-----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, Mry23r7V/E5Pm+tD8dNMb9vjA9qMM6MOdyP0qMIUIyXRLxfSCkkpQTrMYqJZfpEP 95QVZ84xuBkwxlLc1c+mnw== 0000002491-96-000002.txt : 19960213 0000002491-96-000002.hdr.sgml : 19960213 ACCESSION NUMBER: 0000002491-96-000002 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960212 SROS: NASD 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: 1934 Act SEC FILE NUMBER: 000-04281 FILM NUMBER: 96515357 BUSINESS ADDRESS: STREET 1: 4380 BOULDER HGWY CITY: LAS VEGAS STATE: NV ZIP: 89121 BUSINESS PHONE: 7024354200 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 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, 1995 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.) 4380 Boulder Highway Las Vegas, Nevada 89121 (Address of principal executive offices) (Zip Code) Registrant's telephone number: (702) 435-4200 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 8, 1996 according to the records of the registrant's registrar and transfer agent, was 12,987,483. On the same date, there were no shares outstanding of non voting Junior Convertible Special Stock, $0.10 par value. I N D E X PART I. FINANCIAL INFORMATION Page Item 1. Unaudited Financial Statements Condensed Consolidated Balance Sheets as of June 30, 1995 and December 31, 1995 (unaudited) 3 Unaudited Condensed Consolidated Statements of Operations for the three months ended December 31, 1994 and 1995 4 Unaudited Condensed Consolidated Statements of Operations for the six months ended December 31, 1994 and 1995 5 Unaudited Condensed Consolidated Statements of Cash Flows for the six months ended December 31, 1994 and 1995 6 Notes to Unaudited Condensed Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12 PART II. OTHER INFORMATION Item 1. Legal Proceedings 18 Item 6. Exhibits and reports on Form 8-K 18 SIGNATURES 19 PART 1 ALLIANCE GAMING CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS June 30 Dec. 31 1995 1995 (unaudited) (In thousands) ASSETS Current assets: Cash, cash equivalents and securities available for sale $ 37,414 $ 29,468 Receivables, net 3,316 3,110 Inventories 714 672 Prepaid expenses 4,148 2,984 Other 517 411 Total current assets 46,109 36,645 Property and equipment, net 50,352 50,870 Receivables, net 5,309 4,809 Excess of costs over net assets of an acquired business, net of accumulated amortization of $585 and $694 3,842 3,733 Intangible assets, net of accumulated amortization of $5,516 and $5,798 12,405 11,638 Investment in minority owned subsidiary 1,585 1,585 Other 6,746 7,592 Total Assets $126,348 $116,872 LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY) Current liabilities: Current maturities of long-term debt $ 3,995 $ 4,054 Accounts payable 1,758 2,295 Accrued expenses, including due to related parties of $931 and $23 8,610 10,187 Total current liabilities 14,363 16,536 Long-term debt, less current maturities 97,402 96,052 Othe liabilities 3,955 4,082 Total liabilities 115,720 116,670 Minority interest 643 919 Stockholders' equity (deficiency): Common stock, $0.10 par value; authorized 175,000,000 shares issued and outstanding 11,654,150 and 12,987,483 1,165 1,298 Special stock, $0.10 par value; authorized 10,000,000 shares; issued and outstanding 1,333,333 and 0 133 --- Paid-in capital 32,134 32,134 Unrealized loss on securities available for sale, net (316) (1,587) Accumulated deficit (23,131) (32,562) Total stockholders' equity (deficiency) 9,985 (717) Total liabilities and stockholders' equity (deficiency) $126,348 $116,872 See notes to unaudited condensed consolidated financial statements. ALLIANCE GAMING CORPORATION AND SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS Three Months Ended December 31, 1994 and 1995 1994 1995 (In thousands, except per share amounts) Revenues: Gaming Routes $ 26,794 $ 26,325 Casinos and taverns 3,796 10,489 Food and beverage sales 918 870 Net equipment sales 6 3 31,514 37,687 Costs and expenses: Cost of gaming Routes 20,113 20,148 Casinos and taverns 2,247 4,728 Cost of food and beverage 691 669 Cost of equipment sales 2 1 Selling, general and administrative 3,157 4,849 Business development expenses 1,965 5,372 Corporate expenses 2,356 1,560 Depreciation and amortization 2,309 2,419 32,840 39,746 Operating loss (1,326) (2,059) Other income (expense): Interest income 800 392 Interest expense (1,970) (2,081) Minority share of income (96) (132) Other, net (398) (875) Loss before income taxes (2,990) (4,755) Income tax expense (100) (1,258) Net loss $ (3,090) $ (6,013) Loss per share of common stock $ (.28) $ (.50) Weighted average common shares outstanding 11,231 12,103 See notes to unaudited condensed consolidated financial statements. ALLIANCE GAMING CORPORATION AND SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS Six Months Ended December 31, 1994 and 1995 1994 1995 (In thousands, except per share amounts) Revenues: Gaming Routes $ 52,511 $ 52,621 Casinos and taverns 7,861 21,679 Food and beverage sales 1,950 1,923 Net equipment sales 16 6 62,338 76,229 Costs and expenses: Cost of gaming Routes 39,214 40,361 Casinos and taverns 4,653 9,887 Cost of food and beverage 1,414 1,426 Cost of equipment sales 9 1 Selling, general and administrative 6,486 9,398 Business development expenses 3,508 10,737 Corporate expenses 