10-Q 1 v69413e10-q.txt FORM 10-Q 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, 2000 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 6, 2001, according to the records of the registrant's registrar and transfer agent was 10,356,200. ================================================================================ 2 ALLIANCE GAMING CORPORATION FORM 10-Q FOR THE QUARTER ENDED DECEMBER 31, 2000 I N D E X
PART I. FINANCIAL INFORMATION PAGE Item 1. Unaudited Financial Statements Unaudited Condensed Consolidated Balance Sheets as of June 30, 2000 and December 31, 2000 3 Unaudited Condensed Consolidated Statements of Operations for the three months ended December 31, 1999 and 2000 4 Unaudited Condensed Consolidated Statements of Operations for the six months ended December 31, 1999 and 2000 5 Unaudited Condensed Consolidated Statements of Stockholders' Deficiency for the six months ended December 31, 2000 6 Unaudited Condensed Consolidated Statements of Cash Flows for the six months ended December 31, 1999 and 2000 7 Notes to Unaudited Condensed Consolidated Financial Statements 8-23 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 24-31 Item 3. Quantitative and Qualitative Disclosures About Market Risk 32 PART II. OTHER INFORMATION Item 1. Legal Proceedings 32 Item 6. Exhibits and Reports on Form 8-K 32 SIGNATURES 33
2 3 PART 1 ALLIANCE GAMING CORPORATION UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS (In 000's, except share data)
June 30, Dec. 31, 2000 2000 ---- ---- ASSETS Current assets: Cash and cash equivalents $ 32,044 $ 41,288 Short term investments 2,000 2,000 Accounts and notes receivable, net of allowance for doubtful accounts of $19,255 and $19,157 82,444 76,609 Inventories, net of reserves of $6,660 and $6,238 32,019 36,145 Other current assets 11,198 10,236 -------- -------- Total current assets 159,705 166,278 -------- -------- Long-term notes receivable, net of allowance for doubtful accounts of $954 and $962 4,043 3,628 Leased equipment, net of accumulated depreciation of $10,713 and $12,704 16,959 18,761 Property, plant and equipment, net of accumulated depreciation of $60,028 and $62,872 76,823 75,325 Excess of costs over net assets of acquired businesses, net of accumulated amortization of $5,946 and $6,630 54,994 54,042 Intangible assets, net of accumulated amortization of $20,609 and $23,086 21,850 19,293 Other assets, net of reserves of $1,813 and $1,788 16,913 16,191 -------- -------- Total assets $351,287 $353,518 ======== ======== LIABILITIES AND STOCKHOLDERS' DEFICIENCY Current liabilities: Accounts payable $ 10,367 $ 19,719 Accrued liabilities 32,323 30,474 Current maturities of long-term debt 1,036 1,028 -------- -------- Total current liabilities 43,726 51,221 -------- -------- Long-term debt, net 344,023 331,496 Other liabilities 12,972 12,602 -------- -------- Total liabilities 400,721 395,319 -------- -------- Minority interest 1,361 1,276 Commitments and contingencies Stockholders' deficiency: Special Stock, 10,000,000 shares authorized: Series E, $100 liquidation value; 46,242 shares and 11,179 shares issued and outstanding 4,624 1,118 Common Stock, $.10 par value; 50,000,000 shares authorized; 10,335,000 and 10,505,000 shares issued and outstanding 1,034 1,051 Treasury stock at cost, 83,000 shares and 152,200 shares (508) (716) Additional paid-in capital 141,130 144,619 Accumulated other comprehensive loss (21,790) (22,738) Accumulated deficit (175,285) (166,411) -------- -------- Total stockholders' deficiency (50,795) (43,077) -------- --------- Total liabilities and stockholders' deficiency $351,287 $353,518 ======== ========
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, 1999 2000 ------ ----- Revenues: Gaming equipment and systems $ 30,591 $ 38,551 Wall machines and amusement games 19,542 20,578 Route operations 48,240 53,926 Casino operations 16,114 18,471 -------- -------- 114,487 131,526 -------- -------- Costs and expenses: Cost of gaming equipment and systems 17,893 17,897 Cost of wall machines and amusement games 11,157 11,172 Cost of route operations 38,007 43,584 Cost of casino operations 6,562 8,023 Selling, general and administrative 27,867 25,547 Research and development 3,329 3,481 Depreciation and amortization 6,701 6,664 Unusual items 526 -- -------- -------- 112,042 116,368 -------- -------- Operating income 2,445 15,158 Other income (expense): Interest income 112 201 Interest expense (8,715) (8,840) Minority interest (459) (461) Other, net (381) (297) --------- -------- Income (loss) before income taxes (6,998) 5,761 Income tax provision (178) (252) -------- -------- Net income (loss) $ (7,176) $ 5,509 ======== ======== Basic earnings (loss) per share $ (0.70) $ 0.53 ======== ======== Diluted earnings (loss) per share $ (0.70) $ 0.52 ======== ======== Weighted average common shares outstanding 10,252 10,353 ======== ======== Weighted average common and common share equivalents outstanding 10,252 10,595 ======== ========
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, 1999 2000 ----- ------ Revenues: Gaming equipment and systems $ 70,375 $ 72,212 Wall machines and amusement games 34,218 35,438 Route operations 94,292 106,829 Casino operations 32,804 37,063 -------- -------- 231,689 251,542 -------- -------- Costs and expenses: Cost of gaming equipment and systems 39,986 33,265 Cost of wall machines and amusement games 21,111 19,467 Cost of route operations 74,655 86,200 Cost of casino operations 13,181 15,504 Selling, general and administrative 51,485 48,982 Research and development 6,878 6,664 Depreciation and amortization 13,025 13,171 Unusual items 526 -- -------- -------- 220,847 223,253 -------- -------- Operating income 10,842 28,289 Other income (expense): Interest income 226 356 Interest expense (16,492) (17,879) Minority interest (927) (1,004) Other, net (125) (176) -------- -------- Income (loss) before income taxes (6,476) 9,586 Income tax provision (255) (712) -------- -------- Net income (loss) $ (6,731) $ 8,874 ======== ======== Basic earnings (loss) per share $ (0.66) $ 0.87 Diluted earnings (loss) per share $ (0.66) $ 0.86 Weighted average common shares outstanding 10,204 10,185 ======== ======== Weighted average common and common share equivalents outstanding 10,204 10,338 ======== ========
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, 2000 (In 000's)
