business unit. Selling, general and administrative expenses for the quarter ended December 31, 1999 remained constant at $27.9 million between quarters. Increases in expenses at the Route Operations and Casino Operations business units and an increase in the provision for doubtful accounts, were offset by a decrease in Corporate expenses, primarily professional and consulting fees, and decreases in expenses at the Wall Machines and Amusement Games business unit. Research and development costs for the quarter ended December 31, 1999 were approximately $3.3 million, a decrease of 16% compared to costs of $4.0 million in the prior year quarter. This decrease is due to decreases in costs at the Bally Gaming and Systems and the Wall Machines and Amusement Games business units. Depreciation and amortization for the quarter ended December 31, 1999 was approximately $6.7 million, an increase of 16% compared to $5.8 million in the prior year quarter. The increase was due primarily to increases at the Bally Gaming and Systems and the Wall Machines and Amusement Games business units, partially offset by decreases at the Route Operations and Casino Operations business units. NET INTEREST EXPENSE AND INCOME TAXES Net interest expense in the three months ended December 31, 1999 increased to $8.6 million from $7.4 million in the prior year quarter due to a $0.5 million fee in connection with obtaining an amendment to the Company's bank credit facility coupled with a higher average amount of total borrowings and slightly higher interest rates. The Company recorded an income tax provision of $0.2 million in the 1999 quarter compared to an income tax benefit of $0.2 million in the prior year quarter. The current quarter provision is due to various state income tax provisions. SIX MONTHS ENDED DECEMBER 31, 1998 AND 1999 BALLY GAMING AND SYSTEMS For the six months ended December 31, 1999, Bally Gaming and Systems reported revenues of $70.4 million, a 58% increase compared to revenues of $44.4 million in the prior year period. The improvement was due primarily 31 32 ALLIANCE GAMING CORPORATION FORM 10-Q FOR THE QUARTER ENDED DECEMBER 31, 1999 to a $10.4 million increase in SDS 6000 game monitoring unit sales, an $8.0 million increase in recurring revenue sources and increases in units shipped and the average selling price of new gaming machines. Bally Gaming reported unit sales of approximately 5,300 new gaming machines, an increase of 33% compared to unit sales of approximately 4,000 in the prior year period, due primarily to an overall increase in market demand and the successful introduction of new products recently licensed in more jurisdictions. By market segment, Bally Gaming's unit sales for the six month period consisted of approximately 700 units to the Nevada and Atlantic City markets, 3,300 units to international markets and 1,300 units to riverboats, Native American and other domestic markets. Bally Gaming reported revenues from the sale of new gaming machines of $32.1 million, an increase of 54% compared to $20.9 million in the prior year period, due to higher unit volume and a 16% increase in average selling prices over the prior year quarter. Bally Systems reported revenues from SDS 6000 game monitoring unit sales of $20.1 million, an increase of 108% compared to revenues of $9.6 million in the prior year period. In addition, revenues from recurring revenue sources were $10.6 million, an increase of 312% compared to revenues of $2.6 million in the prior year period. At December 31, 1999 Bally Gaming and Systems had an installed base of over 2,000 gaming machines that earn revenue on a recurring basis compared to approximately 100 gaming machines at December 31, 1998. Gross margin for the six months ended December 31, 1999 remained constant at 43% between periods. A change in product mix to higher margin gaming machines coupled with greater revenues from recurring revenue units and SDS 6000 game monitoring unit sales, were offset by an increase in royalty expense, a greater provision for inventory obsolescence and higher cost of goods sold. For the six months ended December 31, 1999, Bally Gaming and Systems reported operating income of $2.9 million compared to an operating loss of $4.3 million in the prior year period. The improvement resulted from higher revenues and lower research and development costs, partially offset by higher selling, general and administrative costs including a higher provision for doubtful accounts, higher costs to support the recurring revenue units, higher costs from the start of commercial sales in Australia and higher depreciation and amortization expense resulting from the larger installed base of recurring revenue units. Research and development costs totaled $5.4 million, a decrease of 18% over the prior year period. WALL MACHINES AND AMUSEMENT GAMES For the six months ended December 31, 1999, the Wall Machines and Amusement Games business unit reported revenues of $34.2 million, a 23% decrease compared to the prior year period. The lower revenues resulted from a 16% decrease in shipments of new wall machines, a 14% decrease