4,302 3,037 Depreciation and amortization 4,613 4,906 64,199 79,753 Operating loss (1,861) (3,524) Other income (expense): Interest income 1,504 818 Interest expense (3,915) (4,288) Minority share of income (169) (276) Other, net (286) (1,373) Loss before income taxes (4,727) ( 8,643) Income tax expense (290) (788) Net loss $ (5,017) $ (9,431) Loss per share of common stock $ (.45) $ (.79) Weighted average common shares outstanding 11,101 11,879 See notes to unaudited condensed consolidated financial statements. ALLIANCE GAMING CORPORATION AND SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS Six Months Ended December 31, 1994 and 1995 1994 1995 (In thousands) Cash flows from operating activities: Net loss $ (5,017) $ (9,431) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 4,613 4,906 Loss on sale of property and equipment 560 240 Write off of other assets 361 201 Provision for losses on receivables 261 20 Amortization of debt discounts 179 118 Equity in losses of affiliate 405 --- Deferred income tax provision --- 655 Net change in operating assets and liabilities: Decrease in: Inventories 28 12 Prepaid expenses 1,577 1,163 Refundable income taxes --- 312 Other assets 615 143 Increase (decrease) in: Accounts and slot contracts payable 101 537 Accrued expenses (1,333) 1,577 Minority interests 168 276 Other liabilities (424) (223) Net cash provided by operating activities 2,094 506 Cash flows from investing activities: Additions to property and equipment (2,905) (5,004) Proceeds from sale of property and equipment 265 2,218 Additions to receivables (12,303) (6,296) Cash collections on receivables 9,272 6,564 Investment in subsidiary (1,580) --- Proceeds from sale of (purchases of) securities available for sale (133) 8,015 Additions to intangible assets (162) (420) Additions to other long-term assets (1,959) (2,179) Net cash provided by (used in) investing activities (9,505) 2,898 Cash flows from financing activities: Reduction of long-term debt (1,594) (2,091) Proceeds from long-term debt --- 682 Issuance of stock 109 --- Net cash used in financing activities (1,485) (1,409) Cash and cash equivalents: (Decrease) increase for period (8,896) 1,995 Balance, beginning of period 37,085 13,734 Balance, end of period $ 28,189 $ 15,729 See notes to unaudited condensed consolidated financial statements. ALLIANCE GAMING CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Six Months Ended December 31, 1994 and 1995 1. ADJUSTMENTS FOR FAIR PRESENTATION In the opinion of management, the accompanying unaudited interim financial statements contain all adjustments, consisting of normal recurring adjustments, necessary to present fairly the financial condition, results of operations and cash flows of the Company for the respective periods presented. The results of operations for an interim period are not necessarily indicative of the results to be expected for a full year. Certain information and footnote disclosures normally included in financial statements presented in accordance with generally accepted accounting principles have been condensed or omitted. It is suggested that the accompanying condensed consolidated financial statements be read in conjunction with the financial statements and notes in the Company's annual report on Form 10- K. All intercompany accounts and transactions have been eliminated in consolidation. 2. RECLASSIFICATIONS Certain reclassifications have been made to prior period financial statements to conform with current period presentations. 3. RECEIVABLES The Company's gaming route operations from time to time involve making loans to location operators in order to participate in revenues over extended periods of time. These loans, generally made for buildouts, tenant improvements and initial operating expenses, are generally guaranteed on a full recourse basis by the location owner and are secured by the assets of the location. The majority of the loans are interest bearing and are expected to be repaid over a period of time not to exceed the life of the related revenue sharing agreement. The loans have varying payment terms requiring either weekly or monthly payments. Annual interest rates on the loans range from prime plus 1.5% to stated rates of 12% with various maturity dates ranging through 2007. The loans are expected to be repaid from the locations' cash flows or proceeds from the sale of the leaseholds. Receivables consist of the following: June 30 Dec. 31 1995 1995 (In thousands) Notes receivable-location operators $ 7,760 $ 7,764 Other receivables 865 155 8,625 7,919 Less current amounts (3,316) (3,110) Long-term receivables, excluding current amounts $ 5,309 $ 4,809 Receivables are presented net of an allowance for doubtful accounts of approximately $1,659,000 and $1,435,000 as of June 30, 1995 and December 31, 1995, respectively. The allowance is allocated between current and long-term receivables on a pro rata basis related to notes receivable from location operators. ALLIANCE GAMING CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Six Months Ended December 31, 1994 and 1995 4. DEBT Long-term debt at June 30, 1995 and December 31, 1995 consists of the following: June 30 Dec. 31 1995 1995 (In thousands) Convertible subordinated debentures due 2003, 7.5% $ 85,000 $ 