Total Accumulated Stock- Common Stock Additional Other holders' ------------ Series E Treasury Paid-in Comprehensive Accum. Equity Shares Dollars Special Stock Stock Capital Loss Deficit (Deficiency) ------ ------- ------------- ----- ------- ---- ------- ----------- Balances at June 30, 2000 10,335 $1,034 $4,624 $(508) $141,130 $(21,790) $(175,285) $(50,795) Net income -- -- -- -- -- -- 8,874 8,874 Repurchases of common stock for treasury -- -- (436) -- -- -- (436) Treasury shares issued upon exercise of employee stock options -- -- 228 -- -- -- 228 Conversion of Series E Special Stock to Common Stock 170 17 (3,506) -- 3,489 -- -- -- Foreign currency translation adjustment -- -- -- -- -- (948) -- (948) ------ ------ ------ ----- -------- -------- --------- -------- Balances at December 31, 2000 10,505 $1,051 $1,118 $(716) $144,619 $(22,738) $(166,411) $(43,077) ====== ====== ====== ====== ======== ========= ========== =========
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, 1999 2000 ---- ---- Cash flows from operating activities: Net income (loss) $ (6,731) $ 8,874 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 13,025 13,171 Amortization of debt discounts 26 26 Write down of other assets 591 -- (Gain) loss on sale of assets (1,056) 284 Provision for losses on doubtful receivables 2,433 2,271 Other (656) 180 Net change in operating assets and liabilities: Accounts and notes receivable 5,549 5,543 Inventories (11,687) (6,283) Other current assets (32) 1,007 Accounts payable 525 9,307 Accrued liabilities (5,422) (2,092) -------- -------- Net cash provided by (used in) operating activities (3,435) 32,288 -------- -------- Cash flows from investing activities: Additions to property, plant and equipment (9,769) (7,692) Proceeds from disposal of property and equipment and other assets 1,082 -- Proceeds from sale/leaseback transaction 971 -- Additions to other long term assets (1,928) (338) -------- -------- Net cash used in investing activities (9,644) (8,030) -------- -------- Cash flows from financing activities: Reduction of long-term debt (3,291) (2,044) Net increase (decrease) in revolving credit facility 27,511 (12,726) Purchase of common stock for treasury (436) Proceeds from exercise of stock options 10 228 -------- -------- Net cash provided by (used in) financing activities 24,230 (14,978) -------- -------- Effect of exchange rate changes on cash (129) (36) Cash and cash equivalents: Increase for period 11,022 9,244 Balance, beginning of period 16,930 32,044 -------- -------- Balance, end of period $ 27,952 $ 41,288 ======== ========
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, 1999 AND 2000 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, 2000. All intercompany accounts and transactions have been eliminated in consolidation. The accompanying condensed consolidated financial statements at June 30, 2000, were derived from audited consolidated financial statements, but do not include all disclosures required under generally accepted accounting principles. 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:
June 30, Dec.31, 2000 2000 ---- ---- (in 000's) Raw materials $14,143 $12,269 Work-in-process 948 2,421 Finished goods 16,928 21,455 ------- ------- Total inventories $32,019 $36,145 ======= =======
3. DEBT, REVOLVING CREDIT FACILITY Long-term debt consists of the following (in 000s):
June 30, Dec 30, 2000 2000 ----- ---- 10% Senior Subordinated Notes due 2007, net of unamortized discount of $649 and $623 $149,351 $149,377 Term loan facilities: Tranche B Term Loan 70,641 69,756 Tranche C Term Loan 37,776 37,292 Delayed Draw Term Facility 23,789 23,492 Revolving Credit Facility 62,360 51,729 Other, secured by related equipment 1,142 878 -------- -------- 345,059 332,524 Less current maturities 1,036 1,028 -------- -------- Long-term debt, less current maturities $344,023 $331,496 ======== ========
8 9 ALLIANCE GAMING CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SIX MONTHS ENDED DECEMBER 31, 1999 AND 2000 The Company's bank debt consists of: (i) term loans with an original principal balance in August 1997 of $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) an $80 million revolving credit facility (the "Revolving Credit Facility") with a 6-year term. Each of the term loans and credit facility requires variable rate borrowings with interest rates, which are based on 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 + 4.25% January 31, 2005 Tranche C Term Loan LIBOR + 4.50% July 31, 2005 Delayed Draw Term Facility LIBOR + 4.25% January 31, 2005 Revolving Credit Facility LIBOR + 3.75% July 31, 2003
The Revolving Credit Facility also allows for German Deutschemark borrowings at the Euro-deutschemark rate plus 3.75% (or 8.8% at December 31, 2000). At December 31, 2000, borrowings under the $80.0 million Revolving Credit Facility totaled $51.7 million, of which $23.1 million were German Deutschemark borrowings. Based on the terms of the revolving credit facility, the Company would have been able to borrow an additional $5.7 million as of December 31, 2000. The borrowing base for the revolving credit facility includes eligible receivables and inventory (as defined). 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 and issue preferred stock, pay dividends or make other distributions, enter into certain acquisitions, repurchase equity interests or subordinated indebtedness, issue or sell equity interests of the Company's subsidiaries, engage in mergers or acquisitions, or engage in certain transactions with subsidiaries and affiliates, and that otherwise restrict corporate activities. The Company is in compliance with the credit agreement debt covenants as of December 31, 2000. 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 facility. The Senior Subordinated Notes are fully and unconditionally guaranteed on a joint and several, senior subordinated basis by all existing and future domestic Restricted Subsidiaries 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 are general unsecured obligations of the Guarantors, ranking subordinate in right of payment to all Senior Debt of the Guarantors. The Company is in compliance with the operational covenants contained in the indenture for the Senior Subordinated Notes. 9 10 ALLIANCE GAMING CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SIX MONTHS ENDED DECEMBER 31, 1999 AND 2000 4. INCOME TAXES The Company's effective tax rate for the periods ended December 31, 1999, and 2000, differ from the statutory rate of 35% due to state income taxes and the impact of taxes applicable to earnings of Bally Wulff. In addition, no tax expense has been recorded for the taxable income produced by the Companies' domestic subsidiaries as such earnings were offset against net operating loss carryforwards. 5. SUPPLEMENTAL CASH FLOW INFORMATION The following supplemental information is related to the unaudited condensed consolidated statements of cash flows.