in the average selling price of new wall machines and a 39% decrease in amusement game distribution revenues, partially offset by a 4% increase in leased machine revenues. The foreign currency fluctuation between the dollar and the deutschmark decreased revenues by $3.1 million and EBITDA by $0.2 million in the six months ended December 31, 1999. The Company believes that the soft demand for new wall machines is due to the potential changes in the laws regulating wall machines. The soft demand will likely remain until the outcome of the proposed law changes is known. The ultimate outcome and timing of the proposed changes is not determinable at this time. Wall Machines and Amusement Games continued to expand its leasing program whereby new wall machines are leased to customers pursuant to operating leases. These leases provide Wall Machines and Amusement Games with a stream of revenues and cash flow over the life of the leases, which range from six months to three and one half years. As of December 31, 1999 a total of 5,320 machines were deployed in the leasing plan compared to 4,760 deployed at December 31, 1998, an increase of 12%. The average monthly lease rate increased by 4% compared to the prior year period. 32 33 ALLIANCE GAMING CORPORATION FORM 10-Q FOR THE QUARTER ENDED DECEMBER 31, 1999 For the six months ended December 31, 1999, gross profit margin decreased to 38% compared to 40% in the prior year period. This decrease was due to the unfavorable impact of a higher volume of trade-ins of used equipment and a lower fixed cost absorption rate, partially offset by sales of higher margin progressive jackpot machines. Wall Machines and Amusement Games reported an operating loss of $1.0 million compared to operating income of $2.3 million in the prior year period, due primarily to lower revenues and margins coupled with increases in the provision for doubtful accounts and depreciation expense, partially offset by lower selling, general and administrative expenses, principally a decrease in salary and wages and marketing expenses. ROUTE OPERATIONS For the six months ended December 31, 1999, the Route Operations business unit reported revenues of $94.3 million, an increase of 14% compared to revenues of $82.8 million in the prior year quarter. Revenues for the Nevada operations increased 17% as net win per gaming machine per day increased to $59.60 from $54.00 in the prior year period, while the average number of gaming machines increased to 7,640 from 7,190 in the prior year period resulting primarily from machines added as a result of new locations and taking over the contracts to operate locations previously served by competitors. Revenues continue to be strong in Southern Nevada, particularly in Gamblers Bonus locations. As of December 31, 1999, the Gamblers Bonus product was installed in over 3,000 gaming machines at approximately 300 locations statewide or 39% of the installed base of gaming machines. Revenues for the Louisiana operations decreased 9% compared to the prior year period due primarily to the July 1, 1999 closing of two OTB's that, pursuant to a prior vote, effective July 1, 1999 were required to close. This resulted in a 9% decrease in the average number of gaming units deployed and a decrease in net win per day per gaming machine to $76.80 from $77.90 in the prior year period. As a percentage of revenues, cost of revenues increased slightly to 79% from 78% in the prior year quarter. Nevada route operations cost of revenues increased as a percentage of revenues to 81% from 80% in the prior year quarter, due primarily to the lower margins in the Southern Nevada route operations, partially offset by improved margins in the Northern Nevada route operations. The lower margins resulted primarily from the impact of the start-up costs for the Raley's stores where the Company was not able to operate until February 1, 2000 and increased gaming machine rental and participation costs. Louisiana operations cost of revenues decreased as a percentage of revenues to 64% from 66% in the prior year quarter. The Route Operations business unit reported operating income of $7.0 million, an increase of 9% compared to operating income of $6.4 million in the prior year period. The increase in operating income resulted primarily from higher revenues and lower depreciation expense, partially offset higher operating costs and higher selling, general and administrative expenses, principally increases in salary and wages and promotion and marketing costs at the Nevada route operation. CASINO OPERATIONS For the six months ended December 31, 1999, the Casino Operations business unit reported revenues of $32.8 million, an increase of 6% compared to revenues of $31.1 million in the prior year period. This increase was a result of a 24% increase at the Rail City Casino. The revenue improvement at the Rail City Casino to $8.5 million from $6.9 million in the prior year period was attributable to an increase in the average gaming machine net win per day of 19% to $74 from $62 in the prior year period and an 11% increase in the average number of gaming machines. Rainbow Casino revenues remained constant at $24.3 million between periods as a 2% increase in net win per day per gaming machine to $155 from $152 in the prior year period was offset by a 2% decrease in the average number of gaming machines. Revenues at the Rainbow Casino impacted from temporarily removing machines as part of the casino expansion and internal remodeling projects which are now complete. 