85,000 Due to stockholder due 1998, 200 basis points over the London Inter Bank offer rate (current rate 7.97%), net of discount of $747,619 and $629,573 3,309 2,797 Hospitality Franchise Systems due 2001, 7.5% 9,065 8,476 National Gaming Mississippi due 2002, 10.0% 631 1,224 Other debt 3,392 2,609 101,397 100,106 Less current maturities 3,995 4,054 Long-term debt, less current maturities $ 97,402 $ 96,052 Accrued interest of approximately $1,991,000 (June 30) and $1,973,000 (December 31) is included in accrued expenses in the unaudited condensed consolidated balance sheets. Amounts due to stockholder include amounts owed to affiliates of Alfred H. Wilms, the Company's largest stockholder and a member of the Board of Directors of the Company, relating to funding of the Company's majority-controlled subsidiary, Video Services, Inc.'s ("VSI") gaming device route operations. 5. INCOME TAXES The Company accounts for income taxes in accordance with the provisions of Financial Accounting Standard No. 109 Accounting for Income Taxes. Under the asset and liability method of Statement 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under Statement 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Due to losses and the lack of available carrybacks, the Company recognized no federal income tax expense or benefit for the six month period ended December 31, 1994 and 1995 other than the tax effects of changes in the unrealized gains (losses) on securities available for sale. At December 31, 1995, the Company had estimated net operating loss carryforwards for federal income tax purposes of approximately $35,000,000 which are available to offset future federal taxable income, if any, expiring 2007 through 2009. The tax deferred benefit from the net operating losses has been fully reserved. ALLIANCE GAMING CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Six Months Ended December 31, 1994 and 1995 6. INVESTMENT IN MINORITY OWNED SUBSIDIARY The Company and Casino Magic Corporation, through wholly owned subsidiaries, are members in Kansas Gaming Partners, L.L.C. ("KGP") and Kansas Financial Partners, L.L.C. ("KFP"), both Kansas limited liability companies. Under an option agreement (the "Option Agreement") granted to KGP by Camptown Greyhound Racing, Inc. ("Camptown") and The Racing Association of Kansas- Southeast ("TRAK Southeast"), KGP has been granted the exclusive right, which right expires on September 13, 2013, to operate gaming devices and/or casino-type gaming at Camptown's racing facility in Frontenac, Kansas if and when such gaming is permitted in Kansas. In December 1994, Camptown received a $3,205,000 loan from Boatmen's Bank which was guaranteed by KFP. The Company and Casino Magic Corporation each invested $1,580,000 in KFP which was used to purchase a certificate of deposit to collateralize its guaranty. Construction of Camptown's racing facility has been completed and the facility opened for business in May 1995. The racing facility was temporarily closed on November 5, 1995 due to poor financial results. Camptown filed for reorganization under Chapter 11 of the U.S. Bankruptcy Code in January 1996 and has stated an intention to reopen for business following bankruptcy reorganization. Boatmen's Bank demanded payment of the Camptown loan from KFP under the terms of the guaranty. KFP paid the loan and Boatmen's Bank returned KFP's certificate of deposit and KFP assumed Boatmen's Bank's position in the loan to Camptown which is secured by a second mortgage on Camptown's greyhound racing facility in Frontenac, Kansas. TRAK Southeast and Camptown continue to be bound by the Option Agreement. KFP intends to vigorously pursue all of its rights and remedies which may include, among other things, seeking authority from the bankruptcy court to commence a foreclosure action. In the case of a foreclosure action, KFP would be required to assume or pay the existing first mortgage of approximately $2,000,000 if KFP becomes the purchaser at any such sale. The Company intends to continue to monitor its investment in KFP. While the Company is encouraged by the positive movement in Kansas towards considering legislation that would legalize the operation of gaming devices at pari- mutuel track locations, there can be no assurance as to Camptown's ability to maintain its license at the location, or any successful completion or operation of any part of this project. 7. CASH, CASH EQUIVALENTS AND SECURITIES AVAILABLE FOR SALE For balance sheet presentation the following account balances have been combined at December 31, 1995: (in thousands) Cash and cash equivalents $ 15,729 Securities available for sale 13,739 Total $ 29,468 As of December 31, 1995 unrealized losses for securities available for sale was $1,587,000 net of the tax effect of $817,000 and is included as a component of stockholder's equity. ALLIANCE GAMING CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Six Months Ended December 31, 1994 and 1995 8. INTANGIBLE ASSETS Intangible Assets includes $4,272,000 net of $1,232,000 of accumulated amortization, for costs related to the commissions, discounts and other issuance costs of the Company's private placement of $85,000,000 aggregate principal amount of 7.5% Convertible Subordinated Debentures due 2003. Such costs are being amortized on a straight line basis over the term of the debentures. 