Six months ended December 31, 1999 2000 ---- ---- Non-cash transactions: (In 000's) Reclassify other assets to property, plant and equipment $ 217 $ 2,649 Dividends for Series E Special Stock 442 -- Reclassify inventory to equipment 10,170 -- Translation rate adjustment 1,649 915 Conversion of Series E Special Stock into common shares 11,198 3,506 Deferred gain on sale/leaseback transaction 484 --
6. COMPREHENSIVE INCOME (LOSS) As of July 1, 1998, the Company adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"), which requires the changes in the Company's 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, 1999, and 2000, total comprehensive income (loss) amounted to $(0.9) million and $7.9 million, respectively. 7. 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 are made from time to time in the open market or in privately negotiated transactions. During the quarter ended December 31, 2000, the Company announced its intention to resume its share repurchase plan. Fiscal year to date the Company repurchased a total of 104,000 shares at an average price of $4.19. The Company has from time to time used the acquired common stock to satisfy obligations pursuant to the exercise of stock options under the Company's stock option plans. As of December 31, 2000, the Company had approximately 152,200 shares of common stock held in treasury. 8. 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. 10 11 ALLIANCE GAMING CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SIX MONTHS ENDED DECEMBER 31, 1999 AND 2000 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. The computation of Basic and Diluted EPS is as follows:
Three months ended Six months ended ------------------ ---------------- December 31, December 31, ------------ ------------ 1999 2000 1999 2000 ---- ---- ---- ---- (In 000's except per share data) Net income (loss) $ (7,176) $ 5,509 $ (6,731) $ 8,874 Wt. average common shares outstanding 10,252 10,353 10,204 10,185 Dilutive effect of stock options outstanding -- 188 -- 99 Dilutive effect of Series E Special Stock -- 54 -- 54 Wt. average common and potentially dilutive shares outstanding 10,252 10,595 10,204 10,338 Basic earnings (loss) per share $ (0.70) $ 0.53 $ (0.66) $ 0.87 ======== ======== ======== ======== Diluted earnings per share $ (0.70) $ 0.52 $ (0.66) $ 0.86 ======== ======== ======== ========
Stock options and warrants outstanding that were potentially convertible into approximately 1.1 million common shares as of December 31, 2000, 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. In June 1996, the Company issued 113,160 shares of Series E Special Stock to certain holders of the Company's 7 1/2% Convertible Subordinated Debentures who, as part of an exchange offer, elected to receive such stock in lieu of receiving common stock. The holders of shares of Series E Special Stock have no voting rights except as required by law. Each share of Series E Special Stock accrued non-cash dividends at an annual rate of 11 1/2% however the dividend requirement concluded on July 1, 1999. The Series E Special Stock is convertible into common stock at a conversion rate of 4.859 shares of common stock per share of Series E Special Stock, subject to adjustment under certain circumstances. During the six months ended December 31, 2000, a total of 35,063 shares of Series E converted into approximately 170,370 shares of common stock. Upon full conversion of the remaining shares of Series E Special stock, an additional 54,300 shares of common stock will be issued. 11 12 ALLIANCE GAMING CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SIX MONTHS ENDED DECEMBER 31, 1999 AND 2000 9. 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 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 table below presents information as to the Company's revenues and operating income:
Six Months Ended December 31, 1999 2000 ---- ---- (In $000's) Revenues: Gaming equipment and systems $ 70,375 $ 72,212 Wall machines and amusement games 34,218 35,438 Route operations 94,292 106,829 Casino operations 32,804 37,063 --------- --------- Total revenues $ 231,689 $ 251,542 ========= ========= Intersegment revenues: Gaming equipment and systems $ 11,174 $ 4,465 Wall machines and amusement games 32 28 Route operations -- -- Casino operations -- -- --------- --------- Total intersegment revenues $ 11,206 $ 4,493 ========= ========= Operating income (loss): Gaming equipment and systems $ 2,233 $ 12,415 Wall machines and amusement games (1,686) 2,642 Route operations 6,986 7,461 Casino operations 10,595 11,672 Corporate and unusual items (7,286) (5,901) --------- --------- Total operating income $ 10,842 $ 28,289 ========= =========
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. 12 13 ALLIANCE GAMING CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SIX MONTHS ENDED DECEMBER 31, 1999 AND 2000 The table below presents information as to the Company's revenues and operating income by geographic region:
Six Months Ended December 31, 1999 2000 ---- ---- (In $000's) Revenues: United States $ 183,884 $ 209,043 Germany 39,331 39,277 Other foreign 8,474 3,222 --------- --------- Total revenues $ 231,689 $ 251,542 ========= ========= Operating income (loss): United States $ 13,505 $ 24,441 Germany (1,908) 2,735 Other foreign (755) 1,113 --------- --------- Total operating income $ 10,842 $ 28,289 ========= =========
10. ASSETS HELD FOR SALE The Company has entered into a definitive agreement for the sale of its Nevada Route Operations for approximately $118 million. This transaction is expected to close in approximately June 2001. The following table presents the net assets held for sale of the Nevada Route:
June 30, Dec. 31, 2000 2000 ---- ---- ASSETS Current assets: Cash and cash equivalents (a) $13,639 $15,999 Accounts and notes receivable, net 3,923 4,150 Other current assets 5,332 4,150 ------- ------- Total current assets 22,894 24,299 ------- ------- Long-term notes receivable 1,310 1,232 Property, plant and equipment, net 17,891 17,637 Intangible assets, net 12,186 10,947 Other assets, net 3,910 3,880 ------- ------- Total assets $58,191 $57,995 ======= ======= LIABILITIES Current liabilities: Accounts payable $ 1,590 $ 2,660 Accrued liabilities 2,583 2,489 Current maturities of long-term debt 521 136 ------- ------- Total Liabilities 4,694 5,285 ------- Net Asset $53,497 $52,710 ======= =======
(a) The definitive agreement requires certain minimum levels of cash to be placed into vaults, change banks and gaming devices at the time of the consummation of the transaction. Therefore, the cash balances shown may differ from the amounts actually transferred at the time of sale. 13 14 ALLIANCE GAMING CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SIX MONTHS ENDED DECEMBER 31, 1999 AND 2000 11. 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 (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 Subsidiaries"). The notes to consolidating financial statements should be read in conjunction with these consolidating financial statements. 15 ALLIANCE GAMING CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATING BALANCE SHEETS June 30, 2000 (In 000's)