33 34 ALLIANCE GAMING CORPORATION FORM 10-Q FOR THE QUARTER ENDED DECEMBER 31, 1999 For the six months ended December 31, 1999, the cost of revenues for Casino Operations decreased to $13.2 million compared to $13.3 million in the prior year quarter and, as a percentage of revenues, improved to 40% from 43% in the prior year quarter. The Casino Operations business unit reported operating income of $10.6 million, an improvement of 19% compared to operating income of $8.9 million in the prior year period. Rainbow Casino operating income increased 9% to $8.7 million due primarily to improved operating margins and a decrease in selling, general and administrative costs. Rail City Casino operating income increased by 113% to $1.9 million due primarily to the increase in revenues and improved operating margins, partially offset by an increase in selling, general and administrative costs, primarily gaming machine rent and participation payments. CONSOLIDATED Total revenues for the six months ended December 31, 1999 were $231.7 million, an increase of 14% compared to revenues of $202.7 million in the prior year period. The increase is due primarily to the aforementioned increases at the Bally Gaming and Systems, Route Operations and Casino Operations business units, partially offset by a decrease at the Wall Machines and Amusement Games business unit. Cost of revenues for the six months ended December 31, 1999 was $148.9 million, an increase of 15% compared to $129.9 million in the prior year period. Cost of revenues as a percentage of total revenues remained constant at 64% between periods. Improvements in costs as a percentage of revenues at the Casino Operations business unit, were offset by an increase in costs as a percentage of revenues at Wall Machines and Amusement Games and the Route Operations business units. Bally Gaming and Systems costs as a percentage of revenues remained constant between periods. Selling, general and administrative expenses for the six months ended December 31, 1999 were $51.5 million an increase of 5% compared to $48.9 million in the prior year period. The increase was due primarily to increases in expenses at the Bally Gaming and Systems, Route Operations and Casino Operations business units and an increase in the provision for doubtful accounts, partially offset by a decrease in Corporate expenses, principally salary and wages and consulting fees, and decreases in expenses at the Wall Machines and Amusement Games business unit. Research and development costs for the six months ended December 31, 1999 were approximately $6.9 million, a decrease of 16% compared to costs of $8.1 million in the prior year period. This decrease is due to decreases in costs at the Bally Gaming and Systems and the Wall Machines and Amusement Games business units. Depreciation and amortization for the six months ended December 31, 1999 was approximately $13.0 million, an increase of 17% compared to $11.1 million in the prior year period. The increase was due primarily to increases at the Bally Gaming and Systems and the Wall Machines and Amusement Games business units, partially offset by decreases at the Route Operations and Casino Operations business units. NET INTEREST EXPENSE AND INCOME TAXES Net interest expense in the six months ended December 31, 1999 increased to $16.3 million from $15.0 million in the prior year period due to a $0.5 million fee in connection with obtaining an amendment to the Company's bank credit facility coupled with a higher average amount of total borrowings and slightly higher interest rates. The Company recorded an income tax provision of $0.3 million in the current year period compared to an income tax benefit of less than $0.1 million in the prior year period. The current year period provision is due to various 34 35 ALLIANCE GAMING CORPORATION FORM 10-Q FOR THE QUARTER ENDED DECEMBER 31, 1999 state income tax provisions. * * * * * The information contained in this Form 10-Q may contain "forward-looking" statements within the meaning of section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Act of 1933, as amended, and is subject to the safe harbor created thereby. Such information involves important risks and uncertainties that could significantly affect results in the future and, accordingly, such results may differ from those expressed in any forward looking statements herein. Future operating results may be adversely affected as a result of a number of factors such as the Company's high leverage, its holding company structure, its operating history and recent losses, competition, risks of product development, customer financing, sales to non-traditional gaming markets, foreign operations, dependence on key personnel, strict regulation by gaming authorities, gaming taxes and value added taxes, uncertain effect of National Gambling Commission, and other risks, as detailed from time to time in the Company's filings with the Securities and Exchange Commission. 