9. PROPOSED BGII MERGER TRANSACTION On October 18, 1995, the Company and Bally Gaming International, Inc. ("BGII") entered into a definitive merger agreement ("Merger") under which the outstanding shares of BGII common stock would each be exchanged for $13 in cash and shares of the Company,s common stock. On January 22, 1996, the parties reached an agreement to amend the terms of the Merger. Under the amended agreement, each share of BGII common stock outstanding (10,799,501 as of September 30, 1995 less the 1,000,000 shares already owned by the Company) will receive $7.83 per share in cash, $3.57 per share in the Company's Series B Special Stock which is a Pay- in-Kind (PIK) preferred stock, and $0.30 per share of the Company's common stock totaling $11.70 per share of BGII common stock. The PIK preferred stock has an eight-year maturity and has a dividend rate of 15% as follows: PIK at 15% for the first five years; 8% PIK and 7% cash for years six and seven; and 15% cash in the eighth year of the term. All shares of Series B Special Stock are mandatorily redeemable by the eighth anniversary of the date of initial issuance. If the Company fails to redeem such shares by that date, then the number of directors constituting the Company's Board will be increased by two and the holders of the shares of Series B Special Stock will have the right to elect no more than two directors total to the Company's Board. The holders of Series B Special Stock will have no other remedies upon such failure to redeem the outstanding shares of Series B Special Stock by such date. Other than as described herein, the holders of shares of Series B Special Stock have no other voting rights except as stated by law. The Company intends to seek to have the Series B Special Stock quoted on NASDAQ. The aggregate amount of cash is unchanged from the previous agreement. The transaction is subject to approval by shareholders, obtaining customary regulatory approvals, the securing of $150,000,000 in permanent financing by the Company including $15,000,000 through a registered public offering of the Series B Special Stock, and certain other conditions. The Merger is expected to occur in late April 1996. 10. LEGAL PROCEEDINGS In June 1995, Bally Entertainment Corporation ("BEC") asserted that a certain agreement between BEC and BGII (the "Noncompete Agreement") prohibits the use of the trade name "Bally" if it is merged with a company that is in the casino business within or without the United States and operates such business prior to January 8, 1996. BGII believes such claim is entirely without merit since the restriction referred to expires on January 8, 1996 and in any event does not relate to the use of the "Bally" trade name, which is covered by the License Agreement. The restriction in the Noncompete Agreement will not have any impact on the combined company after the Merger since the effective time of the Merger contemplates a closing of the Merger after the restriction in the Noncompete Agreement lapses. BEC has not reasserted this position since ALLIANCE GAMING CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Six Months Ended December 31, 1994 and 1995 10. LEGAL PROCEEDINGS (continued) it was informed by BGII in July 1995 that the restriction lapses on January 8, 1996. Consequently, BGII believes BEC has determined not to contest with BGII's position. BEC has also asserted that its permission is required for use of the "Bally" trade name by any entity other than BGII and that a merger between BGII and another company would violate the terms of the License Agreement. BGII has denied these claims and believes that the surviving company in a merger will be permitted to use the "Bally" trade name in accordance with the terms of such License Agreement. BGII believes that no breach of such License Agreement is caused by the Merger and the use of the "Bally" trade name by the surviving corporation. In a letter dated November 9, 1995, BEC reasserted its position. On November 20, 1995 the Company, the Company's Merger Subsidiary, and BGII commenced an action against BEC in Federal District Court in Delaware seeking a declaratory judgment, among other things, that the surviving company in the Merger will be permitted to use the "Bally" trade name in accordance with the terms of the License Agreement, and seeking injunctive relief (the " Alliance Action"). On November 28, 1995, BEC commenced an action against BGII, Bally Gaming (a BGII subsidiary), the Company, and the Company's Merger Subsidiary in Federal District Court in New Jersey to enjoin the defendants from using the "Bally" trade name (the "BEC Action"). The BEC Action alleges that BGII's continued use of the trade name after the Merger will (1) constitute a prohibited assignment of BGII's rights to use the trade name and (2) exceed the scope of the license granted to BGII because BGII will be under control of the Company. Also on November 28, 1995, BEC filed a motion to di smiss, transfer to New Jersey, or stay the Alliance Action pending resolution of the BEC Action. BGII, Bally Gaming, the Company, and the Company's Merger Subsidiary intend to vigorously defend their position in these actions. However, there can be no assurance that BEC will not be successful in its action to prohibit the surviving corporation in the Merger from using the "Bally" trade name. The loss of the "Bally" trade name would have a material adverse effect on the gaming machine operations of the surviving corporation in the Merger. 