Alliance Gaming Parent and Non- Corporation Guaranteeing Guaranteeing Elimina- and Subsidiaries Subsidiaries tions Subsidiaries ------------ ------------ -------- ------------ ASSETS Current assets: Cash and cash equivalents $ 19,528 $ 12,516 $ -- $ 32,044 Short term investments -- 2,000 -- 2,000 Accounts and notes receivable, net 44,889 41,603 (4,048) 82,444 Inventories, net 18,452 13,567 32,019 Other current assets 8,831 2,367 11,198 -------- -------- --------- -------- Total current assets 91,700 72,053 (4,048) 159,705 -------- -------- --------- -------- Long-term notes receivable, net 104,342 942 (101,241) 4,043 Leased equipment, net 9,618 7,341 16,959 Property, plant and equipment, net 42,152 34,671 76,823 Excess of costs over net assets of acquired businesses, net 37,845 17,149 54,994 Intangible assets, net 21,567 283 21,850 Investments in subsidiaries 70,933 (70,933) -- Other assets, net 39,425 (18,600) (3,912) 16,913 -------- -------- --------- -------- $417,582 $113,839 $(180,134) $351,287 ======== ======== ========= ======== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY) Current liabilities: Accounts payable $8,232 $ 2,135 $ $ 10,367 Accrued liabilities 20,743 12,707 (1,127) 32,323 Current maturities of long-term debt 4,488 3,498 (6,950) 1,036 -------- -------- --------- -------- Total current liabilities 33,463 18,340 (8,077) 43,726 -------- -------- --------- -------- Long term debt 421,328 23,897 (101,202) 344,023 Other liabilities 12,225 879 (132) 12,972 -------- -------- --------- -------- Total liabilities 467,016 43,116 (109,411) 400,721 -------- -------- --------- -------- Minority interest 1,361 1,361 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 7,862 (7,862) 141,130 Accumulated other comprehensive loss (21,790) (21,810) 21,810 (21,790) Retained earnings (accumulated deficit) (175,285) 66,839 (66,839) (175,285) -------- -------- --------- -------- Total stockholders' equity (deficiency) (50,795) 70,723 (70,723) (50,795) -------- -------- --------- -------- $417,582 $113,839 $(180,134) $351,287 ======== ======== ========== ========
See accompanying unaudited note. 15 16 ALLIANCE GAMING CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATING BALANCE SHEETS December 31, 2000 (In 000's)
Alliance Gaming Parent and Non- Corporation Guaranteeing Guaranteeing Adjust- and Subsidiaries Subsidiaries ments Subsidiaries ------------ ------------ ------- ------------ ASSETS Current assets: Cash and cash equivalents $ 25,485 $ 15,803 $ -- $ 41,288 Short term investments 2,000 2,000 Accounts and notes receivable, net 36,867 42,835 (3,093) 76,609 Inventories, net 24,604 11,541 -- 36,145 Other current assets 8,014 2,222 -- 10,236 --------- --------- --------- --------- Total current assets 94,970 74,401 (3,093) 166,278 --------- --------- --------- --------- Long-term notes receivable, net 107,250 575 (104,197) 3,628 Leased equipment, net 11,871 6,890 -- 18,761 Property, plant and equipment, net 41,326 33,999 -- 75,325 Excess of costs over net assets of acquired businesses, net 37,316 16,726 -- 54,042 Intangible assets, net 19,079 214 -- 19,293 Investment in subsidiaries 77,134 -- (77,134) -- Other assets, net 35,621 (15,577) (3,853) 16,191 --------- --------- --------- --------- $ 424,567 $ 117,228 $(188,277) $ 353,518 ========= ========= ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY) Current liabilities: Accounts payable $ 17,904 $ 1,815 $ -- $ 19,719 Accrued liabilities 20,140 11,270 (936) 30,474 Current maturities of long-term debt 4,424 2,731 (6,127) 1,028 --------- --------- --------- --------- Total current liabilities 42,468 15,816 (7,063) 51,221 --------- --------- --------- --------- Long term debt 411,992 23,701 (104,197) 331,496 Other liabilities 11,908 787 (93) 12,602 --------- --------- --------- --------- Total liabilities 466,368 40,304 (111,353) 395,319 --------- --------- --------- --------- Minority interest 1,276 -- -- 1,276 Commitments and contingencies Stockholders' equity (deficiency): Series E Special Stock 1,118 -- -- 1,118 Common Stock 1,051 17,827 (17,827) 1,051 Treasury stock (716) -- -- (716) Additional paid-in capital 144,619 7,862 (7,862) 144,619 Accumulated other comprehensive income (22,738) (22,759) 22,759 (22,738) Retained earnings (accumulated deficit) (166,411) 73,994 (73,994) (166,411) --------- --------- --------- --------- Total stockholders' equity (deficiency) (43,077) 76,924 (76,924) (43,077) --------- --------- --------- --------- $ 424,567 $ 117,228 $(188,277) $ 353,518 ========= ========= ========= =========
See accompanying unaudited note. 16 17 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 (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 before income taxes (7,380) 1,845 (1,463) (6,998) Income tax benefit (provision) 202 (380) (178) ------- ------- ------- ------- Net income $(7,178) $ 1,465 $(1,463) $(7,176) ======== ======= ======= =======
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, 2000 (In 000's)
Alliance Gaming Parent and Non- Corporation Guaranteeing Guaranteeing Adjust- and Subsidiaries Subsidiaries ments Subsidiaries ------------ ------------ ------- ------------ Revenues: Gaming equipment and systems $ 37,360 $ 3,149 $ (1,958) $ 38,551 Wall machines and amusement games -- 20,578 -- 20,578 Route operations 49,842 4,084 -- 53,926 Casino operations 5,054 13,417 -- 18,471 --------- --------- --------- --------- 92,256 41,228 (1,958) 131,526 Costs and expenses: Cost of gaming equipment and systems 17,913 1,942 (1,958) 17,897 Cost of wall machines and amusement games -- 11,172 -- 11,172 Cost of route operations 40,934 2,650 -- 43,584 Cost of casino operations 2,771 5,252 -- 8,023 Selling, general and administrative 15,556 9,991 -- 25,547 Research and development 2,817 664 -- 3,481 Depreciation and amortization 4,770 1,894 -- 6,664 --------- --------- --------- --------- 84,761 33,565 (1,958) 116,368 --------- --------- --------- --------- Operating income 7,495 7,663 -- 15,158 Earnings in consolidated subsidiaries 5,048 -- (5,048) -- Other income (expense): Interest income 118 140 (57) 201 Interest expense (8,383) (514) 57 (8,840) Rainbow royalty 1,520 (1,520) -- -- Minority interest (461) -- -- (461) Other, net (317) 20 -- (297) --------- --------- --------- --------- Income before income taxes 5,020 5,789 (5,048) 5,761 Income tax benefit (provision) 489 (741) -- (252) --------- --------- --------- --------- Net income $ 5,509 $ 5,048 $ (5,048) $ 5,509 ========= ========= ========= =========
See accompanying unaudited note. 18 19 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 84,721 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. 19 20 ALLIANCE GAMING CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATING STATEMENTS OF OPERATIONS Six Months Ended December 31, 2000 (In 000's)