35 36 ALLIANCE GAMING CORPORATION FORM 10-Q FOR THE QUARTER ENDED DECEMBER 31, 1999 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Refer to Part 1, Item 7A of the Company's annual report on Form 10-K, as amended, for the fiscal year ended June 30, 1999. There have been no material changes in market risks since the prior fiscal year end. PART II ITEM 1. LEGAL PROCEEDINGS See "Notes to Unaudited Condensed Consolidated Financial Statements- 5. Legal Proceedings" for a description of certain legal proceedings. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On January 3, 2000, the Company held its annual shareholders meeting at which the shareholders were asked to vote on the election of two directors. Of the 10,252,380 shares of common stock outstanding, 5,676,327 shares were voted for, and 3,423,624 withheld from Mr. Anthony DiCesare; and 5,676,327 shares were voted for, and 3,423,624 withheld from Mr. Joel Kirschbaum. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a. Exhibits 4.6 Fourth Amendment and Consent among Alliance Gaming Corporation, Bally Wulff Vertriebs GmbH, Bally Wulff Automaten GmbH and various lenders, and Credit Suisse First Boston as administrative agent dated December 16, 1999. 27.1 Financial Data Schedule b. Reports on Form 8-K No reports on Form 8-K were filed during the quarter ended December 31, 1999. 36 37 ALLIANCE GAMING CORPORATION FORM 10-Q FOR THE QUARTER ENDED DECEMBER 31, 1999 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934 the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto authorized. ALLIANCE GAMING CORPORATION (Registrant) By /s/ Robert Miodunski ----------------------------------- Chief Operating Officer (Principal Executive Officer) By /s/ Scott D. Schweinfurth ----------------------------------- Sr. Vice President, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer) 37 EX-4.6 2 EXHIBIT 4.6 1 EXHIBIT 4.6 FOURTH AMENDMENT FOURTH AMENDMENT (this "Amendment"), dated as of December 16th, 1999, among ALLIANCE GAMING CORPORATION, a Nevada corporation (the "U.S. Borrower"), BALLY WULFF VERTRIEBS GMBH, a company with limited liability organized under the laws of the Federal Republic of Germany ("Bally Wulff Vertriebs"), BALLY WULFF AUTOMATEN GMBH, a company with limited liability organized under the laws of the Federal Republic of Germany ("Bally Wulff Automaten" and, together with Bally Wulff Vertriebs, the "German Borrowers," and each a "German Borrower", and the German Borrowers, together with the U.S. Borrower, the "Borrowers," and each a "Borrower"), the financial institutions party to the Credit Agreement referred to below (the "Lenders") and CREDIT SUISSE FIRST BOSTON, as Administrative Agent. Unless otherwise defined herein, all capitalized terms used herein and defined in the Credit Agreement referred to below are used herein as so defined. WITNESSETH: WHEREAS, the Borrowers, the Lenders and the Administrative Agent are parties to a Credit Agreement, dated as of August 8, 1997 (as amended, modified or supplemented through, but not including, the date hereof, the "Credit Agreement"); WHEREAS, the parties hereto wish to further amend the Credit Agreement as herein provided; NOW, THEREFORE, it is agreed: 1. The definition of "Consolidated EBITDA" appearing in Section 11 of the Credit Agreement is hereby amended by deleting the last sentence of said definition and inserting the following sentence in lieu thereof: "For the purposes of calculating Consolidated EBITDA for (A) any period ending on or prior to December 31, 2000, any determination of Consolidated Net Income shall be adjusted by adding thereto (A) the amount of any restructuring charges taken during such period at Bally Gaming, Inc., (B) the amount of any restructuring charges taken during such period in connection with the RCVP Sale, the Nevada Route Operations Sale, the Rail City Sale, the Louisiana Route Operations Sale or any of the transactions contemplated in Section 1 of Article I of the Third Amendment and (C) any ancillary transaction costs incurred in connection with the RCVP Sale, the Nevada Route Operations Sale, the Rail City Sale or the Louisiana Route Operations Sale, provided that (x) the sum of the charges described in clause (A) shall not exceed $1,500,000, and (y) the sum of the charges described in clauses (A) and (B) taken together shall not exceed $7,000,000." 2. This Amendment shall become effective on the date (the "Fourth Amendment Effective Date") when each Borrower, each other Credit Party and the Required Lenders have signed a counterpart hereof (whether the same or different counterparts) and shall have delivered (including by way of facsimile transmission) the same to the Administrative Agent at the Notice Office. 