11. INITIAL SERIES SPECIAL STOCK In September 1993, Kirkland-Ft. Worth Investment Partners, L.P. ("Kirkland") invested $5,000,000 in the Company in exchange for 1,333,333 shares of the Company's Non-Voting Junior Convertible Special Stock, which are convertible on a share for share basis into shares of the Company's Common Stock, and warrants to purchase up to 2,750,000 shares of common stock subject to certain conditions. In December 1995, Kirkland elected to convert the entire 1,333,333 shares of Special Stock into shares of the Company's Common Stock. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Financial Condition Liquidity and Capital Resources: At December 31, 1995, the Company had working capital of approximately $20,109,000, a decrease of approximately $11,637,000 from June 30, 1995. The decrease in working capital is due in part to a decrease in cash and cash equivalents which were used to fund development activities in connection with the Company's business strategy. As of December 31, 1995, the Company had $29,468,000 in cash, cash equivalents and securities available for sale, of which approximately $7,000,000 is necessary to fund ongoing gaming operations in the ordinary course of business. On October 18, 1995, the Company and Bally Gaming International, Inc. ("BGII") entered into a definitive agreement under which the outstanding shares of BGII common stock will each be exchanged for $13 in cash and the Company's shares of common stock. On January 22, 1996, the parties reached an agreement to amend the terms of the merger agreement. Under the amended agreement, each share of BGII common stock outstanding (10,799,501 as of September 30, 1995 less the 1,000,000 shares already owned by the Company) will receive $7.83 per share in cash, $3.57 per share in the Company's Series B Special Stock which is a Pay-in-Kind (PIK) preferred stock, and $0.30 per share of the Company's common stock totaling $11.70 per share of BGII common stock. The PIK preferred stock has an eight-year maturity and has a dividend rate of 15% as follows: PIK at 15% for the first five years; 8% PIK and 7% cash for years six and seven; and 15% cash in the eighth year of the term. All shares of Series B Special Stock are mandatorily redeemable on the eighth anniversary of the date of the initial issuance. If the Company fails to redeem such shares by that date, then the number of directors constituting the Company's Board will be increased by two and the holders of the shares of Series B Special Stock will have the right to elect no more than two directors total to the Company's Board. The holders of Series B Special Stock will have no other remedies upon such failure to redeem the outstanding shares of Series B Special Stock by such date. Other than as described herein, the holders of shares of Series B Special Stock have no other voting rights except as stated by law. The Company intends to seek to have the Series B Special Stock quoted on NASDAQ. The aggregate amount of cash is unchanged from the previous agreement. The transaction is subject to approval by shareholders, obtaining customary regulatory approvals, the securing of $150,000,000 in permanent financing by the Company including $15,000,000 through a registered public offering of the Series B Special Stock, and certain other conditions. The Merger is expected to occur in late April 1996. The Company intends to seek financing of approximately $180,000,000 in connection with its intended merger with BGII, with the additional proceeds to be used for working capital purposes. During the six months ended December 31, 1995, the Company incurred approximately $10,737,000 in costs associated with pursuit of the Company's business strategy. The Company's strategy is to use its strengthened management team, diversified gaming expertise and business and investment community relationships to develop new opportunities in the operation of land-based, dockside and riverboat casinos (including Native American casinos), gaming systems and technology, and the supply and management of gaming devices. Included in these costs are expenses of $9,437,000 associated with the Company's tender and consent solicitation for the common stock of, and subsequent entering into a definitive merger agreement with, BGII. On July 16, 1994, the Rainbow Casino located in Vicksburg, Mississippi permanently opened for business. In connection with the completion of the casino and the acquisition of its 45% limited partnership interest, through a wholly-owned subsidiary, the Company funded a $3,250,000 advance to Rainbow Casino Corporation ("RCC") on the same terms as RCC's financing from Hospitality Franchise Systems, Inc. ("HFS"). On March 29, 1995 the Company consummated certain transactions whereby the Company acquired from RCC the controlling general partnership interest in Rainbow Casino Vicksburg Partnership ("RCVP") and increased its partnership interest. In exchange for