Alliance Gaming Parent and Non- Corporation Guaranteeing Guaranteeing Adjust- and Subsidiaries Subsidiaries ments Subsidiaries ------------ ------------ ------- ------------ Revenues: Gaming equipment and systems $ 69,462 $ 7,060 $(4,310) $ 72,212 Wall machines and amusement games 35,438 35,438 Route operations 98,395 8,434 106,829 Casino operations 9,354 27,709 37,063 -------- ------- ------- -------- 177,211 78,641 (4,310) 251,542 Costs and expenses: Cost of gaming equipment and systems 33,225 4,350 (4,310) 33,265 Cost of wall machines and amusement games 19,467 19,467 Cost of route operations 80,763 5,437 86,200 Cost of casino operations 5,114 10,390 15,504 Selling, general and administrative 29,896 19,086 48,982 Research and development 5,397 1,267 6,664 Depreciation and amortization 9,324 3,847 13,171 Unusual items -- -- -- -------- ------- ------- -------- 163,719 63,844 (4,310) 223,253 -------- ------- ------- -------- Operating income 13,492 14,797 28,289 Earnings in consolidated subsidiaries 8,974 (8,974) Other income (expense): Interest income 272 217 (133) 356 Interest expense (16,982) (1,030) 133 (17,879) Rainbow royalty 3,223 (3,223) Minority interest (1,004) (1,004) Other, net 165 (341) (176) -------- ------- ------- -------- Income before income taxes 8,140 10,420 (8,974) 9,586 Income tax benefit (provision) 734 (1,446) (712) -------- ------- ------- -------- Net income applicable to common shares $ 8,874 $ 8,974 $(8,974) $ 8,874 ======== ======= ======= ========
See accompanying unaudited note. 20 21 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 (129) (129) Cash and cash equivalents: Increase for period 8,380 2,642 11,022 Balance, beginning of period 5,240 11,690 16,930 -------- ------- ------- ------- Balance, end of period $ 13,620 $14,332 $ $27,952 ======== ======= ======= =======
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, 2000 (In 000's)
Alliance Gaming Parent and Non- Corporation Guaranteeing Guaranteeing Adjust- and Subsidiaries Subsidiaries ments Subsidiaries ------------ ------------ ------- ------------ Net cash provided by operating activities $21,245 $12,516 $(1,473) $32,288 ------- ------- ------- ------- Cash flows from investing activities: Additions to property and equipment (3,492) (4,200) (7,692) Proceeds from disposal of property and equipment -- -- -- and other assets -- -- -- Additions to other long term assets (338) -- (338) ------- ------- ------- ------- Net cash used in investing activities (3,830) (4,200) (8,030) ------- ------- ------- Cash flows from financing activities: Reduction of long-term debt (1,666) (1,846) 1,468 (2,044) Net decrease in revolving credit facility (11,400) (1,326) -- (12,726) Proceeds from exercise of stock options -- -- -- -- Purchase of common stock for treasury (436) (5) 5 (436) Issued Treasury share 228 -- -- 228 Dividends received (paid) 1,819 (1,819) ------- ------- ------- ------- Net cash provided by (used in) financing activities (11,455) (4,996) 1,473 (14,978) ------- ------- ------- ------- Effect of exchange rate changes on cash (3) (33) (36) Cash and cash equivalents: Increase for period 5,957 3,287 9,244 Balance, beginning of period 19,528 12,516 32,044 ------- ------- -------- ------- Balance, end of period $25,485 $15,803 $ $41,288 ======= ======= ======== =======
See accompanying unaudited note. 22 23 ALLIANCE GAMING CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS DEBT AND REVOLVING CREDIT FACILITY Long-term debt and lines of credit at June 30, 2000, consisted 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 $149,351 $ $ $149,351 Term loan facilities: Tranche B Term Loan 70,641 70,641 Tranche C Term Loan 37,776 37,776 Delayed Draw Term Facility 23,789 23,789 Revolving Credit Facility 40,000 22,360 62,360 Intercompany notes payable 104,256 3,939 (108,195) Other 1,142 1,142 -------- ------- -------- -------- 425,813 27,441 (108,195) 345,059 Less current maturities 8,508 3,498 (10,970) 1,036 -------- ------- -------- -------- Long-term debt, less current maturities $417,305 $23,943 $(97,225) $344,023 ======== ======= ======== ========
Long-term debt and lines of credit at December 31, 2000, consisted 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 $149,377 $ $ $149,377 Term loan facilities: Tranche B Term Loan 69,756 69,756 Tranche C Term Loan 37,292 37,292 Delayed Draw Term Facility 23,492 23,492 Revolving Credit Facility 28,600 23,129 51,729 Intercompany notes payable 107,895 2,425 (110,320) -- Other -- 878 878 -------- ------- --------- -------- 416,412 26,432 (110,320) 332,524 Less current maturities 539 2,731 (2,242) 1,028 -------- ------- --------- -------- Long-term debt, less current maturities $415,873 $23,701 $(108,078) $331,496 ======== ======= ========= ========
23 24 ALLIANCE GAMING CORPORATION FORM 10-Q FOR THE QUARTER ENDED DECEMBER 31, 2000 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS LIQUIDITY AND CAPITAL RESOURCES At December 31, 2000, based on the terms of the amended $80.0 million revolving credit facility, the Company would have been able to borrow $57.4 million under the facility, of which the Company had borrowings of approximately $51.7 million outstanding. As of December 31, 2000, the unborrowed availability on the revolving credit facility was approximately $5.7 million. The borrowing base for the revolving credit facility consists of eligible receivables and inventory, as defined in the credit agreement. At December 31, 2000, the Company had $41.3 million in cash and cash equivalents. Consolidated cash and cash equivalents at December 31, 2000, includes approximately $23.0 million of cash and cash equivalents used in casino and route operations and 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 expand the proprietary gaming operations of its Bally Gaming and Systems business unit, the Company has increased its investment in leased gaming equipment during the six months ended December 31, 2000. The Company will continue the roll out of, and thus increase its investment in, these proprietary games and wide area progressive games in the future. 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 had declined by $9.5 million from June 30, 2000, to December 31, 2000. The Company is actively managing its working capital and other assets. The fifth amendment to the bank credit agreement allows the Company to obtain third party financing for up to $15 million for is proprietary gaming operations of Bally Gaming and Systems. This financing may be in the form of traditional secured borrowings or lease type financing. 