2 3. In order to induce the Lenders to enter into this Amendment, each Borrower hereby represents and warrants that (i) the representations and warranties contained in Section 7 of the Credit Agreement are true and correct in all material respects on and as of the Fourth Amendment Effective Date both before and after giving effect to this Amendment (it being understood and agreed that, as to any representation or warranty which by its terms is made as of a specified date, each Borrower represents and warrants that such representation and warranty is true and correct in all material respects only as of such specified date) and (ii) there exists no Default or Event of Default on the Fourth Amendment Effective Date both before and after giving effect to this Amendment. 4. This Amendment is limited as specified and shall not constitute a modification, acceptance or waiver of any other provision of the Credit Agreement or any other Credit Document. 5. This Amendment may be executed in any number of counterparts and by the different parties hereto on separate counterparts, each of which counterparts when executed and delivered shall be an original, but all of which shall together constitute one and the same instrument. A complete set of counterparts shall be lodged with the U.S. Borrower and the Administrative Agent. 6. THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAW OF THE STATE OF NEW YORK. 7. From and after the Fourth Amendment Effective Date, all references in the Credit Agreement and in the other Credit Documents to the Credit Agreement shall be deemed to be references to the Credit Agreement as amended hereby. * * * IN WITNESS WHEREOF, the parties hereto have caused their duly authorized officers to execute and deliver this Amendment as of the date first above written. ALLIANCE GAMING CORPORATION By /s/ ------------------------------------ Name: Title: 2 3 BALLY WULFF VERTRIEBS GMBH By /s/ ------------------------------------ Name: Title: BALLY WULFF AUTOMATEN GMBH By /s/ ------------------------------------ Name: Title: CREDIT SUISSE FIRST BOSTON, Individually and as Administrative Agent By /s/ ------------------------------------ Name: Title: By /s/ ------------------------------------ Name: Title: THE BANK OF NOVA SCOTIA By /s/ ------------------------------------ Name: Title: 3 4 KZH ING-1 LLC By /s/ ------------------------------------ Name: Title: SUMITOMO BANK OF CALIFORNIA By /s/ ------------------------------------ Name: Title: THE MITSUBISHI TRUST AND BANKING CORP. By /s/ ------------------------------------ Name: Title: SOUTHERN PACIFIC BANK By /s/ ------------------------------------ Name: Title: 4 5 CRESCENT/MACH I PARTNERS By: TCW Asset Management Company, Its Investment Advisor By /s/ ------------------------------------ Name: Title: MERRILL LYNCH SENIOR FLOATING RATE FUND, INC. By /s/ ------------------------------------ Name: Title: TCW LEVERAGED INCOME TRUST, L.P. By /s/ ------------------------------------ Name: Title: VAN KAMPEN PRIME RATE INCOME TRUST By /s/ ------------------------------------ Name: Title: 5 6 VAN KAMPEN CLO I, LIMITED By: VAN KAMPEN MANAGEMENT INC., as Collateral Manager By /s/ ------------------------------------ Name: Title: INDOSUEZ CAPITAL FUNDING III, LIMITED By: Indosuez Capital, as Portfolio Advisor By /s/ ------------------------------------ Name: Title: DEEPROCK & COMPANY By: Eaton Vance Management As Investment Advisor By /s/ ------------------------------------ Name: Title: ML CLO XII PILGRIM AMERICA (Cayman) LTD. By: Pilgrim Investments, Inc. as its Investment Manager By /s/ ------------------------------------ Name: Title: 6 7 MORGAN STANLEY DEAN WITTER PRIME INCOME TRUST By /s/ ------------------------------------ Name: Title: DELANO COMPANY By: Pacific Investment Management Company, as its Investment Advisor By /s/ ------------------------------------ Name: Title: SENIOR DEBT PORTFOLIO By: Boston Management and Research as Investment Advisor By /s/ ------------------------------------ Name: Title: KZH-CRESCENT CORP. By /s/ ------------------------------------ Name: Title: 7 8 PAMCO CAYMAN LTD. By /s/ ------------------------------------ Name: Title: CYPRESSTREE INVESTMENT PARTNERS I, LTD., By: Cypresstree Investment Management Company, Inc., as Portfolio Manager By /s/ ------------------------------------ Name: Title: TEXAS COMMERCE BANK By /s/ ------------------------------------ Name: Title: ARCHIMEDES FUNDING, L.L.C. By: ING Capital Advisors, Inc., as Collateral Manager By /s/ ------------------------------------ Name: Title: 8 9 GENERAL ELECTRIC CAPITAL CORPORATION By /s/ ------------------------------------ Name: Title: MASSMUTUAL HIGH YIELD PARTNERS I, LLC By: HYP Management, Inc., as Managing Member By /s/ ------------------------------------ Name: Title: Its: ---------------------------------- CALIFORNIA BANK & TRUST By /s/ ------------------------------------ Name: Title: 9 EX-27 3 FINANCIAL DATA SCHEDULE
5 1,000 6-MOS JUN-30-2000 JUL-01-1999 DEC-31-1999 27,952 0 97,601 13,369 47,209 170,774 133,586 56,235 365,905 52,481 0 0 4,624 1,034 (44,124) 365,905 104,593 231,689 61,097 148,933 71,914 2,433 16,492 (6,476) 255 (6,731) 0 0 0 (6,731) (0.66) (0.66)
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