commitments by the Company and National Gaming Mississippi, Inc. ("NGM"), a subsidiary of National Gaming Corporation, to provide additional financing (up to a maximum of $2,000,000 each) to be used for the completion of certain elements of the project which survived the opening of the casino (for which RCC was to have been responsible for, but failed to satisfy), and a $500,000 payment also funded jointly by the Company and NGM paid to HFS as a waiver fee, the following occurred: (i) a subsidiary of the Company became the general partner and RCC became the limited partner and (ii) the respective partnership interests were adjusted. As adjusted, RCC is entitled to receive 10% of the net available cash flows from gaming revenues, as defined (which amount shall increase to 20% of cash flow from gaming revenues above $35,000,000 (i.e. only on such incremental amount)), for a period of 15 years, such period being subject to one year extensions for each year in which a minimum payment of $50,000 is not made. Since March 29, 1995 the results of operations of the Rainbow Casino have been consolidated. The Company and Casino Magic Corporation, through wholly owned subsidiaries, are members in Kansas Gaming Partners, L.L.C. ("KGP") and Kansas Financial Partners, L.L.C. ("KFP"), both Kansas limited liability companies. Under an option agreement (the "Option Agreement") granted to KGP by Camptown Greyhound Racing, Inc. ("Camptown") and The Racing Association of Kansas- Southeast ("TRAK Southeast"), KGP has been granted the exclusive right, which right expires on September 13, 2013, to operate gaming devices and/or casino-type gaming at Camptown's racing facility in Frontenac, Kansas if and when such gaming is permitted in Kansas. In December 1994, Camptown received a $3,205,000 loan from Boatmen's Bank which was guaranteed by KFP. The Company and Casino Magic Corporation each invested $1,580,000 in KFP which was used to purchase a certificate of deposit to collateralize its guaranty. Construction of Camptown's racing facility has been completed and the facility opened for business in May 1995. The racing facility was temporarily closed on November 5, 1995 due to poor financial results. Camptown filed for reorganization under Chapter 11 of the U.S. Bankruptcy Code in January 1996 and has stated an intention to reopen for business following bankruptcy reorganization. Boatmen's Bank demanded payment of the Camptown loan from KFP under the terms of the guaranty. KFP paid the loan and Boatmen's Bank returned KFP's certificate of deposit and KFP assumed Boatmen's Bank's position in the loan to Camptown which is secured by a second mortgage on Camptown's greyhound racing facility in Frontenac, Kansas. TRAK Southeast and Camptown continue to be bound by the Option Agreement. KFP intends to vigorously pursue all of its rights and remedies which may include, among other things, seeking authority from the bankruptcy court to commence a foreclosure action. In the case of a foreclosure action, KFP would be required to assume or pay the existing first mortgage of approximately $2,000,000 if KFP becomes the purchaser at any such sale. The Company intends to continue to monitor its investment in KFP. While the Company is encouraged by the positive movement in Kansas towards considering legislation that would legalize the operation of gaming devices at pari-mutuel track locations, there can be no assurance as to Camptown's ability to maintain its license at the location, or any successful completion or operation of any part of this project. Cash provided by operations for the six months decreased by approximately $1,588,000 from amounts reported for the prior year period. The change is primarily due to an increase in cash provided by the casino and tavern operations of approximately $5,700,000 which was attributable to the Rainbow Casino, offset by an increase in business development costs over the same period from the prior year of $7,229,000, primarily related to the BGII merger. Cash provided by investing activities for the six months improved $12,403,000 from the same period in the prior year due primarily to the proceeds from the sale of approximately $8,015,000 securities available for sale. Also, cash collections on, net of additions to, receivables improved by $3,299,000 compared to the same period last year. Cash used in financing activities for the six months declined $76,000 from the same period last year due primarily to the Company's principal reductions on its existing long-term debt of $2,091,000 offset by proceeds of $682,000 from issuing additional long-term debt. Management believes the Company's present working capital and funds generated from operations will be sufficient to meet its existing commitments, debt payments and other obligations as they become due. As discussed in previous reports, however, it remains a part of the Company's business strategy to seek complementary gaming opportunities, including opportunities in which its route and casino experience may be applicable. As part of its business activities, the Company is regularly involved in the identification, investigation and development of such opportunities. Accordingly, in order to support such activities, the Company may in the future elect to issue