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 continuing its active collections on accounts receivable and managing levels of raw material and finished goods inventories. At December 31, 2000, the Company did not have any significant commitments for capital expenditures. In October 1999, the Company received consents from its bank group to pursue the sale of certain route and casino assets. In August 2000, the Company signed a definitive agreement with UC Acquisitions Company, LLC, an independent third-party gaming operator, for the sale of its Nevada-based route operations. The gross selling price, which is based on a multiple of cash flows for the 12 month period prior to closing, is estimated to be approximately $118 million, consisting of $6 million in preferred stock and $112 million in cash, which will be used to pay down certain lease obligations, pay transactional fees and expenses, with the remainder (estimated to be approximately $95 million) to be used to reduce the Term Loans. This transaction is contingent on the buyer obtaining suitable financing and obtaining approvals from various regulatory bodies, a process which the Company expects will be completed in approximately June 2001. 24 25 ALLIANCE GAMING CORPORATION FORM 10-Q FOR THE QUARTER ENDED DECEMBER 31, 2000 WORKING CAPITAL During the six months ended December 31, 2000, working capital decreased $0.9 million to $115.1 million compared to $116.0 million at June 30, 2000. The primary fluctuations in working capital were an increase in cash and cash equivalents due to cash received from reductions in accounts receivable, offset by increases in finished goods inventories and current liabilities. CASH FLOWS During the six months ended December 31, 2000, the Company generated $32.3 million of cash flows from operating activities, which included an $5.5 million net decrease in accounts and notes receivable, $6.3 million net increase in inventories and a $9.3 million net increase in accounts payable. During the six months ended December 31, 2000, the Company used $8.0 million of cash in investing activities resulting primarily from approximately $7.7 million in capital expenditures and $0.3 million in additions to other long-term assets. During the six months ended December 31, 2000, $15.0 million was used in financing activities primarily resulting from reductions in the Company's revolving credit facility of $12.7 million and $2.0 million of principal reductions on the term debt which included a $1.2 million principal reduction resulting from the excess cash flow provision of the credit agreement. 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, and is secured by both a U.S. and German Pledge Agreement. 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 or subordinated indebtedness, issue or sell equity interests of the Company's subsidiaries, engage in mergers or acquisitions, or engage in certain transactions with subsidiaries and affiliates, and that otherwise restrict corporate activities. EURO CURRENCY CONVERSION The Company's Bally Wulff subsidiary uses the German Deutschemark 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 began 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 by 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 cannot be quantified at this time. 25 26 ALLIANCE GAMING CORPORATION FORM 10-Q FOR THE QUARTER ENDED DECEMBER 31, 2000 RESULTS OF OPERATIONS: GENERAL The following tables set forth the earnings (loss) before interest, taxes, depreciation and amortization (EBITDA) and operating income (loss) for the four business units excluding unusual charges, for the following periods:
Three Months Ending December 31, Six Months Ending December 31, 1999 2000 1999 2000 ---- ---- ---- ---- (In $000's) EBITDA by Business Unit: Bally Gaming and Systems $ (159) $ 8,850 $ 6,626 $ 16,518 Wall Machines and Amusement Games 2,361 3,405 1,751 5,312 Route Operations 6,229 6,017 11,652 11,947 Casino Operations 5,150 6,089 11,623 12,792 Corporate Administrative Expenses (3,909) (2,539) (7,259) (5,109) Unusual Items (526) -- (526) -- -------- -------- -------- -------- EBITDA $ 9,146 $ 21,822 $ 23,867 $ 41,460 ======== ======== ======== ======== OPERATING INCOME (LOSS): Bally Gaming and Systems $ (2,128) $ 6,742 $ 2,875 $ 12,415 Wall Machines and Amusement Games 835 2,108 (995) 2,642 Route Operations 3,957 3,718 6,986 7,461 Casino Operations 4,631 5,517 10,595 11,672 Corporate Administrative Expenses (4,324) (2,927) (8,093) (5,901) Unusual Items (a) (526) -- (526) -- -------- -------- -------- -------- Total Operating Income $ 2,445 $ 15,158 $ 10,842 $ 28,289 ======== ======== ======== ========
The Company believes that the analysis of EBITDA is a useful tool; however, this information should not be construed as an alternative to net income (loss) or any other GAAP measure of performance as an indicator of the Company's performance or GAAP-defined cash flows generated by operating, investing and financing activities as an indicator of cash flows or a measure of liquidity. EBITDA may not be comparable to similarly titled measures reported by other companies. (a) The unusual items in fiscal year 2000 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. 26 27 ALLIANCE GAMING CORPORATION FORM 10-Q FOR THE QUARTER ENDED DECEMBER 31, 2000 THREE MONTHS ENDED DECEMBER 31, 1999 AND 2000 BALLY GAMING AND SYSTEMS For the quarter ended December 31, 2000, Bally Gaming and Systems reported revenues of $38.6 million, a increase of 26% compared to $30.6 million in the prior year quarter. New unit sales totaled 2,600 units, a 12% increase compared to 2,300 in the prior year period. The average new unit selling price increase 6% from the prior year quarter to $6,300. The current quarter shipments for Bally Gaming included approximately 420 units to the Nevada and Atlantic City markets, 260 to Canada, 390 units to international markets, and 1,530 units to riverboats, Native American casinos and other domestic markets. Bally Systems reported revenues of $11.1 million compared to $6.8 million in the prior year's record quarter. Systems reported shipments of 8,400 units, a 48% increase compared to 5,700 in the prior year period. The overall gross margin percentage for the current quarter improved to 54% compared to 42% in the prior year quarter. The improvement was due primarily to a change in product mix to higher margin gaming machines and greater revenues from higher margin recurring revenue machines, partially offset by an increase in royalty expenses. At December 31, 2000, the Company's Bally Gaming and Systems business unit had an installed base of approximately 2,660 units earning recurring revenues compared to approximately 1,960 units at December 31, 1999. During the current quarter, Bally Gaming and Systems recorded $6.3 million of revenues from the proprietary gaming operations, and a total of $8.4 million from all recurring revenue sources, an increase of 32% compared to the prior year quarter. Recurring revenues include revenue received from the operation of the wide-area progressive systems, fees received from the operation of certain proprietary and niche games, and SDS hardware and software maintenance fees. The gaming operations of Bally Gaming and Systems achieved a 67% gross margin compared to 58% in the prior year quarter. Bally Gaming and Systems reported operating income of $6.7 million compared to operating loss of $(2.1) million in the prior year quarter. The increase in operating income was primarily attributed to an increase in proprietary gaming revenues and the effects of the reduced overhead cost structure of this business unit. WALL MACHINES AND AMUSEMENT GAMES For the quarter ended December 31, 2000, the Wall Machines and Amusement Games business unit reported revenues of $20.6 million, a 5% increase from the prior year quarter. The increase in revenues resulted from a 52% increase in shipments of new wall machines, a 124% increase in amusement game distribution revenues offset by a 17% decrease in leased machine revenues, and a 21% decrease in the average selling price of new wall machines. The prior period benefited from the sales of a niche game with higher than traditional margins, sales of which did not occur in the current quarter. The foreign currency fluctuation between the dollar and the Deutschemark decreased revenues by $4.1 million in the current quarter. Gross margin for the quarter, was 46% compared to 43% in the prior year quarter. This increase was primarily due to higher unit sales volumes which enhanced the absorption of the fixed overhead costs. 27 28 ALLIANCE GAMING CORPORATION FORM 10-Q FOR THE QUARTER ENDED DECEMBER 31, 2000 Wall Machines and Amusement Games reported operating income of $2.1 million compared to an operating income of $0.1 million in the prior year quarter. ROUTE OPERATIONS For the quarter ended December 31, 2000, the Route Operations business unit reported revenues of $53.9 million, an increase of 12% compared to revenues of $48.2 million in the prior year quarter. Revenues for the Nevada operations increased 15% as net win per gaming machine per day increased to $66.40 from $61.00 in the prior year quarter, while the average number of gaming machines increased to 8,040 from 7,680 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 for the Louisiana operations decreased 14% due primarily to a significant increase in competition from truck stops in the metro New Orleans area as well as the impact of land based casino in New Orleans. Net win per day per gaming machine declined to $65.30 from $76.10 in the prior year quarter, and was partially offset by a 4% increase in the average number of gaming devices deployed from the prior year quarter. The Route Operations EBITDA of $6.0 million declined 3% compared to the prior period. This decline was a result of the lower results at VSI, a lower than expected hold percentage in Northern Nevada, and higher game rental cost in Nevada which totaled $1.4 million in the current quarter, compared to $0.7 million in the prior year quarter. As a percentage of revenues, cost of revenues increased slightly to 81%, primarily as a result of additional game rental costs. The Route Operations unit reported operating income of $3.7 million, a decrease of 6% compared to operating income of $4.0 million in the prior year quarter. The decrease in operating income resulted primarily from increase in higher game rental cost and selling, general and administrative expenses, primarily increased promotion and marketing costs at the Nevada route operation. CASINO OPERATIONS For the quarter ended December 31, 2000, the Casino Operations business unit reported revenues of $18.5 million, an increase of 15% compared to revenues of $16.1 million in the prior year quarter. This revenue increase was a result of a 16% increase at the Rail City Casino and a 14% increase at the Rainbow Casino. The revenue improvement at the Rail City Casino to $5.1 million from $4.4 million in the prior year quarter was attributable to an increase in the average gaming machine net win per day of 10% to $85 from $77 in the prior year quarter with approximately the same number of gaming devices on the casino floor. Rainbow Casino revenues increased to $13.4 million from $11.7 million in the prior year quarter as a result of a 20% 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 $135 from $141 in the prior year quarter. As a result of the casino expansion, the Rainbow Casino now has 950 gaming machines on the casino floor, compared to 790 in the prior year quarter. For the quarter ended December 31, 2000, the cost of revenues for Casino Operations, as a percentage of revenues, increase to 43% compared to 41% in the prior year quarter. The Casino Operations business unit reported operating income of $5.5 million, an improvement of 19% compared to operating income of $4.6 million in the prior year quarter. Rainbow Casino operating income increased 19% to $4.3 million due primarily to the increase in revenues and partially offset by an increase in selling, general and administrative costs, principally marketing costs. Rail City Casino operating income increased to $1.2 million due primarily to the increase in gaming revenues. 28 29 ALLIANCE GAMING CORPORATION FORM 10-Q FOR THE QUARTER ENDED DECEMBER 31, 2000 NET INTEREST EXPENSE AND INCOME TAXES Net interest expense in the three months ended December 31, 2000 totaled $8.6 million which is unchanged from the prior year quarter, however the prior year included $0.5 million in fees paid to amend the bank credit agreement. The increase in interest expense is primarily due to the higher balance of working capital borrowings which were entered into in December 1999, and the increased interest rates on the credit facility. The Company recorded an income tax provision of $0.3 million in the current quarter compared to $0.2 million in the prior year quarter primarily as a result of state income taxes and deferred taxes recorded in Germany. SIX MONTHS ENDED DECEMBER 31, 1999 AND 2000 BALLY GAMING AND SYSTEMS For the six months ended December 31, 2000, Bally Gaming and Systems reported revenues of $72.2 million, an increase of 3% compared to $70.4 million in the prior year period. New unit sales totaled 4,700 units, an 11% decrease compared to 5,300 in the prior year period. The average new unit selling price increased 3% from the prior year period. The current period shipments for Bally Gaming included approximately 700 units to the Nevada and Atlantic City markets, 800 to Canada, 400 units to international markets, and 2,800 units to riverboats, Native American casinos and other domestic markets. Bally Systems reported sales of $20.6 million of revenue compared to $22.0 million in the prior year period. Systems reported shipments of 14,400 units, a 34% decrease compared to 21,900 in the prior year period. The overall gross margin percentage for the current period improved to 54% compared to 43% in the prior year period. The improvement was due primarily to a change in product mix to higher margin gaming machines and greater revenues from higher margin recurring revenue machines. Bally