additional debt or equity securities if and when appropriate opportunities become available on terms satisfactory to management. Results of Operations. Three Months Ended December 31, 1994 and 1995 Revenues: Total revenues for the three months ended December 31, 1995 were $37,687,000, an increase of $6,173,000 (19.6%) over those for the same period in 1994. Revenues from all gaming route operations decreased $469,000 (1.7%) to approximately $26,325,000 in the second quarter of fiscal 1996. Revenues from the Louisiana route operations increased $334,000 (an increase of 9.0%) primarily as a result of an expansion of operations from the opening of a new OTB parlor in October 1995. Revenue from Nevada route operations decreased approximately $803,000 (3.5%) over those for the same period last year. The decrease in the Nevada gaming route revenues was attributable to a $1.65 decrease in the average net win per gaming device per day for the three months ended December 31, 1995 compared to the same period in 1994 (accounting for a decrease of approximately $793,000) and a decrease in the weighted average number of gaming devices on location for the three months ended December 31, 1995 as compared to the same period in 1994 (accounting for a decrease of approximately $10,000). Revenues from casino and tavern operations, including food and beverage sales, increased approximately $6,645,000 (141.0%) during the current year quarter as compared to those for the prior year as revenues recognized from the Rainbow Casino, which were consolidated beginning March 29, 1995, exceeded the revenues lost with the termination of the Company's lease at the Royal Casino and the reduction of operations at the Company's tavern locations. Costs and Expenses: Costs of Revenues Cost of gaming route revenues for the quarter ended December 31, 1995 increased $35,000 (0.2%) over the same quarter in 1994. Costs of revenues from route operations in Louisiana increased $157,000 (an increase of 6.5% from last year) as a result of an expansion of operations from the opening of a new OTB parlor in October 1995. Costs of gaming revenues for Nevada gaming route revenues decreased $122,000 (0.7%) as compared to the prior year as revenues declined and increased slightly as a percent of Nevada gaming route revenues primarily due to increased costs associated with additional and renewed space lease contracts. Cost of route revenues includes rents under both space lease and revenue sharing arrangements, gaming taxes and direct labor, including related taxes and benefits. The cost of casino and tavern revenues including costs of food and beverage revenues increased $2,459,000 (83.7%) compared to 1994 results primarily due to the Rainbow Casino cost of revenues which were consolidated beginning March 29, 1995. This increase was partially offset from the termination of the Company's lease at the Royal Casino and the reduction of operations at the Company's tavern locations. Cost of casino and tavern revenues includes cost of goods sold, gaming taxes, rent and direct labor, including related taxes and benefits. Expenses For the quarter ended December 31, 1995 the Company incurred developmental costs associated with pursuing the Company's growth strategy of approximately $5,372,000, an increase of $3,407,000 (173.4%) over the same period from last year. These business development expenses include salaries and wages, related taxes and benefits, professional fees, travel expense and other expenses associated with supporting the Company's growth strategy. Current quarter development costs also include expenses of $4,760,000 associated with the Company's merger with BGII. Selling, general and administrative expenses for the period increased approximately $1,692,000 (53.6%) from the prior year. Expenses for casinos and taverns increased $1,984,000 (224.4%) from the prior year primarily due to the Rainbow Casino expenses which were consolidated beginning March 29, 1995. This increase was partially offset from the termination of the Company's lease at the Royal Casino and the reduction of operations at the Company's tavern locations. Such expenses related to gaming route operations decreased $294,000 (12.9%) from the prior year reflecting steps taken to control costs, including reduced staffing levels. Corporate general and administrative expenses decreased $796,000 (33.8%). This decrease was caused primarily by controlling costs and reducing staffing levels. The Company expects that there may be further increases in selling, general and administrative expenses related to the addition of new management and development personnel and other costs associated with supporting the Company's business strategy. Six Months Ended December 31, 1994 and 1995 Revenues: Total revenues for the six months ended December 31, 1995 were $76,229,000, an increase of $13,891,000 (22.3%) over those for the same period in 1994. Revenues from all gaming route operations increased $110,000 (0.2%) to approximately $52,621,000 in the first six months of fiscal 1996. Revenues from the Louisiana route operations increased $147,000 (a increase of 1.9%) primarily as a result of an expansion of operations from the opening of a new OTB parlor in October 1995. Revenues from Nevada route operations