Gaming and Systems recorded revenues of $13.3 million from the proprietary gaming operations, and a total of $17.1 million from all recurring revenue sources, up 64% from the prior year period. The gaming operations of Bally Gaming and Systems achieved a 66% gross margin compared to 57% in the prior year period. Bally Gaming and Systems reported operating income of $12.4 million compared to $2.2 million in the prior year period. WALL MACHINES AND AMUSEMENT GAMES For the six months ended December 31, 2000, the Wall Machines and Amusement Games business unit reported revenues of $35.4 million, a 4% increase from the prior year period. The increase in revenues resulted from a 41% increase in shipments of new wall machines, a 129% increase in amusement game distribution revenues offset by a 12% decrease in leased machine revenues and a 13% decrease in the average selling price of new wall machines. The foreign currency fluctuation between the dollar and the Deutschemark decreased revenues by $6.3 million in the current period. Gross margin for the period was 45% compared to 38% in the prior year period. This increase was primarily due to higher unit sales volumes which enhanced the absorption of the fixed overhead costs. Wall Machines and Amusement Games reported operating income of $2.6 million compared to an operating loss of $(1.7) million in the prior year period, due primarily to the increase in gross margins and lower selling, general and administrative expenses. 29 30 ALLIANCE GAMING CORPORATION FORM 10-Q FOR THE QUARTER ENDED DECEMBER 31, 2000 ROUTE OPERATIONS For the six months ended December 31, 2000, the Route Operations business unit reported revenues of $106.8 million, an increase of 13% compared to revenues of $94.3 million in the prior year period. Revenues for the Nevada operations increased 16% as net win per gaming machine per day increased to $65.40 from $59.60 in the prior year period, while the average number of gaming machines increased to 8,000 from 7,640 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 for the Louisiana operations decreased 12%. Net win per day per gaming machine declined to $68.00 from $76.80 in the prior year period, and was offset by a 2% increase in the average number of gaming devices deployed from the prior year period. As a percentage of revenues, cost of revenues increased slightly to 81%, primarily as a result of additional game rental costs. The Route Operations business unit reported operating income of $7.5 million, an increase of 7% compared to operating income of $7.0 million in the prior year period. The increase in operating income resulted primarily from higher revenues and lower depreciation expense, partially offset by higher selling, general and administrative expenses, primarily increased promotion and marketing costs at the Nevada route operation. CASINO OPERATIONS For the six months ended December 31, 2000, the Casino Operations business unit reported revenues of $37.1 million, an increase of 13% compared to revenues of $32.8 million in the prior year period. This increase was the result of a 10% increase at the Rail City Casino and a 14% increase at the Rainbow Casino. The revenue improvement at the Rail City Casino to $9.4 million from $8.5 million in the prior year period was attributable to an increase in the average gaming machine net win per day of 11% to $82.50 from $74.00 in the prior year period with approximately the same number of gaming devices on the casino floor. Rainbow Casino revenues increased to $27.7 million from $24.3 million in the prior year period as a result of a 29% increase in the average number of gaming machines and offset by lower table game revenue and by an 11% decrease in net win per day per gaming machine to $138 from $155 in the prior year period. For the six months ended December 31, 2000, the cost of revenues for Casino Operations, as a percentage of revenues, increased to 42% compared to 40% in the prior year period. The Casino Operations business unit reported operating income of $11.7 million, an improvement of 10% compared to operating income of $10.6 million in the prior year period. Rainbow Casino operating income increased 10% to $9.6 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 income increased 10% to $2.1 million due primarily to the increase in revenues and slight improvement in selling, general and administrative costs. NET INTEREST EXPENSE AND INCOME TAXES Net interest expense in the six months ended December 31, 2000 increased to $17.5 million from $16.3 million in the prior year period, however the prior year included $0.5 million in fees paid to amend the bank credit agreement. Excluding this fee, the increase in interest expense is primarily due to the higher balance of working capital borrowings which were entered into in December 1999, and the increased interest rates on the credit facility. The Company recorded an income tax provision of $0.7 million in the current year period compared to $0.3 million in the prior year period. The current year period provision is primarily due to various state income tax provisions and deferred taxes recorded in Germany. 30 31 ALLIANCE GAMING CORPORATION FORM 10-Q FOR THE QUARTER ENDED DECEMBER 31, 2000 * * * * * 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, and other risks, as detailed from time to time in the Company's filings with the Securities and Exchange Commission. 31 32 ALLIANCE GAMING CORPORATION FORM 10-Q FOR THE QUARTER ENDED DECEMBER 31, 2000 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCOSURES ABOUT MARKET RISK Refer to Part 1, Item 7A, of the Company's annual report on Form 10-K, for the fiscal year ended June 30, 2000. There have been no material changes in market risks since the prior fiscal year end. PART II ITEM 1. LEGAL PROCEEDINGS Refer to Part 1, Item 3, of the Company's annual report on Form 10-K for the fiscal year ended June 30, 2000. There have been no material changes in any legal proceedings since the prior fiscal year end. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On December 5, 2000, the Company held its annual shareholders meeting at which the shareholders were asked to vote on the election of two directors. Of the 10,326,163 shares of common stock outstanding, 9,690,631 shares were voted for, and 63,719 withheld from Mr. Robert Miodunski; and 7,485,027 shares were voted for, and 2,269,323 withheld from Mr. David Robbins. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a. Exhibits a 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, 2000. 32 33 ALLIANCE GAMING CORPORATION FORM 10-Q FOR THE QUARTER ENDED DECEMBER 31, 2000 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 ------------------------------------- President and Chief Operating Officer (Principal Executive Officer) By /s/ Robert L. Saxton ------------------------------------- Sr. Vice President, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer) 33