decreased approximately $36,000 (0.1%) over those for the same period last year. The decrease in the Nevada gaming route revenues was attributable to a $0.52 decrease in the average net win per gaming device per day for the six months ended December 31, 1995 compared to the same period in 1994 (accounting for a decrease of approximately $499,000) which exceeded an increase in the weighted average number of gaming devices on location for the six months ended December 31, 1995 as compared to the same period in 1994 (accounting for an increase of approximately $463,000). Revenues from casino and tavern operations, including food and beverage sales, increased approximately $13,791,000 (140.6%) during the current six months as compared to those for the prior year as revenues recognized from the Rainbow Casino, which were consolidated beginning March 29, 1995, exceeded the revenues lost with the termination of the Company's lease at the Royal Casino and the reduction of operations at the Company's tavern locations. Costs and Expenses: Costs of Revenues Cost of gaming route revenues for the six months ended December 31, 1995 increased $1,147,000 (2.9%) over the same period in 1994. Costs of revenues from route operations in Louisiana decreased $53,000 (a decrease of 1.1% from last year) as a result of controlling direct labor costs. Costs of gaming revenues for Nevada gaming route revenues increased $1,200,000 (3.5%) as compared to the prior year and increased slightly as a percent of Nevada gaming route revenues primarily due to increased costs associated with additional and renewed space lease contracts. Cost of route revenues includes rents under both space lease and revenue sharing arrangements, gaming taxes and direct labor, including related taxes and benefits. The cost of casino and tavern revenues including costs of food and beverage revenues increased $5,246,000 (86.5%) compared to 1994 results primarily due to the Rainbow Casino cost of revenues which were consolidated beginning March 29, 1995. This increase was partially offset from the termination of the Company's lease at the Royal Casino and the reduction of operations at the Company's tavern locations. Cost of casino and tavern revenues includes cost of goods sold, gaming taxes, rent and direct labor, including related taxes and benefits. Expenses For the six months ended December 31, 1995 the Company incurred developmental costs associated with pursuing the Company's business strategy of approximately $10,737,000, an increase of $7,229,000 (206.1%) over the same period from last year. These business development expenses include salaries and wages, related taxes and benefits, professional fees, travel expense and other expenses associated with supporting the Company's strategy. Current year development costs also include expenses of $9,437,000 associated with the Company's tender and consent solicitation for the common stock of, and subsequent entering into a definitive merger agreement with, Bally Gaming International, Inc. Selling, general and administrative expenses for the period increased approximately $2,912,000 (44.9%) from the prior year. Expenses for casinos and taverns increased $3,629,000 (198.3%) from the prior year primarily due to the Rainbow Casino expenses which were consolidated beginning March 29, 1995. This increase was partially offset from the termination of the Company's lease at the Royal Casino and the reduction of operations at the Company's tavern locations. Such expenses related to gaming route operations decreased $717,000 (15.4%) from the prior year reflecting steps taken to control costs, including reduced staffing levels. Corporate general and administrative expenses decreased $1,265,000 (29.4%). This decrease was caused primarily by controlling costs and reducing staffing levels. The Company expects that there may be further increases in selling, general and administrative expenses related to the addition of new management and development personnel and other costs associated with supporting the Company's growth strategy. PART II Item 1. Legal Proceedings See "Notes to Unaudited Condensed Consolidated Financial Statements- 10. Legal Proceedings" for a description of certain legal proceedings. Item 6. Exhibits and Reports on Form 8-K a. Exhibits Exhibit Number Description 10.67 Agreement and Plan of Merger among Alliance Gaming Corporation, BGII Acquisition Corp. and Bally Gaming International, Inc. as of October 18, 1995. 10.68 Employment Agreement, dated as of October 28, 1995, between the Company and Robert Miodunski. b. Reports on Form 8-K There were no reports filed on Form 8-K for the three months ended December 31, 1995. 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/ Steve Greathouse Chairman of the Board of Directors, President and Chief Executive Officer By /s/ John W. Alderfer Sr. Vice President, Treasurer and Chief Financial Officer EX-27 2
5 This schedule contains summary financial information excerpted from Form 10-Q for the quarter ended 12/31/95. 1,000 6-MOS JUN-30-1996 DEC-31-1995 15,729 13,739 3,110 0 672 36,645 81,505 30,635 116,872 16,536 0 1,298 0 0 (2,015) 116,872 6 76,229 1 51,675 28,078 0 4,228 (8,643) (788) (9,431) 0 0 0 (9,431) (0.79) 0
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